Page 33 - FINAL CFA I SLIDES JUNE 2019 DAY 9
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LOS 32.d: Describe motivations that might cause
management to issue financial reports that are not high Session Unit 9:
quality., p.309 32. Financial Reporting Quality, p.305
To meet or exceed a benchmark number for earnings per share; benchmarks could be:
• Earnings guidance offered earlier by management.
• Consensus analyst expectations.
• Those of the same period in the prior year.
Aggressive Accounting:
By Why?
• Career-orientation -seeking to enhance reputation and promotion prospects;
• Compensation –linked to share price.
• Gain credibility with equity market investors or
tanties
• Improve the way the company is viewed by its customers and suppliers.
• Desire to avoid violating debt covenants.
Conservative Accounting:
• When earnings exceed benchmark levels, managers worry they may not be able to
sustain; so may wish, for instance, delay recognition of revenue!
LOS 32.e: Describe conditions that are conducive to issuing low-quality, or even fraudulent, financial reports, p.309
• The company has weak internal controls.
• The board of directors provides inadequate oversight.
• Applicable accounting standards provide a large range of acceptable accounting
treatments, provide for inconsequential penalties in the case of accounting fraud, or both.
• Rationalisation – ‘I have to’, I’ll reverse it next period’!
