3. Context for Assessing Financial Reporting Quality
d. describe motivations that might cause management to issue financial reports that are not high quality;
e. describe conditions that are conducive to issuing low-quality, or even fraudulent, financial reports;
f. describe mechanisms that discipline financial reporting quality and the potential limitations of those mechanisms;
What are four motivations for managers to issue less than high quality financial reports?
- Mask poor performance
- Boost stock price
- Improve incentive compensation
- Meet debt covenants
What are three conditions that are conducive to issue low-quality financial reports?
- Opportunity is generally provided through weaknesses in internal controls.
- Motivation can be imposed due to personal financial problems or unrealistic deadlines and performance goals.
- Rationalization occurs when an individual develops a justification for fraudulent activities.