Conditions to Low-quality Financial Reports

The decision to issue low-quality financial reports ultimately lies in the hands of individuals. For these individuals, namely managers, to succeed in doing this, the conditions must be convenient.

Conducive Conditions for Issuing Low-quality Financial Reports

The issuance of low-quality financial reports is subject to three conditions.

These are:

(i) opportunity: this may be presented either by internal or external factors. Internal factors include poor internal controls or an ineffective board of directors. External conditions include the use of accounting standards which provide scope for divergent choices or minor consequences for making inappropriate choices;

(ii) motivation: this can result from the pressure on a manager to meet certain criteria either for personal gratification such as receipt of a bonus, or for corporate reasons, such as concerns about future financing; and

(iii) rationalization: when concerned about whether or not a choice is correct, an individual will use rationalization to justify the choice to themselves.

Question 1

Which of the following is the least likely condition under which low-quality financial reports are issued?

1. Suitability.
2. Motivation.
3. Opportunity.

Solution

The correct answer is A.

Suitability is not a condition under which low-quality financial reports are issued.

Choices B and C are typical conditions that must exist.

Question 2

Which of the following least likely presents an opportunity for a management to issue low-quality financial reports?

1. Poor internal controls.
2. Ineffective board of directors.
3. Pressure to achieve some performance level.

Solution

The correct answer is C.

The pressure to achieve some performance level is a motive, not an opportunity.