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 just right.

Conditions Conducive to Issuing Low-quality Financial Reports

There are three conditions that usually exist when low-quality financial reports are issued.

These are:

(i) Opportunity: This may be presented by conditions that are either internal or external to a company. Internal conditions 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 a manager feeling pressured to meet certain criteria in order for personal gratification such as receiving a bonus, or for corporate reasons, such as concern about future financing.

(iii) Rationalization: When concerned about whether or not a choice is correct, an individual will use rationalization as she needs to be able to justify the choice to herself.

Question 1

Which of the following is least likely a condition that typically exists when low-quality financial reports are issued?

A. Motivation

B. Suitability

C. Opportunity

Solution

The correct answer is B.

Suitability is not a condition that usually exists when low-quality financial reports are issued.

Choices A and C are typical conditions that must exist.

Question 2

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

A. Ineffective board of directors

B. Pressure to achieve some performance level

C. Poor internal controls

Solution

The correct answer is B.

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

Reading 29 LOS 29e:

Describe conditions that are conducive to issuing low-quality, or even fraudulent, financial reports

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