Shared Flashcard Set

Details

CFA Book 3 Lesson 40
book 3 lesson 40
10
Finance
Professional
05/22/2010

Additional Finance Flashcards

 


 

Cards

Term
Management may be motivated to overstate earnings to...
Definition

-meet analyst expectations

-remain in compliance with debt covenants

-because higher reported earnings will increase their compensation

Term

Management may be motivated to understate earnings to...

 

Definition

-obtain trade relief

-renegotiate advantageous repayment terms with existing creditors

-negotiate more advantageous union labor contracts

-"save" earnings to report in a future period

Term
Low earnings quality can result from...
Definition

-selecting accounting principles that misrepresent the economics of transactions

-structuring transactions primarily to receive a desired effect on reported earnings

-using aggressive or unrealistic effects and assumptions

-exploiting the intent of an accounting standard

Term
The "fraud triangle" consists of...
Definition

-incentives and pressures (the motive to commit fraud)

-opportunities (the firm has a weak internal control system)

-attitudes and rationalizations (the mindset that fraud is justified)

 

Term
Risk factors related to incentives or pressures for fraud include...
Definition

-threats to the firm's financial stability or profitability

-excessive third-party pressures on management

-threats to the personal net worth of management or board members

-excessive pressure on management and employees to meet internal targets

Term
Risk factors related to opportunities for fraud include...
Definition

-the nature of the industry or operations

-ineffective monitoring of management

-complex or unstable organizational structure

-deficient internal controls

 

Term
Risk factors related to attitude and rationalization for fraud include...
Definition

-inappropriate or inadequately supported ethical standards

-excessive participation by nonfinancial management in selecting accounting standards

-a history of legal or regulatory violations by management or board members

-obsessive attention to the stock price or earnings trend

-aggressive commitments to third parties

-failure to correct known compliance problems

-minimizing earnings inappropriately for tax reporting

-continued use of materiality to justify inappropriate accounting

-a strained relationship with the current or previous auditor

Term
Common warning signs of earnings manipulation include...
Definition

-aggressive revenue recognition

-different growth rates of operating cash flow and earnings

-abnormal comparative sales growth

-abnormal inventory growth as compared to sales

-moving nonoperating income and nonrecurring gains up the income statement to boost revenue

-delaying expense recognition

-excessive use of off-balance-sheet financing arrangements including leases

-classifying expenses as extraordinary or nonrecurring and moving them down the income statement to boost income from continuing operations

-LIFO liquidations

-abnormal comparative margin ratios

-aggressive assumptions and estimates

-year-end surprises

-equity method investments with little or no cash flow

Term
Accounting warning signs related to the Enron scandal include...
Definition

-insufficient operating cash flow

-pressure to support the stock price and debt ratings

-mark-to-market accounting for equity method investments

-disproportionately high revenues in the third and fourth quarters

-inflated sales of financial assets to special purpose entitities

-significant barter and related-party transactions

-high senior management turnover

Term
Accounting warning signs related to the Sunbeam scandal included...
Definition

-"cookie jar" reserves

-receivables increasing faster than sales

-negative operating cash flow

-inflating revenue with bill-and-hold sale arrangements

-lower bad debt expense despite growing receivables

-outsized fourth quarter revenue for a business described as nonseasonal

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