Term
Management may be motivated to overstate earnings to... |
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Definition
-meet analyst expectations
-remain in compliance with debt covenants
-because higher reported earnings will increase their compensation |
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Term
Management may be motivated to understate earnings to...
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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 |
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Term
Low earnings quality can result from... |
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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 |
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Term
The "fraud triangle" consists of... |
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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)
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Term
Risk factors related to incentives or pressures for fraud include... |
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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 |
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Term
Risk factors related to opportunities for fraud include... |
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Definition
-the nature of the industry or operations
-ineffective monitoring of management
-complex or unstable organizational structure
-deficient internal controls
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Term
Risk factors related to attitude and rationalization for fraud include... |
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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 |
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Term
Common warning signs of earnings manipulation include... |
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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 |
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Term
Accounting warning signs related to the Enron scandal include... |
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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 |
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Term
Accounting warning signs related to the Sunbeam scandal included... |
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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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