Financial Reporting Quality

Question 1

Financial reporting quality high, if:

Answer 1

• Comliant to GAAP
• Info relevant, neutral, complete, error-free, useful and decision making
• Faithfully represents economic reality of activities of financial position

Question 2

Earnings quality is high, if:

Answer 2

*earnings are sustainable
provide adequate return to investors

Question 3

Financial reports quality spectrum

Answer 3

1. Reporting is compliant with GAAP and decision useful; earnings are sustainable and adequate.
2. Reporting is compliant with GAAP and decision useful, but earnings quality is low (earnings are not sustainable or not adequate).
3. Reporting is compliant with GAAP, but earnings quality is low and reporting choices and estimates are biased.
4. Reporting is compliant with GAAP, but the amount of earnings is actively managed to increase, decrease, or smooth reported earnings.
5. Reporting is not compliant with GAAP, although the numbers presented are based on the company’s actual economic activities.
6. Reporting is not compliant and includes numbers that are essentially fictitious or fraudulent.

Question 4

Aggressive accounting

Answer 4

Increase current period earnings and financial position

Question 5

Conservative accounting

Answer 5

Decrease current period earnings and financial position

Question 6

Motivations for low quality reporting

Answer 6

Motivation
Opportunity
Rationalization

Question 7

Mechanisms that discipline financial reporting quality

Answer 7

Government regulation
Auditors provide opinion
Private contracts