CFA Level I · CFA Level I Exam · Financial Reporting Quality
Which of the following conditions is most likely to motivate managers to issue low-quality financial reports?
Compensation tied to earnings targets or debt covenants most likely motivates low-quality reporting, because managers gain personally or avoid penalties by managing results. Independent audit committees and strict regulatory enforcement are constraints that reduce opportunity and discourage poor reporting.
- ACompensation tied to meeting earnings targets or debt covenantsCorrect
- BA strong, independent audit committee
- CStrict enforcement of accounting standards by regulators
Explanation
The fraud triangle's motivation element includes pressure to meet targets, bonus thresholds or covenants. Audit committees and enforcement are mechanisms that discipline reporting and reduce opportunity, so they discourage low-quality reporting.
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