CFA Level I · CFA Level I Exam · Financial Reporting Quality
Which of the following is the most likely reason that regulatory filing reviews by securities regulators, such as comment letters on a company's annual report, can limit reporting quality problems?
Regulatory reviews can prompt companies to correct or expand disclosures that appear deficient or inconsistent with the reporting standards. This creates a deterrent against poor reporting. Regulators do not force the most conservative policy, and their review never replaces the required external audit.
- AThey require the company to adopt the most conservative accounting policy available.
- BThey can prompt companies to correct or expand disclosures that appear deficient or inconsistent with standards.Correct
- CThey replace the need for an external audit when the review finds no issues.
Explanation
Regulators review filings and can ask companies to explain, correct or expand disclosures that seem inconsistent with the reporting framework, which deters poor reporting. They do not mandate the most conservative policy and never substitute for the statutory audit.
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