FINANCIAL REPORTING QUALITY
After completing this chapter, you will be able to do the following:
- distinguish between financial reporting quality and quality of reported results (including quality of earnings, cash flow, and balance sheet items);
- describe a spectrum for assessing financial reporting quality;
- distinguish between conservative and aggressive accounting;
- describe motivations that might cause management to issue financial reports that are not high quality;
- describe conditions that are conducive to issuing low-quality, or even fraudulent, financial reports;
- describe mechanisms that discipline financial reporting quality and the potential limitations of those mechanisms;
- describe presentation choices, including non-GAAP measures, that could be used to influence an analyst's opinion;
- describe accounting methods (choices and estimates) that could be used to manage earnings, cash flow, and balance sheet items;
- describe accounting warning signs and methods for detecting manipulation of information in financial reports.
Ideally, analysts would always have access to financial reports that are based on sound financial reporting standards, such as those from the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB), and are free from manipulation. But, in practice, the quality of financial reports can vary greatly. High-quality ...