- CFA Exams
- CFA Level I Exam
- Study Session 9. Financial Reporting and Analysis (4)
- Reading 29. Financial Reporting Quality
- Subject 3. Context for Assessing Financial Reporting Quality
CFA Practice Question
Which of the following are motivations to underreport earnings?
II. Lower incentive compensation
III. Desire to appear more solvent
IV. Obtaining trade relief
I. Negotiation of labor union contracts
II. Lower incentive compensation
III. Desire to appear more solvent
IV. Obtaining trade relief
A. I and II
B. II and III
C. I and IV
User Contributed Comments 7
| User | Comment |
|---|---|
| dimanyc | Not sure why II is not right. |
| noonah | dimanyc: incentive compensation is for the co employees and is proportionately linked to either earnings or the price of the stock. Hence, the lower the earnings, the lower compensation the co has to pay. |
| sushi82 | Hello, what is the meaning of trade relief? |
| cong | Noonah, I think you are right here. Incentive compension is paid to the executives. So there is almost no incentive for the company to lower incentive compensation. |
| serboc | dimanyc:
think about solutions for principle / agent problem in econ sushi: getting better rates and terms on acct payable,etc. |
| dan1987 | i&iv are both external influences on the company's bottom line. Trade Unions are outside of the company's powers, and trade relief is always a positive and therefore incentive to understate It is up to the company if they pay bonus' and how much no need to under state earnings (might piss our employees of tho) and understating earning will not boost solvency |
| ascruggs92 | cong - the question doesn't ask about reasons to lower incentive compensation, it asks about under-reporting earnings. Regardless of whether a company lowers, raises, or leaves incentive compensation the same, there is very little reason to under-report on that basis, as reporting too low of earning might forfeit the incentive comp altogether |