CFA Practice Question

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CFA Practice Question

All of the following items found in the footnotes to the financial statements should concern an analyst except:
A. A very low management turnover.
B. Discounting of competitor's effects on the firm's operating results.
C. Extensive consulting services provided by the people who know the firm the best, its auditors.
Explanation: A very low management turnover means two things: first, the managers aren't being fired for poor performance and two, managers themselves are very pleased with the environment that they work in.

User Contributed Comments 5

User Comment
siggy25 Wouldn't the explanation imply a very low management turnover should concern the analyst? I am not sure why the last choice is not the right answer.
ahug Not being fired for poor performance is a good thing....it makes the managers less tempted to artifically boost earnings to avoid being fired.
joseahernandez Ahug, Poor performance is an assumption on your side but not mention on the question.
Low management turnover means that the managers are doing a good job and they are satisfied with the compensation they are receiving, they have had the time to understand the business much better than other managers who have not had enough exposuer to the company. Of course all this is in theory.
volkovv It is the big no-no, remember Enron and Andersen, if your auditors perform consulting work for you that creates a big conflict of interest!
Laajman A low turnover would suggest stable management. However, turnover would need to be viewed in the light of a firm's performance.

The answer on accountants providing consulting is neither here or there as the world as learnt from the enron fiasco.

That leaves b. discounting the effect of competitors. Sounds like the most logical answer but again, it would depend on the details.

Not the best question..
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