Question

Management is most likely to be motivated to produce low-quality financial reports when:

		earnings are less than analysts expect.
		the firm is not required to abide by loan covenants.
		managers' compensation is unrelated to the firm's share price.

In which of the following situations is management most likely to make conservative choices and estimates that reduce the quality of financial reports?

		The firm must meet accounting benchmarks to comply with debt covenants.
		Management's compensation is closely tied to near-term performance of the firm's stock.
		Earnings for a period will be higher than analysts' expectations.

Which of the following accounting warning signs is most likely to indicate manipulation of reported operating cash flows?

		Higher estimated salvage values than are typical in a firm's industry.
		Capitalizing purchases that comparable firms typically expense.
		More aggressive revenue recognition methods than comparable firms.

Thank you!

Answer 1

1)

Meeting analyst expectations about earnings may motivate low quality financial reports. Not only analyst expectations, compensations and bonus based on share price may also lead to low quality financial reports.

Hence, correct option is “earnings are less than analysts expect”