CFA Reading 25- Evaluating Financial Reporting Quality

1. Four differences in the cash basis and accrual basis:

1). Unearned revenue: cash received, but revenue is not recognized
2). Accrued revenue: cash is not received, but revenue is recognized. (Like Accounts Receivables)
3). Deferred expense: cash is payed, but expense is not recognized
4). Accrued expense: cash is not payed, but expense is recognized

2. Oppotunities and motivations for management to intervene in the external financial reporting

Motivation:
1). Influence capital markets (strategies munipulation)
2). Satisfy contractual provisions (high earning, high bonus)

Mechanisms to deter strategic manipulation
1). Independent audit
2). BOD: audit committee and internal auditors
3). Certification by senior management: CEO and CFO must certify the financial statements
4). Class action litigation: Lawsuits
5). Regulators
6). General market scrutiny: journalists, analyst...