Financial Reporting and Analysis 【Reading 33】Sample
Joan Zeller, CFA, suspects Cornwall Carpets is overstating its profits. Which of the following is least likely to motivate Cornwall to overreport? A)
| Cornwall is attempting to get lawmakers to institute a tariff. |
| B)
| Cornwall depends heavily on stock options to compensate its employees. |
| C)
| Cornwall’s debt covenants are strict. |
|
The satisfaction of debt covenants and profit estimates are strong incentives to overstate earnings. Since stock prices tend to follow earnings over time, the use of stock for compensation could drive executives to inflate profit numbers. However, a company attempting to get trade relief is more likely to underreport earnings. |