Module 3 

FACTORS WHICH CONTRIBUTE TO LOW QUALITY FINANCIAL REPORTS 

Learning Objectives: 
At the end of this chapter students shall be able to: 
1. Know the factors that contribute to low quality reports. 
2. Discuss the motivation behind a company manager’s action to issue low 
quality financial reports. 
3. Discuss the spectrum for assessing financial reporting quality. 

The main motivation behind company manager’s action to issue low

quality  reports includes: Hiding poor performance, such as loss of market share
or low  profitability. This usually arises from: 
a desire to meet or beat market expectations as reflected in analyses forecast
or  management’s own forecasts which usually lead to an increase in stock price and 
management compensation that linked to stock or earnings performance. 
Concern over career and incentive compensation. For example, a manager
may  be worried that a poorly performing company may limit his future career
opportunities or  that he may not receive a bonus based on exceeding an earning
target. 
Avoiding debt covenant violations. This can lead to manager’s inflating
earnings  and this is particularly important for highly leverage and unprofitable
companies. 

CONDITIONS CONDUCIVE TO ISSUING LOW QUALITY FINANCIAL REPORTS  

OPPORTUNITY 
This may be presented by conditions that are either internal or external to a
company.  Internal conditions include poor internal control or an ineffective board of
directors. 

URS-IM-AA-CI-0050 Rev 00 Effective Date: August 24, 2020 

External conditions include the accounting standards which provide scope for
divergent  choices or minor consequences for making inappropriate choices.  

MOTIVATION 
This can result from a manager feeling pressured to meet certain criteria in order
for  personal gratification such as receiving a bonus, or for corporate reasons,
such as  concern about future financing. 

RATIONALIZATION 
When concerned about whether or not a choice is correct, an individual will
use  rationalization as she needs to be able to justify the choice to herself. 

QUALITY SPECTRUM OF FINANCIAL REPORTING

FINANCIAL REPORTING QUALITY

High  Low  High 

High financial reports  

Earnings quality enable assessment  High
Quality  earning s quality  
Low financial reporting 
quality impedes   increases company value 
assessment of earnings 
and impedes valuation
Low
High financial reporting  quality
enables assessment  Low
earnings quality  
decreases company value 

URS-IM-AA-CI-0050 Rev 00 Effective Date: August 24, 2020 

Quality of financial reports can vary. High quality financial reporting provides
information  that is useful to analysts in assessing a company’s performance and
prospects. Low  quality financial reporting contains inaccurate, misleading or
incomplete information 
 URS-IM-AA-CI-0050 Rev 00 Effective Date: August 24, 2020 
Activity 2 
Discussion Questions : 
1. What does low quality financial report means?  
2. What are the factors that contribute to low quality reports? 
3. What is the motivation behind company manager’s action to issue low quality 
reports? 
4. Give an example of misreporting a financial report. 

RUBRIC FOR ACTIVITY 2

Excellent  Good  Satisfactory  Need  
9-10 points 7-8 points 5-6 points Improvement 
0-4 points

Ideas   Thoroughly   Ideas   Ideas   Little or no  

Explanatio explained   explained somewhat   explanation of  ideas
n
ideas explained

Coherency  Extremely   Coherent   Somewhat   Lacks  

coherent writing coherent coherency

Grammar  Few errors  Some Many Many errors  

errors  errors 
that difficult to 
understand

URS-IM-AA-CI-0050 Rev 00 Effective Date: August 24, 2020 

Resources: 
http://www.ifrsbox.com 
https://www.youtube.com/user/IFRSbox
URS-IM-AA-CI-0050 Rev 00 Effective Date: August 24, 2020