d Management dominated mostly by one or a few strong willed individuals Chapter

D management dominated mostly by one or a few strong

This preview shows page 24 - 27 out of 53 pages.

(d) Management dominated mostly by one or a few strong-willed individuals.
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Chapter 02 - Financial Reporting and Analysis 2-25 (e) Personal financial difficulties of members of management.
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Chapter 02 - Financial Reporting and Analysis 2-26 (f) Deteriorating operating performance. (g) Excessively complex capital structure. (h) Management which has displayed a propensity for earnings manipulation. (i) Problem industry displaying weaknesses, in such areas as receivable collection, inventories, contract cost overruns, dependence on few products, etc. (j) Dealings with insiders on related parties or stockholder lawsuits. (k) Turnover of key officers, legal counsel or auditors. (l) Audit conducted by a firm which has experienced a higher than normal incidence of audit failures. It should be noted, however, that while none of the above situations can be taken for granted to always indicate situations of higher audit risk, they have been shown by experience to have appeared in a sufficient number of problem cases to warrant the analyst's close attention. 2-69. KPMG is paid by Citigroup management to perform the audit and render an independent opinion regarding the fairness of the financial disclosures made by Citigroup. KPMG is providing assurance to all users of the financial statements. Should users be confident that KPMG performed the audit in the interests of the users? A couple of market forces dictate that users can use the information with some confidence. First, KPMG faces substantial litigation risk if they do not perform the audit in conformity with generally accepted auditing standards. Second, KPMG places its professional reputation at stake when it issues an opinion. Many public accounting organizations have been forced to fold because their reputation was injured by a high-profile audit that was found to not be in conformity with generally accepted auditing standards. These firms were forced to fold because there was no longer any demand for their services. 2-70. A penny per share misstatement is usually not significant to the user of the financial statements. As a result, correction of such problems is routinely passed upon. However, a penny per share misstatement can, in certain instances, be very significant. For example, if the earnings of the company are very near zero then such a change can be a significant percentage of the reporting earnings or loss. Also, a penny misstatement might allow a company to report earnings that exceed the market’s expectation by a penny. The market appears to value such results. As a result, misstatements that cause the company to meet or beat expectations should be considered significant and worthy of correction during the audit process. 2-71. The "quality" of earnings of an enterprise is a measure of the degree of care and unbiased judgment with which they are determined, the extent to which all important and necessary costs have been provided for and the variability which industry conditions subject these earnings to. Analysts must assess the quality of earnings in order to render them comparable to those of other enterprises.
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