Earnings Quality
What are two terms that can be used when making accounting choices?
Quality of Earnings or Earnings Quality
'Earnings management' has a negative effect on the quality of earnings if it distorts the information that is less useful for predicting future cash flows.
What word does Arthur Levitt use to characterized earnings management?
"game among market participants"
What are three key corporate actors of corporate governance?
The Board, Senior Management, Shareholders
What event led companies to become creative with accounting?
Covid-19 Pandemic
What is an Internal Audit's role?
Internal audit provides assurance by assessing and reporting on the effectiveness of governance, risk management, and control processes designed to help the organization achieve strategic, operational, financial, and compliance objectives.
What has no impact on the stability or reccurrence of earnings?
Management's actions
What is the touchstone of our financial reporting system?
Transparency and Comparability
What is management responsible for?
They are responsible for setting, managing and executing the strategies of the company.
What are two examples of Uber's non-standard metrics?
Adjusted net revenue and adjusted EBITDA
What are the two most important things that an internal audit provides?
Insight and Foresight
The more likely an item of earnings is to recur, the ____ its quality will be.
Higher
Who represents the most reliable guardians of the public interests?
Audit committees
The board should set a tone at the top to demonstrate...?
The company's commitment to integrity and legal compliance.
How much did Uber adjust its net revenue and EBITDA
Adjusted its revenue $19 Million
Adjusted its EBITDA $24 Million
How does an internal audit add value to a company?
Internal audit can add value by providing advisory and consulting services, intended to improve governance, risk management, and control processes, so long as internal audit assumes no management responsibility.
What is required when accounting for business operations?
Judgement and Estimates
What are five of the more popular illusions that companies create in their financial statements that deceive investors?
"Big Bath", restructuring charges
Creative acquisition accounting
"Cookie jar" reserves
"Immaterial" misapplications of accounting principles
Premature recognition of revenue
Who keeps the board and committees informed about significant risks of the company and its risk management processes?
Senior Management
What does adjusted EBITDA metric apply?
It should be regarded as a one time event.
Ideally, who should the internal audit report to?
Ideally, internal audit should report functionally to the board or audit committee and administratively to management.
What are the three degrees to which quality of earnings could be used?
1. To which management's choices to accounting estimates can affect income
2. To which management takes advantage of its flexibility
3. To which managers choose items that result in income recognition thats more likely to lead to recurring patterns of income
What is considered to be apart of the gray area of accounting?
Where managers are cutting corners and where earnings reports reflect the desires of management rather than the actual underlying performance of the company
What does effective corporate governance require?
Clear understanding of the roles of the board, management and shareholders; their relationships with each other and their relationships with other corporate stakeholders.
What should investors look at in a company's financial statement post pandemic?
Whether companies are piling too many negative charges into the pandemic affected quarters in order to make their reported results look even better once the crisis is over.
Who is internal auditing performed by?
Internal auditing is performed by professionals who have a deep appreciation of the importance of strong governance, an in-depth understanding of business systems and processes, and a fundamental drive to help their organizations succeed.