Lecture 7 Flashcards
Standard 5
Investment Analysis, Recommendations and Actions
Standard 5 (A)
Diligence and Reasonable Basis
Diligence and Reasonable Basis meaning
Recommendations be made based on a firm’s independent research or the quantitative research of other reputable sources
Key Ethical Principles in making a recommendation
Honesty, Integrity and Professionalism
Standard 5 (B)
Communication with a client
Communication with a client meaning
Members must disclose the limitations and risks associated with investment recommendations and activities and client must know if you are stating a fact or an opinion
When advising a client, what words must you use?
“It is my opinion that…”
Standard 5 (C)
Record Retention
Record Retention meaning
All records used for a recommendation must be retained
Discretionary Accruals
Accruals because of accounting choices made by management
Jones (1991) Model
Model of expected or normal accruals
Self Reversing
When accrual amount accrues more revenue earlier, it must accrue less revenue later so total accrued amount doesn’t exceed transaction amount
Cookie Jar Reserves
Reserve accounts created in anticipation of future liabilities/expenses
Big Bath
When firms make poor results look worse to make future results look better
Channel Stuffing
Managers ship products they know will be returned so they can book revenues
