Accounting Q-Bank

During Parlex Chemicals’ media day, four executives spoke. Here are excerpts from all four executives speeches. Calvin Baynard, CEO: “I’ve been a scientist all my life, but I want to assure shareholders that as CEO I am actively involved in both managing operations and setting accounting policy.” Kristan Lenz, CFO: “I work closely with our auditors to make sure we are always on the same page.” Melvin Jackson, COO: “In the past I have told you that Parlex would meet aggressive growth targets. I am proud to say that we have met those targets.” Sally Yu, compliance director: “All of our executives are required to review Parlex’s ethics policy every year.” Reporter John Bustard, CFA, is concerned that three of the executives are exhibiting attitudes or rationalizations that can lead to accounting fraud. Bustard should be least concerned about: A) Yu. B) Baynard. C) Lenz. D) Jackson.


A i remember doing this question…there was something twisted…just can’t remember it now!

It was a toss up between A and C. I went along with dinesh. I’d like to see the reasoning.

I thought it was A…but seemed too obvious so I begin asking myself it does not say what kind of policy the company has in place,we don’t know what the ethics policy is - maybe its not good ethics policy, etc.

I don’t think it is C because your not supposed to work closely with auditors - the auditors are supposed to be independent. If you work closely with them then it could mean you have a greater influence over them as well. Between the two, I would be least concern with management reviewing ethics policy - there is no harm in reviewing policy.

While we wait for the correct answer… I thought that ‘Yu’ was unnecessarily bossing around, by using the word “required” in her speech.


haha, good thought Dinesh, though I don’t know bossing around is a violation in CFAI :slight_smile: I go with A, and I use the same reasoning as Deep for not saying C.

I still go with C…Thinking that working closely with auditors isn’t bad. A corp should work closely/cooperate.

i think i got this one wrong when i took it qbank also- i want to say answer is C and they said it wasn’t A b/c not only execs should review the policy, eveyrone should. but that’s kind of a low blow… i mean, the execs reading it isn’t a bad thing, they just didn’t go beyond that to say what the rest of the company was doing.

Your answer: C was correct! Working closely with auditors is a good thing. All of the other statements reflect behavior that can lead to fraudulent accounting. Baynard’s involvement in accounting policy could be problematic, considering his lack of financial experience. Jackson made a commitment to the media that the company would meet targets – that promise could spark a rationalization to falsify numbers to meet the target. Yu said all executives must review Parlex’s ethics policy, but what about everybody else? Most of the employees are not executives, and if the rank and file, including those in the accounting department, are not familiar with the firm’s ethical standards, it could breed ethical problems throughout the organization I misread the question and thought it said most likely. Got it right for the wrong reasons. I suppose all the other answers make sense. But I would think working closely with auditors would be a conflict of interest. I know I read something about the need to have auditors independent in corporate governance.

Unfortunately, I had some SOX experience. Corporate officers are always working with Auditors. A company should exceed the needs of their requirements and this would not be possible without auditor feedback. Adittionally, you have different levels of auditors working in the corporate setting: compliance (on the company head count), internal auditors (consultants that help achieve controls), external auditors (make qualification statement), and in some many cases independent auditors (specialized consultants in high risk areas to ensure accuracy). The CFO is cutting the check for all these people so you would want them to be “on the same page,” as Lenz said. With all this said, the CFAI’s point is that the auditors (especially External) must arrive at an independent conclusion in a fair manner.