Answer: Changing the company's audit firm.

## Explanation **Correct Answer: B - Changing the company's audit firm** **Why this is the correct answer:** 1. **Auditor independence and oversight**: When a company changes its audit firm, it may indicate that management is seeking a more lenient auditor who will be more accommodating to aggressive or biased accounting choices. This is a classic red flag for potential earnings management or accounting manipulation. 2. **Auditor shopping**: Companies may change audit firms to find one that is more willing to accept their preferred accounting treatments, especially when facing pressure to meet earnings targets or present financial results in a particular light. 3. **Regulatory concerns**: Regulators and standard-setters view frequent auditor changes as a potential warning sign of accounting quality issues. The new auditor may not have the same historical knowledge or may be more willing to accept management's accounting estimates and judgments. **Why the other options are less likely:** - **A. Changing the company's CEO**: While a CEO change can lead to changes in accounting policies, it doesn't inherently create bias. New CEOs often want to "clean house" and may actually be more conservative with accounting choices to establish credibility. - **C. Changing the company's fiscal year**: This is typically done for operational or strategic reasons (aligning with industry cycles, parent company reporting, etc.) and doesn't inherently create bias in accounting choices. While it could potentially be used to manipulate reporting periods, it's less directly linked to biased accounting choices than auditor changes. **Key concepts from CFA curriculum:** - Auditor changes as a red flag for financial reporting quality - The importance of auditor independence in ensuring unbiased financial reporting - Management's ability to influence accounting choices through auditor selection - Warning signs of potential earnings management **Professional Standards Context:** Under ethical and professional standards, analysts should be particularly alert to auditor changes as they may indicate potential issues with financial reporting quality or management's willingness to use aggressive accounting practices.

Author: LeetQuiz .