Deck 30: Web 5:conflicts of Interest in the Financial Services Industry

Question 1

The problem with spinning is that it may ________ the cost of capital to a firm and thus ________ the efficiency of the capital market.

A)increase;increase
B)increase;decrease
C)decrease;increase
D)decrease;decrease

Answer 1

B

Question 2

Evidence suggests that the market ________ take into account the credibility of analyst's recommendations of IPOs that were underwritten at the analyst's investment bank because the performance of these recommendations was about 50% ________ compared to recommendations made by other analysts at different investment banks.

A)does;better
B)does;worse
C)does not;better
D)does not;worse

Answer 2

B

Question 3

Which of the following is not a conflict of interest in accounting firms?

A)The firm provides consulting as well as rating creditworthiness.
B)Auditors may be pressured to skew their opinions so the client will stay with the firm.
C)Auditors may be reluctant to criticize advice put into place by nonaudit personnel of the firm.
D)Auditors release an overly favorable audit in order to solicit business.

Answer 3

A

Question 4

Conflicts of interest may arise within the credit rating agencies because

A)the investors pay the credit agencies for ratings.
B)the issuers of debt securities pay the credit agencies for ratings.
C)the credit rating agencies provide auditing services to issuers of debt securities.
D)the credit rating agencies are involved in offering credit counseling to investors.

Question 5

When financial institutions are able to reduce the costs of information for each service they offer by applying the same information source to each service,we say that the financial institution is realizing

A)economies of scope.
B)economies of scale.
C)increasing returns.
D)diminishing marginal returns.

Question 6

A type of ________ problem that occurs when a person or institution has multiple objectives that conflict with each other is called ________.

A)moral hazard;conflicts of interest
B)adverse selection;conflicts of interest
C)moral hazard;spinning
D)adverse selection;spinning

Question 7

Conflicts of interest arising from management advisory services brought down ________ in 2002.

A)Enron
B)WorldComm
C)Arthur Andersen
D)Global Crossing

Question 8

The incentive for analysts in investment banks to distort research increases when

A)revenues from brokerage commissions increase.
B)the potential revenues from underwriting greatly exceed brokerage commissions.
C)the potential brokerage commissions greatly exceed revenues from underwriting.
D)revenues from underwriting decrease.

Question 9

Conflicts of interest is a type of ________ problem that occurs when a person or institution has multiple objectives that are in conflict with each other.

A)moral hazard
B)adverse selection
C)risk sharing
D)spinning

Question 10

Not surprisingly,when financial institutions have consolidated more services under one roof,the amount of conflicts of interest has ________,which has led to ________ in unethical behavior.

A)increased;an increase
B)increased;a decrease
C)decreased;an increase
D)decreased;a decrease

Question 11

In investment banking,a conflict usually is present between the issuers of securities,who ________,and investors,who ________.

A)benefit from unbiased auditing;desire unbiased consulting
B)desire unbiased research;benefit from optimistic research
C)benefit from optimistic research;desire unbiased research
D)desire unbiased consulting;benefit from unbiased auditing

Question 12

Describe what is meant by economies of scope and explain how financial institutions' realizing economies of scope has led to an increase in conflicts of interest.

Question 13

One problem with conflicts of interest is that they can reduce the ________ in financial markets,thereby increasing ________.

A)quantity of information;financial institutions' profits
B)quantity of information;asymmetric information
C)quality of information;asymmetric information
D)quality of information;financial institutions' profits

Question 14

Which of the following is an example of a bank realizing economies of scope?

A)The bank develops a standard mortgage loan application to make the process of loaning out mortgages easier.
B)The bank reduces costs of credit checking for the loan process by outsourcing the process to a specialist.
C)By using the information collected from a corporation,the bank can decide how easy it would be to sell bonds issued by the corporation to the public.
D)A bank in a rural area specializes in providing agricultural loans.

Question 15

Reputational rents refer to

A)the profit earned by a firm when it captures economies of scope.
B)the costs associated with building credibility of a firm.
C)the profit earned solely based on the credibility of a firm.
D)the costs associated with the firm's achievement of economies of scale.

Question 16

When the Glass-Steagall Act was repealed in 1999,potential conflicts of interest arose with

A)the development of universal banking.
B)the introduction of more credit-rating agencies.
C)accounting firms developing more comprehensive services.
D)investment analysis in investment banking.

Question 17

Explain the type of conflicts of interest that can arise from the development of universal banking.

Question 18

When investment banks allocate shares of a popular but underpriced IPO to executives of other firms in order to attract their business,it is called

A)spinning.
B)a bribe.
C)reputational activities.
D)a kickback.

Question 19

Evidence suggests that credit-rating agencies ________ exploited conflicts of interest because ________.

A)have not;it would cause their ratings to lose credibility and thus have a lower value in the marketplace
B)have not;they would have an increase in profits in the long-run
C)have;it would cause their ratings to lose credibility and thus have a lower value in the marketplace
D)have;they would have an increase in profits in the long-run

Question 20

Advice on taxes,accounting or management information systems,and business strategies are commonly referred to as ________ services.

A)accounting audit
B)management advisory
C)seller
D)managing underwriter

Question 21

Which of the following policy measures required the SEC to prevent issuers of asset-backed securities from choosing the credit-rating agencies that will give them the highest rating and supported earlier initiatives by the SEC?

A)the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
B)Sarbanes-Oxley Act of 2002
C)Global Legal Settlement of 2002
D)Gramm-Leach-Bliley Act of 1999
E)Riegle-Neal Act of 1994

Question 22

If a conflict of interest exists

A)it will always have serious adverse consequences.
B)it may not have a serious adverse consequences if the incentive to take advantage of the conflict is low.
C)the government needs to step in to pass legislation to remove the conflict.
D)there will not be serious adverse consequences,even if the incentive to take advantage of the conflict is low.

Question 23

Which of the following policy measures authorized investors to bring lawsuits against credit-rating agencies for a reckless failure to get the facts when providing a credit rating?

A)the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
B)Sarbanes-Oxley Act of 2002
C)Global Legal Settlement of 2002
D)Gramm-Leach-Bliley Act of 1999
E)Riegle-Neal Act of 1994

Question 24

Which of the following policy measures created an Office of Credit Ratings at the SEC with its own staff and the authority to fine credit-rating agencies and to deregister an agency if it produces bad ratings?

A)the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
B)Sarbanes-Oxley Act of 2002
C)Global Legal Settlement of 2002
D)Gramm-Leach-Bliley Act of 1999
E)Riegle-Neal Act of 1994

Question 25

If the incentive to take advantage of a conflict of interest is high

A)removing the economies of scope that created the conflict may induce higher costs because of the decrease in the flow of reliable information.
B)then the government must step in to remove the conflict.
C)the costs of non-action in removing the conflict will always be higher than the cost of removing the conflict.
D)firms will always step in and work to remove the conflict.

Question 26

Which policy measure increases the punishment for white-collar crime and obstruction of official investigations?

A)Sarbanes-Oxley Act of 2002
B)Global Legal Settlement of 2002
C)Gramm-Leach-Bliley Act of 1999
D)Riegle-Neal Act of 1994

Question 27

Which of the following policy measures prohibited compliance officers from being involved in producing or selling credit ratings?

A)the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
B)Sarbanes-Oxley Act of 2002
C)Global Legal Settlement of 2002
D)Gramm-Leach-Bliley Act of 1999
E)Riegle-Neal Act of 1994

Question 28

Which policy measure increased the SEC budget to supervise securities markets?

A)Sarbanes-Oxley Act of 2002
B)Global Legal Settlement of 2002
C)Gramm-Leach-Bliley Act of 1999
D)Riegle-Neal Act of 1994

Question 29

Explain how the market can reduce the incentive for credit-rating firms to take advantage of conflicts of interest.

Question 30

Which policy measure bans spinning?

A)Sarbanes-Oxley Act of 2002
B)Global Legal Settlement of 2002
C)Gramm-Leach-Bliley Act of 1999
D)Riegle-Neal Act of 1994

Question 31

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 included which of the following provisions to deal with conflicts of interest in the credit-rating Industry? 1. Created an Office of Credit Ratings at the SEC with its own staff and the authority to fine credit-rating agencies and to deregister an agency if it produces bad ratings.
2. Forced credit-rating agencies to provide reports to the SEC when their employees go to work for a company that has been rated by them in the last twelve months.
3. Prohibited compliance officers from being involved in producing or selling credit ratings.
4. Required the SEC to prevent issuers of asset-backed securities from choosing the credit-rating agencies that will give them the highest rating and supported earlier initiatives by the SEC.
5. Authorized investors to bring lawsuits against credit-rating agencies for a reckless failure to get the facts when providing a credit rating.

A)1,2,3,and 4.
B)2,3,4,and 5.
C)none.
D)1,2,3,4,and 5.

Question 32

If there isn't sufficient information available,then which of the following approaches to reduce conflicts of interest will have the lowest probability of working?

A)leave it to the market
B)supervisory oversight
C)separation of functions
D)socialization of information production

Question 33

Which of the following is not a part of the Sarbanes-Oxley Act of 2002?

A)the establishment of a Public Company Accounting Oversight Board (PCAOB)to supervise accounting firms and thus insure that audits are independent and controlled for quality
B)increased penalties for white-collar crime and obstruction of official investigations
C)requires a CEO and CFO to certify that periodic financial statements and disclosure of the firm are accurate
D)requires investment banks to make public their analysts' recommendations

Question 34

Which policy measure requires investment banks to sever the links between research and securities underwriting?

A)Sarbanes-Oxley Act of 2002
B)Global Legal Settlement of 2002
C)Gramm-Leach-Bliley Act of 1999
D)Riegle-Neal Act of 1994

Question 35

If firms have an incentive to hide information from mandatory disclosure because the information is proprietary,then which of the following remedies is the least intrusive way to overcome this incentive?

A)leave it to the market
B)separation of functions
C)supervisory oversight
D)socialization of information production

Question 36

Which of the following policy measures forced credit-rating agencies to provide reports to the SEC when their employees go to work for a company that has been rated by them in the last twelve months?

A)the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
B)Sarbanes-Oxley Act of 2002
C)Global Legal Settlement of 2002
D)Gramm-Leach-Bliley Act of 1999
E)Riegle-Neal Act of 1994

Question 37

Which of the following is a part of the Global Legal Settlement of 2002?

A)The establishment of a Public Company Accounting Oversight Board (PCAOB)to supervise accounting firms and thus insure that audits are independent and controlled for quality.
B)Increased penalties for white-collar crime and obstruction of official investigations.
C)Requires a CEO and CFO to certify that periodic financial statements and disclosure of the firm are accurate.
D)Requires investment banks to make public their analysts' recommendations.

Question 38

When the SEC requires companies to publicly release financial statements,which of the following remedies of conflicts of interest does this fall under?

A)leave it to the market
B)regulate for transparency
C)supervisory oversight
D)separation of functions

Question 39

Which policy measure makes it unlawful for a registered public accounting firm to provide any nonaudit service to a client contemporaneously with an impermissible audit?

A)Sarbanes-Oxley Act of 2002
B)Global Legal Settlement of 2002
C)Gramm-Leach-Bliley Act of 1999
D)Riegle-Neal Act of 1994

Question 40

Which policy measure requires investment banks to make public their analysts' recommendations?

A)Sarbanes-Oxley Act of 2002
B)Global Legal Settlement of 2002
C)Gramm-Leach-Bliley Act of 1999
D)Riegle-Neal Act of 1994

Question 41

Under the Global Legal Settlement of 2002,the provision that requires investment banking firms to sever the link between underwriting and research is an example of

A)regulate for transparency.
B)supervisory oversight.
C)separation of functions.
D)socialization of information production.

Question 42

Under the Global Legal Settlement of 2002,the provision that requires,for a period of five years,brokerage firms to contract with independent research firms to provide information to their customers is an example of

A)regulate for transparency.
B)supervisory oversight.
C)separation of functions.
D)socialization of information production.

Question 43

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 authorized investors to bring lawsuits against credit-rating agencies for a reckless failure to get the facts when providing a credit rating.This is an example of which remedy of conflicts of interest?

A)regulate for transparency
B)supervisory oversight
C)leave it to the market
D)socialization of information production

Question 44

Under the Sarbanes-Oxley Act of 2002,the clause that makes it unlawful for a registered public accounting firm to provide any nonaudit service to a client contemporaneously with an impermissible audit is an example of which remedy of conflicts of interest?

A)regulate for transparency
B)supervisory oversight
C)separation of functions
D)socialization of information production

Question 45

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 did not prohibit companies issuing securities from paying the credit-rating agencies to rate them.This is an example of which remedy of conflicts of interest?

A)regulate for transparency
B)supervisory oversight
C)leave it to the market
D)socialization of information production

Question 46

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 created an Office of Credit Ratings at the SEC with its own staff and the authority to fine credit-rating agencies and to deregister an agency if it produces bad ratings.This is an example of which remedy of conflicts of interest?

A)regulate for transparency
B)supervisory oversight
C)leave it to the market
D)socialization of information production

Question 47

Of the remedies for conflicts of interest,which one is the most intrusive?

A)regulate for transparency
B)separation of functions
C)supervisory oversight
D)socialization of information production

Question 48

Under the Global Legal Settlement of 2002,the provision that requires investment banking firms to make their analysts' recommendations public is an example of

A)regulate for transparency.
B)supervisory oversight.
C)separation of functions.
D)socialization of information production.

Question 49

Under the Sarbanes-Oxley Act of 2002,the provision that established the PCAOB to supervise accounting firms is an example of

A)regulate for transparency.
B)supervisory oversight.
C)separation of functions.
D)socialization of information production.

Question 50

Under the Sarbanes-Oxley Act of 2002,the provision that gives more funding to the SEC is an example of

A)regulate for transparency.
B)supervisory oversight.
C)separation of functions.
D)socialization of information production.