Final answer:
Improper recognition of revenue can lead to a reduction in the quality of earnings because it misrepresents the company's actual performance and profitability. An increase in revenue or effective cost management generally improves earnings quality, while a decrease in expenses has a variable impact.
Step-by-step explanation:
The quality of earnings refers to the degree to which a company’s earnings are free from distortion and give an accurate depiction of its profitability. In the context of financial reporting, certain practices can lead to a reduction in the quality of earnings, and among the choices provided, improper recognition of revenue is the one that would result in such a reduction. An increase in revenue and effective cost management typically contribute positively to the quality of earnings when done through legitimate business growth and efficiency improvements. However, a decrease in expenses could either improve or worsen the quality of earnings depending on whether the decrease is sustainable and reflects true operational efficiency, or if it results from one-time items or accounting changes that may not be repeatable and could potentially distort earnings quality.