Window Dressing

Creative Accounting
BY:N JYOTI 118928

Window Dressing

Window Dressing
y Window dressing refers to attempts by business to present its

accounts in the best light y Has become more of a necessity as pressure to please shareholders and the City increases y It is NOT illegal y Deliberate deception in the accounts is fraud
y How do firms massage the accounts? y Timing of reporting y Balance sheet snapshot of a business at a point in time,

therefore:
y Delay major payment y Include large injection of cash/assets

Contd....
y Exploit accounting procedures often a wide range in

the definition
y Exploiting other definitions extraordinary items what counts

as extraordinary? y Depreciation different results gained using different methods which is the best and the most accurate? y Residual values could be altered

Example:
y A high profit will be declared for shareholders y A reduced profit for Tax Authorities y A high profit for management to negotiate new y employment contract y A reduced profit to avoid a revision of salary for y all the employees. y A high profit to prevent a corporate takeover y A reduced profit when the company exceeds y the market benchmark.

A Real Life Example of Window Dressing the Accounts of A Business

y A vacancy appeared in a Newspaper advertising a post for an y Accountant to join one of the multi-national companies. y A short-list of the candidates were made and the Head of the Human y Resources selected 3 of the highest qualified Accountants for the y interview. y A Panel of 5 Executives were organized to interview the candidates. y The interview date was announced and the candidates turned up y for the interview at the companys Head Office. y One of the questions asked by the Finance Director of the Company y was: y I want you to solve this accounting problem for me: y What is the answer of :

1+3=

1st Candidates Answer 1 + 3 = 4 2nd Candidates Answer 1 + 3 = 4 3rd Candidates Answer 1 + 3 = Scientifically the answer is 4 BUT Accounting wise what you want me to make of the figures.

Who Do You Think Got the Job? Can Anyone Guess?

An amazing Incident with Window Dressing

The fact that the multi-national company was involved in producing creative accounting for the shareholders, the Panel of 5 Executives decided to employ the 3rd candidate for the accountant position. Unfortunately, the MNCs operations did not last long because the executives lost track of the number of creative transactions. The following stakeholders lost money in the end: Shareholders, suppliers, banks, employees, Tax Office, employees, and even the New Accountant.

Why Window Dress a set of Financial Statements?

The reason may be associated with the following factors: Directors or a group of shareholders may want to impress a prospective group of shareholders with the companys past performance. Following a takeover bid, management may wish to impress existing shareholders of their strategic decision. Earning fixation. Earnings-per-share indicator as the top market news. Directors remuneration may be fixed to profit performance of the business (e.g. profit related pay). Income smoothing to show a low variability in income, thus give the impression of low risk operation. Information Asymmetry managers are privy to internal information than most outsiders inclusive of analysts.

Methods of Window Dressing

Short term Borrowing

y Short term borrowing is done just the date on which the

balance sheet is drawn up. y This gives an impression that the ability to pay the short term debts is enhanced y But increases an additional liability

Chasing Debtors
y Special effort to chase debtors before the balance sheet is

drawn up y This might involve discounts for prompt payment and extra expense. y Conversion of debtors into cash will improve the balance sheet and cash position of the organization y There is a sudden improve in the liquidity but at the expense of sales revenue

Bringing Forward Sales

y Sales show up in the P&L account when the order is y

y y y

received- not when the cash is received. If the customers are made to place the orders earlier than planned. There will an increase in the sales revenue figure in the P&L account This can bring the next years sales to current year The sales cannot be included in next years figure The problem continues to exist.

Including Intangible Assets

y Intangible assets: Brand name, Good will y Normally only included if purchased y They are subject to depreciation-amortization y But if they are not depreciated the firm maintain the value of

its assets thus giving a misleading view of the asset value of the firm.

What about the Auditors Role in Window Dressing Accounting?

The auditors has a crucial role to identify fraud, mistaken, incorrect value, manipulation, errors in his clients accounts. Auditors are responsible directly under the law especially the international standards to report directly to the shareholders on the status of the companys or a banks account at a particular point in time. With regards to window dressing, if they have been unable to identify such a Practice, then they cannot be made to be solely liable for negligence because its it the responsibility of the Board of Directors and the management to ensure that the accounts are not tempered with.

References
y http://tutor2u.net/business/presentations/accounts/windo y y y y y

wdressing/default.html http://www.enotes.com/ethics-finance-reference/ethicsfinance http://www.blacksacademy.biz/ba/civ/XG9hg1anx/1z7Qv tuZFT.pdf http://220.227.161.86/19857ipcc_bcel_be_vol2_cp12.pdf http://business.gwu.edu/accountancy/files/windowdressing-financial-leverage.pdf http://www.pace.edu/emplibrary/Window_Dressing.pdf