Window dressing is a technique to manipulate reports and financial statement of the company to show more favorable results and performance o...
Window dressing is a technique to manipulate reports and financial statement of the company to show more favorable results and performance of firm for a period and it is used by companies and financial managers. Although window dressing is illegal or unethical, it is slightly dishonest and is usually done to mislead investors.
Window dressing means it describes the act of making a company's performance, particularly its financial statements and reports, look attractive.
Window dressing is the actions taken close to the end of a reporting period by company’s managers or fund managers and make their financial statement and report look better. It is often used to hide lower than expected results and loss too.
Window dressing is works for the short term only. If a manager is not performing up to standards; his performance will eventually be discovered. Long-term poor results are impossible to hide using window dressing.
“Window dressing is an art to make more attractive by dressing up the financial reports”
The first use of window dressing is in the year of 1994.
What Is Window Dressing Accounting?
Window dressing refers to actions taken or not taken by issuing financial statements in order to improve the financial statements and balance sheet.
Window dressing is actions taken to improve the appearance of a company's financial statements and reports. Window dressing is generally used when a business has a large number of shareholders, so that management is able to show well-run company to investors who probably do not have much contact with the business on day to day basis. It is also useful when a company wants to impress a lender for qualifying for a loan. The owners are always a better informed about company results and performance, so there is no reason for anyone to apply window dressing to the financial statements.
Fund managers are also used the concept of window dressing, who replace the poor performance securities into the higher-performing ones just before the end of a reporting period, to impress the investors and shareholders.
Window dressing is probably found in investment brokers and mutual fund provider firms. Mutual fund managers often sell their poor performing stock and other investments at the end of a period and use the money to buy high performing stock. This way new investors see the portfolio of high performing stock and investor invest the money into that. Obviously, this is only a short-term strategy to play with the investors. Any experienced and expertise investor will analyze portfolio trends over the past few periods to see that actually the firm is making the profit or not.
The entire concept of window dressing is clearly unethical, because it is misleading the investors and shareholders of the company. Also, it merely robs results in order to make the current period look better, from a future period so it is short-term in nature.
How It Works (Example):
For example if the Company ABC wants to look attractive to potential acquirers. It might do some window dressing by announcing higher amount of sales projections, obtaining and holding a large amount of cash, or making other announcements that are to raise the price of the stock, even if only for a short time. The main objective of window dressing is to make a good impression on potential shareholders.
Companies are not only the ones which are engage in window dressing. Mutual funds do the same, often by cutting their losses and buying high-fliers near the end of a reporting period.
Techniques of Window Dressing:
1) Sale and leaseback – company is selling their assets before the year end and lease them back to increase cash but do not involve in a commitment to pay rentals. There entity may sell the assets before the year end and lease it back.
2) Short Term borrowings – this is another technique of window dressing where companies borrow loans for a short term before the yearend to show an enough ability to repay debts although it does increase liabilities of the company.
3) Receipts of Receivables– this is the technique where the company is directly asking to the customers to pay their debts early so the cash is received before the balance sheet date. Discounts are offered to the customers so they will agree to pay earlier this. This makes the cash position better and it does improve liquidity but it reduces the profits.
4) Bringing sales forward–Here, the firm is asking to customers to take sales early so they can be recognized before the year end. This increases income and profits but it’s not increase cash. Unfortunately it brings problems for the next financial year as the sales cannot be recognized again, so effectively the company is taking next year’s sales into the current year.
5) Changing depreciation policies – if an entity decides to increase the useful life of non-current assets this will reduce the income statement depreciation charge and improve the asset position and profit will be increased...
“SATYAM 2G SCAM” is the big example for window dressing in a year 2009.it is the big fraud of Indian history of 1.47 billion $
So, in short window dressing is an art to show the good profit and statement to just impress to the investors and shareholders. It is one kind of fraud and it is totally unethical in nature.