Window dressing is presenting the companies financial records in a manner which emphasizes the economic position of the company.
It is a form of innovative accounting that involves the manoeuvring of statistics to butter up the financial position of the firm.
Window dressing is the main platform of accounts to make them look flattering as possible and to present different pictures on the balance sheet.
The bank balance and cash holdings like all other asset in the balance sheet will be shown at their value at that day only. Various ways by which figures can be manipulated on the balance sheet are as follows;
- Transactions and leaseback: involves selling fixed benefit or asset to a third party and then paying an amount of capital or money for every year to lease it back.
- Short term borrowing: this is when businesses borrow just sooner than the date on which the balance sheet is to be revealed.
- Chasing debtors: a special effort to chase debtors just before the balance sheet is drawn; transfer of debtors into cash will develop the balance sheet and capital position of the business.
- Delaying placing orders.
- Paying bills until after the balance sheet date.
- Sales of asset: for instance fixed assets and depositing proceeds into the bank to make the account look good.
- To show convincing and stronger or healthier market position than is warranted.
- To manipulate share price, firms that want to increase new capital from investors would consider making its financial accounts to look favourable as possible.
- To lessen liability of taxation, in order to reduce the amount of tax paid, firms make the financial account look worse than it is.
- To hide from view dilemma of liquidity problem or to hide poor administration decisions, here in order to prevent critics from financial press and shareholders, businesses might put a good financial account forward for share holders and possible or future shareholders.
- To discourage takeover proposals, a firm which wants to discourage possible buyers from taken over the company might show flattering accounts this is because this account would increase the cost of purchasing the company.
- To satisfy the demand of major investors concerning the level of returns
- When owners of a business want to sell their business, they present better financial account in order to get a higher price.
- To encourage investors.
- To reassure lenders of finance.
Ideally account must represent a true and fair record of the financial affairs of the business. To this extent legislation and financial accounting reporting standards place limits on the different ways in which a business can present account.
There are various reasons why organisations window dress, some of this reasons are as follows:
Having discussed the reasons for window dressing many accounting matters are matters of opinion and not provable facts so there is always going to be room for disagreement. No business can get away with fraudulent or even suspect behaviour for long. Many accounting tricks simply shift profit from one period to another so that in the long run it isn't fraud.
Any directors of companies or accountants not obeying the law can face heavy fines or imprisonment. The risks are high but there is also the temptation to manipulate the books to please the shareholders or city.
Some method of window dressing is contrary to the law or contrary to accounting standards and would not be employed by reputable firms, but accounting standards permit some flexibility of interpretation.
In conclusion organization should try as much as possible to limit the extent to which they window dress such that they would continue to earn public respect of their financial accounting publications to help them make worthwhile and useful investment decisions.