Window Dressing in AccountingExplained & Defined

Written By:
Adiste Mae

Window dressing is a deliberate action taken by a company to make its financial statements look more appealing and provide an appearance that it is doing well.

Typically, this practice is done by companies that have a large number of shareholders who do not have much contact with the company and have no idea of its day-to-day operations.

By window dressing their financial reports, these shareholders are led to believe that their investment is under the helm of a well-run business.

From a lender’s point of view, a good financial report will show that the company will be able to pay for current and future borrowings.

Window dressing is unethical because it provides misleading financial information that is crucial in the decision-making process of stakeholders, investors, and lenders.

Purpose of Window Dressing in Accounting

Companies resort to Window Dressing to cover up the real financial position of a company to achieve the following:

• Attract Investors – When the business is shown as doing good, existing investors will keep their investments in the company, and potential investors will be more inclined to start investing in the company. With new investors coming in, that will also mean that the company will have more funds coming in.
• Increase in the Stock Price – There are many factors that influence the value of the stock prices of companies. One of which is the current financial performance of the company. If it continues to show increasing net operating profits, the value of the stock price increases.
• Cover up poor management –  Poor decisions done by management can negatively impact the financials of the business. Financial statements that look good in a way, sends a message that the business is well-managed, and at the same time, cover the fact that it is nearing insolvency.
• To show that the company has stable finances – Companies would always want to show that the business is stable and is headed for growth. This keeps employees within the organization, attracts investors and lenders.

The above-mentioned reasons are only a few examples why companies window dress their financials.

There could be more reasons as to why they do this and this depends on the goal they want to achieve.

Methods

There are a few accounts that can be manipulated in order for companies to show higher profits, or show make it appear that the company is highly liquid or solvent.

A few methods companies use to window dress their books affect the following accounts:

Cash

In order to show a higher cash or bank balance, the company can delay the payments to their suppliers.

At the same time, they can also sell old assets in order to increase the cash or bank balance of the company.

Inventory

The profits of the company will be directly affected by the amount of inventories recorded.

Depending on the type of valuation used, it can either increase or decrease the profits.

Depreciation

Just like the valuation of inventories, when a company changes the method of depreciation from an accelerated depreciation method to a straight line depreciation method, the expenses decrease, so the profits will increase.

Provisions

Creating provisions increases the expenses of the company and therefore reduces the taxable income.

Revenue

Usually, businesses market offers and discounts at the end of the year in order to increase their sales.

Expenses

Small expenses that are supposed to be recorded as an expenses in the period that were incurred are capitalized instead in order for the profit to increase.

How to Identify

In order to spot window dressing in a company’s account, the financial reports of the company can be compared from previous years.

Other ways of checking would be checking the Cash Flow Statement and check which activities of the company has resulted in Cash Inflows.

Change in accounting policies should also be noted, especially a change in inventory valuation or method of depreciation used.

A sudden increase in sales, especially during the year-end, should also be noted especially when the boost in sales was done through a lot of sales offers and discounts.

Conclusion

Window dressing is unethical because its very nature is misleading.

It is done by companies to attract investors and lenders by showing them that the company is doing well through their financial reports when in reality, it is not.