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Financial Management

Handout for Window Dressing

Submitted to: Dr. Tulsi Devi NIT WARANGAL.

Submitted by: N. Jyoti (118928)

Slide 1: Cover Page This slide gives the topic name. The topic is Window Dressing. It is presented by N. Jyoti. Slide 2: Introduction (Window dressing) This slide shows the pictorial representation of Window Dressing.

Slide 3: What is Window Dressing? This slide gives a brief insight on what is Window Dressing? Window dressing refers to attempts by business to present its accounts in the best light Has become more of a necessity as pressure to please shareholders It is NOT illegal Balance sheet snapshot of a business at a point in time, therefore: Delay major payment Include large injection of cash/assets Slide 4: Example This slide gives some examples of window dressing. A high profit will be declared for shareholders A reduced profit for Tax Authorities A high profit for management to negotiate new employment contract A reduced profit to avoid a revision of salary for all the employees. A high profit to prevent a corporate takeover

A reduced profit when the company exceeds the market benchmark. Slide 5-7: A Real Life Example A vacancy appeared in a Newspaper advertising a post for an Accountant to join one of the multi-national companies. A short-list of the candidates were made and the Head of the Human Resources selected 3 of the highest qualified Accountants for the interview. A Panel of 5 Executives were organized to interview the candidates. The interview date was announced and the candidates turned up for the interview at the companys Head Office. One of the questions asked by the Finance Director of the Company was: I want you to solve this accounting problem for me: 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. 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. Slide 8: 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. Slide 9-13: Methods of Window Dressing Short term Borrowing Short term borrowing is done just the date on which the balance sheet is drawn up. This gives an impression that the ability to pay the short term debts is enhanced But increases an additional liability Chasing Debtors Special effort to chase debtors before the balance sheet is drawn up This might involve discounts for prompt payment and extra expense. Conversion of debtors into cash will improve the balance sheet and cash position of the organization There is a sudden improve in the liquidity but at the expense of sales revenue Bringing Forward Sales Sales show up in the P&L account when the order is 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

Intangible assets: Brand name, Good will Normally only included if purchased They are subject to depreciation-amortization But if they are not depreciated the firm maintains the value of its assets thus giving a misleading view of the asset value of the firm.

Slide 14: What about the Auditors Role in Window Dressing Accounting? The auditor 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. Slide 15: References: