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Window dressing is a strategy used by mutual fund and portfolio managers near the
year or quarter end to improve the appearance of the portfolio/fund performance
before presenting it to clients or shareholders. To window dress, the fund manager
will sell stocks with large losses and purchase high flying stocks near the end of the
quarter. These securities are then reported as part of the fund's holdings.
Performance reports and a list of the holdings in a mutual fund are usually sent to
clients every quarter. Another variation of window dressing is investing in stocks
that don't meet the style of the mutual fund. For example, a precious metals fund
might invest in stocks that are in a hot sector at the time, disguising the fund's
holdings, so clients really have no idea what they are paying for. Window dressing
may make a fund appear more attractive, but you can't hide poor performance for
long.
Example:
Window dressing refers to actions taken or not taken prior to issuing financial
statements in order to improve the appearance of the financial statements.
Here is an example of window dressing. A company operates throughout the year
with a negative balance in its general ledger Cash account. (Its balance at the bank
is positive due to the time it takes for its checks to clear its bank account.) Since
the financial statements report the Cash amount appearing in its general ledger
account, the financial statements would report a negative amount of Cash.
However, the company does not want its December 31 balance sheet to report a
negative cash balance, since it will be reviewed by many outsiders. To avoid
reporting a negative cash balance the company does not make the payments for
amounts that should be paid between December 26 and December 31. This
postponement of payments allows its book amount of Cash to temporarily be a
positive amount. Then on January 2, the company issues checks for all of the
amounts that normally would have been paid at the end of December.
2. Creation of more provisions for bad debts or discounts on debtors than expected
bad debts or discount on debtors.
3. Over statement of liabilities along with understatement of owner claim.
4. Treatment of contingent liabilities as actual liabilities on the liability side of
balance sheet.
Now a days accountants use this convention as a way to create income statement
on the whims of the owners. By creating excess provisions accountants can lower
down profits to reduce tax burden and to lower down the rate of dividends and viceversa.
Management accountant has to keep in mind which basis of the valuation is being
followed since asset can be valued at realizable values or replacement cost. He
should ensure that the method of valuation conforms to the principles on which
assets are being valued.
In examining the intangible assets like goodwill patents, brands etc. some points he
has to keep in mind that what was the basis for valuation at the time of their origin,
adequacy of the amortization procedure, consistency followed in recording such
assets. Nowadays intangible assets like brands are gaining importance and are
subject to correct or realistic valuation. Management accountants are to ensure
their accurate valuation as some of them may be un-saleable.
3. Verification of provisions:
Generally provisions are created to meet losses or to meet a specific contingency
for instance provision for bad debts, discount on debtors, etc. An excessive
provision for bad and doubtful debts will lower the income shown in profit and loss
account. A trend can be framed so as to put a check on this malpractice. More over
creation of provisions is subjective in nature. More conservative accountant will
create more provision and vice versa.
4. Verification of Capital and Revenue Items:
A distinction between capital and revenue item is very important from the point of
view of calculating the correct profit or loss of a business concern. Window dressing
can be done by shifting any capital expenditure from balance sheet to income
statement so as to lowering down the profits and vice & versa.
Press releases and conference calls regarding quarterly earnings and related
information
Quarterly and annual reports to stockholders
Financial information posted on a corporation's website
Financial reports to governmental agencies including quarterly and annual reports
to the Securities and Exchange Commission (SEC)
Prospectuses pertaining to the issuance of common stock and other securities.
Where did the business get its capital, and is it making good use of the money?
What's the cash flow from the profit or loss for the period?
Businesses often assume that the readers of the financial statements and other
information in their financial reports are fairly knowledgeable about business and
finance, in general, and understand basic accounting terminology and measurement
methods, in particular. Dont expect to find friendly hand holding and helpful
explanations in financial reports you read, and realize that drafting a financial report
yourself takes a lot of accounting know-how.
Scandals: Without a doubt, the rash of accounting and financial reporting scandals
over the last two decades was one major reason for the step-up in activity by the
standards setters.
The Enron accounting fraud not only brought down a major international CPA firm
(Arthur Andersen) but also led to passage of the Sarbanes-Oxley Act of 2002.
Sarbanes-Oxley includes demanding requirements on public companies regarding
establishing and reporting on internal controls to prevent financial reporting fraud.
The price of dealing with these situations has been a rather steep increase in the
range and rapidity of changes in accounting and financial reporting standards and
requirements. You must make sure that your financial reports follow all current rules
and regulations.
CSR may also be referred to as "corporate citizenship" and can involve incurring
short-term costs that do not provide an immediate financial benefit to the company,
but instead promote positive social and environmental change.
BREAKING DOWN 'Corporate Social Responsibility'
Large companies are immensely powerful entities, to the point that they have
frequently trumped the interests of sovereign nations. American businessmen
deposed the queen of Hawai'i in 1893 because they were incensed with her tariff
policies. The formerly independent country became an American territory a few
years later. Corporate interests frequently harm local communities, as in 1928 when
the Colombian army massacred an unknown number of striking United Fruit
Company workers. The U.S. had threatened a military invasion of Colombia to
protect the company's interests.
Corporations can have enormously detrimental effects on the environment. Oil spills
are some of the most conspicuous examples, but industries as varied as chemical
manufacturing, mining, agriculture and fishing can do permanent damage to local
ecosystems. Climate change can also be attributed in large part to corporations.
While their responsibility is hard to untangle from that of the consumers who
demand electricity and transportation, it is difficult to deny that many corporations
have profited from the deterioration of the global environment.
In light of this often dark legacy, some areas of corporate culture have begun to
embrace a philosophy that balances the pursuit of profit with a commitment to
ethical conduct. Google Inc's (GOOG) slogan sums up the idea of corporate social
responsibility nicely: "Don't be evil."
The same money and influence that enable large companies to inflict damage on
people and the environment allows them to effect positive change. At its simplest, a
corporation can give money to charity. Companies can also use their influence to
pressure governments and other companies to treat people and resources more
ethically. When Martin Luther King, Jr. won the Nobel Peace Prize in 1964, Atlanta's
business leaders initially refused to attend a dinner celebrating the Atlanta native's
achievement. Coca Cola Co.'s (KO) CEO, recognizing the damage such a display of
segregationist attitudes could do to the firm's international brand, threatened to
move Coke out of the city, causing an immediate change of heart in the local
business elite.
Companies can invest in local communities in order to offset the negative impact
their operations might have. A natural resources firm that begins to operate in a
poor community might build a school, offer medical services or improve irrigation
and sanitation equipment. Similarly, a company might invest in research and
development in sustainable technologies, even though the project might not
immediately lead to increased profitability.
In recent years, supply chains have emerged as a central focus of corporate social
responsibility. Company X's management might make extraordinary efforts to hire,
foster and empower a diverse workforce. They might offer generous paid maternity
The diamond industry, for example, has come under fire for benefiting from
injustices along its supply chain. "Blood diamonds" or "conflict diamonds" are
diamonds which have been sourced from war zones, where rebel groups will often
fund their campaigns through mining, frequently using forcedoften childlabor.
Such situations have arisen in Angola, Liberia, Ivory Coast, Mozambique, Zimbabwe,
the Democratic Republic of the Congo and Congo-Brazzaville. International
consumer and NGO pressure has caused diamond companies to scrutinize their
supply chain, and has reduced the number of diamonds reaching the market from
conflict zones.
Today, a shift has occurred in the way people conceptualize corporate social
responsibility. For decades, corporate business models have been assumed to be
necessarily harmful to certain communities and resources. The intention was
therefore to mitigate or reverse the damage inherent in doing business. Now many
entrepreneurs consider profit and social-environmental benefit to be inextricable.
Few tech startups pitch their ideas without describing how they will change the
world for the better. Social media platforms believe they will facilitate democracy
and the free exchange of information; renewable energy companies believe they
will make money by selling sustainable solutions; sharing economy apps believe
they will cut down on the waste and inefficiency of a post-war economy myopically
geared toward the individual consumer.
violate its duties to the owners. Some counter that this concerned is misplaced,
since responsible initiatives can increase brand loyalty and therefore profits. This
may become increasingly true as ethical consumer culture gains wider acceptance.