Some companies try to manipulate financial information, in order to make the financial disclosures look more attractive to the stakeholders. This set of activities is called window dressing. Window dressing is mostly done at the end a financial term, but can be undertaken at any point during the year. This technique is mostly employed by companies and mutual funds.

The main purpose of window dressing involves making the performance and liquidity position of the firm look healthier and appealing. Financial statement such as Income Statement, Balance Sheet and cash flow statement are the three main company generated document that can be used to assess the performance of a company. Hence, window dressing involves manipulating these statements before they are released to the stakeholders to review and evaluate.

How is it done?

There are several ways through which a company can window dress it financial statement. One of the most popular technique is changing asset deprecation, by using a different deprecation method. Short-term borrowing, engaging in sales and leaseback transaction near the end of year can substantial impact the outlook of the company’s financials, since it embellishes company’s financial result and liquidity position.

Another form of window dressing involves advertising and creative marketing, which entails exaggeration of company’s product and service, while the negative attributes are kept hidden, in order to boost sales under false pretenses.

Financial institutions often sell underperforming stock, and replace them with well-performing stock in the last few days of the financial year, which leads to better position in the balance sheet, hence making the investing with that particular bank or mutual fund more appealing for he clients.

Window dressing is usually beneficial to managers, since their remuneration depends on how well their company performs, while some times managers want to please the banks with a better liquidity position in order to acquire loans.

Some companies window dress their financial accounts in order to reduce their tax liability, as lower income would entail lower taxes. During mergers and acquisitions, firms often over overstate their asset so that a higher value could be places on the company.

Unethical and Misleading

Window dressing in considered unethical and even illegal in most countries, since it distorts the information, which misleads the stakeholders. In order to stop companies from manipulating their financial statement, accounting standards have been developed, which make it necessary for all companies to record financial transaction in a specific manner, hence leaving no room for creative accounting.