International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 - 6510(Online), INTERNATIONAL JOURNAL OF MANAGEMENT (IJM) Volume

e 5, Issue 2, February (2014), pp. 61-68 IAEME

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CREATIVE ACCOUNTING @ WINDOW DRESSING: AN EMPIRICAL ANALYSIS

Dr. B .Chandra Mohan Patnaik Associate Professor, School of Management, KIIT University, Bhubaneswar, Odisha Dr. Ipseeta Satpathy, D.Litt. Professor, School of Management, KIIT University, Bhubaneswar; Odisha Mr. Chandrabhanu Das Research Scholar, School of Management, KIIT University, Bhubaneswar, Odisha

ABSTRACT In recent times it is found that most of the corporate houses are indulged in window dressing in their financial statements. This window dressing is nothing but a creative accounting. The core objective of this is to manipulate the books of accounts. In the present paper it an attempt to understand the various tools that are used for these creative accounting. For this purpose we tried to make empirical analysis by undertaking a survey in some selected private sector undertakings in the Kolkota of West Bengal and Bhubaneswar & Cuttack of Odisha. In this direction 196 questionnaires were distributed in accounting department of selected units and of this only 87 responses were received. This includes 34 female employees and rests are male employees of junior level and middle level executives of private sector corporate units. The response rate was 44.39%. Likert scale with close end option and rank method is followed for the purpose of data analysis. The study found that window dressing practices are prevalent in majority of corporates but it also depends upon the expertise knowledge of the accounting department. Moreover it is also found that the external auditors to some extent encourage these practices for their own interest. For the purpose of confidentiality the names of the units are not mentioned. Keywords: Creative Accounting, Window Dressing, Financial Statements. I. AN OVERVIEW The Accounting Standards are issued with an objective of achieving uniformity in compliance to accounting practices and preparation of financial statements thereby ensuring the
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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 - 6510(Online), Volume 5, Issue 2, February (2014), pp. 61-68 IAEME

comparability of financial statement of different organizations. At present there are 32 Accounting Standards (AS) issued by the Institute of Chartered Accountants of India (ICAI). These are in fact issued by the Accounting Standard Board of ICAI. The main objective is to streamline the diverse accounting practices followed by different corporate houses. These Accounting Standards (AS) are issued to address the issues related to Recognition of events and transactions in the financial statements Measurement of these transactions and events, Presentation of these transactions and events in the financial statements in the manner that is meaningful and understandable to the readers and The disclosure requirement which should be there to enable the public at large and the stake holders and the potential investors in particular, to get an insight into what these financial statements are trying to reflect and thereby facilitating them to take prudent and informed business decisions. As we know that accounting data are the languages of business. This refers that the performance of an organization is being reflected in the accounting data or financial statements. This information is being used by various interested parties like investors, bankers, government, creditors, debtors, researchers and so on. The reliability and authenticity of these financial statements are important. However, unfortunately most of the times the accounting information provided by these corporate are not true. Here, the role of creative accounting through window dressing comes in to the picture. The best example is Satyam Scam in India. In a nutshell some of the major window dressing done by Satyam are enlisted below: Sales were inflated with fake orders and order book position. The debtors were also inflated due to this. To prevent the analysts from figuring this out from Cash Flow Statements and show better cash position added the received yet uncleared cheques through Bank Reconciliation statements to Current Account Balances. That showed huge balances with Current Account in Banks. Understated liabilities of unsecured loans and created false figures on Interest accrued on fixed deposits whereas there was no interest accrued. The Auditors missed the following areas in Satyam Scam The Auditors relying on the company reputation and brand image believed on the supporting documents and verbal assurance by the organization. This led to the following flaws mentioned below: Checking of Invoices and Billing Documents not done properly. Non verification of originality of FD Interest, TDS and Tax Liability. Non confirmation of Bank Balances directly from the Bank. This attitude of auditors was misused by the Company by creating Fake Balance Confirmation Letters using the Banks Letter Head with Logo of the Bank. Movements in Bank Transactions were omitted out of the Company Books and could not be detected by the Auditors. Failed to monitor the Fixed Assets Register and checking of Capitalization of Fixed Assets. Failed to reconcile the Ledgers, sub ledgers and Bank Reconciliation Statements to know the differences arising out of transactions.
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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 - 6510(Online), Volume 5, Issue 2, February (2014), pp. 61-68 IAEME

Individual checking of transactions relating to FOREX Loss/Gain was not done. Apart from all these flaws there are also allegations that end to end audit was not done and laxity of systems was not addressed for rectification by auditors. II. OBJECTIVE OF THE STUDY To understand the various ways of window dressing To suggest remedial measures to counter this creating accounting through window dressing. III. LIMITATIONS OF THE STUDY The research universe is restricted to urban areas only. The study is based on the perception of the respondents of selected private sector units and the views of this group may not represent the universal one. The period of study is limited to 4 months i. e October 2013 to January 2014 IV. METHODOLOGY OF THE STUDY The present study is based on primary data and to some extent secondary data. The data is collected by visiting various private sector corporate units in Kolkata of West Bengal and Cuttack & Bhubaneswar of Odisha. Collection of data was very challenging one for sensitive topic like window dressing that to from accounting staff. In this direction 196 questions distributed by adopting stratified random sample method and managed to collect 87 responses. For the purpose of analysis of data, Likert scale method used with close end option. For the purpose of collecting data 15 variables are identified. Respondents view with regard to Creative Accounting @ Window dressing To measure the perceptions of respondents of various private sector corporate units, the various variables identified are reallocation of income across various accounting period, treatment of capital expenses to revenue expenses, increasing the expected value of an assets, extension of accounting year, revaluation of fixed assets to suit the needs of the company for presenting better picture, altering stock valuation method for changing the gross profit figure, playing with third party lease, by altering capital lease to operational lease, depreciation treatment for intangible assets, playing with AS-9 on revenue recognition, manipulating transfer price from subsidiaries, inclusion of extraordinary items in normal operations, short term borrowings, not providing for decline in value of investments, receivable collection by offering discount before close of the financial year etc. For this purpose we have assigned 5,4,3,2,1 for the response of the respondents as Strongly Agree, Agree, Neutral, Disagree and Strongly Disagree. The total scores are calculated by multiplying the number of response by the weights of the corresponding response. Calculation of respondents perception: Ideal and Least scores Ideal scores are calculated by multiplying the number of respondents in each category with (5) and product with total number of attributes. Least scores calculated by multiplying the number of respondents in each category with (1) and the product with number of attributes in the questionnaires.

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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 - 6510(Online), Volume 5, Issue 2, February (2014), pp. 61-68 IAEME

Table : Ideal and Least scores Table-1

Category Junior Level Accounts Executives (Male) Junior Level Accounts Executives (Female) Middle Level Accounts Executives ( Male) Middle Level Accounts Executive ( Female) Equation 15X5X19 15X5 15X5X14 15X5X31 15X5X23 Ideal score 1425 1050 2325 1725 Equation 15X1X19 15X1X14 15X1X31 15X1X23 Least score 285 210 465 345

V. ANALYSIS OF DATA
Variables Aggregate Score Junior Level Accounts Middle Level Executives Accounts Executives Male Female Male Female 85 70 138 87 81 64 129 86 88 67 130 81 83 59 129 87 88 55 124 89 85 84 93 81 88 76 74 76 85 86 1253 1425 285 87.92 19 59 60 64 62 63 66 64 65 62 59 939 1050 210 89.42 14 126 134 134 125 124 110 126 122 133 130 1914 2325 465 82.32 31 90 87 92 94 99 89 93 95 98 104 1371 1725 345 79.48 23

Reallocation of income across various accounting period Treatment of capital expenditure to revenue expenses Increasing the expected value of an asset Extension of accounting year Revaluation of fixed assets to suit the needs of the company for presenting better picture Altering stock valuation method for changing the gross profit figure Playing with third party lease By altering capital lease to operating lease Depreciation treatment for intangible assets Playing with AS-9 9 on revenue recognition Manipulating transfer price from subsidiaries Inclusion of extraordinary item in normal operations Short term borrowings Not providing for decline in value of investments Receivable collection by offering discount before close of the financial year Total Scores Ideal Scores Least Scores % of total score to Ideal score No of respondents

Source: Annexure A, B,C & D

2500 2000 1500 1000 500 0 Male Female Male Female

Total Scores Ideal Scores Least Scores

Junior Level Accounts Executives Middle Level Accounts Executives

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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 - 6510(Online), Volume 5, Issue 2, February (2014), pp. 61-68 IAEME

VI. INTERPRETATION In the above table it shows that the total scores for junior level accounts executive male are 1253 for female 939 as against the ideal score of 1425 and 1050 respectively. The percentages of total score against the ideal score are 87.92 and 89.42. Similarly, in case of middle level accounts executive, the ideal score are for female and male respondents 1725 and 2325 and as against this the total scores are 1371 and 1914 respectively. The percentage of total score of female and male to the ideal scores are 79.48 and 82.32. Here, the observation is that in no case the total scores are near to the least score. This concludes that all the variables or attributes considered for the study are having enough support base and these variables are being practiced as part of creative accounting through window dressing. VII. SUGGESTIONS TO OVERCOME THE ISSUES RELATED TO WINDOW DRESSING Auditors have to check transactions after closing date and trace the number of transactions reversed or rectified. This process may help in detecting the erroneous journal entries or fraudulent transactions which are done to cook the books during the audit period. Protocols to be established for obtaining balance confirmation from different customers, vendors and house bank of company and to be verified with the balance in company books. Income booked from services/contract jobs which are performed and to be billed can be verified by auditors with greater accuracy from project site where the client can authenticate the works contract completion. Verification of Sales Orders of High Value and cross checking with Logistics team to find out rejection of materials at customer end. This will enable auditors to know whether all these rejections have been provided for by the company. Checking of CMA Data and FFR statements submitted to Bank by Company for availing Working Capital and short Term Loan. Auditors can know whether the statements are prepared as per the audited results or are misrepresented to enjoy better facilities from Banks. Similarly Capital Expenditure proposals submitted to Banks for availing Term Loans to be verified for feasibility and adequate disclosures Transfer pricing contracts to be studied and analysis to be made to see whether the price fixation is as per the transfer pricing rules and regulations. Inventory Cost may be validated after consultation with an expert and technical advisor who knows the business process and proper allocation of costs incurred. Detecting whether any short term financing done before the close of financial year to increase the cash balance and methods resorted to avail it. Similarly any other methods resorted to increase the Cash balance and specifically Cash Flow from Operations also to be investigated. Sophisticated and advanced auditing tools are to be developed which can integrate successfully with the accounting software used by Companies so as to detect any abnormal or fraudulent transactions. VIII. CONCLUDING OBSERVATION The fierce competitive market and the recent regulatory environment asking for more disclosures have made many companies to resort to window dressing. Window Dressing often known as creative accounting by many seems to be the easier alternative than really working hard to achieve the numbers. Since Creativity may be misused for Fraud so companies have to accept moral responsibility to be first ethical then creative. In Satyam fiasco the ethics was not the priority due to
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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 - 6510(Online), Volume 5, Issue 2, February (2014), pp. 61-68 IAEME

which the Chairman repented later saying that he was riding a tiger, not knowing how to get off without being eaten. Much of the moral responsibility to prevent companies to resort to unethical window dressing lies with the auditors. Nevertheless accountants and auditors of audit firm should always be cautious for fraudulent transactions. As Warren Buffet has once quoted Invest in those shares whose business you know similarly auditors may audit clients from those sectors where they are more conversant with the business process and models. This will give them better grip over Internal Controls and Systems. Then there will be fewer chances for fraudulent transactions and accounting scams. REFERENCES 1. Study material of IPCC- ICAI, New Delhi 2. R.Narayanaswami- Financial Accounting, PHI publication, June 2011

VARIABLES

Reallocation of income across various accounting period Treatment of capital expenditure to revenue expenses Increasing the expected value of an asset Extension of accounting year Revaluation of fixed assets to suit the needs of the company for presenting better picture Altering stock valuation method for changing the gross profit figure Playing with third party lease By altering capital lease to operating lease Depreciation treatment for intangible assets Playing with AS-9 on revenue recognition Manipulating transfer price from subsidiaries Inclusion of extraordinary item in normal operations Short term borrowings Not providing for decline in value of investments Receivable collection by offering discount before close of the financial year

Annexure-A (19) Perception of Junior Level Accounts Executives (Male) SA A N DA SDA SCORE 5 4 3 2 1 12 4 3 0 0 85 13 15 14 15 2 2 1 2 1 1 2 1 2 1 1 1 1 0 1 0 81 88 83 88

13 14 16 12 14 11 10 12 13 14

3 2 1 3 4 3 4 2 3 2

2 1 1 2 0 1 1 1 2 2

1 1 1 1 1 2 1 1 1 1

0 1 0 1 0 2 3 3 0 0

85 84 93 81 88 76 74 76 85 86

Source: Compiled from field survey

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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 - 6510(Online), Volume 5, Issue 2, February (2014), pp. 61-68 IAEME
VARIABLES Annexure-B(14) Perception of Junior Level Accounts Executives (Female) SA A N DA SDA SCORE 5 4 3 2 1 10 2 2 0 0 70 11 12 9 8 1 1 2 2 1 1 1 1 1 0 1 1 0 0 1 2 64 67 59 55

Reallocation of income across various accounting period Treatment of capital expenditure to revenue expenses Increasing the expected value of an asset Extension of accounting year Revaluation of fixed assets to suit the needs of the company for presenting better picture Altering stock valuation method for changing the gross profit figure Playing with third party lease By altering capital lease to operating lease Depreciation treatment for intangible assets Playing with AS-9 on revenue recognition Manipulating transfer price from subsidiaries Inclusion of extraordinary item in normal operations Short term borrowings Not providing for decline in value of investments Receivable collection by offering discount before close of the financial year

9 10 11 10 9 11 11 10 8 9

1 1 1 1 3 2 1 3 4 1

2 1 1 2 2 1 1 1 2 2

2 1 1 1 0 0 1 0 0 2

0 1 0 0 0 0 0 0 0 0

59 60 64 62 63 66 64 65 62 59

Source: Compiled from field survey

VARIABLES

Reallocation of income across various accounting period Treatment of capital expenditure to revenue expenses Increasing the expected value of an asset Extension of accounting year Revaluation of fixed assets to suit the needs of the company for presenting better picture Altering stock valuation method for changing the gross profit figure Playing with third party lease

Annexure-C (31) Perception of Middle Level Accounts Executives (Male) SA A N DA SDA SCORE 5 4 3 2 1 21 4 2 1 3 138 20 19 18 17 3 5 6 6 3 2 3 2 3 4 2 3 2 1 2 3 129 130 129 124

16 22 67

8 2

3 2

1 5

3 0

126 134

International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 - 6510(Online), Volume 5, Issue 2, February (2014), pp. 61-68 IAEME
By altering capital lease to operating lease Depreciation treatment for intangible assets Playing with AS-9 on revenue recognition Manipulating transfer price from subsidiaries Inclusion of extraordinary item in normal operations Short term borrowings Not providing for decline in value of investments Receivable collection by offering discount before close of the financial year 21 20 19 15 18 19 18 17 3 2 2 2 5 1 6 6 4 2 4 2 3 3 5 3 2 4 3 9 2 6 2 6 1 3 3 3 3 2 0 0 134 125 124 110 126 122 133 130

Source: Compiled from field survey

Annexure-D (23) Perception of Middle Level Accounts Executives (Female) SA A N DA SDA SCORE 5 4 3 2 1 Reallocation of income across various 11 4 2 4 2 87 accounting period Treatment of capital expenditure to 12 2 3 3 3 86 revenue expenses Increasing the expected value of an asset 9 4 2 6 2 81 Extension of accounting year 10 5 2 5 1 87 Revaluation of fixed assets to suit the 12 4 2 2 3 89 needs of the company for presenting better picture Altering stock valuation method for 11 6 2 1 3 90 changing the gross profit figure Playing with third party lease 13 2 2 2 4 87 By altering capital lease to operating 14 1 2 6 0 92 lease Depreciation treatment for intangible 15 2 2 1 3 94 assets Playing with AS-9 on revenue 16 2 1 2 2 99 recognition Manipulating transfer price from 13 2 2 4 2 89 subsidiaries Inclusion of extraordinary item in normal 14 2 1 5 2 93 operations Short term borrowings 15 2 1 4 1 95 Not providing for decline in value of 16 2 1 3 1 98 investments Receivable collection by offering 18 1 2 2 0 104 discount before close of the financial year VARIABLES

Source: Compiled from field survey

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