Window Dressing

Financial Statements are said to be window dressed when the management tries to portray a rosier performance and financial position of the company than is true, to suit its motives. The motives could be to fetch a better price for its IPO or merger, borrowings from financial institutions, to protect the image of the company or to get better remuneration from the promoters in case the ownership and management are different. The list is endless. Window dressing may take many forms, for example 1. Non- operational/ non recurring income being the major source of income like sale of investment or fixed assets. Hence the need to look at the details of Other Income. 2. Non-provision of diminution in the value of long-term investments due to discretion available to the management. 3. Capitalization or deferment of revenue expenses to inflate the bottom line. 4. Revaluation of fixed assets to show better financial position. 5. Extension of the accounting year to cover up a major loss or to include major likely gain of immediately following 2-3 months. 6. Advancing the billing on the customers towards the year end to inflate the top line as well as the bottom line. 7. Inadequate or no provision for doubtful debts to inflate the financial position. 8. Increasing the estimate life of the fixed assets to charge a lower depreciation 9. No separate disclosure of prior period adjustments or extraordinary items.

Beating Window Dressing

Following are the measures to beat window dressing to be successful in analyzing the financial statements.
By: Prof. Megha Shah NRIBM- GLS

1. Careful study of Notes to the accounts and accounting policies annexed to the financial statements and an assessment of the variations in policies, accounting estimates, extraordinary items and contingent liabilities. 2. Assessment of financial impact of qualifications in auditors report on the corporate profitability and financial position. 3. Study of Chairmans statement, Directors report , corporate governance report particularly the management discussions and analysis contained therein and integrating them with the study of financial statements. 4. Comparison of Basic and diluted EPS to predict the EPS sustainable in future. 5. Analysis of related party transactions to find out whether any undue benefit is being provided to them at the cost of company.

By: Prof. Megha Shah NRIBM- GLS