Essay on Window Dressing Of Financial Account Is Fraudulent
Get essay help
for this at assignment4finance@gmail.com
According to Wikipedia Online “accounting is the
art of communicating financial information about a business entity to users
such as shareholders and managers”. The Law of commerce states that business
organisation must objectively record the accounts of the business organisation.
These laws also state accounts must be clear and represent a fair and true
record of the financial affairs of a business; these laws also put in place
regulations on distinct ways in which a business organisation can present their
accounts. Corporate management have some discretion in influencing
the occurrence, measurement and reporting of
these items .In contrast legal means can be adopted by business organisations
in order to manipulate their accounts as to paint a different financial
picture. This can simply be referred as window dressing.
According to Your Dictionary window
dressing is “an adjustment made to a portfolio or financial statement to create
a more positive appearance than is actually the case. For example, a manager
may decide to provide window dressing to a portfolio by selling stock that has
declined in value and replacing it with stock that has increased in value”. By
doing this the manager creates the impression of a successful portfolio
management. In short, WD is a financial statement manipulation or window
dressing where frauds are camouflaged by overstating the income or understating
the expenses or understating liabilities and overstating assets. Tutor2u see
window dressing as “a form of accounting involving the manipulation of figures
to flatter the financial the financial position of the business”. The focus of
window dressing:ssxample of a student's work
in order to help you with your studies. This is
not
Liquidity – hiding a deteriorating liquidity
position
Profitability – massaging profit figures
It is important to read this topic-
The Profit & Loss Account (or Income Statement)
The Importance of Window Dressing
To get praise from share holders and potential
share holders the account book must be properly percentaed and make good to the
general public as observed in the case A.B.B (Asia, Bovia and Brown)
Incorporated US this construction firm along side with enron presented to the
general public for ten years a positive account balance even though they were
in red and their shares and stock were the toast of the US before the bubble.
Similarly, window dressing is important to
enable the firm to raise present and future capital from the stock market given
their positive account balance as in the case of Intercontential bank and
oceanic bank respectively in Nigeria who were rated AA+ by international credit
rating companies where as they were in the woods.
Window dressing is similar to asymmetric
information in which a party has better information than the other. To sell a
hailing company it must be window dressed otherwise no prospective buyer will
come.
Also to avoid tax payment a firm may present a
poor financial return or position to the general public to technically evade
payments of tax. This is achieved by distotinting the balance sheet of the
firm.
Advantages of Window Dressing
The advantages of window dressing is similar to
the importance of window dressing in the sense that the firm is able to achieve
what its aiming to achieve without running fowl of the law. The penalty for
window dressing is mild except where it is not properly done as in the case of
Enron where the owner was jailed for more than 36 years even though Enron has
achieved what it wanted to achieve.
Furthermore it cost less to window dress than
taking a loan for business expansion simply because it involves with internal
running of the firm.
Disadvantages of Window Dressing
Examples of window dressing in Indian Companies:
1. Tata Motors transferred 24% stake in Tata
Automotive Components (TACO), a company with revenue of $675 in FY07, to Tata
Capital, a group company, and booked a profit of Rs 110 crore in Q1 FY09.
Management declined to disclose the valuation methodology. Tata Motors also
changed its methodology for calculating provisions for doubtful receivables,
which resulted in higher reported Ebitda to the extent of Rs 50.7 crore (10% of
Ebitda).
2. TCS, the software major, increased its
depreciation policy on computers from two years to four years. As a result, Q1
FY09 PBT was higher by an estimated Rs 50 crore (4% of net profit in 1QFY09).
TCS followed cash-flow hedge accounting and till FY08, it used to recognise
hedging gains on effective hedges in its revenue line, thus boosting the reported
revenue growth and Ebit margin. In FY08, TCS had Rs 421crore from hedging
gains, of which, Rs 137 crore was included in the revenue line. However, from
Q1 FY09, TCS is expected to report all forex losses/gains below the Ebit line
in other income. Thus, the losses it had on its hedge position will no longer
be booked in the operating line.
3. Jet Airways, changed its depreciation policy
from WDV to SLM, and thereby wrote back Rs 920 crore into its P&L, which
helped the company to report profits during the quarter. It also helped Jet to
report a higher net worth, which will help in keeping reported gearing low.
4. Dr Reddy’s adjusted mark to market losses (Q1
FY08) on outstanding $250 million of hedges in the balance sheet, while P&L
reflects forex gains realised.
5. Reliance Communications adjusted short-term
quarterly fluctuations in foreign exchange rates related to liabilities and
borrowings to the carrying cost of fixed assets. The company adjusted Rs 109
crore of realised and Rs 955 crore of unrealised forex losses in the above
manner. In addition, the company has not recognised Rs 399 crore of translation
losses on FCCBs, since the FCCBs can potentially get converted, although the
FCCBs are out of money. Adjusted for all the above, the company would have
virtually no profits in Q1 FY09.
Bibliography and Reference
Stimpson P. (2002), AS and A level Business
Studies. Cambridge University press
Dave.H, Jones.R .C, Andertain. A, (1993)
Business Studies (fourth edition). Pearson Education Edinburgh
Further we will discuss about following topics:
Issues in accounting standards for Islamic financial institutions
Purchase method of accountingIssues in accounting standards for Islamic financial institutions
No comments:
Post a Comment