Introduction

Why Window Dressing

Select Examples

Methods of Window Dressing

Prevention

Companies indulged in Window Dressing

Contd.

TO SHOW MORE LIQUIDITYCompany can show more cash and bank liquidity by delay the big payments or by taking big loans at the end of year.

TO DECREASE THE VALUE OF TAXATION

Company can decrease the value of taxation by increasing false expenses.

Definition:

It means recognizing revenues before actual sales by the consignee while ownership is still with the consigner.

The fraud involves recording revenue in respect of goods sent on consignment as final sale even before the risk and reward associated with the goods have been transferred to the buyer.Example:

Lucent Technologies ,a fortune 500 company, was investigated and fined by the Securities Exchange commission , for improperly recognizing 1.148 bn(approx) of revenue and $4700 of pre tax income during fiscal year 2000. Besides other violations Lucent recorded more than $350 million in equipment sales to two distributors with a promise that the equipment could be returned if no buyers are found. It was returned ,but after fourth quarter closed.

Definition:

A round trip trade aims at artificially boosting the revenue by selling some goods, assets or securities to another entity with an understanding to buy it back at the same price.

As both the transaction are done at almost the same price, it may not have any impact on the bottom line of the company.

Example:

A fortune 500 company, was investigated and fined by SEC for overstating of its energy trading activity resulting from round trip. It may also take the form of barter trade of similar goods and services. For Egan agreement where by two Tv Channels or websites agree to advertise an each other with the sole purpose of increasing revenue without any economic justification may help both the parties to the transaction to boost the reported revenue figure.

Definition:

By advancement of income by improper accounting , the current periods revenue as well as earnings gets inflated.

It however, will have a negative impact on the reported earnings in the future periods.

On of the conditions is the certainty that it will be realized

Example:

Xerox corp. ,a fortne500 company, was imposed a penalty of $0 million by the SEC .The co. also agree to restate its financial results and set up a committee to review its accounting controls.. These act most of which violated GAAP, Accelerated the company revenue by 1.5 bn.

Between the year 1997-2000,Xerox used accounting policies to shift revenues from financing and servicing to the equipment and booked it upfront rather than over the lease period. By not disclosing this change in accounting policy and estimate, the company created an impression that it was earning more from the sales of equipment than in reality is was.

Definition:

It is a name given to deceptive business practice used by the company to inflate its sales and earnings figures by deliberately sending retailers along its distribution channels more product than they are able to sell.Example:

From the first quarter of 2000 through the fourth 500 company, Bristol Myers was engaged in a fraudulent scheme to inflate its sales and earnings in order to create false appearance that the company had met.

If inflated its results by stuffing its distribution channels with excess inventory near the end of every quarter in amounts sufficient to meet the targets by making sales ahead of demand and improperly recognizing 1.5 bn in revenue.

Definition:

In order to increase revenue to meet the targets-internal or external- an enterprise may keep its accounts open for an extended period of time. Sales of subsequent period may can then be backdated and included in the previous accounting period.

Example:

The accounts for the quarter ended 31st march 2011 May be kept open till say 15th April 2011. Any sales order received till the extended date may be backdated and recognized as revenue for the quarter ended 31st March 2011.

Definition:Revenue from sales of goods or services may be recognized by falsifying accounting records, raising false invoices, manipulating inventory records and booking non-existent receivables. This is an extreme form of shenanigan which involve active fraud by the management of the companies.

Example:

Satyam computer services ltd. was the one indulged in recording fictitious revenue by generating fake invoices with the motive of showing inflated sales.

Definition:An enterprise may be engaged in the business of trading in goods or financial securities. In such cases, the enterprise should recognize only the service charge or commission as revenue.

Example:A stock broker bought shares worth Rs. 10,000 for its client charging 1percent as commission. It paid Rs. 10,000to the seller and collected Rs.10.100 from the buyer inclusive of commission. The broker should record only Rs100 i.e. commission earned. To inflate revenue it may show Rs. 10,100 as revenue. And at the same time 10,000 commission.

MMTC ltd. Was indulged in overstating of revenue.

Definition:The management may use its discretion to treat operating expenses as capital expenditure. The fraud impacts both the reported profits as well as the assets in the balance sheet. By treating operating expenses as capital expenditure the P&L a/c is deferred resulting in higher profits. At the same time assets get inflated.

Example:A telecommunication company treated one of its routine payment namely Line cost as its capital expenditure .As a result both the profits and assets of a company are over-stated.

Definition:It is a practice of income smoothening by creating reserves during good period and utilizing the same in not so good periods.This is based on the assumption that company reporting smooth profits are viewed to be less risky by the investors than the company with fluctuating profits.

Example:A company with quarterly profits of RS. 400 million , RS. 120mn., Rs. 360mn and Rs.180mn will be considered volatile compared to another company with quarterly profits of Rs. 280mn, Rs 240mn, Rs 300mn and Rs 240mn. In both the case though aggregate annual profit is the same. As second income income stream is perceived to be more stable the company will enjoy better valuation in the market.

Definition:It refers to massive one time writing off assets or expenses. It actually involves advanced recognition of expenses and losses and is justified by unprincipled management as a cleaning up exercise or as a conservative approach.

The company takes a big hit in current period by accruing higher expenses, writing off assets and recording liabilities, but it will surely have a positive effect on future earnings.Example:In case of a takeover, new management may decide to write off assets and investments or make large provisions towards anticipated expenses and losses. This way the blame for poor reported earning is shifted to previous management and new management is assured of better performance in the future.

Create and maintain high standards of moral values, honesty and ethics throughout the organization

Set Realistic targets_ both for external and internal performance measurement.Establish and maintain a strong internal control environment reducing the opportunity to manipulate.

Emphasis on regular reconciliations on confirmation of outstanding balances_ large and long standing entries in suspense account, gap between physical records and physical inventory.

Encourage an environment of openness and transparencyLay down a strong governance structure, and Proper corporate communication with the stakeholders.

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