windows dressing

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Window Dressing

Accounting FraudsAuditing

Corporate Governance

PIYOOSH BAJORIA



Limitations of Financial

Statements

Based on Historical Costs

Human Assets not recorded

Personal Judgment of Accountant

Deliberate Manipulations

Differences in Accounting PoliciesWindow Dressing

PIYOOSH BAJORIA



Responsibility of CEO

Fair (Not false & misleading) presentation of Co’s Financial Statements

“Look” of the Co’s Financial Statements in thebest interests of the business

Use of permissible accounting methods (asper Accounting Standards) to measure Co’s profit

PIYOOSH BAJORIA



Window Dressing

Massaging (manipulating) the accounting numbers to

make the short term solvency & liquidity of the businesslook better than what it really was at the end of the year.Examples:

(1) Accounting records of a company kept open for a few

days after the end of its accounting yearObjective: Record additional cash collection from Debtors.

(2) Accelerate sales at the fag end of the year by shippingmore products to the company’s captive dealers ( Dumping

of goods without orders or stuffing the channels of distribution)

(3) Deferring or reducing discretionary expenses e.g. R & MCosts, employee training & development Costs, advertising

expenses, etc. PIYOOSH BAJORIA



Window Dressing

(4) End of year adjusting entries requiring estimates e.g.

Provision for expenses, provision for doubtful debts,decline in value of intangibles, etc.

Manager’s perception that net income numbersgenerated from accounting system may behave too

erratically year to year and hence, argue that some

manipulation required to ensure smooth reported

profit year to year.

PIYOOSH BAJORIA



Cooking the Books / Accounting Frauds

Frauds in Financial Reporting

Deliberate Dishonesty Goes beyond window dressing

Falsification of accounting records

Fabrication of sales revenue & expenses

e.g. recording sales revenue when no sales were made or not recording actualexpenses or losses during the period. Reporting assets that don’t exist or not reportingliabilities that do exist. Withholding vital information from being disclosed in thefinancial report.

Massaging the numbers – recording legitimate sales revenue & expenses butmanagement takes action to nudge the numbers up or down for the year.

If manipulation is carried too far, it can end up being equivalent to accounting fraud.

Hence, Window Dressing is a slipping slope that can lead to accounting fraud.

PIYOOSH BAJORIA



Fraud in Financial Statements

Committed in 5 ways

1. Fictitious Revenues

2. Fraudulent Timing Differences

3. Concealed Liabilities & Expenses

4. Improper or Fraudulent Disclosures or Omissions

5. Fraudulent Asset Valuations

PIYOOSH BAJORIA



Restatement of Financial Reports

Company’s management retracting the originally

published financial report and replacing with the revised

version

In most of these cases, the new net income is

considerably lower than the one first reported by the

business

No of restatements exploded from only 90 in 1997 to

2,000+ by 2010 & most of them by private companies not

listed on a major stock exchange

Negative market reaction- Investors should be morecareful about investing in these companies

More skeptical in reading the financial statements of a

private company , unless they have been audited by a CPA

firm. Consider quality of earnings & not just the magnitude.PIYOOSH BAJORIA



Audits of financial reports in the

Post- Enron Era

Few cases of Accounting Fraud:

-World .com

- Enron

-Tyco- Ahold

- Xerox

- Rite Aid

- Global Crossing-Health South

-Adelphia communications

-Satyam

PIYOOSH BAJORIA



Types of Audits

• Statutory Audit

• Internal Audit/ Management Audit

• Tax Audit

• Special Audit/Investigation

• Forensic Accounting

• Concurrent Audit (Banks)

• Propriety Audit

• Environmental Audit

•

Energy Audit PIYOOSH BAJORIA



Propriety Audit•

Loans and advances made by the company – whether secured properly and whether the terms

are not prejudicial to the interest of the company

or its members.

• Transactions represented merely by book entries

are not prejudicial to the interest of company.

• Personal expenses whether charged to Revenue

A/c.

• Non investment company – whether securities

were sold at a price less than the purchase price.

PIYOOSH BAJORIA



Auditing & Corporate Governance

• Internal Controls

• Audit Committee

•

Compliance Report by CEO• Due Diligence Audit Report (M&A)

• Quarterly Financial Reporting

• Interim Review• Code of Ethics & conduct

• Auditing Practices (SSAP)

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Types of Audit Reports

• Clean Report

• Qualified Report

•

Disclaimer of opinion

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Corporate Governance Report

SEBI Code of Corporate Governance requires

listed companies to include a separate

section of ‘corporate governance’ in their

annual reports. This section should include adetailed compliance report on corporate

governance. The code provides the following

suggested list of items to be included in thereport:

PIYOOSH BAJORIA



Corporate Governance

• Defining Good Corporate conduct

• Roles & Responsibilities of Directors

• Increasing expectations from Directors• Investors servicing & investors protection

measures

• Whistle Blowing policy

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Audit Committee• Sub Committee of the Board

•

Mandatory for every public company with a paid upcapital of not less than Rs.5 crore (Sec.292 A of

Company’s Act)

• Minimum 3 directors on the Audit Committee

• 2/3rds of such directors shall be directors other thanMD or WTD

• A chairman selected by the committee from these

directors• Composition to be disclosed in the Annual Report

• The statutory auditor, internal auditor and Director -

Finance may attend and participate at the meeting,

but have no right to vote.PIYOOSH BAJORIA



Audit Committee

• Clause 49 of the Listing Agreement requires setting

up of an Audit Committee.• Minimum 3 members, all being non executive

Directors, with majority of them being independent

and with at least one having Financial & Accounting

knowledge.

• The chairman of the committee shall be an

independent Director. He must be present at the

AGM to answer share holders’ queries. • Invite executives, as felt necessary, to be present at

the committee meetings.

• The Company Secretary would act as the Secretary to

the committee.PIYOOSH BAJORIA



Audit Committee• At least 3 meetings in a year – one meeting before

finalization of Annual Accounts and one each everysix months.

• Quorum – either two members or 1/3 of the

members, which ever is higher and minimum of two

independent Directors.

• Mechanism of Audit Committee as an overall part of

Corporate Governance is acquiring greater

significance.• Such self – governance structure would enhance the

auditor’s independence

PIYOOSH BAJORIA



Functions of Audit Committee• Discuss quarterly Internal Audit (IA) reports submitted to the

management and the report on action taken on the suggestions –

appraising the effectiveness of the IA function in the organization.

• Review quarterly financial statements and disclosures before

submission to the Board for its completeness and reliability/

integrity.

• Ensure compliance with the internal control systems. Review of Statutory and Regulatory compliances.

• Examine fraud risk assessment and mitigation mechanism.

• Authority to investigate any matter, including items referred to it

by the Board. Access to all the information contained in thecompany records.

• Make recommendations relating to Appointment / Removal of

the external Auditor and approve his remuneration/ terms of

engagement PIYOOSH BAJORIA



Non Standard Items on Audit

Committee Agenda

• Review of risk strategy

• Review of Forex transactions

•

Review of major investments or prospectiveacquisitions

• Review of related party transactions

•

Review of third party dealings – Interactionwith external consultants/ independent

council for forming up opinions, action plans

PIYOOSH BAJORIA



Recommended Books of Reading /

Research Papers

1. “How to read a financial report for Managers,Entrepreneurs, Lenders, Lawyers & Investors” – John A

Tracy, Wiley Publication (2009)

2.Corporate Governance -Global concepts & Practices – Dr. S. Sinha, Excel Books

3.Corporate Governance – Machi Raju – Himalaya

Publication

4. The Role of Audit Committee Chair in a fast changing

global scenario – Governance Publication by BDO

Consulting, India, June 2010PIYOOSH BAJORIA



Thank You

PIYOOSH BAJORIA

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