Window Dressing in Accounting

Updated on January 3, 2024

What is Window Dressing in Accounting?

Window Dressing in Accounting refers to the manipulation done by the company’s management intentionally in the financial statements to present a more favorable picture of the company in front of the users of the financial statement before the same is released to the public.

Window dressing in accounting means an effort made by the management to improve the appearance of a company’s financial statements before it is publicly released. It is a manipulation of financial statements to show more favorable results for the business. It is done to mislead the investors. Companies and mutual funds can use it.

  • It is done when a company/business has many shareholders, and the management wants to project to the investors/ shareholders that the business is doing well and wants their financial information to look appealing to them.
  • It is done as the company’s financial position is one of the critical parameters, and it plays a crucial role in bringing in new business opportunities, investors, and shareholders.
  • Window dressing can mislead the investors and other stakeholders who do not have the proper operational knowledge of the business.
  • In closely-held business, it is not done as the owners are aware of the company’s performance.
Window Dressing in Accounting

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Example of Window Dressing (WorldCom)

The Worldcom case is one of the most infamous examples of window dressing, which was done by inflating earnings through improper capitalization of expenses. As a result, WorldCom declared bankruptcy in July 2002. Chief Accounting and finance executives charged with securities fraud.

Window Dressing WorldCom example

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Purpose of Window Dressing in Accounting

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Top Methods of Window Dressing in Accounting

The above mentioned are a few ideas for window dressing in accounting; there are many other ways where the financials can be manipulated and presented according to management needs.

Window dressing is predominantly done to boost the stock price and make potential investors interested in the business. This concept is unethical as it is misleading, and it is only a short-term advantage as it merely takes the benefit from the future period.

How to Identify Window Dressing in Accounting?

Window dressing in accounting can be spotted by properly analyzing and comparing the financial statements. In addition, financial parameters and other components should be appropriately reviewed to understand the state of the business.

The following can be looked into the company’s financials to identify window dressing.

Conclusion

Window dressing in accounting is a short-term approach to make financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more and portfolios look better and more appealing than they genuinely are. It is done to mislead investors from the real performance. It is an unethical practice as it involves deception, and it is done in the management’s interest.

Recommended Articles

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