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Meaning of Window Dressing In Accounting


Meaning of Window Dressing In Accounting
Basic terminology, audit is an independent examination of financial information with an objective to give an opinion on its true and fare view.. So Auditors work is to give an opinion on the financial statements which is in fact prepared by the management.
                        
Why Audit is important?
Audit is important because financial information on which auditor expresses his opinion is used and relied by many stakeholders like shareholder's, creditors, investors, government etc. And any wrong opinion on the financial statements by auditor will fail the real purpose and impact the users of the financial statements.

Let's discuss about window dressing
Many a times management of the company (which prepares the financial statements) tries to hide the real financial position of the company by stating incorrect and unrealistic information in the financial statements with an objective to mislead the users or to get an undue advantage. Window dressing gives you fraudulent views about the Financial Statement, as it creates wrong impact about the company on investors and misguides the stakeholders about the true and fair view of financial statement.

Let's take few examples
  1. When the statement of account is showing that the company has incurred profit in a financial year when actually the company has incurred a loss in reality.
  2. When the statement of account is showing heavy losses to get government grants but in reality the company might have got profits.
  3. Understatement of creditors
  4. Overstatement of inventories
  5. Overstatement of Debtors
A company window dresses its financial statements to prevent the occurrence of certain negative events such as, but not limited to, the following: 
  1. defaulting on a loan (and making the loan immediately due and demandable) if debt covenants are not met
  2. bank’s refusal to grant the company a loan if certain ratios (e.g., liquidity and solvency and activity ratios) are too low or are not met
  3. failure to raise targeted capital (due to investors’ pullout) if operating performance is below forecasted levels or industry benchmark
  4. low or zero increase in employees’ salaries for the next fiscal year
  5. no bonus payout to employees during the year
  6. overall decline in the company’s market value due to continual losses in recent years
Window dressing is like dolling up the Beast and making him appear as Beauty! So basically it's the job of Auditors to ensure no such window dressing is done by the management while preparing the financial statements and this is ensured by auditor by performing his audit procedures and once he gets reasonable assurance on financial statements the Auditor gives his opinion on the financial statements that they are free from material misstatements and they reflect true and fair view.

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