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Creative Accounting @ Window Dressing- An empirical analysis

Article · February 2014

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International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 - 6510(Online),
INTERNATIONAL JOURNAL
Volume 5, Issue 2, February (2014), OF MANAGEMENT (IJM)
pp. 61-68 © IAEME

ISSN 0976-6502 (Print)

ISSN 0976-6510 (Online)
IJM
Volume 5, Issue 2, February (2014), pp. 61-68
© IAEME: www.iaeme.com/ijm.asp
©IAEME
Journal Impact Factor (2014): 3.2150 (Calculated by GISI)
www.jifactor.com

CREATIVE ACCOUNTING @ WINDOW DRESSING: AN EMPIRICAL

ANALYSIS

Dr. B .Chandra Mohan Patnaik

Associate Professor, School of Management, KIIT University, Bhubaneswar, Odisha

Dr. Ipseeta Satpathy, D.Litt.

Professor, School of Management, KIIT University, Bhubaneswar; Odisha

Mr. Chandrabhanu Das

Research Scholar, School of Management, KIIT University, Bhubaneswar, Odisha

ABSTRACT

In recent times it is found that most of the corporate houses are indulged in window dressing
in their financial statements. This window dressing is nothing but a creative accounting. The core
objective of this is to manipulate the books of accounts. In the present paper it an attempt to
understand the various tools that are used for these creative accounting. For this purpose we tried to
make empirical analysis by undertaking a survey in some selected private sector undertakings in the
Kolkota of West Bengal and Bhubaneswar & Cuttack of Odisha. In this direction 196 questionnaires
were distributed in accounting department of selected units and of this only 87 responses were
received. This includes 34 female employees and rests are male employees of junior level and middle
level executives of private sector corporate units. The response rate was 44.39%. Likert scale with
close end option and rank method is followed for the purpose of data analysis. The study found that
window dressing practices are prevalent in majority of corporates but it also depends upon the
expertise knowledge of the accounting department. Moreover it is also found that the external
auditors to some extent encourage these practices for their own interest. For the purpose of
confidentiality the names of the units are not mentioned.

Keywords: Creative Accounting, Window Dressing, Financial Statements.

I. AN OVERVIEW

The Accounting Standards are issued with an objective of achieving uniformity in

compliance to accounting practices and preparation of financial statements thereby ensuring the
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International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 - 6510(Online),
Volume 5, Issue 2, February (2014), pp. 61-68 © IAEME

comparability of financial statement of different organizations. At present there are 32 Accounting

Standards (AS) issued by the Institute of Chartered Accountants of India (ICAI)’. These are in fact
issued by the Accounting Standard Board of ICAI. The main objective is to streamline the diverse
accounting practices followed by different corporate houses. These Accounting Standards (AS) are
issued to address the issues related to

Recognition of events and transactions in the financial statements

Measurement of these transactions and events,

Presentation of these transactions and events in the financial statements in the manner that is
meaningful and understandable to the readers and

The disclosure requirement which should be there to enable the public at large and the stake
holders and the potential investors in particular, to get an insight into what these financial
statements are trying to reflect and thereby facilitating them to take prudent and informed
business decisions.

As we know that accounting data are the languages of business. This refers that the
performance of an organization is being reflected in the accounting data or financial statements. This
information is being used by various interested parties like investors, bankers, government, creditors,
debtors, researchers and so on. The reliability and authenticity of these financial statements are
important. However, unfortunately most of the times the accounting information provided by these
corporate are not true. Here, the role of creative accounting through window dressing comes in to the
picture. The best example is Satyam Scam in India. In a nutshell some of the major window dressing
done by Satyam are enlisted below:

Sales were inflated with fake orders and order book position. The debtors were also inflated
due to this.

To prevent the analysts from figuring this out from Cash Flow Statements and show better
cash position added the received yet uncleared cheques through Bank Reconciliation
statements to Current Account Balances. That showed huge balances with Current Account in
Banks.

Understated liabilities of unsecured loans and created false figures on Interest accrued on
fixed deposits whereas there was no interest accrued.

The Auditors missed the following areas in Satyam Scam

The Auditors relying on the company reputation and brand image believed on the supporting
documents and verbal assurance by the organization. This led to the following flaws mentioned
below:

Checking of Invoices and Billing Documents not done properly.

Non verification of originality of FD Interest, TDS and Tax Liability.

Non confirmation of Bank Balances directly from the Bank. This attitude of auditors was
misused by the Company by creating Fake Balance Confirmation Letters using the Bank’s
Letter Head with Logo of the Bank.

Movements in Bank Transactions were omitted out of the Company Books and could not be
detected by the Auditors.

Failed to monitor the Fixed Assets Register and checking of Capitalization of Fixed Assets.

Failed to reconcile the Ledgers, sub ledgers and Bank Reconciliation Statements to know the
differences arising out of transactions.

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International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 - 6510(Online),
Volume 5, Issue 2, February (2014), pp. 61-68 © IAEME

Individual checking of transactions relating to FOREX Loss/Gain was not done.

Apart from all these flaws there are also allegations that end to end audit was not done and
laxity of systems was not addressed for rectification by auditors.

II. OBJECTIVE OF THE STUDY

To understand the various ways of window dressing

To suggest remedial measures to counter this creating accounting through window dressing.

III. LIMITATIONS OF THE STUDY

The research universe is restricted to urban areas only.

The study is based on the perception of the respondents of selected private sector units and
the views of this group may not represent the universal one.

The period of study is limited to 4 months i. e October 2013 to January 2014

IV. METHODOLOGY OF THE STUDY

The present study is based on primary data and to some extent secondary data. The data is
collected by visiting various private sector corporate units in Kolkata of West Bengal and Cuttack &
Bhubaneswar of Odisha. Collection of data was very challenging one for sensitive topic like window
dressing that to from accounting staff. In this direction 196 questions distributed by adopting
stratified random sample method and managed to collect 87 responses. For the purpose of analysis of
data, Likert scale method used with close end option. For the purpose of collecting data 15 variables
are identified.

Respondents view with regard to Creative Accounting @ Window dressing

To measure the perceptions of respondents of various private sector corporate units, the
various variables identified are reallocation of income across various accounting period, treatment of
capital expenses to revenue expenses, increasing the expected value of an assets, extension of
accounting year, revaluation of fixed assets to suit the needs of the company for presenting better
picture, altering stock valuation method for changing the gross profit figure, playing with third party
lease, by altering capital lease to operational lease, depreciation treatment for intangible assets,
playing with AS-9 on revenue recognition, manipulating transfer price from subsidiaries, inclusion
of extraordinary items in normal operations, short term borrowings, not providing for decline in
value of investments, receivable collection by offering discount before close of the financial year etc.
For this purpose we have assigned 5,4,3,2,1 for the response of the respondents as Strongly Agree,
Agree, Neutral, Disagree and Strongly Disagree. The total scores are calculated by multiplying the
number of response by the weights of the corresponding response.

Calculation of respondents’ perception: Ideal and Least scores

Ideal scores are calculated by multiplying the number of respondents in each category with
(5) and product with total number of attributes. Least scores calculated by multiplying the number of
respondents in each category with (1) and the product with number of attributes in the
questionnaires.

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International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 - 6510(Online),
Volume 5, Issue 2, February (2014), pp. 61-68 © IAEME

Table
Table-1: Ideal and Least scores
Category Equation Ideal score Equation Least score

Junior Level Accounts 15X5X19

15X5 1425 15X1X19 285
Executives (Male)
Junior Level Accounts 15X5X14 1050 15X1X14 210
Executives (Female)
Middle Level Accounts 15X5X31 2325 15X1X31 465
Executives ( Male)
Middle Level Accounts 15X5X23 1725 15X1X23 345
Executive ( Female)

V. ANALYSIS OF DATA

Variables Aggregate Score

Junior Level Accounts Middle Level
Executives Accounts Executives
Male Female Male Female
Reallocation of income across various accounting period 85 70 138 87
Treatment of capital expenditure to revenue expenses 81 64 129 86
Increasing the expected value of an asset 88 67 130 81
Extension of accounting year 83 59 129 87
Revaluation of fixed assets to suit the needs of the company 88 55 124 89
for presenting better picture
Altering stock valuation method for changing the gross profit 85 59 126 90
figure
Playing with third party lease 84 60 134 87
By altering capital lease to operating lease 93 64 134 92
Depreciation treatment for intangible assets 81 62 125 94
Playing with AS-99 on revenue recognition 88 63 124 99
Manipulating transfer price from subsidiaries 76 66 110 89
Inclusion of extraordinary item in normal operations 74 64 126 93
Short term borrowings 76 65 122 95
Not providing for decline in value of investments 85 62 133 98
Receivable collection by offering discount before close of the 86 59 130 104
financial year
Total Scores 1253 939 1914 1371
Ideal Scores 1425 1050 2325 1725
Least Scores 285 210 465 345
% of total score to Ideal score 87.92 89.42 82.32 79.48
No of respondents 19 14 31 23
Source: Annexure A, B,C & D

2500
2000
1500
Total Scores
1000
500 Ideal Scores
0
Least Scores
Male Female Male Female

Junior Level Accounts Executives Middle Level Accounts Executives

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International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 - 6510(Online),
Volume 5, Issue 2, February (2014), pp. 61-68 © IAEME

VI. INTERPRETATION

In the above table it shows that the total scores for junior level accounts executive male are
1253 for female 939 as against the ideal score of 1425 and 1050 respectively. The percentages of
total score against the ideal score are 87.92 and 89.42. Similarly, in case of middle level accounts
executive, the ideal score are for female and male respondents 1725 and 2325 and as against this the
total scores are 1371 and 1914 respectively. The percentage of total score of female and male to the
ideal scores are 79.48 and 82.32. Here, the observation is that in no case the total scores are near to
the least score. This concludes that all the variables or attributes considered for the study are having
enough support base and these variables are being practiced as part of creative accounting through
window dressing.

VII. SUGGESTIONS TO OVERCOME THE ISSUES RELATED TO WINDOW DRESSING

Auditors have to check transactions after closing date and trace the number of transactions
reversed or rectified. This process may help in detecting the erroneous journal entries or
fraudulent transactions which are done to cook the books during the audit period.

Protocols to be established for obtaining balance confirmation from different customers,
vendors and house bank of company and to be verified with the balance in company books.

Income booked from services/contract jobs which are performed and to be billed can be
verified by auditors with greater accuracy from project site where the client can authenticate
the works contract completion.

Verification of Sales Orders of High Value and cross checking with Logistics team to find
out rejection of materials at customer end. This will enable auditors to know whether all these
rejections have been provided for by the company.

Checking of CMA Data and FFR statements submitted to Bank by Company for availing
Working Capital and short Term Loan. Auditors can know whether the statements are
prepared as per the audited results or are misrepresented to enjoy better facilities from Banks.

Similarly Capital Expenditure proposals submitted to Banks for availing Term Loans to be
verified for feasibility and adequate disclosures

Transfer pricing contracts to be studied and analysis to be made to see whether the price
fixation is as per the transfer pricing rules and regulations.

Inventory Cost may be validated after consultation with an expert and technical advisor who
knows the business process and proper allocation of costs incurred.

Detecting whether any short term financing done before the close of financial year to increase
the cash balance and methods resorted to avail it. Similarly any other methods resorted to
increase the Cash balance and specifically Cash Flow from Operations also to be
investigated.

Sophisticated and advanced auditing tools are to be developed which can integrate
successfully with the accounting software used by Companies so as to detect any abnormal or
fraudulent transactions.

VIII. CONCLUDING OBSERVATION

The fierce competitive market and the recent regulatory environment asking for more
disclosures have made many companies to resort to window dressing. Window Dressing often
known as creative accounting by many seems to be the easier alternative than really working hard to
achieve the numbers. Since Creativity may be misused for Fraud so companies have to accept moral
responsibility to be first ethical then creative. In Satyam fiasco the ethics was not the priority due to

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International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 - 6510(Online),
Volume 5, Issue 2, February (2014), pp. 61-68 © IAEME

which the Chairman repented later saying that he was riding a tiger, not knowing how to get off
without being eaten. Much of the moral responsibility to prevent companies to resort to unethical
window dressing lies with the auditors. Nevertheless accountants and auditors of audit firm should
always be cautious for fraudulent transactions.
As Warren Buffet has once quoted “Invest in those shares whose business you know” similarly
auditors may audit clients from those sectors where they are more conversant with the business
process and models. This will give them better grip over Internal Controls and Systems. Then there
will be fewer chances for fraudulent transactions and accounting scams.

REFERENCES

1. Study material of IPCC- ICAI, New Delhi

2. R.Narayanaswami- Financial Accounting, PHI publication, June 2011

Annexure-A (19)
VARIABLES Perception of Junior Level Accounts Executives
(Male)
SA A N DA SDA SCORE
5 4 3 2 1
Reallocation of income across various 12 4 3 0 0 85
accounting period
Treatment of capital expenditure to 13 2 1 2 1 81
revenue expenses
Increasing the expected value of an asset 15 2 1 1 0 88
Extension of accounting year 14 1 2 1 1 83
Revaluation of fixed assets to suit the 15 2 1 1 0 88
needs of the company for presenting
better picture
Altering stock valuation method for 13 3 2 1 0 85
changing the gross profit figure
Playing with third party lease 14 2 1 1 1 84
By altering capital lease to operating 16 1 1 1 0 93
lease
Depreciation treatment for intangible 12 3 2 1 1 81
assets
Playing with AS-9 on revenue 14 4 0 1 0 88
recognition
Manipulating transfer price from 11 3 1 2 2 76
subsidiaries
Inclusion of extraordinary item in normal 10 4 1 1 3 74
operations
Short term borrowings 12 2 1 1 3 76
Not providing for decline in value of 13 3 2 1 0 85
investments
Receivable collection by offering 14 2 2 1 0 86
discount before close of the financial year
Source: Compiled from field survey

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International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 - 6510(Online),
Volume 5, Issue 2, February (2014), pp. 61-68 © IAEME

Annexure-B(14)
VARIABLES Perception of Junior Level Accounts Executives
(Female)
SA A N DA SDA SCORE
5 4 3 2 1
Reallocation of income across various 10 2 2 0 0 70
accounting period
Treatment of capital expenditure to 11 1 1 1 0 64
revenue expenses
Increasing the expected value of an asset 12 1 1 0 0 67
Extension of accounting year 9 2 1 1 1 59
Revaluation of fixed assets to suit the 8 2 1 1 2 55
needs of the company for presenting
better picture
Altering stock valuation method for 9 1 2 2 0 59
changing the gross profit figure
Playing with third party lease 10 1 1 1 1 60
By altering capital lease to operating 11 1 1 1 0 64
lease
Depreciation treatment for intangible 10 1 2 1 0 62
assets
Playing with AS-9 on revenue 9 3 2 0 0 63
recognition
Manipulating transfer price from 11 2 1 0 0 66
subsidiaries
Inclusion of extraordinary item in normal 11 1 1 1 0 64
operations
Short term borrowings 10 3 1 0 0 65
Not providing for decline in value of 8 4 2 0 0 62
investments
Receivable collection by offering 9 1 2 2 0 59
discount before close of the financial year
Source: Compiled from field survey

Annexure-C (31)
VARIABLES Perception of Middle Level Accounts Executives
(Male)
SA A N DA SDA SCORE
5 4 3 2 1
Reallocation of income across various 21 4 2 1 3 138
accounting period
Treatment of capital expenditure to 20 3 3 3 2 129
revenue expenses
Increasing the expected value of an asset 19 5 2 4 1 130
Extension of accounting year 18 6 3 2 2 129
Revaluation of fixed assets to suit the 17 6 2 3 3 124
needs of the company for presenting
better picture
Altering stock valuation method for 16 8 3 1 3 126
changing the gross profit figure
Playing with third party lease 22 2 2 5 0 134

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 International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 - 6510(Online),
Volume 5, Issue 2, February (2014), pp. 61-68 © IAEME

By altering capital lease to operating 21 3 4 2 1 134

lease
Depreciation treatment for intangible 20 2 2 4 3 125
assets
Playing with AS-9 on revenue 19 2 4 3 3 124
recognition
Manipulating transfer price from 15 2 2 9 3 110
subsidiaries
Inclusion of extraordinary item in normal 18 5 3 2 3 126
operations
Short term borrowings 19 1 3 6 2 122
Not providing for decline in value of 18 6 5 2 0 133
investments
Receivable collection by offering 17 6 3 6 0 130
discount before close of the financial year
Source: Compiled from field survey

Annexure-D (23)
VARIABLES Perception of Middle Level Accounts Executives
(Female)
SA A N DA SDA SCORE
5 4 3 2 1
Reallocation of income across various 11 4 2 4 2 87
accounting period
Treatment of capital expenditure to 12 2 3 3 3 86
revenue expenses
Increasing the expected value of an asset 9 4 2 6 2 81
Extension of accounting year 10 5 2 5 1 87
Revaluation of fixed assets to suit the 12 4 2 2 3 89
needs of the company for presenting
better picture
Altering stock valuation method for 11 6 2 1 3 90
changing the gross profit figure
Playing with third party lease 13 2 2 2 4 87
By altering capital lease to operating 14 1 2 6 0 92
lease
Depreciation treatment for intangible 15 2 2 1 3 94
assets
Playing with AS-9 on revenue 16 2 1 2 2 99
recognition
Manipulating transfer price from 13 2 2 4 2 89
subsidiaries
Inclusion of extraordinary item in normal 14 2 1 5 2 93
operations
Short term borrowings 15 2 1 4 1 95
Not providing for decline in value of 16 2 1 3 1 98
investments
Receivable collection by offering 18 1 2 2 0 104
discount before close of the financial year
Source: Compiled from field survey

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