Window dressing

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Window dressing
Informal practice commonly found in Worldwide
World map.png
Map of Worldwide, where Window dressing commonly takes place.
Entry written by David Leung.
David Leung is affiliated to Coventry University.

Original text by David Leung

‘Window dressing’ describes a pretence or a façade, a showy misrepresentation of an idea or policy in an attempt to disguise an undesirable reality. The term is derived from the retail sector, where it means decorating a shop window with goods and trimmings in order to attract customers. In the financial sector, it denotes the deliberately misleading manipulation of a company’s income statement and balance sheet in order to create a falsely attractive image and thereby conceal poor performance or monetary losses; it may also refer to an excessively negative presentation of such figures. In the financial context, ‘window dressing’ is synonymous with ‘cooking the books,’ ‘creative accounting,’ ‘Enronomics’ (a reference to the accounting fraud carried out by US energy giant Enron, bankrupted in 2001), and the more euphemistic ‘earnings management,’ which is used by accounting regulators and the academic community.

Cornered 18 Oct 2012 by Mike Baldwin

There are many reasons why companies engage in ‘window dressing.’ Manipulating earnings upwards may help executives to hide poor decisions (such as value-destroying acquisitions), mitigate potential breaches of debt covenants (such as interest cover), meet analysts’ forecasts and boost share prices as a way of attracting investors. Managing earnings downwards may on the other hand help companies to secure government subsidies or relief, avoid or evade taxation, and pre-empt regulatory interference (such as anti-trust regulation). Meanwhile all these forms of manipulation can, of course, help to boost managers’ remuneration.

Window dressing is accordingly a global phenomenon that pervades all types of organisations, large and small, public and private, national and multinational. Even states and governments have been accused of dressing up, for example, their gross domestic product and unemployment rate statistics. Window dressing is widely reported in the international media, especially its most extreme form – accounting fraud (see for example the cases relating not only to Enron but also to Polly Peck, WorldCom, Tyco, Parmalat, American International Group, Satyam, Olympus and Tesco). Comparable cases in academia have included fraudulent statistical studies (Burgstahler and Dichev 1997[1]) and case-study ethnographies (Leung 2011[2]). ‘Creative accounting’ has also entered popular culture, for example, in Mel Brooks’ satirical film ‘The Producers’ (1967) and its Broadway musical version (2001).

From the legal perspective, window dressing is an ambiguous concept. While it is widely considered to be unethical – since it involves an element of deception – window dressing is not necessarily illegal. Accountants are expected to follow the spirit as well as the letter of the law and to observe the economic substance of a transaction rather than its legal form (ASB 1994[3]). However, there is a jurisdictional contest between accountants and lawyers that undermines the authority of accounting standards (Pong 1999[4]). There are also ‘finitist’ and interpretation problems in the application of accounting rules (Hatherly et al. 2008[5]; MacKenzie 2008[6]; Leung 2011[7]). The debate about arguably the most important UK accounting term, ‘true and fair view,’ is a case in point. Legislation and official accounting and auditing pronouncements require financial statements to give a ‘true and fair view’ of the state of affairs of a company. Yet there is no formal definition of the term and no universal agreement as to its meaning. In practice, the term is merely the opinion of a group of purported experts, the auditors. It is moreover generally acknowledged that there is more than one true and fair view that faithfully reflects a company’s position.

So how does one cook the books? Depending on one’s motive (to increase or decrease earnings and to hide debt), the practice involves overstating or understating the key elements of the financial statements: revenue, expenses, assets and liabilities. Examples of techniques that overstate revenue include recognising income early, before the product is delivered to the customer (treating sales orders as completed sales); ‘channel stuffing’ or ‘trade loading,’ where excess products are dumped onto a distributor to inflate sales; and ‘round tripping,’ where the same amounts of sales and cost of sales are recognised, for instance, from the reciprocal sales of identical assets between two companies.

There are myriad ways to manipulate expenses, such as changing the depreciation method (from reducing balance to straight line, extending the useful economic life of assets), using ‘cookie jars’ and ‘big baths’ which involves making unrealistically large charges in the current period in order to decrease expenses in later periods, not writing down assets that have declined in value (such as obsolete inventories, damaged goodwill, bad debts) and capitalising expenses (such as classifying scientific research as assets rather than as expenses).

To remove debt or liabilities from the balance sheet – and thereby improve a company’s risk-profile or creditworthiness – various ‘off-balance sheet’ tricks are employed. These include the sale and leaseback of assets, where finance leases are dubiously classified as operating leases, and the use of ‘special purpose entities.’ In the latter case, various types of entities such as partnerships, joint ventures and trusts are excluded from the balance sheet because of their ‘materiality,’ that is, their insignificant impact on investors (IASB 2010[8]).

Artist with figures

These techniques are well known, yet little has been done about them. In the UK, regulators and the accounting profession have revised the corporate governance and ethics codes, issued reporting standards that focus on the economic substance of transactions (ASB 1994[9], 2003[10]) and consulted widely on the quality of auditing practice (APB 2001[11], 2010[12], 2012[13]). In response to the Enron, WorldCom and other accounting frauds, US regulators created the Sarbanes-Oxley Act of 2002 which imposed stricter requirements on auditors and senior executives as regards the accuracy and completeness of financial reports.

As the 2008 banking crisis showed, however, such regulatory measures have had little or no impact on window dressing. As Arthur Levitt (1998[14]) observed during his tenure as Chairman of the US Securities and Exchange Commission, the culture of the financial community and the structure of the capitalist system seem to demand that all listed corporations engage in earnings management. Participants in this market play a self-serving game of ‘nods and winks’: as used-car salesmen spin stories to sell vehicles, corporate accountants concoct ‘bullshit’ to satisfy the needs of investors and analysts (Macintosh 2006[15], 2009[16]) while auditors, who have long deserted their duties (House of Lords 2011[17]), continue to be ‘lick-arses’ for corporate management (Sikka 2009[18]).

References and Bibliography

  1. Berenson, A. 2003. The Number: How America’s Balance Sheet Lies Rocked the World’s Financial Markets. London: Pocket Books
  2. Chryssides, G. and Kaler, J. (eds). 1993. An Introduction to Business Ethics, Chapter 7. London: Chapman & Hall
  3. MacKenzie, D. 2003. ‘A philosophical investigation into Enron’, London Review of Books, 26 May,
  4. Smith, T. 1992. Accounting for Growth: Stripping the Camouflage from Company Accounts. London: Century Business


  1. Burgstahler, D. and Dichev, I. 1997. ‘Earnings management to avoid earnings decreases and losses,’ Journal of Accounting and Economics, 24: 99-126.
  2. Leung, D. 2011. Inside Accounting: The Sociology of Financial Reporting and Auditing. Farnham: Gower Publishing.
  3. Auditing Standards Board (ASB). 1994. Financial Reporting Standard 5 – Reporting the Substance of Transactions. Kingston upon Thames: ASB.
  4. Pong, C. 1999. ‘Jurisdictional contests between accountants and lawyers: The case of off-balance sheet finance 1985-1990,’ Accounting History, 4(1): 7-29.
  5. Hatherly, D., Leung, D. and MacKenzie, D. 2008. ‘The Finitist Accountant’ in T. Pinch and R. Swedberg (eds), Living in a Material World: Economic Sociology Meets Science and Technology Studies. Cambridge, MA: MIT Press.
  6. MacKenzie, D. 2008. ‘Producing accounts: Finitism, technology and rule-following’, in M. Mazzoti (ed.), Knowledge as Social Order: Rethinking the Sociology of Barry Barnes. Farnham: Ashgate.
  7. Leung, D. 2011. Inside Accounting: The Sociology of Financial Reporting and Auditing. Farnham: Gower Publishing.
  8. International Accounting Standards Board. 2010. The Conceptual Framework for Financial Reporting. IFRS Foundation.
  9. Auditing Standards Board (ASB). 1994. Financial Reporting Standard 5 – Reporting the Substance of Transactions. Kingston upon Thames: ASB.
  10. ASB. 2003. Amendment to Financial Reporting Standard 5 – Reporting the Substance of Transactions: Revenue Recognition. Kingston upon Thames: ASB.
  11. Auditing Practices Board (APB). 2001. Consultation Paper: Aggressive Earnings Management. London: APB.
  12. APB. 2010. Discussion Paper: Auditor Scepticism: Raising the Bar. London: APB.
  13. APB. 2012. Professional Scepticism: Establishing a Common Understanding and Reaffirming its Central Role in Delivering Audit Quality. London: APB.
  14. Levitt, A. 1998. The Numbers Game, Speech at the New York University Center for Law and Business, New York, 28 September.
  15. Macintosh, N. 2006. ‘Commentary: The FASB and Accounting for Economic Reality; Accounting – Truth, Lies, or “Bullshit”? A Philosophical Investigation,’ Accounting and the Public Interest, 6: 22-36.
  16. Macintosh, N. 2009. ‘Accounting and the Truth of Earnings Reports: Philosophical Considerations,’ European Accounting Review, 18(1): 141-175.
  17. House of Lords Select Committee on Economic Affairs. 2011. Auditors: Market concentration and their role. London: The Stationery Office.
  18. Sikka, P. 2009. ‘Financial crisis and the silence of the auditors,’ Accounting, Organizations and Society, 34: 868-873.