According to Financial Times, quarterly, $170bn of balances have been reduced by foreign banks to appear “more successful” on the balance sheet (McLannahan, 2015). This made me wonder the purpose of window dressing in commerce. The concept of Window dressing refers to when a company is portraying its financial statements in a way that makes it appear as a highly successful/high performing business in the eyes of its stakeholder.
For a Public limited company (PLC) whose share can be traded at a stock exchange market to public is obliged to release financial statements on quarterly/annual basis, to inform shareholders of company’s process. PLCs raise capital through selling shares to public; under the condition that the company is performing well and attracting the public to purchase shares. If a company is profitable, investors will have confidence in the growth of the company. If the company isn’t growing, or investors anticipates no future success for the company, why would someone want to retain his/her investment in the company? I know I wouldn’t because I won’t because I won’t be making any earning on shares I bought. I would sell my shares instead.
The decision to sell or purchase shares (Lewis, n.d)
The share prices are determined by the simple supply and demand law. If investors sell (supply) more shares than demand, a surplus would occur, leading to lower share prices. (Harper 2017) If a surplus takes place, the company’s asset value will fall, which could lead to financial issues/insolvency
Window dressing can occur by selling ‘bad assets’ that aren’t profitable, delaying payments to suppliers so cash balance appears higher. In other situations, such as banks, window dressing is practiced by means such as lending assets to customers as stated in the Financial Times, by which company can earn capital (for short period). And once new quarter begins, assets are bought back. This allows banks to report ‘better’ and ‘more profitable’ quarter, as it shows banks had a ‘better quarter-end ratio’ of capital to total assets. Although this method proved to be effective in helping bank to perceive themselves as prosperous, companies like Lehman Brothers faced high risks that ended the company to collapse.
I believe the practice of window dressing could fall under actions considered illegal for a company, but looking at it from a company’s perspective, they want to make money, moreover the practice of window dressing has become so pervasive among companies globally. Businesses want investors to invest in the company, creating inflow of funds, hence raising capital for future growth. At the end, every company wants to look ‘attractive’ on paper, to gain attention of potential investors to increase capital in the company for future investment, for which window dressing provides the mean for companies to do so.
Word Count: 450
Citations:
McLannahan , %. (2015, November 01). Foreign banks use US repo deals to ‘window-dress’ risk . Retrieved September 24, 2017, from https://www.ft.com/content/cf89061a-80ab-11e5-8095-ed1a37d1e096
