Difference between revisions of "Window dressing (Global)"

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<ref>International Accounting Standards Board. 2010. The Conceptual Framework for Financial Reporting. IFRS Foundation.</ref>).

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<ref>International Accounting Standards Board. 2010. The Conceptual Framework for Financial Reporting. IFRS Foundation.</ref>).

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<ref>Auditing Standards Board (ASB). 1994. Financial Reporting Standard 5 – Reporting the Substance of Transactions. Kingston upon Thames: ASB.</ref>, 2003<ref>ASB. 2003. Amendment to Financial Reporting Standard 5 – Reporting the Substance of Transactions: Revenue Recognition. Kingston upon Thames: ASB.</ref>) and consulted widely on the quality of auditing practice (APB 2001<ref>Auditing Practices Board (APB). 2001. Consultation Paper: Aggressive Earnings Management. London: APB.</ref>, 2010<ref>APB. 2010. Discussion Paper: Auditor Scepticism: Raising the Bar. London: APB.</ref>, 2012<ref>APB. 2012. Professional Scepticism: Establishing a Common Understanding and Reaffirming its Central Role in Delivering Audit Quality. London: APB.</ref>). 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.

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<ref>Auditing Standards Board (ASB). 1994. Financial Reporting Standard 5 – Reporting the Substance of Transactions. Kingston upon Thames: ASB.</ref>, 2003<ref>ASB. 2003. Amendment to Financial Reporting Standard 5 – Reporting the Substance of Transactions: Revenue Recognition. Kingston upon Thames: ASB.</ref>) and consulted widely on the quality of auditing practice (APB 2001<ref>Auditing Practices Board (APB). 2001. Consultation Paper: Aggressive Earnings Management. London: APB.</ref>, 2010<ref>APB. 2010. Discussion Paper: Auditor Scepticism: Raising the Bar. London: APB.</ref>, 2012<ref>APB. 2012. Professional Scepticism: Establishing a Common Understanding and Reaffirming its Central Role in Delivering Audit Quality. London: APB.</ref>). 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<ref>Levitt, A. 1998. The Numbers Game, Speech at the New York University Center for Law and Business, New York, 28 September.</ref>) 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<ref>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.</ref>, 2009<ref>Macintosh, N. 2009. ‘Accounting and the Truth of Earnings Reports: Philosophical Considerations,’ European Accounting Review, 18(1): 141-175.</ref>) while auditors, who have long deserted their duties (House of Lords 2011<ref>House of Lords Select Committee on Economic Affairs. 2011. Auditors: Market concentration and their role. London: The Stationery Office.</ref>), continue to be ‘lick-arses’ for corporate management (Sikka 2009<ref>Sikka, P. 2009. ‘Financial crisis and the silence of the auditors,’ Accounting, Organizations and Society, 34: 868-873.</ref>).

As the 2008 banking crisis showed, however, such regulatory measures have had little or no impact on window dressing. As Arthur Levitt (1998<ref>Levitt, A. 1998. The Numbers Game, Speech at the New York University Center for Law and Business, New York, 28 September.</ref>) 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<ref>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.</ref>, 2009<ref>Macintosh, N. 2009. ‘Accounting and the Truth of Earnings Reports: Philosophical Considerations,’ European Accounting Review, 18(1): 141-175.</ref>) while auditors, who have long deserted their duties (House of Lords 2011<ref>House of Lords Select Committee on Economic Affairs. 2011. Auditors: Market concentration and their role. London: The Stationery Office.</ref>), continue to be ‘lick-arses’ for corporate management (Sikka 2009<ref>Sikka, P. 2009. ‘Financial crisis and the silence of the auditors,’ Accounting, Organizations and Society, 34: 868-873.</ref>).