Question

Do Numbers Lie? The Other Side of Financial Statement Analysis

If you were to enter the banking industry you may find yourself approving or not approving loans. The following is a good example of a common event you may encounter.

Company X is looking for a $100,000 to purchase new equipment. The finance manager for Company X recently presented financial reports. Upon further analysis of the statements you, the banker, noted some window dressing of the financial statement. In this case, it seems Company X will delay payments to vendors in order to make their cash position look higher.

1. Do you see this practice a matter of ethical and or legal concern?

2. Do you think most all company’s “window dress” their data?

3. Please explain your decision to approve or disapprove Company x’s loan.

Please list any references used or in text citations

Answer 1

This is an unethical practice although it is not illegal. Window dressing is unethical because it deceives the users of the financial statements and is performed in the interest of Management rather than interest of the users. The data is presented to make the position of the business look rosier than it actually is. Generally it is not illegal but if it involves fraud or goes against the law or accounting standards it will become illegal.

In my opinion many companies window dress their data by manipulating the accounting standards in their favour. Most of them stay within the law and manipulate the data to fulfil their intentions.

The company's loan should be disapproved primarily because window dressing gives an indication of dishonesty of the management. The delay in payment to vendors has been made to make the cash position look better which implies that the cash position is not actually as good as it appears in the financial statements. This increases the risk of default on the part of company X and it may not have sufficient cash to pay the interest and principal in time.