Today, I would like to go over the concept of window dressing settlement. What is window dressing settlement and why is it important? Let me give you a simple scenario to elaborate the concept further. Mr. Kim is a mutual fund and portfolio manager of a company. It is his job to attract clients and investments for the company. His company however, did not get so lucky this term and had a poor performance that could possibly reduce the number of potential investors and shareholders. In response to this situation, Mr. Kim decides to change few numbers appeared in financial statement to make the company appear more ‘presentable’.
Now, in the scenario above, Mr. Kim manipulated few numbers to project false image to investors that his company was doing a good job even though it was not. In cases like this, we can say that Mr. Kim window dressed his company. Simply put, window dressing is a strategy used by corporates to conceal poor performance and make the company appear more attractive. It may bring out profits to the companies whereas oblivious investors and clients are forced to take higher risks without realizing. Does this mean that we have no way of prevention? Thankfully, we have few precautionary measures we can take. Firstly, involving external audit can really help.
The involvement of certified public accountants during inspection process was widely believed to be effective. Though, during CPA’s inspection there were several cases that window dressed financial statements were passed unspotted under numerous reasons including pressure from the top management of the company. Window Dressing attempts include, minimizing trade receivable’s appropriation for bad &irrecoverable debt so that companies could maximize profits. In similar pattern, understated numbers were put in performance category in order to avoid increase in taxation and employee’s salary.
In attempt to target these misdeeds internally, Financial Services Commission is trying to toughen up restriction measures. One is trying to widen the range of punished subjects. Before, only the upper management including the boards was punished for their crime. However, FSC thought it was more rightful that anybody who directed window dressing to face equal responsibilities. Secondly, consequences for manipulating financial statement will be heavier. Directors of window dressing will face with criminal charges as well as resignation orders and so on.
Externally, more thorough inspection process will be required. For instance, if accountants in charge of external audit were not to report window dressing, they will have to deal with increased fine or business suspension. The penalty fee was raised from 5 billion\ to 20 billion\. Additionally, for transparency more required courses will be added before the financial statement of a company goes public. Companies will have to hand in financial statements as well as other important accounting documents to Korea Exchange. After Korea Exchange examines the materials, the evaluation will be reported to the Securities & Future Commission. This process must be completed six weeks prior to share holder meeting. If companies do not hand in required information in given time, they will be receiving fine as well as criminal charge.
Window dressing settlement is a concept of financial fraud. When fighting illegal and unjust actions, stricter regulation is a must. Along with more specified and clear precautionary measures, we can expect more advanced, healthy and transparent financial market. Transparency is the key in financial deals. Hopefully, the revised version in tackling window settlement will close enough loopholes and improve our society for the better.
by Jiae Choung (email@example.com)