Window Dressing

Firms do it around a year-end or quarter-end because reported figures drive ratings, regulatory ratios, bonuses and fund rankings. A bank may borrow and lend back to swell or shrink its balance sheet on the reporting date. A company may delay paying suppliers to show more cash, or ship goods early to book revenue. A fund manager may buy recent winners and sell losers just before holdings are published. Many such actions are lawful and only misleading in spirit. Others become financial statement manipulation if they break accounting rules or hide material facts. Auditors and supervisors look for spikes at period-end that reverse in the first days of the next period, and compare average or daily balances with the snapshot. A reader of the year-end accounts alone would judge the business on a position it does not normally hold.

At one bank, the capital ratio is measured on the last day of each quarter. In the final two days it shrinks its balance sheet by cutting short-term securities financing, so the reported ratio looks healthy. In the first week of the next quarter the positions return to their usual size. Supervisors comparing daily averages with the quarter-end snapshot see the gap and ask management to explain.