In the business world, the term window dressing is known. This term is an act to exaggerate the company’s financial statements.
This is because the company’s financial condition is the main consideration for an investor when considering an investment.
Window dressing is an action that refers to the manipulation of data or activities in the company, investors who do not know this will certainly be trapped and believe what is in the financial statements.
This term also exists in the investment world. Investment managers can sell low-performing stocks for high-value stocks before the fourth quarter portfolio report is produced.
The result? Beginner investors may be lulled into thinking that the investment manager has a good track record.
Definition window dressing
Some of you may have wondered what window dressing is. Well, the meaning is an effort to beautify the financial statements of a company.
If you guessed that window dressing is a fraudulent act by a company to its clients, then you are right.
Many companies polish their financial statements to attract investors or clients to them, but dishonestly.
Unfortunately, window dressing is an act that is not easy to spot, especially by unscrupulous investors. This fraudulent method causes poor decision-making because the basis for determining it is wrong from the start.
In addition, this term is also found in the investment world. Portfolio managers or investment managers can manipulate portfolios by selling and buying certain stocks just before the portfolio report is issued. However, this method is not of a kind stupid investment.
The discussion of this method in investing will be explained in more detail in the next section.
Now, after knowing what window dressing is, what is important to know next is how it works. This method is usually used by companies when they find out that their performance reports will deteriorate at the end of the period.
To cover this, the company then sells the previous shares and replaces them with stocks that provide large returns in the short term. This effort can improve the company’s performance reports.
Apart from funding, this fraudulent method is also used to manipulate financial reports such as profit value and product sales volume. Window dressing is usually used in the following ways.
- Selling off capital goods that are depreciating so that the total value of assets seems to increase with the presence of new assets.
- Give customers an early discount to make a profit faster
- Entering bill payments to the next period
- Delaying expenses such as profit sharing so that the ending balance is higher
The impact of window dressing on investors
Performance reports or portfolios are generally used by investors to determine the next steps in the financing activities carried out.
In addition to determining the extension of investment, the report can also determine the return and potential returns in the future.
Unfortunately, with the window dressing, investors’ decisions will not be as accurate as compared to the original performance report. In this case, investors must be more careful and critical in reading performance reports or portfolios, especially when entering the end of the business period.
Investors’ attitude towards window dressing
This fraudulent strategy made some stock values go up. As a result, many investors may be tempted to buy stocks whose value moves up due to the high demand.
One thing that should be considered is whether the increase in the value of the stock only lasts at the end of the business period or is it potential to decline afterward. Investors should not base their decisions on year-end increases, but also use analysis and a lot of judgment when making transactions.
Furthermore, there are several things that investors can do to avoid being trapped in window dressing.
- Technical and fundamental analysis
Technical analysis is done by studying stock movements from time to time while fundamental analysis is obtained from company financial statement data.
- Accuracy in reading financial statements
One thing that can be observed from the financial statements is the tax payment. See if the tax expenditure is following the applicable PPH. If not, it is possible that the profit in the financial statements does not reflect the true value.
Perpetrators commonly involved in window dressing
window dressing are an effort made to cover the company’s reproach. So, who is the culprit behind this fraud?
In general, the perpetrators of this method are managers who have recently had a bad management record.
If the party suddenly improves their track record quickly especially if the progress is significant, it could be a sign that the manager is doing window dressing.
In addition, this fraud can be seen from funds that have a fast turnover. Especially if the fund has a different track record before or increased drastically at the end of the period only.
These two criteria can be used as an initial measuring tool regarding this fraudulent practice in any industry, including the retail industry.
In addition, one thing that can be seen from this fraudulent practice is the existence of discounts or massive offers so that profits soar before the financial statements for the period are made.
This makes more sense to do than to do the manipulation as mentioned earlier.
Window dressing in mutual funds
window dressing much is done in the mutual fund market. Usually, investment managers will sell underperforming stocks and buy other stocks that can add value to the client’s portfolio. shareholders.
This is done so that they do not make the wrong choice in allocating investor funds.
Therefore, the end of the year is often considered the best month because stock transactions will be busy with the activities of investment managers polishing their stock portfolios.
Stocks with large capitalizations will be the belle of the many targeted at the end of the year to cover the poor track record in the previous months.
window dressing means that the strategy to beautify the stock portfolio at the end of the period, but not necessarily all this fraudulent activity only considers that need.
The state of the pandemic and how the government directs its policies in suppressing the rate of infection is also a matter of consideration.
Reporting from Kontan, the government’s efforts to combat the pandemic coupled with the presence of the Omicron variant are still considered good, as evidenced by the unaffected volume of stock trading activity ahead of the new year.
Although this method has a bad connotation, some of the methods are proven not to be done fraudulently, such as giving discounts and massive year-end deals.
In addition, this method is also known to increase the value of shares because when the demand for shares increases, the value also increases automatically.
That’s the discussion about what it is window dressing to its activities in the mutual fund market. Don’t forget to always make careful considerations before deciding to make financial transactions.
Source : lifepal.co.id