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If fraudulent financial statements are discovered, not only can the parties concerned be held criminally responsible, but it also causes great damage to the company.In this article, we will explain the basic knowledge of window dressing, the main tricks, measures to prevent it, and how to see through it.We will also introduce the appropriate investigation method when it actually happens.
What is window dressing
Window dressing is the overstatement of a company's profits.It is a misrepresentation of revenues and expenditures through fraudulent accounting, with the aim of gaining the trust of stakeholders by pretending that business performance is good.
What is reverse window dressing accounting?
Reverse window accounting is the opposite of window dressing, where the company's profits are underestimated.The purpose is to reduce the amount of tax to be paid, and this is also illegal.
Reasons and risks for window dressing and reverse window dressing
Why do companies that use window dressing or reverse window dressing end up committing illegal acts?We will explain the main reasons, the background, and the risks that companies are exposed to.
Main reasons for window dressing and reverse window dressing
To obtain a loan from a bank
This is especially true for small and medium-sized enterprises (SMEs) in order to obtain loans from banks.In many cases, they depend on banks for financing, and if their financial condition is poor, their borrowing conditions will be tightened, and new borrowings will be suspended, making management difficult.Therefore, they try to show good performance even if the tax amount increases.
·For maintaining the listing or stock price countermeasures
Many listed companies do so because they want to maintain their listing or take stock price measures.They don't want to be held accountable by their shareholders, so they make it look like they're doing well by making false accounts.
· To reduce taxes
Many of the reasons for reverse window dressing are to reduce taxes.The effective tax rate of corporate tax is about 3%, and it is regrettable that the profits that have been obtained with great effort will be taken, and if they are taken, the business will not turn around.
The main risks that accounting fraud poses to companies
Subject to imprisonment and penalties
Criminal liability for fraudulent settlement of accounts includes illegal dividends, false statements in securities reports, special breach of trust, and fraud.Imprisonment or fines or both may be imposed.
· Possibility of claims for damages
A company may be sued for damages if a third party is harmed by window dressing, such as a bank that has been forced to make a loan under conditions that are far from normal, or a shareholder whose stock price has plummeted.
·Additional tax payment
If you declare less tax due to mistakes or misunderstandings, you will be charged with under-declaration additional tax, but if you cheat tax with malicious intent like window dressing, you will be charged with double additional tax.The maximum tax rate for underreporting additional tax is 15%, but the double additional tax has a very high tax rate of 35%.
Main methods of window dressing and reverse window dressing and measures to prevent them
We will explain the tricks used for window dressing and reverse window dressing, and the measures to prevent them.
Main methods used for window dressing and reverse window dressing
· Excessive or fictitious recording of sales or inventory
Increase inventory on your balance sheet by under-reporting the cost of goods sold by pretending to have fictitious inventory that you do not actually have on hand.There is also a trick to record sales by making a contract with a fictitious business partner.
Manipulation of costs and expenses
Recording company housing and company cars for personal use as expenses, and intentionally recording sales that should be recorded in the current period in the next period onward are one of the tricks of reverse accounting.
· Create multiple financial statements
In order to receive advantageous loans from financial institutions, there is also a trick to create multiple financial statements instead of manipulating numbers.There are also cases where separate financial statements were prepared for all the banks.
Measures to prevent accounting fraud
·Strengthen the internal check system
First, compliance training and in-house education will be used to thoroughly disseminate that accounting fraud is a criminal act.It is also effective to set up a contact point within the company.On top of that, it is important to strengthen the internal check system, such as not concentrating authority on specific people or departments, so that crimes cannot be physically committed.
· Be available to consult with an accountant or tax accountant
In addition to the check system inside the company, make use of outside power, such as voluntarily introducing accounting audits, which are mandatory for listed companies, and having a professional certified public accountant take a look.By using a tax accountant, you can strengthen the external monitoring system.Having a tax specialist available at all times will make it harder for employees to take action if they are tempted to make accounting fraudulent.
How to spot window dressing
Even if you have a check system in place, window dressing may still occur.We will explain how to spot fraudulent financial statements, such as points to be seen in financial statements and effective investigations.
View Accounts Receivable, Accounts Payable, and Accounts Payable
In accounts receivable, estimate how many months of monthly sales are appropriate, and if it is abnormally higher than usual, be careful.Conversely, if accounts payable and accounts payable are lower than usual, be careful.
see stock
Inventory adjustments are also common in window dressing accounts.Increasing inventory will affect the cost rate and gross profit rate.If the gross profit rate is suddenly good, you need to be careful.
View temporary payments and loans
Pay attention to the contents and amounts of these account items to see if you are forcibly capitalizing the expenses you actually paid to reduce expenses and show more profits.
conduct a forensic investigation
Anything suspicious requires a thorough investigation."Forensic investigation" is effective not only for financial statements, but also for collecting and analyzing data related to money and transactions.
Use “Forensic Investigation” in Case of Fraudulent Accounting
If there is suspicion of window dressing, a forensic investigation by an investigation company by a specialized investigation company is effective.We will also explain what kind of survey it is and how to select a research company.
What is a forensic investigation?
A branch of forensic science that involves collecting and analyzing information stored on digital devices to uncover evidence of crime or wrongdoing.
For forensic investigation requests, choose from a professional investigation company with a proven track record
Forensic investigations should be outsourced to an investigative company rather than conducted in-house.By utilizing the specialized software and know-how of a research company, we are able to conduct research reliably, efficiently, and at a cost suitable for the scale.
A research company that utilizes AI enables high-precision and rapid research
It can be said that the use of AI (artificial intelligence) is no longer essential in modern forensic investigations that handle huge amounts of data.A small number of sample files are read by a small number of experts, and the AI learns the judgment criteria to sort a large amount of data into those that are likely to be related and those that are not.The simple data sorting work that must be done at the beginning of a survey can be done in a short time with a small number of people, so not only can the survey be made more efficient, but also the accuracy can be improved by concentrating the resources of experts.
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