Report to the Management of Wastage Plc

From: Financial Consultant
To: Board of Directors, Wastage Plc
Date: November 15, 2016
Subject: Concepts of Creative Accounting and Window Dressing

(a) Definitions of Creative Accounting and Window Dressing

1. Creative Accounting:
   Creative accounting refers to the manipulation of financial records or the use of loopholes in accounting standards to present a desired but misleading financial position. This practice often masks the true performance or financial health of a company.
2. Window Dressing:
   Window dressing involves intentionally altering financial statements to make them appear more favorable to stakeholders, such as investors or regulators. Unlike creative accounting, window dressing can sometimes involve outright illegal practices.

(b) Five Examples Each of Creative Accounting and Window Dressing

Creative Accounting Examples:

1. Adjusting depreciation rates or asset lives to manipulate expenses.
2. Capitalizing research and development costs that should be expensed.
3. Recording revenue prematurely before it is earned.
4. Misclassifying operating leases as finance leases to inflate asset values.
5. Delaying expense recognition to improve profit margins.

Window Dressing Examples:

1. Overstating inventory to increase profits.
2. Underreporting liabilities to enhance financial stability.
3. Inflating accounts receivable by failing to write off bad debts.
4. Manipulating period-end cash positions with short-term loans.
5. Overvaluing assets through questionable revaluations.

(c) Three Possible Reasons for Creative Accounting and Window Dressing

1. Tax Benefits: Companies may use creative accounting to reduce taxable income and save on tax liabilities.
2. Investor Attraction: Presenting a strong financial performance to attract new investors or retain existing ones.
3. Regulatory Compliance: Adjusting figures to meet financial covenants or avoid regulatory penalties.

(d) Five Preventive Measures for Creative Accounting

1. Independent Audits: Engage external auditors to provide unbiased reviews of financial statements.
2. Robust Corporate Governance: Implement a strong governance framework to oversee financial reporting.
3. Strict Adherence to IFRS: Comply fully with International Financial Reporting Standards to ensure transparency.
4. Foster Ethical Culture: Develop and enforce ethical guidelines for management and employees.
5. Encourage Whistle-Blowing: Establish systems for reporting unethical practices without fear of retaliation.

Conclusion:

Adopting these preventive measures will enhance financial reporting integrity, ensure compliance with regulations, and maintain stakeholder trust.

Yours faithfully,
[Your Name]
Financial Consultant