Revenue Recognition:
* Channel Stuffing: A company pushes excessive inventory onto its distributors or retailers, artificially inflating sales figures. The distributors may agree to return the excess inventory later, but this is not reflected in the company's financial statements.
* Accelerated Revenue Recognition: Companies may recognize revenue too early, for example, recognizing revenue for a service before it is fully performed.
* Round Tripping: A company sells assets to a related party at an inflated price, then buys the assets back later. This creates a false sense of revenue and profit.
Expense Management:
* Delaying Expenses: Companies may delay recording expenses until the next period to make their current earnings look better.
* Capitalizing Expenses: Companies may capitalize expenses that should be expensed, such as research and development costs, to reduce their current period expenses and improve earnings.
* Misclassifying Expenses: Companies may misclassify expenses as something else to make their financials look better, such as booking operating expenses as capital expenditures.
Balance Sheet Manipulation:
* Hiding Liabilities: Companies may hide or understate their liabilities, such as off-balance-sheet financing, to improve their financial position.
* Inflating Assets: Companies may overstate the value of their assets, such as inventory or property, to increase their reported assets and equity.
* Using Aggressive Accounting Standards: Companies may use accounting standards in a way that is not considered standard practice to present a more favorable financial picture.
Other Window Dressing Techniques:
* Earnings Management: Companies may engage in various tactics to manipulate their earnings, such as adjusting accruals or manipulating inventory levels.
* Changing Accounting Policies: Companies may change their accounting policies to improve their financial statements.
* Making Unusual Transactions: Companies may engage in transactions that are unusual or non-recurring to improve their financials.
Identifying Window Dressing:
* Analyze financial statement trends: Look for unusual or sudden shifts in financial ratios or trends in key metrics.
* Compare company performance to industry peers: Compare a company's financial performance to similar companies in its industry to see if anything looks out of line.
* Read the footnotes and management discussion and analysis (MD&A): The footnotes and MD&A contain important disclosures about the company's accounting policies and financial performance.
* Look for red flags: Indicators of potential window dressing include frequent changes in accounting policies, unusual or non-recurring transactions, and a history of earnings restatements.
It's important to note that some accounting practices that may appear to be window dressing can be legitimate. However, investors should be wary of any company that seems to be aggressively manipulating its financial statements.
Ultimately, investors should do their own research and carefully evaluate a company's financial statements before making any investment decisions.