Definition of Window Dressing

A company can use window dressing when preparing financial statements to improve the appearance of its performance or liquidity.

Explanation of Window Dressing

Window dressing may consist of changing asset depreciation or valuation policies, making short-term borrowings, or engaging in sales and leaseback transactions at the end of a period. By doing so, management increases the company’s results or liquidity and obtains some benefits.

Most of the times, beneficiaries of window dressing are those who use this practice, i.e. companies and mutual fund managers. In many cases, managers’ remuneration (i.e., salaries and bonuses) depend on how well their companies or mutual funds performed; so there is a direct interest in making financial results or liquidity look better than they really are.