Oleh Dimas Wicaksono, Excel Arrayyan, dan Hasna Rufaidah (Divisi Pasar Modal)
INTRODUCTION
The term “window dressing” refers to the method of organizing and presenting financial statements to ensure a company’s financial report appears particularly pleasing and appealing.[1] According to Black’s Law Dictionary, “window dressing” is the act of misrepresenting or deceiving a fact or the appearance of a company’s financial documents to make it attractive and/or favorable to the issuer and the company itself.[2] The term “window dressing” dates to the middle of the 19th century. Retailers utilize a method referred to as “window dressing”, to decorate a window display to attract customers. It functioned as a way to showcase products and entice people passing by to enter the store.[3] Over time, the term “window dressing” began to be used metaphorically in various fields, including accounting, public relations, and finance.
The financial industry adopted it referring to the practice of altering financial data to make it more appealing to potential investors. Usually, at the end of the year, a phenomenon occurs where financial statements appear to be better or increase significantly. The idea of “Window Dressing,” as it relates to mutual funds, states that managers would purchase stocks that will make them appear advantageous at the end of a quarter or year, fund managers make superficial changes to their portfolio to appear more attractive and appealing before publishing required reports.[4] The implementation of window dressing is carried out through the embellishment of financial reports distributed to the public to enhance the company’s image. As a result, this practice is commonly found in both the primary market (initial public offerings) and the secondary market (the sale of shares after the initial public offering). The application of window dressing practices periodically could increase its managed funds and/or operational income. Adjusting accounting procedures, selectively presenting information, temporarily shifting assets or liabilities, or accentuating favorable aspects of a business while downplaying its problems are several instances of window dressing. The term is sometimes used derogatorily, implying an attempt to convey a false or unduly optimistic view of a company’s financial condition. Window dressing is believed to be a deceptive practice because information is manipulated to make a company appear to perform better than it did. It is an unethical practice because it attempts to manipulate and deceive regulators and potential investors. The company’s valuation has a significant impact on its fundamental condition, so fraudulent practices in company valuation should be avoided. In this context, such deception is typically carried out through the manipulation of the company’s financial representations. The practice of window dressing can be considered a tangible representation of deviation from the application of transparency principles as regulated in the relevant legal provisions of the Capital Market. The provision of the Indonesian Capital Market law prohibits the existence of window dressing practices. Window dressing practices against the financial reports and/or prospectus of the issuer or public company, essentially have the potential to be classified as a criminal offense when there are misleading statements, resulting in market price fluctuations and losses charged to investors.[5] This is further emphasized by the existence of the “fraud on the market theory”, which was once used by the Supreme court of the United States in the case of Basic Inc. v. Levinson. In that ruling, it was explained that the market theory is based on the hypothesis that in the Capital Market, a company’s stock price is determined by the availability of material facts related to the company.[6]
DISCUSSION
Finance and Legal theory are inter-connected approaches to reach financial development.[7] Nevertheless, from a legal perspective, window dressing is still an ambiguous concept. While its widely considered to be unethical (since it involves an element of deception) window dressing is not necessarily illegal.[8] From the view of law, Law Number 8 of 1995 threatens crime for fraud in the implementation of the capital market, this is expressly stated in Article 104 and 107. The capital market expressly prohibits securities trading activities that contain elements of fraud such as making false statements about material facts or refusing to disclose material facts so that investors / investors do not know the true situation with the intention of benefiting themselves and others, or by influencing others to buy or make securities. If this action continues to occur, investors’ public funds will not be protected and the operation of the capital market industry will not last long, this will imply public distrust of the capital market industry. Window Dressing, for example, occurred in 2017, as PT Tiga Pilar Sejahtera Food Ltd (AISA) conducted window dressing by inflating the receivables of six distributors amounting to Rp1.6 trillion. This causes AISA’s financial statements to look better than they are. This case became known after Bapepam-LK examined of AISA. Bapepam-LK imposed sanctions on AISA management, including a fine of IDR 10 billion.
Information is an essential element for the business world because Information essentially presents information, records, or images both for the past, present and future conditions of a Company and its securities market. Information is a factor that gives meaning to investors, especially in decision-making. This is because complete, relevant, exact, and precise information is needed by investors. In the capital market, people also need information that can be used as a basis for a decision. The importance of this information is so important that it is linked to the capital market without information is tantamount to gambling.[9]
Considering the importance of information in the capital market, every activity in the capital market obliges parties in a public offering to pay attention to and fulfill the principle of disclosure. According to Article 1 Paragraph (25) of the Capital Market Law, the principle of disclosure is a general guideline that requires issuers, public companies, and other parties subject to this law to inform the public in a timely manner all material information about their business or its stock that may affect investors’ decisions on the securities in question and / or the price of these securities. Investors, especially professional investors and institutional investors are always actively collecting information about material facts and using them to understand the prices of shares offered. Material facts themselves according to Article 1 Paragraph 7 of the Capital Market Law, Material information or facts are important and relevant information or facts about events, events, or facts that can affect the price of securities to the stock exchange and / or the decision of investors or other interested parties on the Information or facts. The purpose of upholding the principle of disclosure in the capital market is to maintain investor confidence, create an efficient market, and protect investors.
Window Dressing clearly violates the principle of disclosure in the Capital Market Law. Principle of Disclosure means that it is mandatory for issuers, public companies and other parties to inform the public in a timely manner all material information about their business or its effects that may affect the decision of investors on the securities in question or the price of such securities.[10] Investor confidence in issuers is at stake in window dressing practices. Although the issuer has provided financial statements, the report is not per the actual situation, or in other words, there is manipulation in it.[11] The practice of irregularities in Window Dressing is often found in the implementation of making balance sheets, including bookkeeping in general. Often the balance sheet included in the financial report section is made in various variations according to their respective goals. Therefore, conducted possible for manipulation to occur by falsifying financial statements conducted by various companies.
As stipulated in Article 378 of the Criminal Code, Window Dressing as a criminal act of fraud in the capital market can take the form of deception and a series of lies, the unlawful nature of Window Dressing is equally deceptive, or the content is not true or false and can cause confidence / impression for others that it all seems to be true. A series of deceptions that are conducted solely for others to believe and be interested or moved to hand over the object in question, stock. Manipulating the Market, which is a criminal act or unlawful act, is one of the chapters regulated in Law Number 8 of 1995 concerning Capital Market. As stated in Article 91, manipulating the market is an act conducted by any party directly or indirectly with the intention of creating a false or misleading picture of trading, market conditions or prices of securities on the stock exchange.
CONCLUSION AND SUGGESTION
The “window dressing” phenomenon is a critical issue with both legal and ethical dimensions. While it may not always be explicitly illegal, it is widely recognized as an unethical practice that compromises transparency in financial reporting. Window dressing involves the deliberate manipulation of financial data to present a more favorable image of a company’s financial health, which can deceive regulators and potential investors. As such, it not only undermines the integrity of the capital market but also poses legal risks, with potential consequences ranging from regulatory penalties to criminal charges.
The significance of accurate and transparent information in the capital market cannot be overstated. Investors rely on complete, relevant, and precise information to make informed decisions, and the principle of disclosure is fundamental to maintaining investor confidence and market efficiency. Window dressing directly contradicts this principle by distorting material information, potentially leading to harm to investors’ interests.
To address this issue, regulatory authorities should continue to strengthen enforcement mechanisms and provide clear guidelines for identifying and penalizing window dressing practices. Moreover, investors should be educated and encouraged to conduct thorough due diligence before making investment decisions, which can mitigate the effectiveness of window dressing strategies. Companies must be aware of the legal and ethical risks associated with such practices and prioritize accurate and transparent financial reporting.
As financial landscapes evolve and markets become increasingly complex, upholding the principles of transparency and disclosure becomes even more crucial to safeguard the trust of investors and protect the integrity of the capital market. In a world where information is the lifeblood of investment decisions, promoting ethical and legal responsibility in financial reporting is essential to ensure that the capital market remains a reliable and trustworthy avenue for both issuers and investors.
Suggestions for addressing the issue of window dressing include fostering a culture of ethical reporting and conducting more rigorous audits, as well as enhancing the collaboration between regulatory bodies, auditors, and corporations to promote greater transparency and compliance with the principles of disclosure. By doing so, we can protect the interests of investors, maintain market integrity, and uphold the credibility of the capital market.
Sumber:
[1] Hendy M. Fakhruddin, Istilah Pasar Modal A-Z (Jakarta: Elex Media Komputindo, 2008), 211.
[2] Bryan A. Garner, Black Black’s Law Dictionary (New York: West,2009), 1738.
[3]James Chen. “What is Window Dressing in Finance?” Investopedia.com https://www.investopedia.com/terms/w/windowdressing.asp#:~:text=Window%20dressing%20occurs%20when%20portfolio,a%20quarter%20or%20fiscal%20year. (accessed October, 24th 2023)
[4]Ibid.
[5]Julia Agnetha Agnesta Br. Barus, Bismar Nasution, Budiman Ginting, Mahmul Siregar, “ANALISIS HUKUM TERHADAP PERLINDUNGAN HUKUM BAGI INVESTOR DARI PRAKTEK WINDOWS DRESSING OLEH EMITEN DI PASAR MODAL” USU Law Journal vol. 4, no. 2 (Maret 2016): 128.
[6]Basic Inc. v. Levinson, 485 U.S. 224, [1988]
[7]Thorsten Beck, Asli Demirgüç-Kunt, Ross Levine, “Law and finance: why does legal origin matter?” Journal of Comparative Economics vol. 31, issue 4 (2003): 653-675.
[8]David Leung. ”Window dressing (Global) In-formality.com. https://www.in-formality.com/wiki/index.php?title=Window_dressing_(Global)#:~:text=From%20the%20legal%20perspective%2C%20window,dressing%20is%20not%20necessarily%20illegal (accessed October 28th 2023).
[9]Marzuki Usman, ABC Pasar Modal Indonesia (Jakarta: Institut Bankir Indonesia, 1990), 165.
[10]Raffles, “ANALISIS PENERAPAN PRINSIP KETERBUKAAN DI PASAR MODAL DALAM KAITANNYA DENGAN PENGELOLAAN PERUSAHAAN YANG BAIK”.
[11]Julia Agnetha Agnesta Br. Barus, Bismar Nasution, Budiman Ginting, Mahmul Siregar, “ANALISIS HUKUM TERHADAP PERLINDUNGAN HUKUM BAGI INVESTOR DARI PRAKTEK WINDOWS DRESSING OLEH EMITEN DI PASAR MODAL” USU Law Journal vol. 4, no. 2 (Maret 2016): 17.