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enron case study.pdf - Enron and How It Changed the World...

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This handout by Jerred Flynn, James Hills, and Ravneel Prasad is licensed under aCreative Commons Attribution-4.0 International License.Enron and How It Changed the World of BusinessBackgroundEnron was a multibillion-dollar energy company who, through dishonest accounting practices, was ableto hide their losses till the point where their next major merger fell through. They did this with shellcompanies that they would off load their losses to, to make their own financials look pristine. At thepoint of the failed merger, they filed for bankruptcy as their liabilities were too much for them to stayafloat. This resulted in tens of thousands of people to lose millions, both in pensions and shares of thecompany they could not sell.Questions Before the Case1) Is it alright to exaggerate anything when submitting official documents? Be it a resume, timesheet, orsomething else.2) Back when all of this happened, the incentivization for people who came forward with information(whistleblowers) was almost non-existent. Should there be incentives beyond the social recognition of“doing the right thing” for whistleblowers?3) If you are a manager, is it ever right to bend the truth so that you and those under you can keep yourjobs or tell the truth and possibly lose them?Enron CaseRevenue Recognition: Why Doing Something Different Isn’t Always Better.In the case of Enron, they, like most of their competition, had a system of “historical cost” principlesthey had to follow when they booked their revenue. Basically, they bought the natural gas they sold at agiven price, and when they sold it at whatever price they could get for it, they took the costs off andreported that as profit. This was how it worked in any given year to account for fluctuations in theselling price; they had to wait until they sold the gas before they could record revenues.

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