I am reading a case study for a marketing law class, but the finance/accounting/legality aspect is difficult for me to understand
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Basically, Enron used mark to market accounting to over inflate their profits. This is the process of counting projected future revenues from projects in today’s revenue. This by itself is not unreasonable if done correctly. Let’s say you sign a simple service contract with a client for $5 million, but it starts several months from now. You know exactly how much that contract is worth, so you can book those future profits.
However, Enron badly abused this system. They were booking future profits from projects that did not have a known value and were very difficult, if not impossible, to forecast. On top of that, they were hyper inflating those projections. They weren’t just estimating $20 million on a $19 million project… they were booking $80 million on a $5 million project.
Eventually, the lies caught up with them. You can only pull this scheme for so long before people start to notice that the actual cash coming into the business is nowhere close to what has been reported.
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