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Chapter 9. Goosing, Stuffing, and Faking... > Red Flag 8: Beware of Companies That...

Red Flag 8: Beware of Companies That Record the Entire Value of Trades As Their Revenue

Some companies are extremely generous in the way they decide what really constitutes revenue, and it is important that investors know whether this makes their financial statements directly comparable with those of competitors. Enron’s booking of the value of all its energy trading contracts as revenue, rather than just its trading revenue, helped to propel the company to the number five spot in the Fortune 500, even as it was heading into bankruptcy. Enron recorded $138.7 billion in revenues in the year of its collapse, putting it ahead of General Electric Co. and Citigroup. Clearly, this is nonsense—even at its height, Enron was nowhere near as important to the U.S. economy as companies like those. A decision by accounting rulemakers in 2002 to require energy traders to subtract the cost of sales from gross revenue figures to produce a “net revenue” number is reducing this practice, though the gross revenue technique is still used by some companies in other industries.


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