A few years ago, the top executive of a large oil refining company (based in New York) was convicted of financial statement fraud. One of the issues in the case involved the way the company accounted for its oil inventories. In particular, the company would purchase crude oil from exploration companies and then process the oil into finished oil products, such as jet fuel, diesel fuel, and so forth. Because of the ready market for these finished products, the company would record its oil inventory at the selling prices of the finished products less the cost to refine the oil (instead of at cost) as soon as it purchased or discovered the crude oil. In addition to the fraud in the case, the type of accounting was questioned because it allowed the company to recognize profit before the actual sale (and even refining) of the oil. This method was even attested to by one of the large CPA firms.
If you were the judge in this case, would you be critical of this accounting practice? Why or why not? Consider these questions and then post whether or not you believe this type of accounting practice should be criticized and whether or not this rather “aggressive” accounting was a warning signal that fraud might be occurring.
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