Appropriateness of Accounting Rules
Response to the following problem:
In the early 1990s, 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 there was a ready market for these finished products, as soon as the company purchased the crude oil, it would value its oil inventory at the selling prices of the finished products less the cost to refine the oil. Although the case involved fraud, the type of accounting used was also questioned because it allowed the company to recognize profit before the actual sale (and even refining) of the oil. Nevertheless, one of the large CPA firms attested to the use of this method. If you were the judge in this case, would you be critical of this accounting practice?