You Decide: Could we see Enron coming?

Sherron Watkins, the whistle-blower at Enron, made the following statement at a conference that one of the authors attended: “If anyone would have been watching the cash flows of Enron, they could have figured out that there were problems.” While traditional ratios don’t reveal the problems, the following ratio provides some interesting results when looked at on a quarterly basis:

During the period 1998 and 2001, this ratio revealed the following:

Does this ratio look normal or as expected for a nonfraud committing company? What would you expect this ratio to look like? Why do the yearly results look so different than the quarterly results?

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Net Income from Operations - Cash Flows from Operations Net Income from Operations