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16 Case prt sc Enron: The Revenue Recognition Principle Synopsis In its 2000 annual report, Enron prided itself on having "metamorphosed from an asset-based pipeline and p and logistics company whose biggest assets are its well-established business approach and its innovative people."1 Enron's strategy seemed to pay off, in 000 it was the seventh largest company on the Fortune 500, with assets of $65 billion and sales revenues of $100 billion. From 1996 to 2000, its rev enues had increased by more than 750 percent, which was unprecedented in any industry. Yet just a year later, in December 2001, Enron filed for bank ruptcy, and billions of shareholder and retirement savings dollars were lost. Background Enron was created in 1985 by the merger of two gas pipeline companies: Houston Natural Gas and InterNorth. Enron's mission was to become the leading natural gas pipeline company in North America. As it adapted to changes in the natural gas industry, Enron changed its mission, expanding into natural gas trading and financing and into other markets, such as electricity and other commodity markets. In the process, Enron made significant changes to several of its accounting pro- cedures. For example, Enron began using mark-to-market (MTM) accounting for its trading business. Firms in the financial services industry typically used MTM Enron 2000 annual report, p. 7. 2 Joseph F. Berardino, Remarks to U.S. House of Representatives Committee on Financial Services December 12, 2001 3 Bala G. Dharan and William R. Bufkins, "Red Flags in Enron's Reporting of Revenues and Key Financial Measures," March 2003, prepublication draft (www.ruf.rice.edu/-bala/files/ dharan-bufkins_enron_red_flags_041003.pdf), p. 4 25