Harvard Case - Now You See It, Now You Do Not: The Case Of Jet Airways And Its Accounting Policies
"Now You See It, Now You Do Not: The Case Of Jet Airways And Its Accounting Policies" Harvard business case study is written by Padmini Srinivasan. It deals with the challenges in the field of Accounting. The case study is 12 page(s) long and it was first published on : Jan 1, 2010
At Fern Fort University, we recommend a comprehensive overhaul of Jet Airways' accounting policies and practices, focusing on transparency, accuracy, and alignment with international accounting standards. This includes implementing a robust internal control system, adopting activity-based costing for a more accurate representation of costs, and improving communication with stakeholders to ensure a clear understanding of the airline's financial performance.
2. Background
This case study examines the financial struggles of Jet Airways, a prominent Indian airline, and the role of its accounting policies in contributing to its downfall. The airline, once a symbol of India's economic growth, faced significant challenges, including rising fuel costs, intense competition, and a complex web of financial transactions. The case highlights how questionable accounting practices, including aggressive revenue recognition, inflated asset values, and opaque financial reporting, contributed to the airline's financial distress.
The main protagonists of the case are:
- Naresh Goyal: Founder and Chairman of Jet Airways, who played a crucial role in the airline's initial success but also faced criticism for his management style and financial decisions.
- The Board of Directors: Responsible for overseeing the airline's operations and ensuring ethical and transparent financial reporting.
- The Auditors: Responsible for reviewing the airline's financial statements and ensuring compliance with accounting standards.
- The Investors: Who relied on the airline's financial statements to make investment decisions.
3. Analysis of the Case Study
This case study can be analyzed through the lens of several frameworks:
Financial Analysis:
- Profitability: The case reveals that Jet Airways struggled with profitability, facing rising costs and declining revenues.
- Financial Performance Measurement: The airline's financial performance was misrepresented due to aggressive accounting practices, leading to an inaccurate picture of its true financial health.
- Balance Sheets: The airline's balance sheet was inflated due to overvalued assets, creating a false sense of financial stability.
- Cash Flow: Jet Airways faced significant cash flow challenges, which were masked by its accounting practices.
Corporate Governance:
- Boards: The board of directors failed to effectively oversee the airline's financial management and hold management accountable for their actions.
- Accounting Procedures and Policies: The airline's accounting policies lacked transparency and were not aligned with international accounting standards.
- Corporate Social Responsibility: The airline's focus on short-term profits at the expense of long-term sustainability led to a disregard for ethical practices and corporate social responsibility.
Management Accounting:
- Cost Accounting: Jet Airways' cost accounting system lacked accuracy, leading to misallocation of costs and an inaccurate understanding of profitability.
- Activity-Based Costing: The airline could have benefited from implementing activity-based costing to accurately allocate costs to specific activities and improve cost management.
- Budgeting and Budgeting: The airline's budgeting process lacked rigor and was not aligned with its financial performance.
International Business:
- Emerging Markets: Jet Airways' operations in the Indian market were heavily influenced by the country's economic growth and regulatory environment.
- Competition: The airline faced intense competition from domestic and international carriers, which impacted its profitability.
4. Recommendations
To address the issues highlighted in the case, Jet Airways should implement the following recommendations:
- Implement a Robust Internal Control System: This should include clear segregation of duties, regular audits, and a whistleblower program to prevent financial irregularities and ensure compliance with accounting standards.
- Adopt Activity-Based Costing: This will provide a more accurate representation of costs and allow for better decision-making regarding pricing, resource allocation, and profitability analysis.
- Improve Communication with Stakeholders: The airline should provide transparent and accurate financial reporting to investors, creditors, and other stakeholders, ensuring a clear understanding of its financial performance and future prospects.
- Strengthen Corporate Governance: The board of directors should be more proactive in overseeing the airline's financial management and ensuring compliance with ethical and legal standards.
- Focus on Long-Term Sustainability: Jet Airways should prioritize long-term sustainability over short-term profits, adopting a more responsible approach to financial management and corporate social responsibility.
- Enhance Cost Management: The airline should implement rigorous cost management practices, including optimizing routes, negotiating better fuel contracts, and reducing operational expenses.
- Develop a Clear Growth Strategy: Jet Airways should develop a clear growth strategy that is aligned with its financial capabilities and market opportunities.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: The recommendations align with the airline's core competency of providing air transportation services and its mission of delivering safe, reliable, and affordable air travel.
- External Customers and Internal Clients: The recommendations aim to improve customer satisfaction by ensuring a reliable and safe travel experience and enhancing employee morale through transparent and ethical practices.
- Competitors: The recommendations help Jet Airways stay competitive by improving cost management, enhancing financial performance, and providing better value to customers.
- Attractiveness: The recommendations are expected to improve the airline's financial performance, enhance its attractiveness to investors, and ensure long-term sustainability.
6. Conclusion
The case of Jet Airways highlights the importance of sound accounting practices and ethical corporate governance in ensuring the long-term success of any business. By implementing the recommended changes, Jet Airways can regain investor confidence, improve its financial performance, and secure its future in a competitive aviation market.
7. Discussion
Other alternatives not selected include:
- Merging with another airline: This could provide access to resources and expertise, but it also carries significant risks and may not be feasible in the current market conditions.
- Liquidation: This would be a drastic measure with significant consequences for employees, creditors, and the aviation industry.
Key assumptions:
- The Indian aviation market will continue to grow, providing opportunities for Jet Airways to expand its operations.
- The airline will be able to implement the recommended changes effectively and efficiently.
- The government will provide a supportive regulatory environment for the aviation industry.
8. Next Steps
The implementation of these recommendations should be a phased approach, with clear milestones and deadlines. The following steps are crucial:
- Phase 1 (Immediate): Implement a robust internal control system and begin the process of adopting activity-based costing.
- Phase 2 (Short-Term): Improve communication with stakeholders and strengthen corporate governance.
- Phase 3 (Long-Term): Develop a clear growth strategy, enhance cost management, and focus on long-term sustainability.
By taking these steps, Jet Airways can overcome its past challenges and emerge as a stronger and more sustainable airline, contributing to the growth of the Indian aviation industry.
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Case Description
The case highlights issues arising from changes in accounting policies followed by Jet Airways during the accounting year ended March 31, 2009. During the first quarter ended June 30, 2008, Jet Airways changed its accounting policy of charging depreciation from written down value method to straight line method on certain aircraft, which resulted in a writeback of excess depreciation of Rs. 9159 million. The company adopted an accounting policy that capitalized and deferred the losses arising out of certain foreign currency exchange difference instead of charging it to the income statement. They had also revalued some of their assets in the previous year. Airline companies have significant fixed assets, and therefore the accounting for depreciation is important. The accounting policy choice that the company makes impacts not only profits and asset values for the current year but those of future years.
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