Halliburton's accounting probed by SEC

Aggressive maneuver occurred when Cheney ran company

May 30, 2002|By NEWSDAY

WASHINGTON — Wendy Hall, WASHINGTON - An aggressive accounting maneuver adopted at Halliburton Co. when Vice President Dick Cheney directed the huge oilfield services business is being investigated by the Securities and Exchange Commission.

By claiming added construction costs before they were received, the accounting change increasingly helped the company's bottom line grow from $89 million to $234 million over the past four years, bolstering a sagging profit picture at a company that had $13 billion in revenues last year.

Halliburton is being investigated amid heightened public skepticism about the accounting practices of a number of energy companies that are under SEC scrutiny and with the accounting industry shaken by the collapses of Enron Corp. and Global Crossing Ltd., and the continuing troubles of Arthur Andersen Co.

Halliburton officials acknowledged the SEC investigation yesterday and said the company has promised to cooperate fully. Spokesmen for Cheney, who was in Tennessee, and Andersen, the company's auditor, directed inquiries to Halliburton.

Halliburton officials said the accounting switch reflected a change in business practices when the bidding strategy on major construction projects changed from a preset agreement with a fixed profit margin to a base price, with the cost of overruns to be negotiated after construction.

"This is pretty standard throughout the construction industry," said Halliburton press secretary Wendy Hall.

The SEC will be examining the reason for the accounting change and whether there was any intent to defraud, whether company officials benefited and whether the change influenced Wall Street research analysts and the stock price, said Douglas Carmichael, director of Baruch College's Center for Integrity in Financial Reporting.

Cheney guided Halliburton as chief executive from 1995 to August 2000, although it is not clear whether he or his top aide, David J. Lesar, would have authorized the accounting change. Lesar, a former Andersen accountant, succeeded Cheney as Halliburton's chairman and CEO.

Accounting experts said rules are particularly clear when it comes to booking contracts the way Halliburton did. "There are very detailed and rigorous requirements that apply to permitting accrual claims before they're paid," Carmichael said. "There has to be a legal basis for the claim and it has to be clearly spelled out" in financial disclosures.

In Halliburton's case, Carmichael said, "it doesn't seem as though any of the requirements were met."

Halliburton officials likened the alternative strategy to switching doorknobs on a new house. Under the former pricing strategy, the price of the doorknobs would be included in the overall bid. Under the new strategy, the cost of the doorknobs would have to be renegotiated after installation.

Halliburton projected the cost and claimed it as revenue, even though the price had not been negotiated.

Accounting standards allow such projections to be claimed "only if it is probable that the claim will result in additional contract revenue and if the amount can be reliably estimated," according to Financial Accounting Standards Board regulations.

Hall said Halliburton's projections had been accurate. Since 1998, the unresolved construction claims counted as revenue grew from $89 million to $98 million to $106 million to $234 million, according to the company's financial disclosure forms. It seems to have had little effect on Halliburton stock, which has fallen nearly 70 percent since 1998.

The issue of inflated revenues has become central to the burgeoning accounting scandal in the wake of Enron's collapse. Recent disclosures involved energy trading by Enron that manipulated California energy prices during the state's energy crisis in 2000 and 2001, and top officials at Dynegy Inc., Reliant and CMS Energy resigned after disclosures of similar "round-trip" trading.

The switch also occurred at a time of stress for Halliburton. It had acquired another energy company, Dresser, and the Brown and Root construction company, including outstanding obligations of more than 250,000 unresolved asbestos claims against Dresser totaling nearly $1 billion.

William McLucas, a former director of enforcement for the SEC and now a partner at Washington law firm Wilmer, Cutler & Pickering, said it would be a mistake to assume that Cheney's political position will have any effect on the investigation. "The SEC is completely unreactive to any effort to generate any kind of political pressure," McLucas said. "It will not have any influence."

Cheney's departure from Halliburton sparked controversy during the 2000 election campaign. He cashed in stock options worth $18.5 million as the company's stock hit a high of $54.50. By the time he took office in January, 2001, the stock had fallen to $40.75. It closed yesterday at $18.38.

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