Posted on 07/25/2002 4:01:46 PM PDT by gubamyster
July 25, 2002 8:45 a.m.
People around Vice President Dick Cheney are growing increasingly frustrated with reports that he's gone into virtual hiding to avoid questions about his time as CEO of Halliburton. "It's absurd," says one administration source, noting that Cheney has appeared at several public events in recent weeks (he has one today, too, in Washington). While reporters complain that Cheney stays away from the press at those events — most of his appearances are speeches where he doesn't answer questions — his defenders say that's the way he's always worked. "He doesn't go down to the briefing room and take questions," says the administration source.
But why not do a traditional sit-down interview to clear the air about Halliburton, now that there is a Securities and Exchange Commission inquiry into the company's accounting practices while Cheney was its chief executive? "The Office of Vice President cannot and will not work on Halliburton issues," says the source. "The vice president has not been contacted by the SEC, and it would not be appropriate for him to comment on a pending SEC investigation."
Whether or not that's the best course to take is open to question. But there is no question that while Cheney remains silent, Democrats are pounding him with allegations that he engaged in fraudulent accounting practices during his corporate career. Recently, for example, the Democratic National Committee charged that Cheney's record at Halliburton was filled "with irregularities that look similar to practices by WorldCom and other corporations condemned by the administration in recent weeks." DNC chairman Terry McAuliffe recently called on Cheney to "come clean" about "the accounting tricks he used as CEO of Halliburton." The bottom line, Democrats charge, is that Cheney is a hypocrite to support corporate reforms which he didn't follow when he had the chance — or, at the very least, that his business record undermines any credibility he might have to enact reform.
But there is a solid defense to be made for Cheney's actions, even if he himself is not making it. Even though most of the evidence the SEC is investigating in the Halliburton case remains out of public view, a look at what is available suggests there is no merit to the Democratic charges that he used "accounting tricks" or "irregularities similar to practices by WorldCom." Instead, both the available evidence and interviews with people knowledgeable about the case strongly suggest that the SEC will finish its probe without finding any evidence of accounting fraud by Halliburton or Cheney.
AN ACCRUING CONTROVERSY
Though Democrats have long accused Cheney of being too close to the energy industry, allegations of corruption did not kick into high gear until May 22, when the New York Times reported that during Cheney's time at Halliburton, the company "altered its accounting policies so it could report as revenue more than $100 million in disputed costs on big construction projects." That move, the Times said, helped Halliburton conceal growing losses. The paper also noted that Halliburton did not tell its investors about the "aggressive" change for more than a year, adding, "Accounting specialists said that the change stretched and may have broken accounting rules." Within a week, Halliburton received notice from the SEC that federal regulators had begun an investigation of the company's accounting practices.
In the weeks that followed, Cheney's critics jumped on the story, accusing the vice president's old company of switching to a risky method of accounting to cover up its debts, and then keeping the change secret from stockholders.
First, the accounting allegation: Halliburton handles enormous construction projects, like power plants and oil refineries. In the past, the company had signed construction contracts on what was known as a cost-plus basis. That meant the customer paid the costs of construction plus an agreed-upon profit for Halliburton. But in the 1990s, Halliburton began to sign more fixed-price contracts in which it agreed to do projects for a pre-determined fee. "The industry as a whole was changing," says Wendy Hall, a spokeswoman for Halliburton. "It was moving from cost-plus contracts to large lump-sum contracts."
The change created pressure to revise the way Halliburton accounted for revenues from such projects. With a fixed-price deal, whenever the final cost of the project ran over the preset dollar amount, Halliburton had to go back to the customer to try to get payment for the extra costs. Until 1998, Halliburton recorded such payments in its revenue column only when the customer actually sent in a check. But in 1998, Halliburton adopted another system of accounting in which it recorded revenues more quickly, based on an estimate of what it would ultimately collect. Halliburton made the change in the aftermath of its expensive merger with Dresser Industries, and the change allowed Halliburton to post more revenue to offset the losses associated with the merger.
Contrary to the criticism that the move "stretched and may have broken accounting rules," it appears that Halliburton's method of accounting is in fact not only perfectly legitimate but is the preferred way for large companies to do business these days. "Back in 1982, the American Institute of Certified Public Accountants issued a statement of position on contract accounting, including cost overruns," says Doug Carmichael, professor of accounting at Baruch College. "Prior to that time, those things were only recorded when they were resolved on a cash basis. But generally, accounting doesn't work that way. It works on an accrual basis, where things are recognized when they happen rather than when cash changes hands." Now, Carmichael says, "recognizing [revenues] on an accrual basis when the costs are incurred is probably the method that most contractors follow. It's what the audit guide says should be done."
Still, there is potential for abuse — what if a company counts as revenue money it knows it will never be paid? Accounting rules require firms to have a solid basis to expect that money will actually be collected before the money can be posted as revenue. "There's a lot of specific guidance on what makes revenue bookable," explains a Halliburton source, who says the company has carefully stayed within the guidelines. "We follow that, and our auditors review our work." Although Halliburton has taken a lot of heat for using Arthur Andersen as its accountant, the source says that more recently specialists from KPMG Peat Marwick have reviewed and approved Halliburton's contract accounting. If the company can make that case to the Securities and Exchange Commission, there will likely be no problem with the issue of its accounting.
The second allegation against Halliburton is that it kept the accounting change secret from its stockholders for more than a year, waiting until the 1999 annual report to make it public. There is little doubt that Halliburton should have reported the change in the '98 report. But the company has argued that the change did not, at first, involve all that much revenue — that it was not what accountants would call a "material" amount. In the first year, for example, Halliburton used the new accounting method to post $89 million in revenue — out of annual sales of $17 billion. "We felt like that wasn't a material amount," says Wendy Hall. "The next year, we realized it was a material amount and we wanted to report it."
But even though the $89 million was a small part of Halliburton's total sales, it represented a significant chunk of Halliburton's net income and it was, by anybody's count, a lot of money. So it is entirely possible that the SEC will decide Halliburton should have made the change public immediately. "My guess is the SEC will say that they should have disclosed it," says J. Edward Katz, a professor of accounting at Penn State. "I would argue that it was material when compared with income."
But the SEC then has to answer another, critical question: Was it fraud? "Making a determination that the difference was material still doesn't mean it was fraudulent," says an SEC source. "Was it a violation, or was it a fraudulent violation?"
Here, there are two factors that argue strongly in Halliburton's favor. First, the company did disclose the accounting change the next year. And second, when it announced the change, nothing much happened. If the accounting switch had signaled a major shift in the company's finances, it likely would have caused an uproar among industry analysts and Halliburton investors. But in fact no one seemed to care. "There were no analysts or research reports questioning it," says a Halliburton source. "Regardless of whether it should or should not have been [disclosed] in '98, we did put it out in '99, and there was no market reaction. Up until this year, there have been no analyst or investor inquiries."
Given those facts, it seems a good bet that the SEC investigation will end with a whimper. "The likelihood is that it would end up in a Section 21C order, which is a cease and desist order," says Edward Fleischman, a former SEC commissioner. "Without Halliburton admitting or denying, the SEC would order the company to cease and desist from ever doing anything like that again. Unless they have found some systemic, Fastow-like effort [a reference to Andrew Fastow, the former chief financial officer at Enron] to play games, that's the end of the story."
A WINNING ISSUE?
But for now, the SEC investigation goes on. A source at the commission concedes that politics may have played a role in the decision to begin a probe, and it might play a role in future decisions on its length and thoroughness. "We know this is a high-profile company," says the source. "We probably had a lower threshold [on Halliburton] just because of the political sensitivity." It is entirely possible that Halliburton will receive more scrupulous attention than the hundreds of cases that the SEC examines each year.
But whatever facts the SEC uncovers, the investigation seems unlikely to satisfy Democrats in Congress. With mid-term elections approaching, party leaders in the Senate are said to be considering holding hearings on both Cheney's time at Halliburton and President Bush's dealings with Harken Energy. "I hope that a congressional investigation into Harken and Halliburton is not necessary, but they are possible if there are not adequate answers to what happened," Sen. Joseph Lieberman, a potential presidential challenger in 2004, told The Hill newspaper Wednesday. Sen. Carl Levin, chairman of the Senate Governmental Affairs Permanent Subcommittee on Investigations, told the paper, "I think they [Bush and Cheney] need to turn over all the documents that relate to this issue...It seems to me there is a potential, at least for Halliburton, of possible hearings."
So expect much more from Democrats, who believe they may have found a winning issue against a White House that has been consistently popular since last September's terrorist attacks. And finally, do not underestimate the intensity of the Democrats' desire for payback after the last administration. "To me, it's just a matter of consistency," says one Democratic strategist. "The GOP wanted the Clintons to be scrubbed and investigated and turned over and poked in every imaginable way — in a deal where money was lost." Halliburton and Harken, he says, are valuable for Democrats "as a metaphor for the Republican party and its coziness with big business and its propensity to think the rules don't apply to them. It's a great issue for Democrats."
Well, this probably explains Cheney's silence on the issue. The dems think they have an issue- Dick knows they do NOT, so he's just letting them waste their time with it. It doesn't hurt him as long as the truth has anything to do with it and is just an exhausting and fruitless effort for the dems and liberal media.
The dems don't have any winning issues. This Haliburton thing is the type thing that should be used as a last resort, when you've exhausted all your legitimate issues. This just goes to show that the dems have been at the table empty handed the entire time. Let 'em root around in this closet all they want. It keeps 'em busy and occupied.
It's wrong, but it's to be expected.
Don't you wish we had a dollar for every single time we've read that?
Who knows... government lawyers at work.... lol. I suspect they can move it along quite rapidly if they choose to. I doubt it will be anything out before the fall elections...... just my guess
I guess that explains the attraction for Klayman?
BTW, $89 million out of $17 billion is less than 1%.
After reading Andrew Sullivan's latest article I'm ready for someone to jump all over Robert Rubin - and Citibank, of course.
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