Posted on 08/10/2002 8:34:49 AM PDT by HarryH
The company reveals new information, but the press isn’t interested.
Does the national press corps really want to learn the story of Halliburton's accounting practices during the time Vice President Dick Cheney was the company's CEO? The answer appears to be no, at least when you consider what happened — or didn't happen — after Cheney's speech Wednesday at the Commonwealth Club in San Francisco.
Cheney declined to answer a question about Halliburton's accounting, which is now the subject of a preliminary investigation by the Securities and Exchange Commission. "I am, of necessity, restrained in terms of what I can say about that matter," Cheney said, "because there are editorial writers all over America poised to put pen to paper and condemn me for exercising undue, improper influence if I say too much about it, since it is a matter pending before an independent regulatory agency." Instead, Cheney recommended that anyone interested in the issue should go to the company's website to learn about a recent conference call in which two top company executives spoke in detail about Halliburton's accounting practices.
Halliburton has posted an audio recording of the July 24 call, in which CEO David Lesar and chief financial officer Douglas Foshee discussed the company's situation with shareholders and industry analysts. The ostensible purpose of the call was to report the company's 2002 second-quarter results, but it also included an extended response to the charges that have been made against Cheney and Halliburton. In the course of that talk, Lesar and Foshee released new and detailed information that answers one of the key questions in the controversy — and refutes one of the most serious accusations made against Cheney.
But so far at least, it appears that no national reporter, even those who have written extensively on the accusations against the vice president, has taken the time to report on the conference call (the one notable exception is CNN's Brooks Jackson). It's not an easy story; there are lots of figures and financial terms. But it is an extraordinarily valuable one. So for all those who have not heard about it — not seen it on TV, not read it in the newspaper — here is what was discussed during the call.
THE $89 MILLION EXPLANATION The Halliburton controversy began on 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." It was, the Times reported, an "aggressive" change which experts said "stretched and may have broken accounting rules." Within a week, Halliburton received notice from the SEC that federal regulators had begun a preliminary investigation of the company's accounting practices.
One of the main questions in the SEC investigation is whether Halliburton properly accounted for revenues under a new accounting method it adopted in 1998. The company handles enormous construction projects, like power plants and oil refineries. Those projects take a long time to build, and customers take a long time to pay for them. Oftentimes there are cost overruns. Until 1998, Halliburton recorded revenues from cost overruns only when the customer actually paid the bill. In 1998, however, Halliburton changed its accounting practice to record cost-overrun revenues on a running basis, using an estimate of how much the company would ultimately be paid. That different method is the one recommended by the accounting profession's guiding organization; it is said to be a better way of dealing with bills that are often not settled until years after projects are completed.
But the practice presented Halliburton — and the many other companies that use the same accounting method — with one crucial challenge: How does one estimate how much of a cost overrun will ultimately be collected? If the company was too optimistic, counting as revenue money it knew it could never collect, that would distort its income statement and make it look more profitable than it was. Being too pessimistic would make the company's revenues look too low. The solution is for the company to book as revenues only those cost overruns which they have reasonable grounds to believe will be collected; in the SEC investigation, federal regulators will try to determine whether Halliburton made good-faith estimates of its to-be-collected revenues.
In the July 24 conference call, Douglas Foshee, Halliburton's chief financial officer, discussed the issue at length, focusing on 1998, the year Halliburton changed accounting methods for cost overruns. In that year, Halliburton counted as revenue $89 million more than it would have using the old, cash-in-hand method. (That was a tiny portion of Halliburton's annual sales of $17 billion, but a somewhat larger chunk of Halliburton's net income for that year.) Cheney's critics have suggested the $89 million amounted to phantom revenue, booked to conceal Halliburton's losses — the Democratic National Committee even released a statement saying that the vice president'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." But Foshee told shareholders and analysts that in the years after 1998 the company in fact collected much of the estimated revenue and expects to collect more in the next few years.
According to Foshee, nearly all of the $89 million in estimated revenues came from three big construction projects, two in South America and one in the Middle East. (A small amount, $2 million, was from a project in North America, and it has been collected in full.) On the first South American project, Foshee said, Halliburton estimated it would collect $18 million in revenue from cost overruns. In late 1999, it had to write off $3 million of that as a loss, but in 2000, it collected the remaining $15 million.
On the second South American project, Halliburton estimated it would collect $38 million in revenue from cost overruns. In late 1999, it collected $12 million, but was forced to write off $13 million as a loss. That left $13 million more to collect. In 2000, it collected $10 million of that and wrote off the final $3 million.
On the Middle Eastern project, Halliburton assumed it would collect $31 million in revenues from cost overruns. The project will not be completed until later this year — the estimated revenue figure has now grown to $44 million — and Halliburton has not yet collected any of the expected revenue, which is not unusual for project that has not been finished.
Together, those figures mean that of the $89 million Halliburton estimated it would collect for work done in 1998, it has collected $39 million. It is still pursuing and expects to collect another $31 million (for the unfinished Middle Eastern project) and it has written off $19 million as losses. In the end, the company says, it will have collected $70 million of the original estimate of $89 million. "Settling claims on large contracts frequently involves prolonged negotiations with our customers, sometimes for years," Foshee told the conference-call audience. "We assess the recoverability of claims every quarter, based on the latest information. The assumed claims as of June 30, 2002 represent our best estimate of what we'll recover as of that date. We strongly believe they are the most probable amount of what we'll actually recover."
Although it was not reported in the national press, the conference call seemed to encourage investors and analysts who had been worried by all the negative coverage of Cheney and Halliburton. Halliburton's stock rose $2.10 per share, to $11.20, after the call was over (it closed Thursday at $13.21). The trade paper Petroleum Finance Week was filled with positive comments from those who follow the industry closely.
"When you look at the multiplicity of issues at Halliburton, it's a little unrealistic to think that one conference call — even one so comprehensive — can remove all doubts," Salomon Smith Barney analyst Geoff Kieburtz told the paper. "But it's a good start. In addition to the substance of the call, the extent of the comments had an impact on people's thinking. They [Foshee and Lesar] didn't circumvent or skirt any of the issues that are out there." James K. Wicklund, an analyst for Bank of America Securities in Houston, told the paper, "The company has done a very thorough job of explaining what the accounting treatment has been and why, and what the resolution will be. For it to come out and be so detailed and complete is a huge positive. It makes it that much more difficult for the media to complain that anyone is hiding behind a veil of secrecy."
COME CLEAN? Still, the call did not answer all the questions about the Halliburton case. For example, the SEC is investigating whether the company waited too long to disclose the accounting change (after making the change in 1998, it waited until its 1999 annual report to notify investors). Foshee maintained that the company made the right decision because executives thought the amounts of money involved (in the context of Halliburton's multibillion dollars in sales) were not large enough to merit an announcement. "We believe that it was not a significant issue at that time," Foshee said. "With perfect hindsight, could someone disagree with this conclusion? Yes. But the ultimate arbiter here is the SEC, and we look forward to their conclusion."
It is possible that the SEC will decide that Halliburton should have announced the change earlier. But at the moment, especially in light of the new information released in the conference call, there is no reason to think the SEC will find that Halliburton acted out of any intent to defraud.
But that won't keep Democrats from continuing their attacks on Cheney. Recently DNC chairman Terry McAuliffe called on the vice president to "come clean" about "the accounting tricks he used as CEO of Halliburton." Many other Democrats have said similar things. Some of those charges might lose their punch if the press reported the information that was in the Halliburton conference call. It's not scintillating and it's not sexy, but it does explain why Halliburton is not likely to become the scandal that the vice president's enemies would like to make it.
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