June 1, 2002
The New York Times, which first reported the Halliburton funny business, explained it pretty clearly: The company runs large construction projects, mostly for the government and the oil industry. Apparently, large construction projects work just like small ones, such as remodeling the bathroom. That is, the contractor states a price, runs over budget, then tries to get the customer to fork over the difference. Until 1998 Halliburton had the tact to wait until it got the extra money before putting it on the books. In that year, it began guessing how much of a disputed surcharge would ultimately get paid and crediting itself in advance. Why not? You only live once! This self-administered pick-me-up added $100 million in reported revenues to Halliburton’s books.But read the whole thing; otherwise, the terrori—[bang] [02:04 PM]And where was Arthur Andersen while its client Halliburton was saute-ing the spreadsheets? Looking the other way, apparently. Later, when the Enron story broke, Halliburton undoubtedly thought, “Goodness. We’d better get rid of Arthur Andersen and find ourselves an accounting firm with integrity. We certainly don’t wish to be associated with an auditor that will allow us to do the kind of thing we’re doing.” So they fired Arthur Andersen. Too late, too late. Due entirely to Andersen’s failure to stop it, Halliburton is now under investigation for doing what it did.
And where was the future vice president while this was going on? The company insists, graciously, that a mere $100 million flyspeck on the company accounts (1999 income: $438 million) was beneath the notice of a busy CEO like Dick Cheney. This is believable. Cheney’s income in 2000, his last year at Halliburton, was $36 million in salary, bonuses, benefits, deferred compensation, restricted stock sales, exercised options, frequent-flier miles, a turkey at Christmas, and other standard elements of the modern CEO compensation package. It is a vital responsibility of anyone who is that valuable to remain completely ignorant of anything improper going on around him. He owes it to the company to be untainted.
Kinsley has it just plain wrong. Accounting rules REQUIRE that income be reported in the period in which it is EARNED (when they did the work), never mind when the check arrives. This holds true even when the amount of the future check is somewhat doubtful, in which case the firm is supposed to essentially take its best honest estimate.
Thus when Haliburton (or ANY firm) determines "Hey, we did $20 million in work on a project this period, even though we only bid $18" then it gets recorded on the income statement as $20 million income in the current period. On the balance sheet, it may be recorded as cash (the check arrived), or as accounts receivable (waiting for the check).
I don't know what Daniel's accounting background is, but the IRS (for example) supports two accounting methods for income: cash and accrual. In a cash method, you report the money as income when you get it. In an accrual method, you report the income as of the date billed or goods shipped. But the question isn't whether some practice is accepted in accounting.
The questions one should ask about Haliburton, I think, are: did they change the rules for income accounting, and did they inform current and prospective shareholders about the change in the rules?
This is important not because of abstract accounting rules, but because customers who researched the stock based on the old accounting rules before buying or holding the stock were defrauded if they weren't told that new rules were in effect.
In addition to the above comments correcting Mr. Kinsley's ignorance of accounting rules, it must also be noted that this is a $100 million revenue item in a company that did $12.3 billion in 1999. At its' corporate income rate this is a $3.5 million change in income (less than 1%). Given that the accountants probablly had a multiple year history of average recovery rates for overcharges, this is not exceptional. In other words, no BFD.
According to the SEC's recent pronunciamento, Staff Accounting Bulletin 101, companies are basically encouraged to delay the recognition of revenue to as late in the process as they can, e.g. not recognizing the last month of a year's subscription revenue till that month comes around. All the more so for revenue that a company is not assured of collecting, like billing for cost overruns. When I worked for a consulting firm, we almost never collected cost overruns to the point where we almost never billed them. So Halliburton was, by SEC standards, being aggressive to the point of stretching their directives to the breaking point.
Hard-Hitting Moderator: Teresa Nielsen Hayden.
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