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Wednesday, May 07, 2003

"If Halle Barry married a congressman from Indiana, she'd be Halle Burton"-This is one that doesn't quite want to go away; Josh wondered if there was anything to the story about accounting irregularities at Halliburton, the oil equipment company that Dick Cheney headed up in the 90s. Not really, but there are enough bad bounces to make it easy fodder for the left. First of all, they had the bad luck to have Arthur Andersen as their auditor. Not that AA did an Enron-sized screw-up here, but Enron's accounting firm will draw winks and sneers from the non-accounting crowd; two years ago, the average American would of thought Arthur Andersen was a defenceman for the Maple Leafs. Second, they happen to be in the oil industry; the left loves to pick on the oil industry, even if an ex-oilman isn't in the White House. Thirdly, they happen to have their former CEO get elected Vice President. Fourth, the rebuilding of Iraq will earn Halliburton a pretty penny. That's because Halliburton's specialty is oil facility construction, not because their former CEO is VP. They're the big dog in oil construction; they'd be conspicious by their absence if they weren't in the Iraq mix. Fifth, they are placed in an era where accounting stories are given greater attention. The issue at hand was how to account for the money due from cost overruns. In the past, they only recognized such revenue when they got the money. However, financial accounting typically goes by what is called accrual accounting; you count income when it's earned rather than when you get the money and count costs when they are incurred rather then when they are paid. For example, if you bought duct tape at Sears just before last Christmas and put it on your store card, Sears would count that as 2002 revenue, even though you won't pay them until 2003; they earned the income in 2002. If this was for your business, you could deduct cost of the duct tape as a 2002 expense, even though you didn't pay for it until 2003; you incurred the expense in 2002. What Halliburton was trying to do is count the expected revenue coming from cost overruns when they did the work rather than when they got the money. If they were making up mythical revenue, you'd have a case. Here's a Fox piece from a year ago and a more head-hunting PBS piece from last fall. The accountants interviewed in the piece, after some digs from the usual suspects, seemed to defend the practice. What seems to be questionable is that they waited a year to note that they had made the change in accounting rules; had people known that part of the jump in profits was due to an accounting change, the profits wouldn't look quite as good. The legal question is whether Halliburton investors were significantly defrauded by the lack of disclosure. Even had it been disclosed, it would have been burried in a footnote that only statement analysis geeks would have caught. The $89 million in extra revenue from 1998 doubled the $170 million dollar profit that year. Given that the income was real, the only thing that they were lacking was the information of the accounting change. Those cost overruns were revenue that Halliburton could expect to get. By the transparency standard, counting those did give the investing public a better picture of the company's financial status. I don't think the stock price would have been significantly lowered had their been a proper note in the annual report. Given that Halliburton buyers in 1998 weren't shortchanged, the likelihood of a sucessful lawsuit is minimal. In the case of Enron, fraudulent accounting was used to understate the debt of the firm, defrauding investors. In this case, the chage was designed to properly state the value of Halliburton. The political question is how much of this should be dumped on Dick Cheney's lap. Being a political scientist rather than an accountant by trade, the construction of the footnotes of an annual report aren't going to be something he'd likely be micromanaging. If he had such knowledge, I'd wonder why he'd become such an accounting geek. Given the Enron debacle and the fact that they shared an auditing firm, the foes of the administration will use this even if the transgression was fairly minor. Even if there wasn't any culpable activity by Mr. Cheney, critics can talk about "questionable accounting practices" at Halliburton. Such a charge need not be proved in a court of all or even be proved in a hit piece, they merely need to question it.

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