CEO, Dick Cheney & Unethical Accounting

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iVillage Member
Registered: 03-25-2003
CEO, Dick Cheney & Unethical Accounting
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Thu, 08-05-2004 - 3:22pm
V.P. Cheney's salary & bonuses were directly tied to the unethical accounting practices at Halliburton when he was CEO.

C

August 4, 2004

Halliburton Settles S.E.C. Accusations

By FLOYD NORRIS

The Halliburton Company secretly changed its accounting practices when Vice President Dick Cheney was its chief executive, the Securities and Exchange Commission said yesterday as it fined the company $7.5 million and brought actions against two former financial officials.

The commission said the accounting change enabled Halliburton, one of the nation's largest energy services companies, to report annual earnings in 1998 that were 46 percent higher than they would have been had the change not been made. It also allowed the company to report a substantially higher profit in 1999, the commission said.

The commission did not say that Mr. Cheney acted improperly, and the papers released by the commission did not detail the extent to which he was aware of the change or of the requirement to disclose it to investors. The S.E.C. said that Mr. Cheney had testified under oath and had "cooperated willingly and fully in the investigation conducted by the commission's career staff."

A lawyer for Mr. Cheney, Terrence O'Donnell, said the vice president's "conduct as C.E.O. of Halliburton was proper in all respects,'' adding that the S.E.C. "investigated this matter very, very thoroughly and did not find any responsibility for nondisclosure at the board level or the C.E.O. level.''

Mr. O'Donnell, a partner at Williams & Connolly in Washington, declined to answer a question as to whether Mr. Cheney had been aware of the effect of the accounting change on the company's profits.

The accounting change dealt with the way Halliburton booked cost overruns on projects. At the time, it was having large cost overruns on projects in the Middle East operated by its Brown & Root Energy Services business, which under its old accounting policy would have reduced its reported profit.

The actual change in accounting, the commission said, was permissible under generally accepted accounting principles, but the failure to inform investors that the change had been made - and of its effect on the company's reported profit - violated securities laws.

"At bottom, what this case is about is insuring that investors understand the numbers," said Stephen M. Cutler, the S.E.C.'s enforcement director. "If you change methodologies and don't explain that, then investors are not going to understand what they are seeing."

Halliburton's former controller, Robert C. Muchmore Jr., agreed to settle the S.E.C. action by accepting an order to cease and desist from further violations of securities laws and to pay $50,000. Neither he nor the company admitted or denied the commission's accusations. The company also accepted a cease-and-desist order.

Gary V. Morris, who was the chief financial officer at the time the actions took place, did not settle. The commission filed a civil lawsuit against him in Federal District Court in Houston.

A lawyer for Mr. Muchmore declined to comment while one for Mr. Morris did not return phone calls.

David J. Lesar, who succeeded Mr. Cheney as chief executive in 2000, said, "We are pleased to bring closure to this matter."

The commission said the $7.5 million penalty paid by Halliburton "reflects the commission's view that there were unacceptable lapses in the company's conduct during the course of the investigation, which had the effect of delaying the production of information and documentation necessary to the staff's expeditious completion of its investigation."

Until the second quarter of 1998, Halliburton had dealt with cost overruns on projects by taking a loss for the amount of the overrun unless and until the company that it was working for agreed to pay part or all of the overrun. But confronted with a large overrun on a fixed-fee project to build a gas production plant in the Middle East - the commission did not say in which country - Halliburton changed its policy so that it would record the income it thought the customer would eventually agree to pay.

That change in policy was not disclosed until March 2000, when the company filed its 1999 annual report with the S.E.C. The commission said that pretax profit for all of 1998 was reported at $278.8 million, 46 percent more than the $190.9 million that would have been reported under the old accounting.

The first three quarters of 1999 also had earnings that were about $40 million higher than they would have been, although the percentage increases were smaller.

At the time the accounting was changed, Halliburton was preparing to merge with Dresser Industries and was dealing with a decline in the company's share price partly caused by slumping oil prices. It reported a 34 percent gain in profit for the quarter, far better than other oil services companies were reporting, and Mr. Cheney said then that "Halliburton continues to make good financial progress despite uncertainties over future oil demand."

The commission said yesterday that the gain would have been just 6.7 percent without the undisclosed change in accounting policies.

In a call with analysts at the time, the company said that profit at Brown & Root Energy Services rose 40 percent during the quarter but did not disclose that the operation would have reported a loss had it not changed its accounting practices.

Halliburton's reported profits for the quarter exceeded analysts' estimates but would have fallen far short of them had the change not been made, the S.E.C. said. Nonetheless, the company took a cautious tone in that conference call, leading analysts to cut profit estimates and causing the stock to fall $3, to $37.88.

Halliburton said yesterday that it would take a $7.5 million charge in the second quarter of this year to reflect the penalty it agreed to pay. That will increase the per-share loss previously reported by a penny, to 13 cents.

Shares of Halliburton rose 8 cents yesterday, to $31.38.


http://www.nytimes.com/2004/08/04/business/04halliburton.html

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iVillage Member
Registered: 05-28-2003
Thu, 08-05-2004 - 3:48pm
Has anyone seen which accounting firm allowed this? I'm guessing Arthur again, otherwise we'd be hearing of discipinary actions against another accounting firm.

Have they dealt with Cheney's illegal foreign bribe issue yet? Just wondering if I missed the findings.

Also, why isn't it a big deal that Cheney still gets money from Halliburton?

iVillage Member
Registered: 04-08-2003
Thu, 08-05-2004 - 3:58pm
I'm pretty certain Cheney is making no money from Haliburton while serving as VP.

He may make a truckload once he's out of office in January, but I think he's out of the (pay) loop now.

iVillage Member
Registered: 04-16-2004
Thu, 08-05-2004 - 4:06pm
I think he received his last buyout check sometime last summer.

BTW, I think the accounting firm in question was Arthur Andersen. Boy...imagine if I hired them to do my income taxes....

iVillage Member
Registered: 03-31-2003
Thu, 08-05-2004 - 5:32pm
Sounds like his friends at Enron gave him some creative accounting ideas.
iVillage Member
Registered: 07-05-2003
Thu, 08-05-2004 - 10:10pm
The SEC action Tuesday involved Houston-based Halliburton, Robert C. Muchmore Jr., its controller at the time of the alleged securities laws violations in 1998 and 1999, and Gary Morris, the CFO at that time.

The SEC said Cheney cooperated in the investigation. An attorney for the vice president told the New York Times that the SEC "investigated this matter very, very thoroughly and did not find any responsibility for nondisclosure at the board level or the C.E.O. level."

http://cbs.marketwatch.com/news/story.asp?guid=%7B69F65292-1015-4722-B5E0-EB1D6E49581D%7D&siteid=google&dist=google

iVillage Member
Registered: 05-28-2003
Fri, 08-06-2004 - 8:56am
Don't know if anyone here has any corporate accounting experience, but I wouldn't buy the CEO part. I also believe Cheney's testimony is sealed?

Still think I've read that Cheney is still receiving money from Haliburton - not a buyout check, but more like a continuing investment payment. I'll post when I find it.

iVillage Member
Registered: 07-05-2003
Fri, 08-06-2004 - 10:18am
It'd be interesting to read... I believe bonus options and what not were dedicated by Cheney to charity... my guess is he may be entitled to a pension which could be deferred while he's in office... personally I don't have an issue with a former CEO taking a pension.

The findings weren't against Cheney... as you do, it seems unusual to me that there isn't a finding adverse to Cheney... but it is still significant that no wrongdoing was found by Cheney as the result of the investigation thus far. That didn't seem mentioned much.

iVillage Member
Registered: 05-28-2003
Fri, 08-06-2004 - 10:33am
I have to remember that this is BEFORE Sarbanes-Oxley, but I still can't believe the CEO wouldn't be involved. First of all, even back then you'd have to really push back/intimidate/threaten (whatever) your auditors to allow this kind of accounting change without footnote disclosure in the financial statements. Auditors love to tell you what to do and with something that's clearly so wrong and for a publicly traded company, I can't believe even Arthur wouldn't have had a big issue - especially how it swung the financial data. I don't take this against Cheney really (alhtough it fits the image I have of him), I take this more as a knock on my profession. I'm just an outraged accountant. :-)
iVillage Member
Registered: 05-28-2003
Fri, 08-06-2004 - 10:56am
A little old but the first thing I found. See my math calculations at the end From CNN Money...


http://money.cnn.com/2003/09/25/news/companies/cheney/?cnn=yes

Cheney may still have Halliburton ties



Congressional report finds Vice President still has financial interest in his old company.

September 25, 2003: 4:28 PM EDT




WASHINGTON (CNN) - A congressional report concludes that, under federal ethics standards, Vice President Dick Cheney still has a financial interest in Halliburton, the energy services company he used to run.

The report, by the Congressional Research Service, came at the request of Sen. Frank Lautenberg, a New Jersey Democrat and former player in the corporate world who has pushed Cheney on the issue.



The report says that the deferred compensation that Cheney receives from Halliburton as well as the more than 433,000 stock options he possesses "is considered among the 'ties' retained in or 'linkages to former employers' that may 'represent a continuing financial interest' in those employers which makes them potential conflicts of interest."

"As this C.R.S. report shows," Lautenberg said, "The ethics standards for financial disclosure is clear. Vice President Cheney has a financial interest in Halliburton."

On Sept. 14, Cheney said on the NBC News program "Meet the Press" that "Since I left Halliburton to become George Bush's vice president, I've severed all my ties with the company, gotten rid of all my financial interest. I have no financial interest in Halliburton of any kind and haven't had, now, for over three years."

Cheney has insisted in the past that the deferred compensation was set up long before he became a candidate for the vice presidency. The money is insured in case the company goes under and Lautenberg acknowledged that the compensation received so far has been donated to charity.

Lautenberg also acknowledged that the president and the vice president are both exempt from the enforcement of ethics laws.

"I believe the vice president is an honorable man," Lautenberg said at a news conference, "I just think he made a mistake."



In a written release, Lautenberg said, "I ask the vice president to stop dodging the issue with legalese, and acknowledge his continued ties with Halliburton to the American people."

Lautenberg said $205,298 was paid to Cheney in deferred salary by Halliburton in 2001, and $162,392 last year. Lautenberg said Halliburton stock options held by Cheney were 100,000 shares at $54.50 per share, 33,333 shares at $28.125 and 300,000 shares at $39.50 per share.

Halliburton (HAL: Research, Estimates) stock closed Thursday at $24.72. The Morningstar stock rating service gives Halliburton a C-minus grade for growth, D-plus for profitability and a B for financial health, even though Halliburton secured $2.25 billion in contracts in Iraq, including a controversial $1.25 billion no-bid contract.

My comments: 100,000 shs x $54.50 = $5,450,000

33,333 shs x $28.125 = $937,490.625

300,000 shs x $39.50 = $11,850,000

Total = $18.2 Million dollars of stock options




iVillage Member
Registered: 03-31-2003
Fri, 08-06-2004 - 1:22pm
Now they're being sued for accounting fraud. Here's an article in todays NY Times. Maybe some of the accountants on the board could explain what "doubtfull" accounts are? I think I can guess from the context but I've never heard the term before. At the end of this article it says :

"One former employee cited in the filing said that the company would routinely overbill but not bother to collect. Neither did the company add to reserves for doubtful accounts, the former employee said. She noted that at one point, the company had $20 million in accounts receivable that were more than six months old. The reserve for doubtful accounts, meanwhile, was $700,000."

http://www.nytimes.com/2004/08/06/business/06halliburton.html

Suit Accuses Halliburton of Fraud in Accounting

By GRETCHEN MORGENSON

Published: August 6, 2004

Four former finance employees at the Halliburton Company contend that a high-level and systemic accounting fraud occurred at the company from 1998 to 2001, according to a new filing in a class-action lawsuit on behalf of investors who bought the company's shares.

The filing accuses the company of accounting improprieties that go far beyond those outlined by the Securities and Exchange Commission in its civil suit against Halliburton, which the company settled on Tuesday, paying $7.5 million.

The charges in the complaint and in the S.E.C.'s action cover the two years when Vice President Dick Cheney was Halliburton's chief executive. But he was not named as a defendant in the new filing nor in the regulatory proceeding. S.E.C. officials said Mr. Cheney provided testimony and willingly cooperated in their inquiry and his lawyer, Terrence O'Donnell, said Mr. Cheney's conduct as chief executive of Halliburton was "proper in all respects." He added that the S.E.C. "investigated this matter very, very thoroughly and did not find any responsibility for nondisclosure at the board level or the C.E.O. level."

According to the new filing, the four former employees, who are not identified in the suit but were managers in financial or accounting positions, say that Kellogg Brown & Root, Halliburton's engineering and construction unit, inflated its financial results by overbilling for services, overstating its accounts receivable due from customers and understating accounts payable owed to vendors. The filing also noted that one former employee in the accounting department said superiors had told her to do "whatever it took" to make projects appear profitable and to meet Wall Street estimates for the company's earnings.

The filing also asserts that executives at Halliburton misled investors in the fall of 2001 about asbestos liabilities faced by the company's subsidiary, Harbison-Walker, which it had acquired in the September 1998 purchase of Dresser Industries. Even though the company had lost a major case in a Texas court and was ordered to pay $130 million to plaintiffs, top Halliburton executives told analysts unaware of the verdict that the news regarding its asbestos obligations was "positive" and that there had been "no adverse developments at all" relating to Harbison-Walker.

Only on Dec. 7, 2001, when the verdict became public, did investors learn of Halliburton's obligations as a result of it, the suit said. The company's stock plummeted, losing 42 percent of its value that day.

The suit names Halliburton as a defendant as well as four executives who it said had control over the company's accounting and the contents of its reports to investors. They are David J. Lesar, Halliburton's chief executive, who took over in that job when Mr. Cheney became vice president; Douglas L. Foshee, a former chief financial officer who is now chief executive officer of the El Paso Corporation; Gary V. Morris, a former chief financial officer who is retired; and Robert Charles Muchmore Jr., former controller of the company.

"What we found to be compelling about this is that there appeared to be a series of schemes designed to bolster Halliburton's financial health that did not allow people to really understand the true financial picture at the company," said David Scott, a lawyer at Scott & Scott in Colchester, Conn. "We found that this was not just one isolated event; it appears to be a course of conduct designed to deceive the public."

Halliburton called the lawsuit abusive and an effort to smear the company and extort money from its shareholders. In a statement, the company said: "On June 7, 2004, the federal court in Dallas preliminarily approved Halliburton's settlement of approximately 20 class-action securities cases (including two filed previously by Scott & Scott) and ordered that no further complaints be filed. Apparently hoping to generate publicity, while violating the spirit but not the letter of that order, Scott & Scott has filed a motion seeking the court's permission to file this latest complaint and attached the complaint to that motion as an exhibit.

"Thus," the statement continued, "they abuse the broad immunity from defamation actions enjoyed by litigants and get their publicity at the same time. It is also noteworthy that this is the third lawsuit arising out of the same general series of events filed by Scott & Scott. Many of their complaints have already been asked and already been answered. It is virtually a recycled lawsuit."

The court filing was made on Tuesday in United States District Court in Dallas, the same day the S.E.C. announced an enforcement action against Halliburton, Mr. Morris and Mr. Muchmore. The S.E.C. contended that the company had misled investors about its financial results in 1998 and 1999 by failing to disclose a change it had made to one of its accounting practices. As a result of the change, Halliburton's earnings were considerably higher than they would have been under the method the company had used previously.

Halliburton and Mr. Muchmore settled with regulators, neither admitting nor denying wrongdoing. The company paid $7.5 million in the settlement. Mr. Morris declined to settle and was sued by the commission in federal court in Houston.

Lawyers for Mr. Muchmore and Mr. Morris did not return phone calls seeking comment; neither did Mr. Foshee.

According to a quarterly filing it also made on Tuesday, Halliburton is under investigation by the Justice Department over possible overbilling on government services work done in the Balkans from 1996 through 2000, when Mr. Cheney was the company's chief executive. The filing also noted that the Justice Department and the S.E.C. were investigating a project in Nigeria in which Halliburton participated and which might involve illegal payments under the Foreign Corrupt Practices Act. The company said it was too early to assess the impact the inquiry might have. The four former finance officials at Halliburton cited in the Texas court document worked at the company from as early as 1989 until 2003 and were interviewed by investigators for Scott & Scott in the course of researching the case. In the complaint, the former employees describe an accounting department that was decidedly lax in its controls, employing an antiquated computer system in which entries were manually entered and that did not provide details of the invoices or payments underlying revenues or expenses. Such details allow outside auditors to test a company's financial statements.

One former employee said that manipulation of monthly profit and loss statements at K.B.R. "was systemic and indeed a matter of policy." The accounting improprieties were necessary, the filing said, because they helped conceal burgeoning problems related to Halliburton's exposure to asbestos claims.

Because customers of Kellogg Brown & Root paid the company over long periods of time for its engineering work, the Halliburton unit used project plans based on the contract price and the schedule for completion. These plans projected costs to be incurred monthly based on a percentage of the job completed and the profit margins expected. If the costs of a project began to exceed estimates associated with the job, the company's finance directors told project accountants to change the books before the entries went into K.B.R.'s accounting information system, according to the complaint.

One former employee cited in the filing said that the company would routinely overbill but not bother to collect. Neither did the company add to reserves for doubtful accounts, the former employee said. She noted that at one point, the company had $20 million in accounts receivable that were more than six months old. The reserve for doubtful accounts, meanwhile, was $700,000.

The filing stated that the alleged accounting fraud also enabled Halliburton executives to sell shares at inflated prices. Mr. Lesar sold shares worth $1.64 million during the period that the profit manipulations were made, the filing said. The complaint noted that Mr. Lesar's stock sales during the period amounted to twice the sales he had made in almost three years prior to 1998.

Mr. Scott, along with a partner, Neil Rothstein, specializes in class-action securities litigation.

As one of three firms appointed to the executive committee in the Halliburton class action, Scott & Scott has objected to the $6 million settlement announced last year by lead counsel for the class. Calling the settlement inadequate, Mr. Scott said: "The importance of the $7.5 million fine by the S.E.C. this week against the $6 million settlement is telling. What I can't understand is why there has not been a greater outcry among shareholders on the terms of this settlement."

David C. Godbey, the judge presiding over the case, is expected to rule later this month on whether the settlement is fair.

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