The Cheney Question

As Bush talks tough on CEO responsibility, will the SEC's Halliburton probe turn the Veep into a White House liability?

For two years, Vice-President Dick Cheney has been President George W. Bush's No. 1 asset. The former Defense Secretary and corporate CEO has provided the Washington and diplomatic experience Bush lacked. But as the Administration's focus swings from a war on terror to a battle against corporate greed, Cheney risks becoming a political liability to his boss. The problem dates back to an obscure 1998 change in accounting policies at Halliburton Co. (HAL ), the Dallas-based energy services-and-construction giant Cheney headed from 1995 until 2000.

The Securities & Exchange Commission is investigating whether Halliburton pumped up revenues by $234 million over four years. Cheney has spurned all questions, while Halliburton execs are scrambling to stress that the Veep wasn't involved in the change. That's in stark contrast with Bush's calls for CEOs to shoulder personal responsibility for financial practices -- as Democrats are quick to note.

Turning up the heat, the watchdog group Judicial Watch on July 10 sued Cheney for allegedly fraudulent practices at the company he once headed. Both the White House and Halliburton say the suit is completely without merit. Nonetheless, frets a GOP strategist, Cheney's predicament "could linger like a low-grade fever."


  Despite all the political flak Cheney is taking, Halliburton's shift may actually have improved its bookkeeping. But the timing raises questions: Without the change, Halliburton's already depressed 1998 profits would have fallen far short of Wall Street's targets. And the SEC can't overlook the delay of more than a year before Halliburton told investors that its accounting had changed.

At issue is how Halliburton accounts for cost overruns and changes on its billion-dollar contracts to build such projects as offshore-drilling platforms or liquid natural-gas plants. Until 1998, the company wouldn't report revenue from such claims until the customer agreed to pay -- which could take years.

But since 1998, Halliburton has estimated how much of the disputed costs it expects to collect and booked the not-yet-received payment immediately. For 1998, Halliburton booked $89 million in pretax revenue as unpaid claims. Similar claims added $43 million to revenue in 1999 and $102 million in 2001. There was no impact in 2000.


  While it's aggressive, Halliburton's switch is supported by a 1981 accounting rule because it helps meet accountants' goal of matching revenues with associated costs as they occur, says Douglas R. Carmichael, an accounting professor at Baruch College. Ten of the 15 largest construction companies use the method Halliburton adopted in 1998, says Halliburton CFO Douglas L. Foshee.

Halliburton must prove to the SEC that its collection estimates were reasonable. "If it looks like they were just fabricating the numbers, that verges on fraud," says J. Edward Ketz, professor of accounting at Penn State University. Foshee says the company has an "extremely sophisticated model" for estimates and that projections were sound.

Even if the accounting change passes muster, the timing may raise red flags. In 1998, Halliburton was digesting its takeover of rival Dresser Industries, and profits were down. Without the change, earnings would have fallen far short of expectations.


  Foshee concedes that the added revenue contributed $55 million to the year's $730 million in aftertax profits. But he insists the change was made in 1998 because Halliburton decided in 1997 to focus on bigger, fixed-price jobs, on which the company must negotiate cost overruns. Yet some critics, including former Halliburton execs, argue that most contracts were already fixed-price. And the company says it doesn't disclose its contract mix.

More troubling: Halliburton didn't disclose the switch to the SEC or investors for more than a year, until March, 2000. Halliburton says the change wasn't big enough to matter, since sales in '98 were $17 billion, dwarfing the $89 million boost from the accounting switch. But the SEC may focus on the bottom-line impact and rule that it did matter. With the agency forcing companies to spell out their accounting policies, Halliburton could draw a fine for its delay.

Cheney probably won't be held personally responsible -- but that's little relief for nervous White House aides. Unlike Bush's long-ago woes at Harken Energy Corp. (HEC ), Cheney's Halliburton days are still under investigation. Even if the SEC exonerates the Veep, Cheney's stonewalling won't do much to help the credibility of Bush's call for corporate responsibility.

By Mike McNamee in Washington and Stephanie Anderson Forest in Dallas

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