SURPRISE US--PULL AN OLLIE NORTH :

The Cheney Innuendo : The media and Democrats gin up a phony Halliburton scandal. (Wall Street Journal, July 25, 2002)

Once upon a time reporters tried to distinguish real crooks from political targets of opportunity. And as we inspect the evidence, or rather the lack of it, Halliburton clearly has been swept up in the media and political dragnet solely because Dick Cheney worked for it from 1995 to 2000. The only substantive issue is a change Halliburton made in 1998 in how it accounted for cost overruns on multiyear construction projects. In olden days it would have counted up its profits when the work was done. But that method would hardly satisfy the IRS, which wants profits counted quarterly so it can tax them. Nor would it work for investors and creditors, who need to know if projects are proceeding profitably.

The standard solution is "percentage of completion" accounting. Companies keep a running estimate of their costs and profits on work that has not yet
been paid for or even billed. Halliburton's ostensible sin was including in revenues those cost overruns that it expected clients eventually to agree to pay.

But if you understand the accounting method, it's hard to figure what the critics are going on about. All revenues and profits booked under percentage-of-completion are necessarily provisional. The IRS even mandates a "look-back" when a project is finished to substitute final numbers for the
estimates. And treating overruns as 100% uncollectable would be as cavalier as assuming they'll all be paid in full. The numbers here are small in relation to Halliburton's overall revenues in any case, only $89 million in 1998 out of $17 billion total.

The numbers are naturally larger in relation to profits, though like any accounting system, percentage-of-completion depends on management being
motivated to paint an accurate picture. A company can basically report a profit simply by incurring a cost--a temptation that produced the Frigitemp fraud of the mid-1970s. But 10 of the 15 largest construction companies use the same accounting method as Halliburton adopted in 1998. And according to an annual survey of the Construction Financial Management Association, so do half of the companies in the industry. Are they all crooks?

So why doesn't Cheney demand the hearings and go by himself to testify? He can clear this up, score big political points and start restoring confidence in our corporate leadership? Posted by Orrin Judd at July 25, 2002 8:56 PM