You Don't Know Dick
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Recently, Halliburton agreed to a $7.5 million settlement with the U.S. Securities and Exchange Commission (SEC) over the company's suspect accounting practices while Dick Cheney headed the company. It's worth looking at what led up to that settlement – as well as Cheney's statements regarding all things Halliburton – with an eye towards the vice-president's culpability in the matter, not to mention his veracity.
After all, it was only a couple of years ago when both Cheney and President George W. Bush demanded higher ethical standards for corporations, tougher laws against corporate malfeasance and more responsible corporate executives. "We must usher in a new era of integrity in corporate America," Bush told the Association for a Better New York in July 2002. He called for an end to "cooking the books."
But it appears that tough talk by Bush and Cheney applies to all corporations and their executives – except Halliburton and Cheney.
During his tenure as Halliburton's CEO (1995-2000), Cheney may have participated in getting the company's finance executives to use aggressive accounting methods that gave Wall Street the false impression that the oil-field services company was profitable between 1998 and 1999, which boosted the value of Halliburton's stock and helped Cheney earn more than $35 million when he sold his shares in 2000.
The SEC said that Halliburton changed the way it accounted for construction revenues in 1998 and did not report that change to investors for more than a year, a violation of securities rules. The accounting sleight-of-hand by Halliburton caused the company's public statements regarding its income in 1998 and 1999 to be materially misleading, boosting Halliburton's paper profits by $120 million.
"In the absence of any disclosure, the investing public was deprived of a full opportunity to assess Halliburton's reported income – more particularly, the precise nature of that income, and its comparability to Halliburton's income in prior periods," the SEC said.
The changes to the company's accounting practices led to a "significant difference in their respective effects on Halliburton's financial presentation: the new practice reduced losses on several large construction projects" and allowed the company to report a higher profit, the SEC said.
When Halliburton changed its accounting practices in 1998, the company was already enduring huge financial losses as a result of some of the long-term contracts it signed, quarterly filings with the SEC show. Halliburton's stock subsequently tanked, due in part, to a recession in the oil industry, which author Robert Bryce, who has written extensively on Halliburton, explained during an appearance on PBS' The News Hour on July 24, 2002 following Halliburton's announcement that it was under investigation by the SEC.
"In '98 the world oil industry was in a world of hurt," Bryce said. "Oil prices were depressed. Drilling activity was very low. And Halliburton had also just completed a merger with Dresser Industries..." It should be noted that the New York Times quoted two former Dresser Industries executives in a May 22, 2002 story as saying that after Cheney guided the merger of Dresser with Halliburton in 1998, Halliburton "instituted aggressive accounting practices to obscure its losses."
Bryce elaborated on this point during his interview, saying Halliburton "was eager to show any revenue that it could and by using mark-to-market on this one small segment of their business, they were able to add $90 million or $89 million in '98. And then in '99, it was $98 million. And then in 2000 it was $113 million. So again that's a relatively small figure compared to the tens of billions or over $10 billion that they were counting in revenue but it still counted significantly in terms of their profit statement."
When the investigation into Halliburton's accounting methods was first launched two years ago, Cheney was dogged by questions about his role in the scandal. Like Gary Winnick of Global Crossing, Dennis Kozlowski of Tyco, John Regas of Adelphia and Ken Lay of Enron, Cheney employed a Sgt. Schultz defense, saying publicly on a number of occasions that he was unaware of the financial machinations that went on at Halliburton while he was chief executive. (Of course, each of the aforementioned corporate executives has been prosecuted by the Justice Department for allegedly cooking the books at their respective companies despite their public denials.)
So how much exactly did Cheney know about Halliburton's accounting practices? Let's turn to Halliburton's current chief executive, David Lesar, who told Newsweek magazine in July 2002 that Cheney knew about Halliburton's accounting practices and that "Cheney was aware that the firm was counting projected cost-overrun payments as revenue."
"The vice president was aware of who owed us money, and he helped us collect it," Lesar said.
Wendy Hall, a spokeswoman for Halliburton, also said at the time that Cheney "was aware we accrued revenue on unapproved claims in accordance with generally accepted accounting principles."
Those "generally accepted accounting principles" are something called mark-to-market accounting, whereby profits from long-term contracts are booked immediately rather than when the money is actually received by the company. This accounting trick allowed companies like Enron and Halliburton to create an illusion of a profitable business when in fact the company was losing cash.
This is an example of how it worked: Halliburton's construction projects, which make up the bulk of the company's business, often went over budget. The company used to account for the revenue it received from these projects after settling with its clients on an agreed upon figure. But after 1998, Halliburton took a more aggressive approach, booking revenues that it assumed its customers would eventually pay – even though the numbers that were agreed upon were lower than what Halliburton had reported.
This gimmick, approved by now defunct accounting firm Arthur Andersen, allowed Halliburton to add $89 million in revenues to its books in 1998, helping the company beat its earnings target by 2 cents a share for the year and increasing its stock value. If the accounting change hadn't been employed, said Wall Street analysts, the company would have missed its earnings target by 11 cents a share. Under Cheney's tenure, accounting irregularities at the company exceeded $234 million, according to documents obtained by the watchdog group Center for Public Integrity.
Furthermore, Halliburton's SEC filings raise other red flags indicating the company used aggressive accounting methods to mask other types of illusory profits.
"According to S.E.C. filings, Halliburton's accounts receivable – sales booked by the company even though it had not yet been paid for them - soared relative to its total sales during Cheney's tenure," reported the Times in a May 22, 2002 story. "At the same time, its competitors' accounts receivable fell slightly. When Cheney became Halliburton's chief executive in October 1995, Halliburton had roughly 95 cents in receivables for every dollar in quarterly revenues. When he left in July 2000, the ratio was $1.20 in receivables for each dollar in quarterly sales. Over the same period, the average ratio of receivables to sales at five big competitors of Halliburton fell slightly, from 92 cents per dollar of sales in 1995 to 86 cents per dollar 5 years later."
In other words, Halliburton was inflating its accounts receivables which made the company seem more profitable than it was. And all the SEC filings were signed by Cheney.
Fleecing Uncle Sam
Similar to the current charges that the company has over-billed the federal government for its contract work in Iraq, it was announced in 2000 that the company was being investigated related to its over-billing of the feds for its work at Fort Ord in California - under Cheney's watch. Following revelations that he made a $35 million windfall from his sales of Halliburton stock, right before the company's share price crashed on the announcement that it was being investigated by the grand jury, the Washington Post summed up Cheney's tenure at Halliburton this way on July 16, 2002: "The developments at Halliburton since Cheney's departure leave two possibilities: Either the vice president did not know of the magnitude of problems at the oilfield services company he ran for five years, or he sold his shares in August 2000 knowing the company was likely headed for a fall."
Still, as Halliburton's chief executive, Cheney was responsible for Halliburton's books. Cheney, to some degree, acknowledged that Arthur Andersen, which unraveled in 2002 after the company was found guilty of obstruction of justice for destroying documents related to its role in the Enron debacle, was pushing the envelope in its use of aggressive accounting tactics. Cheney appeared in a 1996 promotional video for Andersen and spoke glowingly about the company for going above and beyond routine audits for Halliburton: "One of the things I like that they do for us is that, in effect, I get good advice, if you will, from their people based upon how we're doing business and how we're operating, over and above the, just sort of the normal by-the-books audit arrangement."
The SEC did question Cheney during its two-year-long probe and said that the vice president should not be held accountable for the accounting shenanigans that went on behind the scenes at Halliburton. All five of the SEC commissioners who interviewed Cheney and approved the recent $7.5 million settlement were appointed by President Bush. The questions surrounding what Cheney knew about Halliburton's misdeeds and when he knew it does not begin and end with the company's accounting practices. The vice president has also been implicated in a scandal involving bribery in Nigeria.
In that case, a French judge is poring over evidence to determine whether Cheney may have been responsible under French law for at least one of four bribery payments exchanged between a Halliburton subsidiary and Nigerian officials to obtain contracts for liquefied natural projects. Under French law, "the head of a company can be charged with 'misuse of corporate assets' for bribes paid by any employee - even if the executive didn't know about the improper payments." The U.S. Justice Department is also investigating the issue.
Doing business in Baghdad
What are impressive about the five years Cheney spent at the helm of Halliburton are the reams of documents in the public domain that, if one were to simply connect the dots, prove that the vice president's business acumen and ethical standards as a corporate executive is at odds with the rhetoric Cheney has been spewing on the campaign trail.
An example of such doublespeak is the way in which the vice president talks about Iraq and its former dictator, Saddam Hussein, as long-standing enemies of the United States, which is a fact, but one that Cheney seemed not to be concerned with when he presided over Halliburton.
When Cheney was Secretary of Defense under George Bush, Sr. he lashed out at American companies that profited from dealings with Iraq after the first Gulf War.
His stance apparently changed when it appeared that Halliburton was headed for financial disaster in the mid-1990s. Cheney said sanctions against countries such as Iraq were hurting corporations like Halliburton.
"We seem to be sanction-happy as a government," Cheney said at an energy conference in April 1996, as reported in the oil industry publication Petroleum Finance Week. "The problem is that the good Lord didn't see fit to always put oil and gas resources where there are democratic governments."
Sanctions make U.S. businesses "the bystander who gets hit when a train wreck occurs," Cheney told Petroleum Finance Week.
"While virtually every other country sees the need for sanctions against Iraq and Saddam Hussein's regime there, Cheney sees general agreement that the measures have not been very effective despite their having most of the international community's support. An individual country's embargo, such as that of the United States against Iran, has virtually no effect since the target country simply signs a contract with a non- U.S. business," the publication reported.
Moreover, Cheney had personally lobbied Congress in 1996 to lift sanctions against several Middle Eastern countries so Halliburton could onduct business in the Gulf, despite concerns that such countries sponsored terrorism. When Congress declined such requests Cheney oversaw Halliburton's business dealings with Iran and Libya – regimes that President Bush has referred to as two-thirds of the "axis of evil" – at a time when U.S. companies were prohibited from entering into such deals as a result of sanctions placed on those countries. Halliburton set up a Cayman Island subsidiary to skirt U.S. law in order to do business with Iran and Libya.
Under Cheney, Halliburton signed contracts with Iraq to sell the country more than $73 million in oil production equipment and spare parts.
But when he spoke about it on a July 30, 2000 edition of "This Week" on ABC-TV, Cheney said: "I had a firm policy that we wouldn't do anything in Iraq, even arrangements that were supposedly legal. We've not done any business in Iraq since U.N. sanctions were imposed on Iraq in 1990, and I had a standing policy that I wouldn't do that."
Halliburton has since acknowledged such dealings took place under Cheney's leadership. Now the Justice Department is investigating whether Halliburton violated sanctions that prohibit U.S. corporations and businesses from engaging in commercial, financial, or trade transactions with Iran while Cheney headed the company.
In July 2004, a federal grand jury issued a subpoena to Halliburton seeking information about its work in Iran. Government officials told the Washington Post such cases are referred to Justice only when there is evidence of "intentional or willful" violations.
Jason Leopold is the former Los Angeles bureau chief of Dow Jones Newswires where he covered the energy crisis and the Enron bankruptcy. He has written a book about the crisis, due out in December through Rowman & Littlefield.