uring Vice President Dick Cheney's tenure as its chief executive, the Halliburton Corporation altered its accounting policies so it could report as revenue more than $100 million in disputed costs on big construction projects, public filings by the company show. Halliburton did not disclose the change to investors for over a year.
At the time of the change - which was approved by Arthur Andersen, the company's auditor at the time - Halliburton was suffering big losses on some of its long-term contracts, according to the filings. Its stock had slumped because of a recession in the oil industry. Two former executives of Dresser Industries, which merged with Halliburton in 1998, said that they concluded after the merger that Halliburton had instituted aggressive accounting practices to obscure its losses.
Much of Halliburton's business comes from big construction projects, like natural gas processing plants, which sometimes run over budget. With the policy change, Halliburton began to book revenue on the assumption that its customers would pay at least part of the cost overruns, although they remained in dispute. Before 1998, the company had been more conservative, reporting revenue from overruns only after settling with its customers.
As chief executive, Mr. Cheney had final responsibility for Halliburton's books. But the company's chief financial officer, Doug Foshee, said yesterday that he could not imagine that Mr. Cheney had specifically approved the change, which he called a routine decision dictated by a shift in Halliburton's business mix.
Mr. Cheney declined to comment yesterday. Andersen, which was fired as Halliburton's auditor last month, referred all questions to the company.
Mr. Foshee said he was certain that the accounting change was approved by David Lesar, a former Andersen accountant who was Mr. Cheney's second-in-command and succeeded him as chief executive in 2000. Halliburton, which continues to follow the more aggressive policy, declined to make Mr. Lesar available for comment.
Accounting specialists said that the change stretched and may have broken accounting rules.
"If they changed their accounting from recording claims when they were settled and collected to recording claims at an earlier point in time, then that would raise a red flag and would raise a question as to whether it's a permissible change," said Lynn Turner, a professor of accounting at Colorado State University and former chief accountant of the Securities and Exchange Commission.
A company that revises an accounting practice usually must show that its new method gives investors more accurate financial information than its old method. Halliburton's revision, Mr. Turner said, does not seem to meet that standard. In addition, such changes are supposed to be disclosed promptly, he said.
The criticism of Halliburton comes amid heightened suspicion on Wall Street about corporate accounting. Andersen is now on trial in Houston for destroying records related to its audits of Enron, and regulators and lawmakers in Washington are debating whether to tighten accounting oversight.
Though the 1998 accounting change involved a relatively small sum for a company that had $17 billion in sales that year, it came at an important moment for Halliburton.
The Dallas-based company was eager to win back investors' confidence after its takeover of Dresser, another energy services company. Mr. Cheney has called that deal, which was completed in September 1998, a top achievement of his time at Halliburton, though some experts say that the asbestos-related liabilities Dresser brought to the company may end up driving Halliburton into bankruptcy.
On Jan. 20, 1999, Halliburton reported sales of $4.3 billion and profit of $66 million for the fourth quarter of 1998, both down from the period a year earlier. Mr. Cheney acknowledged that the quarter had been difficult but said he was "optimistic about the long-term outlook for our industry and for Halliburton in particular."
The change in policy enabled the company to book $89 million in unsettled claims as revenue in 1998, compared to a "de minimis" figure in previous years, Mr. Foshee said.
Exactly how much of that revenue turned into profits for the company is not stated in Halliburton's financial reports. But the impact would have been significant had the company taken the alternative route of writing the cost overruns off as losses, wiping out more than half of its $175 million in pretax operating profits for the fourth quarter, when the accounting change took effect.
One year later, revenue from uncollected claims was about $98 million, according to Halliburton's 1999 annual report to the S.E.C. That report, which the company filed in March 2000, included Halliburton's first public disclosure of the new policy.
Mr. Foshee said the company had not disclosed the change in 1998 because it involved such a tiny fraction of total sales. A year later, Halliburton decided to be especially conservative and disclose the new policy, he said.
Total claims revenue rose to $106 million by July 2000, when Mr. Cheney left the company, and peaked at $234 million at the end of last year.
According to Mr. Foshee, the change in accounting practices reflected changes in the company's business.
Before the late 1990's, Halliburton had generally worked under "cost plus" contracts, which guaranteed the company a small profit on top of its costs, whatever they were. But by 1998, he said, most of Halliburton's contracts were fixed price, requiring it to finish jobs for a set fee - or else try to negotiate payment of cost overruns and change orders.
Though resolving such disputes can take months or years, the company decided it was reasonable to recognize at least part of the revenue from the claims even while they remained in dispute, Mr. Foshee said.
"I don't think that's a change in accounting policy as much as it's a change in business mix," he said. He added that Halliburton eventually collected on many of its claims and that its accounting practices reflected that experience.
"We file a claim, and I think we're pretty conservative - we're fairly conservative - about reporting the claim," he said.
That explanation was disputed by the former Dresser executives who joined Halliburton after the merger. They said that most of Halliburton's contracts had been fixed price even before 1998 and that the company made the accounting change to obscure large losses on several important construction contracts.
Halliburton declined to disclose what percentage of its contracts were fixed price in any given year.
Accounting experts said that Halliburton's practices were aggressive. The change was "clearly a way of pumping up revenues and receivables," said Paul Brown, chairman of the accounting department at the Stern School of Business at New York University.
In general, companies are not supposed to book sales unless they are certain that they will be paid - and how much they will be paid, Mr. Brown said. He asked how Halliburton could know it would be paid on a claim that a customer had the right to dispute.
"There's already a conflict here, or there wouldn't be these claims," Mr. Brown said. "How did Halliburton estimate the possibility that the change order was going to be resolved?"
Indeed, in its 1999 annual report, Halliburton warned investors that "the environment for claims and change orders has become more difficult in the past few years," contributing to increased losses.
Beyond the change in how Halliburton handled disputed claims, the company's books include one other indicator that analysts say can signal aggressive accounting.
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 Mr. Cheney's tenure. At the same time, its competitors' accounts receivable fell slightly, S.E.C. filings show.
When Mr. 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.
The rising receivables are "a little bit of a red flag," said Edward Ketz, an accounting professor at Pennsylvania State University.
Halliburton's stock has plunged since the company merged with Dresser, mainly because the deal saddled Halliburton with huge legal liabilities from a Dresser subsidiary that manufactured asbestos-containing bricks.
Halliburton shares closed yesterday at $17.43, just below their level on Oct. 1, 1995; they stood at more than double that level when Mr. Cheney left the company. Since October 1995, the Standard & Poor's 500-stock index has risen 86 percent.
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