May 31, 2002
From the desk of Jane Galt:Trick Accounting That's not only
Trick Accounting
That's not only the subject of Michael Kinsley's article on Halliburton; it's what he himself does in order to make his point. The article, which has a wickedly funny takedown of CEO's who attempt to fire Anderson and thereby absolve themselves of any guilt in the matter of accounting shenanigans, nonetheless lost all my respect when I read this:Apparently, large construction projects work just like small ones, such as remodeling the bathroom. That is, the contractor states a price, runs over budget, then tries to get the customer to fork over the difference. Until 1998 Halliburton had the tact to wait until it got the extra money before putting it on the books. In that year, it began guessing how much of a disputed surcharge would ultimately get paid, and crediting itself in advance. Why not? You only live once! This self-administered pick-me-up added $100 million in reported revenue to Halliburton's books.. . .
And where was the future vice president while this was going on? The company insists, graciously, that a mere $100 million flyspeck on the company accounts (1999 income: $438 million) was beneath the notice of a busy CEO such as Dick Cheney. This is believable. Cheney's income in 2000, his last year at Halliburton, was $36 million in salary, bonuses, benefits, deferred compensation, restricted stock sales, exercised options, frequent-flier miles, a turkey at Christmas and other standard elements of the modern CEO compensation package. It is a vital responsibility of anyone who is that valuable to remain completely ignorant of anything improper going on around him. He owes it to the company to be untainted.
Now, first of all, it doesn't add any revenue, permanently; if they don't get the money next year, it comes out of next year's earnings. As earnings manipulation goes, it's a venial sin at best. It's not only nowhere near the Enron level of misstatement that caused the Arthur Anderson scandal; it's not even that uncommon.
But can you spot the point where my ears got red and I had to blink to believe my eyes? It lies in the magical sleight of hand with two words: earnings and revenue.
Revenue is every dollar you take in for providing goods or services to someone. Income is what's left after you subtract all the costs of providing the goods and services -- your profit. This distinction is not known to most readers, who assume that corporate income is the same as person income -- in other words, what you get paid. So comparing those two figures, those readers will figure that the manipulation accounted for a full 1/4 of income -- or, in other words, that Dick Cheney had to have known about a manipulation that increased his company's income by almost 33%.
Now, construction profit margins are typically slim, so as soon as I saw him compare that damning $100 million in revenue to the $438 million in income, I knew that this was a spurious comparison. But I didn't guess how spurious. In 1999, the year Kinsley selected for comparison (because the effects of this particular manipulation are one-off), Halliburton had over $10 billion in revenue. In other words, the change in accounting altered revenue by less than 1%. Suddenly "he must have known" doesn't sound as compelling, does it?
Which is not to say that Cheney didn't know. He may well have -- I don't know, any more than does Michael Kinsley. But frankly, playing around with how you booked revenue was hardly a rare occurrence in the late 1990's -- not that I'm in favor of it, but many of the companies that did it managed to convince themselves -- and their auditors -- that they were perfectly justified. There are reasons to do things like that, most notably to match expenses with the income they generate. At any rate, not a capital crime. More importantly, if Kinsley knew enough about reading a financial statement to pick out those two numbers, he also knew enough not to compare apples to oranges. Perhaps there's an argument that that revenue flowed straight through to the bottom line. But he doesn't make it -- he doesn't even tell us that it's so. He just ignores the distinction as if it were meaningless.
Posted by Jane Galt at May 31, 2002 1:11 PM | TrackBack | Technorati inbound links"); ?>