Brad DeLong's Semi-Daily Journal (2004)

Aha. Yes, So Cheney did know that his company's annual reports were fraudulent.

Of course he did. He is merely flaunting his power by lying so blatantly.

D

Give us back our SEC!

It is inconceivable that the CEO of a public company would not know in detail why its earnings spiked by 46% in one year. That is a huge change from historical performance. There is not a business enterprise anywhere that would not have reviewed and discussed at the higest levels such extraordinary results prior to public disclosure.

If something is responsible for a 46% boost to your reported annual profits and you are CEO, you are either aware of it or you are grossly incompetent.

The two are not mutually exclusive.

When Arthur Anderson was going down the tubes, The Daily Show was the only outfit that dug out the commercial that Cheney did for AA, praising their "creative accounting". In the context of Enron, it was hilarious.

Note -- "creative accounting" is not usually considered to be a positive trait ...

"The Halliburton Company secretly changed its accounting practices..."

This should have been headlined, "Why, oh why can't we have a better press corps."

All that happened is that when Halliburton moved from "time and materials" contracts to "fixed bid with change orders", they had a different situation, with different procedures to account for them. When they mentioned this in their 1999 report it had NO DISCERNIBLE change in the stock price.

Nothing was "secret", but an ignorant NY Times reporter thought he had a big scoop, the SEC was put in a political bind. So, they investigated Halliburton. Halliburton has now settled the matter--as any sensible business would.

What is it American stockbrokers tell me? Yes, don't invest overeseas, they have poor corporate governance.

you left out my favorite part!

Halliburton's former controller, Robert C. Muchmore Jr., agreed to settle the S.E.C. action by accepting an order to cease and desist from further violations of securities laws and to pay $50,000. Neither he nor the company admitted or denied the commission's accusations.

doesn't that guy have the perfect name for a chief accountant who reports inflated earnings?

"It is inconceivable that the CEO of a public company would not know in detail why its earnings spiked by 46% in one year."

Um, don't let the facts get in the way of a good story.

The 46% is the difference between calculating reported accounting profit under one legal method of accounting for contracts versus the another legal way of accounting for profits.

It has nothing to do with a 'one year spike in earnings of 46%'. Maybe take a few business classes, and THEN offer an informed opinion?

'The 46% is the difference between calculating reported accounting profit under one legal method of accounting for contracts versus the another legal way of accounting for profits. '

And you think a CEO wouldn't be aware of the difference between accounting methods and how it would make a serious material difference to company results ? And you don't think its a company's responsibility to disclose a material change in accounting methods to the shareholders ?

anyone bought Halliburton stock between the time the 1998 report was issued and the time the 1999 report admitted that the accounting procedures had changed ? If you did, please sue Richard Cheney right now. I'd say an informational campaign might be in order.

KMan wrote:
"It has nothing to do with a 'one year spike in earnings of 46%'. Maybe take a few business classes, and THEN offer an informed opinion?"

Changing accounting methods produced the appearance of a "one year spike" to anyone who didn't know about the accounting, i.e. everyone outside the company. It is a "material" change and the law requires that it be reported.

Please tell me where you took "business classes", because if I ever take one, I'd prefer one that would tend to keep me out of prison.

Punk wrote
"And you think a CEO wouldn't be aware of the difference between accounting methods and how it would make a serious material difference to company results ? And you don't think its a company's responsibility to disclose a material change in accounting methods to the shareholders?"

I do to the first, and I do to the second. Please point out where I wrote that I don't. I was pointing out the the original rwo posters didn't know what they were talking about. You've changed the goalposts.

Roger wrote

"Changing accounting methods produced the appearance of a "one year spike" to anyone who didn't know about the accounting, i.e. everyone outside the company. It is a "material" change and the law requires that it be reported.

Please tell me where you took "business classes", because if I ever take one, I'd prefer one that would tend to keep me out of prison."

True for the most part, although anyone focusing on the cash flows would realize their was no change...accounting profit has no basis in reality anyway.

And for the record, I did my undergrad at Williams College, my MBA is from UNC, and I am a CFA.

KMan writes:

"...anyone focusing on the cash flows would realize there was no change..."

Isn't that exactly the point? That Cheney does not admit that he was "focusing on the cash flows"?

I'm not following you, Jon.

True for the most part, although anyone focusing on the cash flows would realize their was no change...accounting profit has no basis in reality anyway.

IOW, true for the entire part. If cash flows tell the whole story, why not forbid any kind of accounting entry to be made public? It seems to naive me that if they're going to announce something else as "earnings", that it should be comparable from year to year, or it's fraud. It also seems unbecoming to insult other people for not having taken courses, when you're trying to justify corporate fraud. We can't all have the benefit of excellent schools like yours. But that doesn't make us peons who aren't entitled to rudimentary honesty from public corporations.

KMan,

The point is that unless Cheney was a complete incompetent, he was "focusing on the cash flows." In other words, unless he was a complete incompetent, he was aware of the activities of the Halliburton employees -- activities that were required to be disclosed to investors.

That's the story. And in fact it's a good one. I don't understand what "facts" there are that somehow contradict this.

Here's the point.

Reported profits for all companies are completely dependent on literally thousands of choices made by accountants, both within the company and outside the company (known as auditors).

These choices, to name but a few, include things such as the method by which you value your inventory, the way you report and expense operating leases, capitalizing or expensing R&D, accounting for earnings of subsidiaries, expensing options, valuing the worth of long term contracts, etc. There are many different ways to account for each alternative, all of them legal.

When a company changes a method, they are generally required to identify this in the footnotes. According to the SEC, HAL didn't identify one of these changes for 1998, but did note this in 1999 statements going forward.

Should it have been disclosed in 1998? Absolutely. Is it a big deal that it wasn't? No...which is why the fine was essentially pennies ($7.5M for the firm, 50K for the guy). Should the CEO have known this was going on? Not necessarily - you can certainly make the case that the head of a company should know every single thing that goes on, but realistically, one change like this was not generally in the CEO's realm back in the late 90s. (Although due to Sarbanes Oxley, it is definitely on their radar screen right now.)

KMan:
Whether the change in accounting policy is good/bad a moot point. It is the fact that this was not disclosed that violated securities laws.

From the NY Times piece: "At bottom, what this case is about is insuring that investors understand the numbers," said Stephen M. Cutler, the S.E.C.'s enforcement director. "If you change methodologies and don't explain that, then investors are not going to understand what they are seeing."

And for guidance, FASB's decision to adopt the IASB's policy on changes in accounting policy disclosure:

"That when a voluntary change is made, the following should be disclosed:

(1) The nature of and justification for a change in accounting principle and its effect on income in the financial statements of the period in which the change is made. The justification for the change should clearly explain why the newly adopted accounting principle is preferable.

(2) When a change in accounting principle has an effect on the current period or any prior period presented, or may have an effect in subsequent periods, an entity shall disclose the following:

(i) The effect of the change on each financial statement line item and any per share amounts affected for the current period and all prior periods presented. Financial statements of subsequent periods need not repeat the disclosures.

(ii) The amount of any adjustment relating to periods prior to those presented."
http://www.fasb.org/project/short-term_intl_convergence.shtml

What Halliburton did was dishonest to investors and the market. Apparently is did not violate GAAP, but did violate securities laws. And Cheney was CEO at the time. If he didn't know what was going on he should have been fired for negligence.

With your qualifications you should know something is rotten in the state of American corporate and political culture.

Should it have been disclosed in 1998? Absolutely. Is it a big deal that it wasn't?

It made a 46% difference in reported earnings, at a time when a large merger was pending, a merger for which Cheney got a huge bonus. It also affected the value of his stock options. So it was "material" to the price of the stock. Witholding the background information is securities fraud.

Are you trying to argue that a CEO doesn't notice when yearly earnings go up 46%? That seems unlikely to me, although I admit I haven't had all those sophisticated business classes.

KMan,

This is not a matter of expecting that Cheney, or any CEO, knows "every single thing that goes on" in their company. It's expecting that they understand the most basic things about their company -- ie, whether it's making money and if so, why.

And of course CEOs do know such things. It's only when legal liability comes into play that they suddenly become complete ignoramuses.

In this specific matter, Cheney obviously DID know why there was such a large change in KBR's reported profitability. He and his lawyer don't even bother denying it.

That's the story. Now, you can say, as you do above, that it's not a big deal when CEOs break securities laws. I bet as many as 0.8% percent of Americans might even agree with you.

William wrote:
"Whether the change in accounting policy is good/bad a moot point. It is the fact that this was not disclosed that violated securities laws."

Absolutely 100% correct, and I don't disagree with you, (other than to say 'allegedly violated' since the settlement included no admission of wrongdoing).

"What Halliburton did was dishonest to investors and the market. Apparently is did not violate GAAP, but did violate securities laws. And Cheney was CEO at the time. If he didn't know what was going on he should have been fired for negligence."

Somewhat agree, but I would say 'potentially misleading' rather than 'dishonest'. And you are correct that there was no GAAP violation, but a potential problem with securities law, which carries far less weight (again, as evidenced by the minor fine).

As to your point that a CEO should be fired for any settlement with the SEC? That is your opinion, and you are certainly entitled to it.

But I guess that would mean, in the last 12 months alone (not even going back the five years HAL does), you would argue that the CEOs of Goldman Sachs, Morgan Stanley, Bristol Myers, Citigroup, Bank of America, BankOne, Pilgrim Baxter, Janus, Marsh & McLennan, Sun Life Financial, Credit Suisse First Boston, etc should all be fired. Maybe that is your position, but I wouldn't agree.

Has Berkshire Hathaway found it necessary to engage in these shenanigans?

If not, perhaps you can explain to me why these impressive captains of industry needed to, while Buffett still cleaned their capitalist clocks.

KMan: "As to your point that a CEO should be fired for any settlement with the SEC? That is your opinion, and you are certainly entitled to it."

Not the CEO exclusively, but whoever is reponsible for serious breaches of securities laws that involve deceit should at the very least lose their jobs. Of course there can be settlements for trivial matters, I'm not asking for head to roll in those cases, but this is clearly not one of those.

As a matter of principle, the officers of the company should be held accountable. Do you agree? If not the CEO, the CFO, audit committee ... whoever is most responsible.

Accounting policies are changed for a reason. What was the reason? Boosting the share price to get executive options as in-the-money as possible most likely.

I expect you know as well as I do the accounting policy change wasn't "accidentally" overlooked by officers of the company responsible for informing the SEC.

And the big investment banks involved in market timing or whatever should go to jail, and if CEOs were a party to this, so should they. A thief is a thief, even if they live on Park Avenue and have come out of Wharton or HBS. America needs another 50 Eliot Spitzers I say.

"Let justice roll on like a river, righteousness like an neverfailing stream."

Accounting policies are changed for a reason. What was the reason?

The situation here was that HAL stock was underperforming the S&P moderately, but noticeably. They'd arranged a merger with Dresser for HAL stock, and the declining share price for HAL was upsetting Dresser shareholders. At which point a 46% spike in earnings appeared and the merger consummated. In the sequel, it appears Cheney's team didn't carry out due diligence very diligently and Dresser had an asbestos liability that nearly destroyed HAL. I think some units were spun off and took chapter 11. So HAL management went to the trouble of committing securities fraud for a disastrous result. (Cheney got a nice bonus and an appreciation in his stock options, however.)