How Dick Cheney got away with $35 million just ahead of a government probe

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http://www.onlinejournal.com/Special_Reports/082004Leopold/082004leopold.html

By Jason Leopold
Online Journal Assistant Editor

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August 20, 2004—It's obvious that no mainstream news reporter has the gumption to seriously question Vice President Dick Cheney's ethics when he was chief executive of Halliburton, the oil-field services company that is currently embroiled in a scandal with the Pentagon due to its questionable accounting practices related to its work in war-torn Iraq.

Pity those journalists because this is the stuff Pulitzer's are made of. What's even more remarkable is that there are reams of documents in the public domain showing how Cheney cooked the books when he was CEO of Halliburton, which makes the vice president look like Ken Lay's twin brother. The evidence is beginning to collect dust. To tell the story of how Cheney's Halliburton used accounting sleight of hand to fool investors all you need to do is connect the dots, which is what this story will do.

Let's start with a bit of old news. A couple of weeks ago Halliburton agreed to pay a $7.5 million fine to settle a U.S. Securities and Exchange Commission probe related to a 1998 change in the way Halliburton accounted for construction revenue.

The commission says the undisclosed accounting change caused Halliburton's public statements regarding its income in 1998 and 1999 to be materially misleading, boosting Halliburton's profits on paper by $120 million.

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A story in the July 22, 2002, issue of Newsweek sets the record straight and proves that Cheney knew full well that Halliburton was engaging in accounting trickery to boost its stock and standing on Wall Street and he should be held accountable just like those other corporate evildoers.

In an interview with two of Newsweek's reporters, Halliburton CEO David Lesar defended his company's bookkeeping and said that former CEO Dick Cheney was aware of the firm's accounting methods. Lesar says Cheney knew that the firm was counting projected cost-overrun payments as revenues, "The vice president was aware of who owed us money, and he helped us collect it," Lesar told Newsweek.

Wendy Hall, a spokeswoman for Halliburton, said at the time that "the vice president was aware we accrued revenue on unapproved claims in accordance with generally accepted accounting principles."

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1. Doe dee doe dee doe.... oops, I dropped something!

TO: All KBR employees

FROM: Andy Lane, president and CEO, KBR

SUBJECT: Update on our work in Iraq & Our Unsung Heroes


Last week I visited our KBR teams on the ground in Iraq and Kuwait, and I’d like to take this opportunity to update you on the issues we face in the Middle East.

The U.S. military casualties in the war are approaching 1,000. As a civilian company, we have paid an extremely high price in human terms. We’ve experienced the devastating loss of 45 of our colleagues who have died in the Iraq war, 121 have been wounded, and we are very concerned for the two who remain missing. We have more than 30,000 employees and contractors in Iraq and Kuwait, and they truly are unsung heroes for the jobs they are doing. Our convoy drivers face some of the harshest and most dangerous conditions possible in fulfilling their mission. Our employees assigned to military and civilian bases also face significant dangers as they are subject to frequent hostile attacks.

When the U.S. Army decided to outsource its logistics support and we won the Logistics Civil Augmentation Program (LOGCAP) contract in 2001, we became an integral component of these military efforts. Several front line generals and base commanders told me what an important job we are doing and how well we are doing it.

Initially, the contingency contract required us to support between 25,000 and 50,000 troops at multiple bases. The scope of work changed dramatically and today we are supporting approximately 210,000 U.S. and coalition troops and civilians at more than 60 camps in Iraq and Kuwait.

This mission is unprecedented. Both the military and contractors are facing a unique set of logistical and security challenges, and it is important to remember where we began. When we took on the mission, phone communications and power were virtually nonexistent. Employees slept in makeshift accommodations, sometimes on abandoned building rooftops. There was no potable water, no logistical supply transport system and virtually no other infrastructure.

Given these conditions, KBR did everything possible to get systems up and running in an ever-changing situation. We have repeatedly acknowledged that, given the environment in which we operate and our ever-changing role in support of the military operation, our systems have been stretched. Where we have identified problems with our systems, we have taken actions to fix them and we will continue to closely monitor and adjust them as needed.

In a recent edition of This Week, Dave Lesar described the great job KBR employees did when they appeared before the U.S. House Committee on Government Reform in Washington, D.C. The hearing provided KBR with the opportunity to highlight the facts about our accomplishments in Kuwait and Iraq and discuss the challenges we face as we manage the largest civilian force ever assembled to support the military. I’d like to update you on several of these issues.



ONGOING GOVERNMENT AUDITS

The government audits you read about in the newspaper are part of a lengthy, but routine, process of working for the government, and there are several organizations involved. Part of the oversight responsibility for our work resides with the Defense Contract Audit Agency (DCAA). It is our customers and the Defense Contract Management Agency (DCMA) who make final judgments and decisions about our work.

Oversight of the public’s money is important. KBR’s responsibility is supplying the best services and value at the best prices possible -- often under incredible pressure. We know that our work will continue to be the subject of intense scrutiny, but that doesn’t make it any easier.

In the end, all we ask for is a fair assessment of KBR’s performance under the difficult and challenging circumstances of operating in a war zone. With the services we provide in the locations we’re required to operate, we are a company faced with all the risks of war.


15% WITHHOLDING ON PAYMENTS

Our customers believe they have the right to withhold 15% of our future billings on the LOGCAP, RIO and Project and Contracting Office (PCO) Oil contracts until we have definitized our outstanding cost proposals. KBR disagrees with this position, because we feel the Army is misinterpreting the Federal Acquisition Regulation (FAR) clause that pertains to withholding. That said, we are continuing to work with our customers to resolve this issue.

The size and scope of our tasks in Iraq are unprecedented and the process is complex and constantly changing. We are working with our LOGCAP client, the Army Materiel Command (AMC), to reach a definitization schedule, and we will continue to meet the requested timeframe. We expect to work through all remaining issues in a cooperative manner with the AMC.

On the RIO contract, we have submitted the required definitization proposals on our task orders, and on the PCO Oil contract we are current in the submission of cost estimates. The Army Corps of Engineers and the PCO, our clients, have begun withholding payments to KBR on invoices related to the undefinitized portion of the contract. We continue to work with our clients and the DCAA to finalize this process, so the temporary withhold can be lifted.


DINING FACILITIES (DFACs)

During my visit to Iraq I had several meals in our DFACs, and the food and service were excellent. Many soldiers I talked to said that the food and the DFACs were the best they had ever experienced.

The current DFAC issue we are facing stems from a fundamental disagreement with the DCAA on how we should be allowed to bill for food service we provide the military in Kuwait and Iraq. The DCAA contends that the only acceptable counting method is “boots through the door,” or the number of patrons served in the facility at every meal, even though the Army has used a counting method comparable to KBR’s on past DFAC contracts. We believe this “boots through the door” methodology fails to take into consideration the fact that KBR’s contract with the Army required us to provide a turn-key, fully operational dining facility for a minimum number of personnel. The Army also wants the flexibility to move troops and to have food almost on a “whenever and wherever” basis. We are directed to meet their needs for flexibility, not have portion controls or limits on carry outs, and to serve hearty meals every day.

Until this issue can be resolved, AMC is withholding an average of 19% of KBR’s DFAC payments. KBR has continued to provide the DCAA, DCMA, and AMC with all relevant documentation regarding DFACs, and we are confident that we will ultimately be reimbursed for the costs that have been incurred to meet their needs.


HUMANITARIAN FUEL OVERCHARGING ALLEGATIONS

I met several LOGCAP drivers and the mechanics who support their missions at the Theatre Transportation Center (TTC) in Kuwait. They remain very positive about their jobs and realistic about the risks they face every day. I have such respect for these individuals and the courage they are displaying. An August 29, 2004 article in the Los Angeles Times by T. Christian Miller -- “The Conflict in Iraq; ‘Road Warriors’ Deliver the Goods; the lure of a big payday keeps civilian truckers going despite bombs, bullets and ambushes” -- is a very good account of what our convoy drivers face daily. If you haven’t yet seen this article, you can read it at http://www.halliburton.com/news/archive/04/article_082904.jsp.

KBR was also responsible for another major transportation mission in Iraq. The results of a preliminary audit by the DCAA in December 2003 alleged that KBR overcharged the government by $61 million on a humanitarian mission to purchase and import fuel for Iraqi civilians under the RIO contract. The Corps of Engineers has since concluded that we obtained a fair price for the fuel; however, Department of Defense officials have referred the matter to the agency’s inspector general and an investigation is under way.


SUMMARY

As I saw first-hand last week, KBR has an incredible record of accomplishments in Iraq. Each day we serve nearly a half million meals, provide two million gallons of clean water, wash thousands of bundles of laundry, dispatch nearly 700 trucks on the roads throughout Kuwait and Iraq, and a lot more. We are managing all this in a hostile environment -- an environment that is both difficult and dangerous, and unlike any that a contractor has worked in before. This is a war, and despite the fact that the U.S. Army’s needs change by the minute, KBR employees continue to deliver.

KBR has a strong history over more than 60 years of service to our country and our country’s soldiers. We do this work because it is our business, yes -- but we also do it because as a company we can, and do, make a difference in the soldiers’ lives. I am extremely proud of the work that each and every KBR employee is doing to support the soldiers and fulfill our LOGCAP commitment not only in Iraq and Kuwait, but also in Afghanistan, Uzbekistan, Djibouti and the Republic of Georgia.

This is a complex and complicated mission, and sometimes the facts get bogged down in controversy. Rest assured, though, that we will stay the course. We will continue to work closely with our client and with the government to resolve any and all issues. However, we will stand up for our position if we have to.

The story of our work in the Middle East is an important one, and I want to make sure you have the correct information about the issues we face. I am committed to keeping you informed about the news surrounding our company and I hope you will join me in supporting our unsung heroes who are demonstrating unparalleled dedication and hard work during these challenging times.

As I look back and think about the bullet-ridden truck cabs and the job our mechanics are doing to repair these vehicles, and the employees who have reclaimed over $370 million in ammunition through the ammunition retrograde operation, it is clear to me. When I flew in the Black Hawk helicopter -- wearing my flak jacket and helmet -- to three very remote bases where our employees live and work, and where mortars landed just hours after we left, it was clear to me. As I listened to the two-hour exchange of hostile fire during the night in the Baghdad base camp where many of our employees live, it was clear to me. When we left the “Green Zone” and traveled at high risk through Baghdad’s “Red Zone” to attend meetings, it was clear to me. While we are not war fighters, we are clearly a civil company at war. Our employees who live this reality every day need our full support. They all have my respect and they truly are unsung heroes.

If you are interested in reading more about our work in the Middle East, I encourage you to visit the NEWS section of www.halliburton.com, which includes press releases and media statements about our work in Iraq.

For details about the government committee hearings mentioned earlier, including the testimonies presented by KBR employees, go to: http://www.halliburton.com/news/archive/2004/kbrnws_072204.jsp.

Best regards,

Andy