Accounting case hits Halliburton Oil-field-services giant says former employee's complaint is without merit

Anthony Menendez, Halliburton's former director of technical accounting research and training, goes over documents relating to his complaint against the company. Anthony Menendez, Halliburton's former director of technical accounting research and training, goes over documents relating to his complaint against the company. Photo: STEVE CAMPBELL, CHRONICLE Photo: STEVE CAMPBELL, CHRONICLE Image 1 of / 1 Caption Close Accounting case hits Halliburton 1 / 1 Back to Gallery

A complaint by a former employee alleging Halliburton Co. used improper accounting to "distort the timing of billions of dollars in revenue" may soon create trouble for the oil-field-services giant.

This month the top accounting officer from Halliburton, which has dual headquarters in Houston and Dubai, will give a deposition about the company's bookkeeping ahead of a September court hearing.

A congressional oversight committee, headed by Rep. Henry Waxman, D-Calif., has also requested information on the case, attorneys said.

If Halliburton made errors, whether on purpose or by mistake, it could not only force the company to restate past earnings — it could also hurt investor confidence.

But Halliburton spokeswoman Cathy Mann said allegations of improper accounting are without merit.

That conclusion was reached after an internal investigation, a review by outside auditors and an inquiry by the U.S. Securities and Exchange Commission all turned up nothing, she said.

Separately, Halliburton expects to prevail if the employee complaint goes to trial, Mann said.

The complaint was originally filed in Dallas in May by Anthony Menendez under the whistle-blower protection provision of the Sarbanes-Oxley Act.

The former director of technical accounting research and training, who worked for the company from March 2005 to October 2006, alleged he was forced from his job for calling attention to the company's accounting problems.

In December, an appeal in his case landed in Administrative Law Judge Patrick Rosenow's office in Covington, La.

"I blew the whistle and was retaliated against," Menendez told the Chronicle. He wants his old job back, provided the company addresses the accounting issues raised in the complaint. After that, he hopes "we can all move forward."

'Bill-and-hold' issues

In the 54-page complaint, Menendez takes aim at Halliburton for what he says are several accounting problems, but particularly its use of "bill-and-hold" transactions.

Broadly, these transactions refer to cases where a seller books revenue before a product is delivered to the customer, or during a time when the customer still has the option to cancel the sale.

For instance, Halliburton routinely recognized revenue from goods that were still parked, unassembled, in company warehouses, the complaint alleges.

But Menendez also blasts Halliburton for what he called a "terribly flawed" method for guiding employees through complex bill-and-hold transactions.

In Halliburton's "bill-and-hold decision tree" — a copy of which is included in the complaint — employees are guided through a series of questions to determine when it's appropriate to book revenues.

The system has "huge problems," said Lawrence Brown, an accounting professor at Georgia State University, who reviewed the flowchart at the Chronicle's request. It omits many of the criteria needed to make a proper decision and is vague in other places, he said.

"Halliburton could have had a much clearer document," Brown said.

Mann, however, said the diagram alone doesn't reflect the company's approach to bill-and-hold transactions.

"When combined with all other components, including our formal policies and procedures, our revenue recognition practices remain in full compliance with U.S. generally accepted accounting principles," she said.

Booking revenue from bill-and-hold transactions is not automatically improper, accounting experts said.

For instance, a customer may authorize the seller to hold a product for a period before it is delivered, the experts said. But companies have misused the practice to inflate sales and earnings, they noted.

"You often see this when companies hit a slump," said Randolph Beatty, dean of the Leventhal School of Accounting at the University of Southern California.

But Halliburton, the second-largest oil-field-services company behind Schlumberger, has benefited in recent years from a global boom in oil and natural gas exploration. On Tuesday, the company's stock price closed down 9 cents at $34.86 per share.

A closed case?

At least one analyst who follows the company didn't sound the alarm bell when word of the complaint first appeared in a Bloomberg News column last month.

"Over time, we suppose, everything would even out — inventory used in service contracts would either be shipped and consumed, or the contracts would be modified/canceled," Philip Adams, an analyst with Gimme Credit in New York, wrote in an investor note.

Mann said Halliburton received a letter from the SEC on April 30, saying the agency had concluded its inquiry.

But Menendez said when he spoke with SEC investigators in April, they left the door open to exploring issues he raised and asked him to keep all documents related to the case.

SEC spokesman John Heine said the agency does not comment on an inquiry's status.

brett.clanton@chron.com