Halliburton, KBR, and Business Ethics

Back in college, I wrote a research paper on Halliburton. It was in 2006, during the height of awareness of Halliburton's activities...

I was rereading this research paper and wondering what has happened since then. What I found is even more frustrating than the original disgusting practices of the mega-corporation.

First, they sold off their KBR division, hoping to distance themselves from the ruckus caused by poor business decisions.

Then, they moved their corporate headquarters to the United Arab Emirates, hoping to avoid criminal trials for their crimes. (We do not have an extradition treaty with UAE.)

Here is an excellent article that summarizes the atrocities committed by Halliburton against American taxpayers and the U.S. Military:

Huffington Post

Here is another article that describes their move to UAE in 2007:
Halliburton Moves to Dubai

And here is a website that provides a LOT of information regarding Halliburton:
HalliburtonWatch.Org

And here is my original research paper (it's looooooooong):

Accounting, military, and taxes - all three are a part of my every day life. They also have something else in common - Halliburton. As I study for my Associates of Applied Science degree in accounting, I am increasingly more aware of the corruption that greed seems to cause. Studying Accounting and Business Ethics simultaneously this term helped me see that ethics is an integral part of stemming the corruption in American businesses. By understanding the ethical decision-making process, we learn how, when and why to make ethical decisions.

Halliburton is known for corruption in all three areas – accounting, military and taxes. Halliburton KBR is the engineering and construction division of Halliburton Company. They employ more than 63,000 people in 43 countries. (“KBR FAQs”). KBR designs, builds and provides various services for the energy industry (i.e. Enron), the government (i.e. the U.S. Army), and infrastructure (i.e. rebuilding Iraq). One side of the argument says that Halliburton is a great example of the success of multinational capitalism. The other side sees Halliburton as corrupt, greedy and a predator of taxpayers’ money. Through thorough research and lessons learned in Business Ethics B293, I hope to come to an informed conclusion on the decency of Halliburton KBR’s business decisions.

GOVERNMENT CONTRACTS
Similar to the construction industry, when the government has a job they need completed, they require different companies to submit competing bids. The government then awards the job to the lowest bidder.


No-Bid Contracts
Under a “no-bid” contract, however, there is no bidding. The government awards a job to a “preferred” vendor regardless of their proposal costs. According to State Representative Henry Waxman of California, 37 percent of all government contracts in 2003 were no-bid contracts. Of those contracts, 73 percent were military contracts. (“No-Bid Contracts Up Slightly”). The concern with no-bid contracts is that taxpayers’ dollars are potentially wasted because there is no competition to drive prices down.

Cost-Plus Contracts
A typical cost-plus contract reimburses the contractor for the cost of doing the job plus a fee. Usually that fee is 1 percent of the estimated contract cost and an "incentive fee" of up to 9 percent. (HalliburtonWatch.org). Essentially, a contractor is reimbursed all expenses plus paid a 10 percent mark-up. With this system, contractors actually earn more money by wasting taxpayer money. The cost-plus method of accounting is the primary system today for determining how much government contractors are owed by the taxpayer. (HalliburtonWatch.org).

Halliburton’s Army Logistics contract (LOGCAP) commits Halliburton KBR to provide construction of military housing, transporting food and supplies to military bases, delivering mail, and serving food at military cafeterias. (“KBR FAQs”).

Government contracts are awarded generally through a bidding process. Halliburton’s Restore Iraqi Oil contract, however, was a non-bid award. (“All in the Family”). In the construction industry, corporations with a history of corruption are blacklisted from being awarded government contracts. Halliburton has a long history of corrupt practices: kickbacks, overcharges, questionable accounting practices, etc, but apparently, the government does not consider corruption a reason to stop awarding Halliburton multi-billion dollar contracts.

EXAMPLES OF CORRUPTION
In the last five years, Halliburton has been or is currently under investigation for a plethora of offenses. In the 1995, they pled guilty to criminal charges of violating the U.S. ban on exports to Libya. Through its multinational subsidiaries, Halliburton was supplying Libya with oil drilling equipment that could be used to detonate nuclear weapons. (HalliburtonWatch.org). In January 2003, Halliburton admitted that two of its KBR employees accepted 6.3 million in kickbacks from a subcontractor in Kuwait. (HalliburtonWatch.org). Unproven thus far are two different instances of bribery with the Nigerian government.

Though done in a completely legal way, Halliburton plundered $25 million in pensions from their workers to buy and sell other companies. Soon after, Cheney was awarded a $20 million dollar pension. (HalliburtonWatch.org).

Halliburton is being investigated for possible over-billing taxpayers for government work done in the war in the Balkans between 1996 and 2000. The GAO, the auditors of Congress, found inflated costs for materials and services. Also, within its current Army cost-plus contract (LOGCAP), Halliburton has been investigated for gasoline overcharges, meal overcharges, hotel overcharges, and laundry overcharges. Halliburton has taken steps to remedy the problems with LOGCAP. (“KBR FAQs”).

Contract Restore Iraqi Oil
The biggest controversy Halliburton faces is their no-bid contract to extinguish oil fires in Iraq called the Contract Restore Iraqi Oil (a.k.a. RIO). In March of 2003, Halliburton was awarded a $7 billion contract by the Army Corp of Engineers. Under normal circumstances, the contract would go out for competitive bidding. But in times of emergency, or when national security is involved, the government is allowed to bypass normal procedures and award contracts to a single company, without competition. (“All in the Family”). In 2004, the Pentagon admitted that the RIO contract was awarded to Halliburton after a “political appointee” recommended the company for the difficult task. (HalliburtonWatch.org).

“We are the only company in the United States that had the kind of systems in place, people in place, contracts in place, to do that kind of thing,” says Chuck Dominy, Halliburton’s vice president for government affairs and its chief lobbyist on Capitol Hill. (“All in the Family.”) Halliburton’s competitors, of course, do not agree.

In an interview with CBS News, Bob Grace, the CEO of a well known oil well fire fighting firm, did not get the opportunity to showcase his company’s ability to fight fires, because the Department of Defense told him that the information was classified and there would be no bidding.

“I can accept confidentiality in terms of war plans and all that. But to have secrecy about Saddam Hussein blowing up oil wells, to me, is stupid,” says Grace. “I mean the guy's blown up a thousand of them. So why would that be a revelation to anybody?” (“All in the Family”).

Bob Grace says the whole point of competitive bidding is to save the taxpayers money. He believes they are getting a raw deal. “From what I’ve read in the papers, they're charging $50,000 a day for a five-man team. I know there are guys that are equally as well-qualified as the guys that are over there that'll do it for half that.” (All in the Family.”)

The government gave this contract to Halliburton, without bidding, by adding it to Halliburton’s already existing Army contract. The GAO released a report in 2004 stating that the contract was improperly awarded. (HalliburtonWatch.org).
Accounting Fraud

In addition to all the conflicts of interest between Halliburton and the U. S. Government, the SEC is investigating overstated revenues during the late 1990s. Arthur Anderson, the same accounting firm convicted of helping Enron hide illegal activity, approved the overstatements. Halliburton hid tremendous losses caused by a recession in the oil industry by changing their accounting method and not disclosing it. The consistency principle in generally accepting accounting principles states that a company should “apply the same accounting principles across periods, yet a company can change from one acceptable accounting principle to another as long as the change improves the usefulness of information in the financial statements.” (Chiappeta, et al. 513). If a company does change accounting methods, the change must be reflected in their annual financial statements in multiple places. First, they must recreate last year’s numbers with the new method, in order to offer a comparison. Then, the income statement must have a section detailing the net effect of a change in accounting principles. And finally, there must be a note included with the financial statements describing the change, why it is an improvement and what income would have been under the prior method. (Chiappeta, et al. 514). An interesting note related to Halliburton’s accounting fraud is that the former CEO of Arthur Anderson is now the CEO of Halliburton.

Since the late 1990s, Halliburton has been under continuous investigation for one thing or another. Typically, the investigations do not find illegal activities, but a lot of unethical conduct.

ETHICAL ISSUES
Halliburton’s choice to make unethical decisions has far-reaching effects. Because they are a multinational company, they have more stakeholders than I could possibly address in one ethics paper. But I will try to touch on the most integral.

Stakeholders
Vice President, Mr. Dick Cheney, is the former CEO of Halliburton. As the defense secretary during the Persian Gulf War, Cheney had international contacts that helped to expand Halliburton overseas, and acquire most of Halliburton’s domestic competitors. Under Mr. Cheney’s direction, Halliburton doubled their government contracts from $1.2 to $2.3 billion. (“All in the Family”).

On NBC’s Meet the Press, September 14, 2003, Cheney said, “Since I left Halliburton to become George Bush’s vice president, I’ve severed all my ties with the company, gotten rid of all my financial interest. I have no financial interest in Halliburton of any kind and haven’t had, now, for over three years.” (HalliburtonWatch.org).

Unfortunately, that is not true. He received his severance in five annual payments of over $150,000 during his first term as Vice President. His $20 million pension is separate from that severance, as is the $1.4 million bonus he received in 2001.

But the clincher in his financial interest is the 433,333 shares of unexercised stock options. (HalliburtonWatch.org). If Halliburton increases its value through government contracts, Cheney’s stock options are worth more, thus a financial interest. It turns out, however, that there is an insurance policy that awards Cheney the face value of his stock options no matter Halliburton’s financial situation. This insurance policy, according to the Congressional Research Service, releases Cheney from any financial interest in the dealings of Halliburton. Cheney has signed a written agreement to donate all profits from his stock options to charity. (HalliburtonWatch.org). As noble as that is, taxpayers all over the world are funding the revenues that will eventually pay his stock options to a charity he chooses. It is very apparent that Cheney has made unethical decisions; however, Cheney cannot be prosecuted for conflict of interest or lying.

Once I started this research, I realized I, too, am a stakeholder in Halliburton. I am affected by Halliburton’s corruption. Actually, all service members are affected because this seeming corruption only adds to American’s negativity towards the war in Iraq. Plus, service members are getting shafted because their every move is held tightly to a federal budget; it appears that Halliburton is misappropriating some of that budget. To the tune of about $61 million Halliburton is overcharging for transporting gasoline into Iraq. About $27.4 million dollars has been overcharged to taxpayers for meals served on bases in Iraq and Kuwait in 2003. (HalliburtonWatch.org). A routine audit of Halliburton by the Pentagon found that Halliburton was charging for 42,000 meals a day, but only serving 14,000. A letter from Representative Waxman to an auditor of Defense contracts details many overcharges and highlights a motto of “Don’t worry about the price, it is a cost-plus contract.” (Waxman, Henry). The fuel and meal overcharges alone could add $88 million to the defense budget.

In addition to affecting all taxpayer and all military personnel, the accounting fraud of Halliburton affects all of Corporate America, financial investors, and accountants. The stereotypes of fraud and corruption that honest accountants and ethical corporations face daily have only been proven by the willingness of Halliburton and Arthur Anderson tell “half-truths” in their financial statements.

Corporate Culture
In the letter from Waxman, two whistleblowers give great detail to the corrupt corporate culture at Halliburton and its subsidiaries. Whenever these two gentlemen would try to reduce costs on the Army’s LOGCAP contract, their managers would discipline them and then do the opposite. (Waxman, Henry). It was while reading this letter that I was actually brought to tears over the unethical decisions that Halliburton makes.

Social Responsibility
The whole world is somehow affected by this seeming corruption at Halliburton. When taxpayers’ money is wasted or stolen, we have less money for improving the communities in which we live. When defense budgets are wasted on supplying extra food to soldiers that are not there, we have less money for defended the country. When Americans catch wind of the corruption stemming from the Iraq war, Americans are no longer interested in helping the Iraqi citizens who need us.
Multinational Corporation

World-wide growth, like Halliburton KBR experienced during the late 1990s, can have many consequences. An onslaught of new employees in new countries with new cultures, the sudden reality of multicultural clients and unique governments can all make corporate governance a difficult task. As a multinational company (MNC), Halliburton faces very difficult ethical challenges. Though MNCs have the benefit of taking advantage of a global market, these companies must respond to a responsibility to the countries in which they conduct business. Their size and power can lead to corruption and unethical decision-making.

The number one unethical decision made by Halliburton is to use its foreign subsidiaries to conduct business with rogue nations like Iran, Iraq and Libya. In an interview with ABC Television’s Sam Donaldson, Cheney is quoted as saying, “What we do with respect to Iran and Libya is done through foreign subsidiaries, totally in compliance with US law." When Donaldson suggested, "it's a way around US law," Cheney replied: "No, no, it's provided for us specifically with respect to Iran and Libya." If you're a big multinational that's able to incorporate around the world, you don't have to worry.” (HalliburtonWatch.org). To abuse the advantages the government gives for expanding business to other countries is inexcusable.

CONCLUSION

Government entities should never award contracts without a fair and equitable bidding process. The government should write a code of conduct, adopt ethical standards into a written policy and form a value statement to ensuring that their business dealings are ethical. Though it could be extremely costly, the government should conduct an ethics audit and then have ethical decision-making training. Possibly, by contracting with a college, the ethics audit and trainings could be done by interns, thus significantly lowering the cost to taxpayers.

Halliburton will obviously continue to be awarded government contracts despite their history of corruption. Halliburton actually has a code of conduct that is very strict and very thorough. (KBR FAQs). It would appear though, that the culture and the employees do not understand what exactly an ethical issue is. Halliburton needs to first conduct an ethics audit and then have ethical decision-making training on an on-going basis. Through the study of ethical issues we can learn how best to handle them.

REFERENCES

“All in the Family” CBSNews.com. 16 Mar 2006. CBS Worldwide Inc. 21 Sept 2003
Chiappetta, Barbara, Larson, Kermit D., Wild, John, J. Fundamental Accounting Principles. New York, NY: McGraw-Hill Irwin. 2005.
Ferrell, Linda, Ferrell, O. C., Fraedrich, John. Business Ethics: Ethical Decision Making and Cases. Boston, MA: Houghton Mifflin 2005
HalliburtonWatch.org. Essential Information. 13 Feb 2006
“KBR FAQs.” Halliburton. 13 Feb 2006.
Kemper, Dave, et al. The College Writer. Boston, MA: Houghton Mifflin, 2004
News Headlines. Military.com. 16 Mar 2003. Military Advantage. 16 Mar 2003.
“No-Bid Government Contracts Up Slightly.” USAToday.com. 27 May 2004. Gannett News. 17 Mar 2006 http://www.usatoday.com/news/washington/2004-05-27-government-contracts_x.htm
Waxman, Henry A., Letter to Mr. Reed of the Defense Contract Audit Agency. 12 Feb 2004. United States House of Representatives. 16 March 2006 http://www.house.gov/reform/min/pdfs_108_2/pdfs_inves/pdf_admin_halliburton_contract_inves_feb_12_let.pdf