SEC Issues Cease And Desist Order Against Halliburton Co. And Its Former CFO

SEC NEWS DIGEST
Issue 2004-148 August 3, 2004

On August 3, the Commission announced that it filed a civil action in
federal district court, and issued a cease-and-desist order (Order)
relating to Halliburton Company's (Halliburton) failure to disclose a
change to its accounting that materially increased its reported income.
Halliburton is a Texas-based provider of products and services to the
petroleum and energy industries. Halliburton and its former controller,
Robert C. Muchmore, Jr. consented to the cease-and-desist order without
admitting or denying the findings in the Order. Halliburton and
Muchmore also agreed to pay civil penalties of $7.5 million and $50,000,
respectively. The Commission's Order noted that the penalty, in part,
reflects the Commission's view that there were unacceptable lapses in
the company's conduct during the course of the investigation, which had
the effect of delaying the production of information and documentation
necessary to the staff's expeditious completion of its investigation.

The Commission finds in its Order that commencing in the second quarter
of 1998, Halliburton altered its accounting practice on several large
project contracts so that it could begin offsetting cost overruns with
estimated recoveries on claims it had not yet resolved with customers.
According to the Order, although permitted under Generally Accepted
Accounting Principles in appropriate circumstances, this practice was a
significant departure from Halliburton's longstanding public disclosure
regarding its recognition of claims revenue. In the previous five
consecutive years, dating back to 1993, Halliburton disclosed in its
Forms 10-K that it recognized revenue from such claims only after the
claim was resolved with the customer. Pursuant to that practice, until
the claim was resolved the company recorded losses caused by cost
overruns.

The Commission finds in its Order that, as a result of Halliburton's
undisclosed change in accounting practice, cost overruns and resulting
losses on several contracts were reduced or eliminated, triggering
material increases to Halliburton's income: in its 1998 Form 10-K, by
46.1%, and in its Forms 10-Q for the second and third quarters of 1998,
by 24.8% and 5.7%, respectively, and in its Forms 10-Q for the first,
second and third quarters of 1999, by 14.8%, 7.5% and 11.6%,
respectively. Additionally, the change in claims recognition policy
materially enhanced Halliburton's publicly disclosed 1997-1998 quarter-
to-quarter income comparisons. Despite the material impact of the
accounting change on Halliburton's reported income, the company did not
disclose the change until March 2000, in its 1999 Form 10-K - almost two
years after the change went into effect.

The settled Order requires that Halliburton and Muchmore cease and
desist from committing or causing violations and future violations of
Section 17(a)(2) of the Securities Act of 1933 (Securities Act) and that
Halliburton cease and desist from committing or causing, and Muchmore
cease and desist from causing, violations and future violations of
Section 13(a) of the Securities Exchange Act of 1934 (Exchange Act) and
Rules 12b-20, 13a-1 and 13a-13 thereunder.

In its civil suit, the Commission charges Gary V. Morris, Halliburton's
former chief financial officer, with violating Sections 17(a)(2) and
17(a)(3) of the Securities Act and aiding and abetting Halliburton's
violations of the reporting provisions of the Exchange Act: Section
13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder.
Morris, Halliburton's highest-ranking financial officer, bore ultimate
responsibility for ensuring that Halliburton disclosed its accounting
change. The Commission alleges that Morris improperly caused the
revenue related to this undisclosed accounting change to be reported in
Halliburton's Commission filings, each of which he signed. Moreover,
Morris participated in the preparation of earnings releases and in
analyst teleconferences in which Halliburton's net income was touted -
without disclosure of the change in accounting that had materially
enhanced the net income figures. In its lawsuit, the Commission is
seeking a permanent injunction and a civil money penalty against Morris.
[SEC v. Gary V. Morris, Civ. Action No. H-04-3096, USDC, SDTX (Houston
Division)]; [SEC v. Halliburton Company and Robert Charles Muchmore,
Jr., Civ. Action No. H-04-3097, USDC SDTX (Houston Division)]; (LR-
18817); [In the Matter of Halliburton Company and Robert Charles
Muchmore, Jr., Administrative Proceeding - Rels. 33-8452; 34-50137; AAE
Rel. 2072; File No. 3-11574)