A few years ago both Halliburton Corporation, a large construction company, and its auditor, Arthur Andersen, were chided for allowing Halliburton to book a percentage of cost overruns that Halliburton attempted to collect from customers after projects were completed, but before both agreed settlements with customers and, of course, collection thereof. The practice of trying to collect cost overruns in the construction industry is not uncommon. Until 1998, cost overrun collections were not booked until received. Since that time, Halliburton “began guessing how much of a disputed surcharge would ultimately get paid and crediting itself in advance.”
Required:
a. Is there a case that can be made for allowing Halliburton to book these overruns? What arguments, if any, support Halliburton’s accounting methods?
b. What situations should prevent Halliburton from booking these overruns prior to collection?