Accounting Observer > Public Blog - Raytheon's Unruliness

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Raytheon's Unruliness

Location: Blogs AAO Weblog (Public)
Posted by: Jack Ciesielski	6/29/2006 6:14 AM
Yesterday the SEC settled enforcement proceedings against Raytheon Company and its former Chairman and CEO, Daniel P. Burnham, and Aldo R. Servello, the former Deputy CFO and Controller of the aircraft divisions, the Raytheon Aircraft Company (RAC). For the period between 1997 to 2001, Raytheon falsified the results of RAC; it masked the deteriorating conditions of the unit, and essentially made for fraudulent reporting. Burnham and Servello agreed to the settlement without admitting or denying guilt. Others are still under investigation. For not admitting or denying guilt, it cost Burnham $1,238,344 and Servello, $34,628. Raytheon shareholders, who didn't admit or deny anything, will suffer a $12 million penalty. What did Burnham and Servello do? Plenty: "Bill and hold" revenue transactions. Between 1997 and 1999, Raytheon inflated revenues and operating income of the RAC by "pulling forward" sales of aircraft to fill in for operating shortfalls. Revenue was recognized on sales of incomplete aircraft, on which RAC had requested the "bill and hold" treatment (rather than the purchaser), with incentives given to the customers in order to tease them into accept a jazzed-up sale before the end of a quarter or year. Without any disclosure of such terms in filings, Raytheon tapped public markets during this period. Commuter aircraft business. The commuter aircraft business during the period in question saw a decline in profitability and a weakening position in the marketplace - which prompted a number of actions that included improper deferral of losses on leased aircraft, improper accounting for securitized loans, inappropriate use of reserves and pension income, and a lack of disclosure of all these items and their effect on earnings. Cynically, perhaps, the company took a massive writedown for the division after the September 11, 2001 terrorist attacks - letting the general aviation industry problems caused by the attacks provide them with cover. All told, Raytheon filed "at least fifteen quarterly reports, five annual reports, and four registration statements and prospectus supplements that contained materially false and misleading disclosures and financial statements." Curiously, all these machinations took place during the internet bubble era - in a company that least resembles a dot-commer. It's a great example of just how many levers can be pushed in a company when you want to account creatively.

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