Raytheon Accounting Woes Run Deep,Wide

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Raytheon Co.'s recently announced settlement with the Securities and Exchange Commission (SEC) of that agency's probe into alleged accounting irregularities is just the tip of the iceberg of accounting problems for the defense contracting giant based in Waltham, Mass.

Raytheon has announced that the SEC has agreed to close the probe into accounting and disclosure practices related to its Raytheon Aircraft Company commuter aircraft business between 1997 and 2001. Raytheon is paying a $12 million penalty, without admitting or denying any wrongdoing.

In mid-June, the company announced it was issuing approximately $200 million worth of warrants to fund part of its settlement of a class-action shareholders suit, In re Raytheon Company Securities Litigation, in which buyers of the company's stock between 1998 and 1990 alleged their investments were affected by fraudulent accounting from 1997-2001. The New York State Comptroller‘s office, acting as trustee of the New York State Common Retirement Fund, filed the suit in U.S. District Court in Massachusetts, and a settlement was reached there in 2004.

The Boston Business Journal reports that in late June Raytheon filed with the SEC to issue stock to fund a class-action settlement, which is apparently the other portion of its settlement with the New York State Comptroller.

Raytheon's outside auditor, PricewaterhouseCoopers (PwC) in 2004 paid $50 million to settle claims against it in the matter in which it has denied any wrongdoing.
"We stand behind our work and would note there have not been any restatements pertaining to the litigation," the Big Four firm's spokesman Steven Silber told the Boston Globe when the settlement was announced. "We recognize that lawsuits of this nature, and the need to settle them in order to avoid the costs and distractions of protracted litigation, are unfortunate realities of today's business.”

In the just-announced commuter aircraft accounting matter, the SEC was investigating allegations that Raytheon used fraudulent accounting methods to mask the aircraft company's bad financial condition at the end of 2000 when it failed to recognize between $67 million and $240 million in losses.

Recognition of this loss would have reduced the company's profit before taxes by as much as 27 percent, according to several press reports. Instead, the company took the losses in the third quarter of 2001 and overstated the loss provision by 10 percent. Raytheon's former chief executive Daniel Burnham and Aldo Servello, the former deputy chief financial officer of the aircraft unit, settled the matter with SEC by parting with some of their bonus money. Former chief financial officer Edward Pliner has not yet settled.

In a separate accounting matter, officials of Raytheon's aircraft unit in Kansas are negotiating with the Department of Justice (DOJ) over allegations that the company charged too much for parts used to build training planes for the U.S. Air Force, according to Bloomberg. The matter is related to a former Air Force acquisitions official who as jailed in 2005 for conflicts of interest. A Raytheon spokesperson confirmed to Bloomberg the negotiations were underway but declined further comment.

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