Boe­ing to face SEC probe of Dream­liner and 747 ac­count­ing

The Pak Banker - - BUSINESS -

The U.S. Se­cu­ri­ties and Ex­change Com­mis­sion is in­ves­ti­gat­ing whether Boe­ing Co. prop­erly ac­counted for the costs and ex­pected sales of two of its best known jet­lin­ers, ac­cord­ing to peo­ple with knowl­edge of the mat­ter.

The probe, which in­volves a whistle­blower's com­plaint, cen­ters on pro­jec­tions Boe­ing made about the long-term prof­itabil­ity for the 787 Dream­liner and the 747 jumbo air­craft, said one of the peo­ple, who asked not to be named be­cause the in­ves­ti­ga­tion isn't pub­lic. Both planes are among Boe­ing's most iconic, renowned for the tech­no­log­i­cal ad­vance­ments they in­tro­duced, as well as the de­vel­op­ment headaches they brought the com­pany.

Un­der­ly­ing the SEC re­view is a fi­nan­cial re­port­ing method known as pro­gram ac­count­ing that al­lows Boe­ing to spread the enor­mous up­front costs of man­u­fac­tur­ing planes over many years. While the SEC has broad- ly blessed its use in the aero­space in­dus­try, crit­ics have said the sys­tem can give too much lee­way to smooth earn­ings and ob­scure po­ten­tial losses. "We typ­i­cally do not com­ment on me­dia in­quiries of this na­ture," Boe­ing spokesman Chaz Bick­ers said in an emailed state­ment. SEC spokesman John Nester de­clined to com­ment.

Boe­ing fell 6.8 per­cent to $108.44 in New York, the low­est clos­ing price in more than two years. SEC en­force­ment of­fi­cials have yet to reach any con­clu­sions and could de­cide against bring­ing a case, said the peo­ple. The is­sues in­volved are com­plex and there are few black-and-white rules gov­ern­ing how com­pa­nies ap­ply pro­gram ac­count­ing, one per­son said.

Pro­gram ac­count­ing has been around for decades. It was first cham­pi­oned by the aero­space in­dus­try to ad­dress the prob­lem that com­pa­nies' big­gest ex­penses are amassed up­front, as they de­sign planes and de­vise man­u­fac­tur­ing pro­cesses. Costs typ­i­cally fall as the as­sem­bly be­comes more ef­fi­cient, mak­ing it cheaper to build the later jets than the ear­lier ones. The method, which is fully com­pli­ant with Gen­er­ally Ac­cepted Ac­count­ing Prin­ci­ples, lets com­pa­nies av­er­age out the costs and an­tic­i­pated prof­its over the du­ra­tion of the "pro­gram" for a spe­cific jet, a pe­riod that can last decades and en­com­pass hun­dreds or even thou­sands of air­craft.

The ex­pected costs and sales are es­ti­mates and they must be up­dated -and a loss recorded -- when the pro­gram is de­ter­mined to have reached a point where earn­ings won't catch up to losses. As part of the in­ves­ti­ga­tion, SEC en­force­ment at­tor­neys are ex­am­in­ing whether Boe­ing's fi­nan­cial state­ments re­lied on sales fore­casts that might be too op­ti­mistic, one per­son said. An­other av­enue of in­quiry is whether Boe­ing's es­ti­mates for de­clin­ing pro­duc­tion costs will come to fruition, the per­son said.

A whistle­blower has given SEC offi- cials in­ter­nal doc­u­ments and data about Boe­ing's ac­count­ing, ac­cord­ing to the peo­ple. The tipster first raised con­cerns with the reg­u­la­tor more than a year ago, one per­son said. SEC pol­icy is to not re­veal the iden­ti­ties of whistle­blow­ers.

Over the years, a hand­ful of aero­space an­a­lysts have ques­tioned whether Boe­ing will be able to re­coup its costs for both the 787 and the lat­est 747, both of which de­buted far be­hind sched­ule in 2011. In gen­eral, the com­pany has en­joyed a good rep­u­ta­tion on Wall Street, earn­ing bil­lions of dol­lars in an­nual prof­its and win­ning buy rec­om­men­da­tions from most re­searchers who fol­low the in­dus­try. Boe­ing's ac­count­ing projects that the com­pany will even­tu­ally make money on the Dream­liner de­spite al­ready spend­ing $28.5 bil­lion on in­ven­tory and man­u­fac­tur­ing. The fore­cast hinges on Boe­ing sell­ing about 1,300 planes and as­sumes prof­its on its later de­liv­er­ies will off­set high costs stem­ming from early pro­duc­tion snarls.

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