Airplanes and Accounting Games: The Coming Boeing Collapse?

Now that the company’s operational risk has turned into catastrophe, the accounting probably doesn’t make sense. There are large losses to write off, or hide somewhere.

By Matt Stoller and cross-posted from his blog, BIG.

One of the weirder aspects of the Boeing scandals is that the corporation has had significant operational difficulties for 20 years, and yet the stock has done quite well. Even before the 737 Max, the company was bleeding cost overruns. As Maureen Tkacik wrote in the New Republic, the 787 Dreamliner, was budgeted to cost $7 billion for development, but ultimately cost between $30-50 billion (which was both development and manufacturing). That’s a lot of money! Where are the losses?

One hint comes in this headline of a Wall Street Journal story from 2016, before the 737 Max scandals started: “Boeing’s Unique Accounting Method Helps Improve Profit Picture.” Unique is doing a LOT of rhetorical work in this headline. Here’s the nut paragraph:

Boeing is one of the few companies that uses a technique called program accounting. Rather than booking the huge costs of building the advanced 787 or other aircraft as it pays the bills, Boeing—with the blessing of its auditors and regulators and in line with accounting rules—defers those costs, spreading them out over the number of planes it expects to sell years into the future. That allows the company to include anticipated future profits in its current earnings. The idea is to give investors a read on the health of the company’s long-term investments.

In other words, Boeing’s accounting is not about presenting an accurate presentation of losses and profits, but about hiding risk. Obama’s Securities and Exchange Commission in 2016 was apparently investigating, but in keeping with tradition, they didn’t do anything to enforce rules against the powerful, and in all likelihood Trump has continued this bipartisan approach.

Boeing has significant development costs associated with the 737 Max, which is inherently the case for all large complex aircraft systems. The problem is that accounting for these costs have been pushed into the future based on anticipated sales, which is risky but manageable IF you can build safe aircraft airliners want to buy. But unfortunately for Boeing and anyone who wants a good aerospace industry, that was a big if. And now that the risk has turned into catastrophe, the accounting probably doesn’t make sense. There are large losses to write off, or hide somewhere. (UPDATE: Here’s Boeing’s correspondence with the SEC re: the 737 Max)…

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