Why Do Boeing’s Accounting Practices Spur So Many Whistleblower Complaints?

February 10, 2021
What is fraud?

Boeing is under observation by the SEC for possible financial reporting violations, and not for the first time. The company’s stock has dropped severely as a result, but the more important question is: Why has the company been repeatedly accused of less than honest financial practices?

This issue affects investors who rely on the integrity of Boeing’s financial reporting to make reasonable judgment calls. Whether we support large private industries with our taxes or with our investments, transparency and honest accounting are essential—and, in most cases, legally required.

The Boeing Dreamliner

Before the Boeing Dreamliner debuted, it was portrayed as an eco-friendly marvel, a pilot’s best friend and the answer to every passenger’s airplane frustrations. Compared with standard commercial aircrafts, the Boeing 787 is designed to have better fuel efficiency, LED lighting, improved in-cabin air quality, and it’s made of lighter materials.

It’s a fantastic idea, but the logistics of creating and selling Boeing’s groundbreaking aircraft have unfortunately been anything but a dream. In 2014, reports surfaced that the company was not applying adequate quality controls throughout the production process of the Dreamliner. Of particular concern were allegations that Boeing had deliberately obscured possible violations of this kind. Anonymous Boeing employees voiced their concerns in Broken Dreams: Boeing 787, a documentary about the fraught development of the aircraft.

The problems didn’t stop when the Dreamliner finally made its debut in the sky, either. Recurring battery issues, structural weaknesses and software problems caused serious doubt about whether the aircrafts were truly equipped to keep passengers safe on commercial flights.

Since the Dreamliner’s production process has been anything but seamless, consumer trust has been tenuous for years. This is the climate that Boeing has created for itself, and it makes the recent allegations of accounting violations just one piece of a larger puzzle.

Murky accounting practices

Based on early projections, Boeing determined that it could sell 1,300 787 aircrafts within several years. The problem is that actual sales are falling short of those estimates, and production costs are tallying up very quickly. The company has already spent more than $28.5 billion on the Dreamliner, and the aircraft’s production was delayed over three years. Whistleblowers are alleging that the projections may not have been calculated with the most ethical of intentions.

Also under scrutiny by the SEC is the financial reporting for Boeing 747 Jumbo Jets, whose sales have slowed significantly below projections in recent years. Accounting mistakes can happen in any company, but the issue with Boeing is closely correlated with its choice to use a famously imprecise form of financial reporting.

In unit accounting, Boeing would estimate their sales versus production costs based on each plane produced and sold. Because aircraft production involves very high upfront costs, Boeing uses program accounting instead.

The SEC permits program accounting but regulates it closely. This method spreads out the production costs over time based on estimated sales. Doing so makes Boeing appear profitable, even though its production costs at this point technically exceed its sales.

Because Boeing is a publicly traded company, the SEC is entitled to receive reports about how actual sales and production costs measure up against the projections. For a publicly traded company, using program accounting as a financial reporting method should therefore be approached with meticulous caution.

A rocky legal track record

Without question, program accounting is legal, but manipulating it to inspire unwarranted confidence in investors is not. Companies are expected to adjust their projections as new data comes in to avoid discrepancies and losses that ultimately hurt stakeholders.

Boeing’s whistleblowers are raising concerns that the company’s accounting practices are part of a scheme to mislead investors. This is not the first time employees have reported possible wrongdoing in regards to the company’s financial practices.

In 2002, the company settled a securities fraud suit for $92.7 million. The allegations involved faulty financial reporting related to program accounting. Boeing was facing large-scale production issues at the time, and allegedly kept its looming losses hidden from investors.

The Sarbanes-Oxley Act requires certain controls to be in place to make projections and reporting as accurate as possible. In 2007, Boeing faced additional allegations that it wasn’t following appropriate protocol in compliance with this legislation. The whistleblowers in that case were internal auditors at Boeing, and after attempting to sound the alarm internally without success, they went to the press with their claims. Boeing fired both of them.

Program accounting hasn’t been the only cause for speculation about Boeing’s financial practices. The company has faced lawsuit after lawsuit throughout the past two decades; here are just a few of the cases:

  • In 1994, Boeing agreed to pay a $75 million settlement in response to allegations that it overcharged the government for military contracts.
  • In 2000, the company paid a $54 million settlement to resolve a qui tam lawsuit alleging the sale of aircrafts with defective gears.
  • In 2006, Boeing was accused of securing contracts through illegal means, using competitor information. The company settled for $615 million.
  • In 2009, Boeing paid $25 million to settle whistleblower accusations of False Claims Act violations.

Throughout its many legal troubles, Boeing has asserted that any perceived discrepancies are simply a result of the complex nature of aircraft production. CEO Dennis Muilenburg continues to defend Boeing’s financial reporting system and plans to keep using program accounting.

Despite his claims, it’s not hard to see why investors, media outlets and some of Boeing’s own employees might doubt the company’s financial integrity. Complexity is not an excuse for fraud. Boeing made more than $26.4 billion in profits from 2008 to 2013. A company with such resources can surely figure out a more reliable system of financial reporting.

Any publically traded company, furthermore, has an obligation to maintain transparency even when that causes slight organizational inconvenience.