After reading the article “Boeing’s Secret” and watching the video “How a Boeing 787 Dreamliner is Built,” discuss in 400 Words if you believe Boeing is labor intensive, capital intensive, or both. Has Boeing established the “network effect” for their product?  Video: http://www.youtube.com/watch?v=VRfXyccWUP4 Article: On Dec. 11, 1996, Boeing Chairman Philip M. Condit closed the deal of his career. After a relentless three-year courtship, he persuaded the initially reluctant directors of defense giant McDonnell Douglas Corp. to agree to a merger. The combination would create the world's largest aerospace company — the first manufacturer ever with the ability to build everything that flies, from helicopters and fighter jets to space stations. "This is, I believe, a historic moment in aviation," Condit proclaimed at a Dec. 15 press conference. But far from the glare of TV cameras, a disaster was quietly unfolding inside Boeing Co.'s sprawling factories — one that would ultimately wind up costing billions of dollars, cause several executives to lose their jobs, and lead to claims of accounting fraud. Facing an unprecedented surge in orders because of a booming economy, workers were toiling around the clock, pushing the assembly line to the breaking point. At the same time, the company was struggling to overhaul outdated production methods. These pressures were building up to what was, in essence, a manufacturing nervous breakdown. In the weeks after the merger announcement, parts shortages and overtime approached all-time highs — triggering red warning signals in Boeing's colorcoded system for monitoring factory health. As costs went through the roof, the profitability of airliners such as the 777 swooned. A special team formed to study the crisis in May, 1997, issued a report with a blunt conclusion: "Our production system is broken." If investors had understood the scope of the problems, the stock would probably have tumbled and the McDonnell deal — a stock swap that hinged on Boeing's ability to maintain a lofty share price — would have been jeopardized. But shareholders never got the full picture until well after the merger was completed on Aug. 1, 1997. Top executives "were hoping against hope that none of the problems would bubble up before they got the deal done," says a Boeing ex-official. Their wish came true, and the deal sailed through. Recognizing that the bad news would have to come out eventually, company leaders started debating how it should be released. One public-relations manager lobbied for disclosure on Sept. 6 or Sept. 13 — the dates of the funerals for Princess Diana and Mother Teresa — when a grieving public would presumably overlook the story. Those proposals were nixed. On Oct. 8, former McDonnell CEO Harry C. Stonecipher, by then Boeing's president and chief operating officer, shot an e-mail to Condit. "We do know for certain that there is a big surprise coming, and I think we owe the Street a heads-up. We .

1. After reading the article “Boeing’s Secret” and watching the
video “How a Boeing 787 Dreamliner is Built,”
discuss in 400 Words if you believe Boeing is labor intensive,
capital intensive, or both. Has Boeing established the “network
effect” for their product?
Video:
http://www.youtube.com/watch?v=VRfXyccWUP4
Article:
On Dec. 11, 1996, Boeing Chairman Philip M. Condit closed the
deal of his career. After a relentless three-year courtship, he
persuaded the initially reluctant directors of defense giant
McDonnell Douglas Corp. to agree to a merger. The
combination would create the world's largest aerospace
company — the first manufacturer ever with the ability to build
everything that flies, from helicopters and fighter jets to space
stations. "This is, I believe, a historic moment in aviation,"
Condit proclaimed at a Dec. 15 press conference.
But far from the glare of TV cameras, a disaster was quietly
unfolding inside Boeing Co.'s sprawling factories — one that
would ultimately wind up costing billions of dollars, cause
several executives to lose their jobs, and lead to claims of
accounting fraud. Facing an unprecedented surge in orders
because of a booming economy, workers were toiling around the
clock, pushing the assembly line to the breaking point. At the
same time, the company was struggling to overhaul outdated
production methods.
These pressures were building up to what was, in essence, a

2. manufacturing nervous breakdown. In the weeks after the
merger announcement, parts shortages and overtime approached
all-time highs — triggering red warning signals in Boeing's
colorcoded system for monitoring factory health. As costs went
through the roof, the profitability of airliners such as the 777
swooned. A special team formed to study the crisis in May,
1997, issued a report with a blunt conclusion: "Our production
system is broken."
If investors had understood the scope of the problems, the stock
would probably have tumbled and the McDonnell deal — a
stock swap that hinged on Boeing's ability to maintain a lofty
share price — would have been jeopardized. But shareholders
never got the full picture until well after the merger was
completed on Aug. 1, 1997. Top executives "were hoping
against hope that none of the problems would bubble up before
they got the deal done," says a Boeing ex-official.
Their wish came true, and the deal sailed through. Recognizing
that the bad news would have to come out eventually, company
leaders started debating how it should be released. One public-
relations manager lobbied for disclosure on Sept. 6 or Sept. 13
— the dates of the funerals for Princess Diana and Mother
Teresa — when a grieving public would presumably overlook
the story. Those proposals were nixed. On Oct. 8, former
McDonnell CEO Harry C. Stonecipher, by then Boeing's
president and chief operating officer, shot an e-mail to Condit.
"We do know for certain that there is a big surprise coming, and
I think we owe the Street a heads-up. We have an unmitigated
disaster on our hands and need some very candid damage
control," he wrote in an e-mail that was disclosed in a
securities-fraud suit filed against Boeing in Seattle.
Condit, who in his 32 years at Boeing had yet to experience a
failure, responded that the disclosure should be delayed. "My
bias is to soften the third-quarter hit with some warning," he

3. wrote. "Assuming the scale of the problem remains, use the
fourth quarter to prepare the Street to take the real hit then."
On Oct. 22, Condit made the bombshell announcement: The
company's massive production problems would force it to write
off $2.6 billion — by far the biggest charge in Boeing's history.
Overnight, shares fell 8%, to $49.88, wiping out about $4.3
billion in value. As investors digested the scope of the mess, the
company lost years of hard-earned credibility and the stock fell
a further 12%, to 43, by Oct. 27. The stock stayed in a trough
throughout 1998 and won the dubious distinction of being dog
of the Dow that year.
The story of how Boeing kept its 1997 production disaster
secret has never been made public. Although the company
subsequently fixed the assembly-line problems — and it has
recently received praise for its diversification efforts — the tale
provides a sobering view of how easily management can keep
investors in the dark. It also sheds light on the little-known
"program-accounting" method used in aerospace to this day. A
controversial system that many analysts criticize for its lack of
transparency, it continues to give Boeing broad leeway to goose
earnings — and to make it one of the toughest companies in
America to evaluate. In a deal approved by U.S. District Judge
Thomas S. Zilly on Feb. 20, 2002, Boeing settled a private
securities-fraud suit over the 1997 episode for $92.5 million.
The company did not admit guilt. Although some of the
evidence uncovered by the plaintiffs' lawyers was revealed in
court documents, the vast majority was locked under seal at
Boeing's request.
In a three-month investigation, BusinessWeek has reconstructed
this hidden chapter in the company's history — and analyzed its
current implications. New details supplied by several inside
witnesses indicate that Boeing did more than simply fail to tell
investors about its production disaster. It also engaged in a wide

4. variety of aggressive accounting techniques that papered over
the mess. Critics say the company should have taken charges for
the assembly-line disaster in the first half of 1997, even if it
meant jeopardizing the McDonnell merger. They also claim that
Boeing took advantage of the unusual flexibility provided by
program accounting-a system that allows the huge upfront
expense of building a plane to be spread out over several years
— to cover up cost overruns and to book savings from
efficiency initiatives that never panned out. "Boeing managed
its earnings to the point where it got caught," says Debra A.
Smith, a partner at Constraints Management, a Seattle-area
manufacturing consultancy, and a former senior auditor at
Deloitte & Touche who worked on the company's account
during the early 1980s. "Boeing basically decided in the short
run that [managing earnings] was a lesser evil than losing the
merger," adds Smith, a onetime accounting professor at the
University of Puget Sound in Tacoma, Wash.
At a time when investors are asking themselves how far
Corporate America can be trusted, the Boeing saga provides rich
new evidence that companies have much greater leeway to
manipulate their numbers than most people suspect. The
aerospace giant was a widely held blue chip that had a huge
short-term incentive to prop up its stock price. Taking
advantage of an investment community willing to tolerate the
company's opaque reporting system, executives managed to
conceal fundamental operational problems for nearly a year.
Some of these officials, including Condit, are still at Boeing. To
this day, they insist that they had no obligation to disclose cost
overruns when they occurred in the first half of 1997 — which
raises the question of how swiftly they would let investors know
if a similar problem arose today.
As is often the case, none of the outside watchdogs ever barked.
The board never forced Condit to come clean about the
company's production problems. Stock analysts and business

5. journalists underestimated them. And although the company's
auditor, Deloitte & Touche, raised red flags about Boeing's
troubles, it doesn't seem to have put much pressure on its big
client to share this information with investors (page 120). As a
result, Boeing's financial reporting in early 1997 bore little
relationship to its business reality. When the company finally
disclosed its problems, "I was stunned," recalls Richard J.
Glasebrook II, managing director of Oppenheimer Capital,
owner of 5% of McDonnell at the time. "I thought that Boeing
had the building of commercial aircraft down cold."
For its part, Boeing insists it never misled shareholders at all —
and that critics and plaintiffs' lawyers are holding the company
up to unreasonable standards. Noting that the construction of
planes is an incredibly complex and expensive endeavor, it says
that managers told the public about the 1997 production
problems as soon as they were legally required to do so. It also
points out that the Securities & Exchange Commission never
filed charges. Boeing defends program accounting as a
legitimate way to report performance and notes that its
accounting decisions were approved by Deloitte-which was not
named in the fraud suit. All of the key players in the drama,
including Condit, Stonecipher, and former Chief Financial
Officer Boyd E. Givan, declined to comment. "Boeing and its
senior management always tried to do the right thing," the
company wrote in a letter to BusinessWeek. "Boeing and its
executives frequently disclosed Boeing's production
difficulties." Deloitte also insists it acted properly.
So why did Boeing spend $92 million to settle fraud claims?
General Counsel Douglas Bain says the company did not want
to risk litigating complex accounting issues in front of a lay
audience. He adds that because the case would have been tried
in Seattle, which felt stung after Boeing moved its headquarters
to Chicago on Sept. 1, 2001, company lawyers feared a
vindictive jury. Instead, it was willing to accept the settlement

6. — which Bain says is totally covered by the company's
insurance policies.
THE ROOTS OF THE PRODUCTIOH CRISIS
If the Boeing lawsuit had gone to trial, jurors would have heard
a story that begins around 19%, when Boeing was facing a
strategic crisis because of shrinking defense business. Condit
had a choice: either acquire a bigger share of the market or drop
out of it. Since defense provided stable income to offset roller-
coaster commercial plane sales, Condit chose to grow, buying
Rockwell Aerospace & Defense in August, then striking the
McDonnell deal just four months later. The ambitious chairman,
always admired more for his strategic shrewdness than his
operational expertise, was hoping to seal his legacy. But this
bold expansion came at a time when the company faced
mounting internal problems.
As the global economy emerged from recession in the early
1990s, aerospace companies enjoyed skyrocketing orders, which
rose worldwide from 15 aircraft in 1993 to 898 in 1996. But
Boeing's antiquated parts-tracking system couldn't keep up with
the increased production volume. And supply problems
prevented it from getting enough seats and electronic gear on
time.
This problem was compounded in late 1994 when Boeing
realized that rival Airbus Industrie, the European consortium,
was undercutting it on price, thanks to lower manufacturing
costs and government subsidies. By that year, Airbus had
grabbed 30% of the global jet-plane market — up from less than
3% two decades earlier. It was a potentially devastating
development, since lost customers in the airliner industry are
hard to win back after they've spent a fortune training pilots and
mechanics on rivals' equipment.

7. Boeing was forced to knock down costs across the board. It
made early-retirement offers to 9,500 workers in 1995, slashing
its staff of veteran mechanics and engineers. Execs also rolled
out a bug-ridden new computer system for tracking parts, known
by the unwieldy name of Define & Control Airplane
Configuration/Manufacturing Resource Management (DCAC).
As a consultant pointed out in a report to factory execs in the
summer of 1997. the prospect of doubling production rates in
the face of such change was like attempting "a four-and-a-half
somersault off a 50-foot board into a pail of water."
By early 1997, warning signs were everywhere that Boeing's
overheated factories were boiling over. On Dec. 2, 1996,
Deloitte & Touche had alerted the board's audit committee "that
production performance metrics began to trend unfavorably —
overtime, parts shortages, rework, defective parts, and out-of-
sequence work increased." About a dozen alarmed managers at
the company's giant Renten (Wash.) facility met in May for a
"reality check" meeting. They calculated that Boeing's
production system was more than $1 billion over initial cost
projections. One manager taking notes at the get-together
concluded that "we have a real financial crisis on our hands"
with "no relief in sight.
While top execs did acknowledge publicly that the company was
having some production problems in the first half of 1997, they
consistently underplayed the issue. In fact, the company
developed a Production Issues Communication Plan on Mar. 27,
1997, to stave off "focusfed] media attention on the issue of our
ability to meet customer commitments." The document, among
other things, coached executives on how they should respond to
reporters' questions, according to plaintiffs' lawyer Steve W.
Berman, who brought the fraud suit against Boeing. Talking to
reporters after the company's annual meeting in April, 1997,
Condit said that the ramp-up in demand "has resulted in a near-

8. term decline in productivity at company faculties and some
supplier locations." With characteristic confidence, he said that
the first quarter's inefficiencies "would not be repeated during
the remaining quarters of the year" and that the company was
not having "systematic" assembly-line malfunctions.
But already many managers were predicting late deliveries-a
catastrophe that aircraft makers avoid at all costs, since it
triggers enormous late fees and wreaks havoc on customers'
business plans. As Boeing's Gary Scott, vice-president for
737/757 production, wrote in a memo on Mar. 20, 1997: "Late
deliveries due to late [engineering] releases are becoming a
significant problem." As the weeks wore on, the delays grew
worse. On June 27, three days before the end of the second
quarter, about a dozen Boeing commercial airplane executives
met in a windowless meeting room in Renton for their second-
quarter financial plan review. They learned that at least 15
aircraft would probably miss their delivery dates, according to
the plaintiffs' complaint.
INSIDE CONCERN. OUTSIDE ASSURANCES
At this point — about a month before the McDonnell merger
vote — Boeing should have started sharing some of the bad
news with investors, according to Smith and other independent
accounting experts. Under special aerospace industry rules that
are part of generally accepted accounting principles (GAAP),
companies are required to accrue reserves for probable late-
delivery penalties and disclose them in the quarter they become
known. Additionally, "abnormal" costs must be recognized in
the quarter in which they are incurred. Expenses stemming from
the company's production problems in the first half of 1997
"should have been booked in the quarters they were incurred
and reflected in the profit numbers for those quarters," says
Eugene A. Imhoff Jr., an independent expert on program

9. accounting at the University of Michigan.
But Boeing never did so. On July 21, 1997, it reported second-
quarter earnings of $334 million — a number that understated
its production costs, the suit charges, by 3292 million. What's
more, investors still had no idea that the company had run up
$253 million in unexpected costs in the first quarter or that it
would soon would be facing more than $200 million in late-
delivery penalties.
Boeing says it would have been a violation of GAAP to
recognize any increased production charges in the first half of
1997. Of the 15 planes viewed as potential late deliveries on
June 27, it says that "nearly all" snipped on time. Noting that
costs always increase sharply during growth periods, lawyer
Bain says the unplanned escalation in expenses that the
company suffered in early 1997 was consistent with historic
patterns. Therefore, he argues, they were not "abnormal"and did
not meet the test, under GAAP, for an immediate write-off.
Boeing argues that nothing "abnormal" happened until it had to
halt its production lines on Oct. 3. The lawsuit was primarily "a
hindsight dispute about the timing of a write-off," says Ronald
W. Stahlschmidt, a program-accounting expert hired to be a
company witness.
But a Deloitte working paper written in the second half of 1997
offers evidence that some members of the auditing team took
the opposite view: that the cost overruns should have been
charged in the first half of the year. In the memo, Deloitte
called the production disruptions in the first and second
quarters "so abnormal as to require treatment as current-period
charges." The auditor then said that Boeing's decrease in third-
quarter earnings was "retroactively applied" to the first and
second quarters of 1997. Boeing says that "the work paper's
reference to "retroactive' does not suggest that Boeing should
have restated its first- or second-quarter 1997 earnings. It

10. means only that, in taking a charge correctly in the third
quarter, Boeing estimated that charge by reference to year-to-
date data."
BAILING OUT THE 777
The 1997 assembly-line meltdown afflicted every type of plane
Boeing made. But it created a particular problem for the
prestigious 777 line, according to former Boeing employees. To
understand why, it's necessary to look closely at the unusual
accounting system used by the aerospace industry. The
program-accounting method was developed by Boeing and
others in the industry in the 1960s to deal with a central
problem: most of the costs of creating a new plane are incurred
in its early years, while revenues roll in during later years.
To smooth out costs and revenues, aerospace companies are
allowed to average them over the entire duration of an airplane
"program" — usually defined as an initial production run of 400
aircraft. They do this by establishing a projected profit margin
up front — say, 10% for the entire line. This number, which is
continuously updated, is based on Boeing's estimates of the
average costs and revenues over the remainder of the program.
Every quarter, the "profit" the company reports is based on
these projected averages, rather than its actual costs or
revenues. The whole system is built on faith that aerospace
companies can come up with accurate long-term forecasts. To a
degree unmatched in nearly any other industry, aerospace
companies' disclosures are based on their own private estimates.
In this way, companies such as Boeing can absorb the ups and
downs that characterize the industry.
But that comes at a considerable price: little transparency for
investors. "The problem with program accounting is that it is
virtually impossible to audit," says Lynn E. Turner, former

11. chief accountant at the SEC and now director of the Center for
Quality Financial Reporting at Colorado State University. "No
one really knows whether the company will produce as many
planes as [are] needed to recover the costs."
To mitigate this problem, the rules require companies to take an
immediate charge as soon as they have evidence that a line's
long-term profit margin will disappear — or, in industry lingo,
that the program will be in a "forward-loss" position. And that's
just what appears to have been happening to the 777 line in
early 1997. Launched with great fanfare in the early 1990s, it
had a development budget of $5 billion to $7 billion for initial
design, production tooling, and flight-testing. By 1995, it had
quietly overrun this budget by nearly 100%, according to two
former high-ranking Boeing managers.
The prospect of a forward loss in the 777 was galling to Boeing,
since it was the newest model — the plane that boasted the most
advanced technology, that was to drive the company's
performance in the next decade, and that carried Condit's
reputation. Downgrading the 777's forecast would have been not
only an embarrassment but also a threat to the merger. So it was
bad news when, in its 1996 audit, Deloitte said the "low gross
margin" projected for the current block of 777 aircraft risked a
decline in "cost performance that would place the program in a
forward-loss position."
To avoid this humiliation, the company allegedly started to shift
monetary reserves from healthier aircraft programs to keep the
777 on budget, according to the complaint and two former high-
ranking executives. These are funds that would accumulate
when Boeing overestimated the costs for some plane lines.
Officers established "management reserves" to pay for, as
current corporate Controller James M. Bell put it, "unknown
unknowns" — unexpected expenses that historically arise
because of the complexity of airplane construction.

12. While the establishment of these management reserves is
perfectly legal, it is a violation of GAAP to shift money from
one program to another. Nevertheless, a handwritten note from a
Boeing employee dating from May or June, 1997, said the
company had borrowed from other divisions to boost the 777.
"Much of the reserve balance used to cover performance was
generated by other divisions and spent on the 777 division," it
ran. Specifically, the company drew on reserves from the
profitable 767 line after the reserve established for the 777 "was
overrun" in early 1997, says one former Boeing manager.
Boeing vehemently denies it shifted reserves. The handwritten
1997 note "did not mean what the plaintiffs' lawyers suggested
it meant," says Douglas Greene, an outside lawyer at Seattle's
Perkins Coie who represented Boeing in the securities-fraud
litigation. Boeing did not, and does not, have any "off-balance-
sheet," "cookie-jar," or "general contingency" reserves, says
Judith Munlberg, vice-president for communications. "All
reserves at Boeing are related to specific items."
QUESTIONABLE EFFICIENCIES
Another method Boeing allegedly used to stave off a 777 write-
off was exaggerating the effectiveness of some of the cost-
savings initiatives it had launched in the mid1990s. Under the
flexible rules of program accounting, plane makers are
permitted to make projections about efficiency efforts and start
tabulating the benefits immediately — even if, as a practical
matter, the initiative isn't yet working.
But this practice can run afoul of the law, Berman claims, if it
is intended to prevent a particular airplane program from getting
into a forward-loss position, which would require the company
to take a current charge against earnings. And that's just what

13. he says was happening in 1997.
According to the plaintiffs' complaint, Boeing "arbitrarily
manipulate[d] cost-savings figures upwards in order to keep the
777 gross profit estimates from falling into a [forward-] loss
position" during the second quarter of 1997. The complaint
quotes a Deloitte working paper that says Boeing's managers
admitted the second-quarter cost-reduction figures were "a
plug" to keep the 777 profit margins on target A plug is a
commonly used accounting term for a number artificially
generated to produce a desired result.
It is unclear which particular savings initiatives were used to
create the alleged plug. As part of its plan to catch up to Airbus,
Boeing had several efficiency programs under way. But former
employees assert that the estimated savings from the DCAC
parts-tracking initiative, for one, were exaggerated. Launched in
1994, the program cost a total of $1 billion, they say. Boeing
estimated it would pay for itself in two years — and cut the
expense of building a plane by at least 25%.
Problem was, the program cost far more than had been
anticipated. Almost from the start, the DCAC software was
riddled with bugs. One exec involved in DCAC estimates that
overruns reached hundreds of millions of dollars. An internal
audit in the third quarter of 1997 revealed that estimated DCAC
cost savings were being "arbitrarily predetermined" to show
more of a savings benefit than actually existed. When
production managers at Boeing's Wichita assembly plant were
shown the estimated savings they were expected to meet in
March, 1997, "no one would sign off on these numbers" because
the savings benefit appeared unrealistic, according to a report
written by internal auditor Susan Parker. Even without the
signatures, the DCAC savings figures were included in that
year's business plan, the report states. Boeing declined to
discuss in detail the allegations that it used bogus cost savings

14. to prop up the 777. "We are limited in the amount of things we
want to say about it for competitive and proprietary reasons,"
says Muhlberg. She added that "Boeing believes that its
DCAC/MRM … cost-savings estimates were reasonable when
made."
CONTROVERSY OVER PROGRAM ACCOUNTING
Boeing's efforts paid off: The company never declared a
forward loss on the 777 in 1997 — and has not done so at any
time since. Does that mean that the line met the original
profitability targets? Not necessarily. Very quietly, Boeing has
bought itself time to resolve the line's problems by increasing
the number of planes in the 777 program. The initial block of
400 units has been extended twice — first to 500 planes, and
then later to 600.
Under the rules of program accounting, these maneuvers
directly improve the 777's reported profitability by lowering the
percentage of the original development costs that are charged
each quarter. Just extending the block from 500 to 600 aircraft
reduced deferred production costs for the 777 program alone by
$8 million per plane, according to Todd Ernst, a Prudential
Securities Inc. aerospace analyst. He calculated that this saved
Boeing $68 million a quarter and boosted quarterly earnings by
up to 6¢ a share for 2001. "The magnitude of the impact struck
me," he said. "It was a big change in the cost of the airplane."
A neat trick — and one that is perfectly legal under the GAAP
rules governing program accounting. The company didn't have
to announce this important development with a big press
conference. To the contrary, the news was buried in a cryptic
sentence deep in Boeing's 2000 10-K. For its part, Boeing
claims that programs are extended not to defer production costs
but to reflect more sales than originally anticipated. When

15. Boeing has firm sales contracts or high "certainty that the
market is going to absorb more airplanes than we have in the
current [program], we extend it," says Controller Bell.
No doubt other corporations would love to have such financial
flexibility. The wonders of program accounting give Boeing
more ability to paper over any short-term disasters than is
enjoyed in nearly any other industry. As a result of this
situation, investors need to be able to place an unusually high
degree of faith in the company's managers. Boeing says that it
has always earned shareholders' confidence with its rigorous
cost- and sales-estimation process. The business planning
process in 1997, for example, was "methodical and analytic,"
the company wrote to BusinessWeek. "It represented Boeing's
half-century of experience in manufacturing commercial
airplanes. Hundreds of industrial engineers and accountants
worked as separate teams to estimate the thousands of separate
cost items in each program."
That may well be the case. But if there's a moral to this story,
it's that when the stakes are high, the temptations to take
advantage of any flexibility in accounting standards can be
great. "If you can prove that subjective judgments are dead
wrong to the tune that Boeing is willing to cough up $92
million, they must really have been exaggerating their hopes for
the future," according to Imhoff, the University of Michigan
program-accounting expert. The ease with which executives
have the capacity to manipulate program accounting is one
reason why the SEC told the American Institute of Certified
Public Accountants in the early 1980s that it would not permit
the extension of the system to other industries, according to
Turner, the former SEC accounting chief.
After the 1997 meltdown, Condit nearly lost his job and Chief
Financial Officer Givan was replaced in the position by
Deborah C. Hopkins. To regain credibility with the markets, the

16. company took definite steps in an effort to increase its own
financial transparency. Former company officials say that
Hopkins and Stonecipher toyed with the idea of dropping
program accounting altogether. The two Boeing executives
complained that the system confused investors and didn't
provide managers with sufficiently detailed information about
the costs involved in manufacturing an aircraft. "You cannot
reduce the cost of a wing if you don't know where you are
starting," Stonecipher complained in an April, 1999, interview
with CFO magazine.
That idea was abandoned. But in 1999, the company did start
providing investors with supplemental information based on
standard unit accounting. For example, it now supplies a line
item in its reports indicating what the commercial airplane
division's quarterly earnings would be on a traditional unit
basis.
This information, in theory, should make it harder for the
company to mask a production crisis ever again. But analysts
complain that the direct operating income of the commercial
aircraft division is mixed in with earnings from its pension fund
and leasing business. And those items, which are only disclosed
annually, can be significant. In 2001, pension-fund income
accounted for about $785 million, or 18.6% of Boeing's pretax
earnings. "A whole mishmash of other operating items get
thrown into this unit-accounting line item," complains Robert
Friedman, aerospace analyst at Standard & Poor's. "It definitely
clouds the quality of earnings picture."
So while Boeing is not as big a mystery today as it was in 1997,
it is still much harder to evaluate than most companies. Its
accounting methods are none too popular with the professionals
charged with decoding Boeing's books. "You can drive a truck
through what's GAAP in aircraft manufacturing," says Heidi
Wood, an aerospace analyst at Morgan Stanley Dean Witter &

17. Co. "I think everybody has grown weary of program accounting
for a while."
At the moment, though, there are no plans to get rid of the
system. That's not a bad thing for shareholders to keep in mind.
At a time when investors are seeking the maximum in
transparency, Boeing is not even close to that standard.
Boeing still uses controversial program accounting that lets it
offset steep upfront costs with distant payoffs
Boeing insists it never misled shareholders and that it had no
duty to disclose the cost overruns in early 1997
Welcome reform: Since 1999, Boeing provides investors extra
information based on standard unit accounting