News that the government plans to withhold as much as $300 million owed to Halliburton (NYSE:HAL) subsidiary Kellogg Brown & Root until the feds complete an audit is not likely to add to investors' comfort level with the oil services firm's liquidity.

Scrutiny of Halliburton has been intense since it received a "no bid" $1 billion contract last year for work on Iraq's oil production infrastructure. Critics have charged that the company, one of the largest players in its industry, has enjoyed special favors on account of its close ties to the Bush administration through vice president Dick Cheney, who previously served as the company's chairman and CEO.

The withholding issue relates to Halliburton's LogCAP contract, under which it provides support services to troops in Iraq. Halliburton repaid the government $6 million in late January after the firm's internal audit discovered possible overcharges related to the agreement. Subsequently, the government raised more questions, prompting the company to credit $36 million to the Department of Defense and freeze $141 million in invoices.

The total amount involved in all of these delays, withholdings, and credits -- $483 million -- is relatively paltry when viewed in the context of the billions in contract work Halliburton has won. While this is true, these problems may have unpleasant consequences for Halliburton's balance sheet. Since alluding to this in its annual report, Halliburton has reassured investors that its liquidity is "very good."

Admittedly, Halliburton has $1.8 billion in cash on hand, enough to weather the current storm, although the firm's cash flow from operations was a negative $775 million in 2003. The latest investigations probably won't be speedily resolved, meaning cash flow this year could take a hit. Halliburton took on $2.2 billion in new debt last year, boosting its long-term debt load to a hefty $3.4 billion. If questions continue to surface and the firm has trouble collecting from the government, it may have to add to this pile.

At the moment, the danger of more negative revelations seems uncomfortably high, despite Halliburton's declarations to the contrary. Earlier this week, Dow Jones reported that Lt. General Ricardo Sanchez, commander of U.S. forces in Iraq, has criticized Halliburton's work on construction of new bases for troops in that country.

Halliburton may have a point that some of the accusations leveled against it are politically motivated. But for now, the firm may just have to accept that its ties to Cheney could add to its liabilities.

What do you think? Is Halliburton being unfairly targeted? Or does it deserve the criticism it's getting? Discuss it on the Halliburton discussion board.

Fool contributor Brian Gorman is a freelance writer in Chicago, Ill. He does not own shares of any companies mentioned in this article.