Amtrak FY 2013 audit finally

[blue streak 1]

SAM we need your help on this one.  Amtrak has posted its 2013 FY audit.  At the same time it removed the other previous year's audits.  Makes a referrence to note #2.  What in the world did the 2013 audit actually mean and especially note 2 ?

[Anonymous]

blue streak 1

SAM we need your help on this one.  Amtrak has posted its 2013 FY audit.  At the same time it removed the other previous year's audits.  Makes a referrence to note #2.  What in the world did the 2013 audit actually mean and especially note 2 ? 

Basically Amtrak messed up the accounting for its capital leases and deferred income taxes.  I need to spend some time with the financials to understand them.

On January 2nd I sent a letter to Tom Howard, Amtrak's Inspector General, raising a conern about Amtrak's failure to release the 2013 audited financial statements.  I got a letter this afternoon from one of his associates telling me that the statements would be issued soon.  Voila!

A quick review of the financial statements suggests that there are some significant differences between the original 2012 financials and the restated 2012 financials, although they are not material.  

Amtrak probably pulled the prior financials because they too were impacted by the accounting errors.  

If my memory serves me correctly, Amtrak does not have to restate the financials prior to 2012 as long as it presents the 2013 data and the restated 2012 data in a comparative format, which it has done.

Without access to Amtrak's books it is impossible to know the extent of the issues associated with the lease and deferred income tax accounting. Given that it took Amtrak more than 15 months to correct the problem, it suggests that the root cause of the problem ran pretty deep.  I suspect the accounting folks burned a lot of midnight oil fixing the problems.   

[blue streak 1]

Sam1:  Can you determine how Amtrak accounts for unearned transportation revenue?  The airlines that am familiar with always had a line item as a liability.  A lot depends on how the credit card companys handled the charges and how much of the fare was held in reserve by the credit card company.

[Anonymous]

blue streak 1

Sam1:  Can you determine how Amtrak accounts for unearned transportation revenue?  The airlines that am familiar with always had a line item as a liability.  A lot depends on how the credit card companys handled the charges and how much of the fare was held in reserve by the credit card company. 

It is shown under current liabilities on the consolidated Balance Sheet as deferred ticket revenue.  As of December 31, 2013 it was $127,653,000; as of December 31, 2012, it was 122,092,000.  

This is the key part from the accounting notes: "These revenues are recognized as operating revenues when the related services are provided. Amounts received for tickets that have been sold but not used are reflected as “Deferred ticket revenue” in the Consolidated Balance Sheets."

[Anonymous]

The revisions to Amtrak’s 2012 Consolidated Statement of Operations resulted in an increase of $15.6 million in the previously reported 2012 loss.  The original 2012 loss was $1,239 million; the adjusted loss is $1,255 million.  The adjustment is 1.21 per cent of the original loss.  As noted by the external auditors, it was not material.

The company adjusted 10 of the 17 line items on the Consolidated Statement of Operations, excluding the sub-total and total lines. The three largest adjustments were to Other Revenues (down $10.5 million), Depreciation (down $16.1 million), and Interest Expense (up $17.7 million).  The changes had a flow through impact on the other financial statements.

Apparently Amtrak had to restate its prior period financials.  The restatement period was not disclosed. Had it not done so, the impact on the company’s 2013 Consolidated Statement of Operations would have been $276.1 million, which management, probably at the urging of auditors, believed would have been material.  Under Generally Accepted Accounting Principles in the United States, determining materiality is a judgment call by the chief accountant, management, and the external auditors.  

Amtrak apparently had not been accounting properly for its leases and deferred income taxes.  It appears that it had capitalized some leases that should have been treated as operating leases.  A capital lease acts like a capital asset, i.e. property, plant, and equipment.  It generates depreciation expense over the estimated life of the asset.  An operating lease acts like a period expense, i.e. the lease payments flow directly to expense.  Without access to the company’s books, it is impossible to know the details. 

The date of the auditor’s report for the 2013 financials is November 25, 2014, which is more than a year after the close of Amtrak’s 2013 fiscal year.  In prior years the audit report was issued by December following the close of the fiscal year.

It appears that Amtrak had to make numerous changings to its accounting records to get the 2012 and 2013 as well as prior period financials correct.  A significant number of the changes don’t appear to have been driven by the changes for leases and deferred income taxes. 

Why did the external auditors miss these accounting problems?  Amtrak changed auditors in 2010, 2011, and 2012.  This may be part of the answer.  Most companies retain their external auditors for a minimum of five years.  This gives the auditors sufficient time to become familiar with the company’s accounting policies, procedures, and practices.