Don Phillips column about Amtrak accounting

[BaltACD]

Accounting for large complex organizations causes myriad of assumptions to be made when allocating both revenues and expenses.

We all know what happens when you ASSUME - something about ass U and me.

[erikem]

greyhounds

An example would be the branch line from Bloomigton, IL to Mason City, IL.  Right at 45 miles long.  Six days a week a crew would go on duty in Bloomington and take very few cars to and from the various small towns between Bloomington and Mason City.  Now, those cars weren't going to or comming from Bloomington.

If we received a carload of lumber destined to the branch from the Union Pacific at Council Bluffs we had to haul it about 626 miles to get it to Bloomington.  Then a maximum of 45 miles on the branch.  93% of our haul was off the branch.  If we got $600 to move the car from Council Bluffs to destination, just how much of that $600 could be "matched" to the branch's expenses?  We certainly couldn't haul the car from Council Bluffs to Bloomington for nothing.  Any answer would have to be subjective, not objective. 

Ken,

Keeping in mind that the goal of the company is to produce net income, I'd first subtract out the incremental cost of moving the car from Council Bluffs to Bloomington, then compare the remainder with the pro-rated costs for moving the car from Bloomington to the destination. If the remainder is less than the pro-rated costs then the branch line is almost certainly a loser, with the exception based on keeping an otherwise profitable customer.

You're right in that the is a great deal of subjectivity in cost and revenue allocation.

- Erik

[henry6]

Don is an old line journalist....achieve the art with the skills; work at it with intelligence and enthusiasm;  research and study the facts and then chek them again;  develop reliable and credible contacts; respect your contacts, your readers, your work and yourself; report with an even hand.  Then, if you want or when you can, draw your own conclusions and report them as your conclusions and thoughts.   Frailey and a few others around Trains have that same bent, unlike those in the mass media of newspapers, TV, Radio, and internet.

[greyhounds]

I don't know if Phillips ever passed an accounting course.  One very frustrating thing regarding writers such as Phillips is that you never know their qualifications for being a critic.  Same thing with some commenters on this forum.

Myself, I'm not an accountant.  But I did take and pass several accounting classes at the undergraduate and graduate level.

The objective of accounting is to match revenues and expenses.  For example, if a firm had $500,000 of revenue from selling turnips last year, just what was the total expense of getting that $500,000 in revenue?  If it was more than $500,000 they really need to do something.  Up to, and including, the cessation of selling turnips.

The matching of revenues and expenses is much more subjective than some people want to believe.  It's far easier to imagine a villain (evil Wall Street type) than it is to actually understand the complexities.

My favorite railroad example comes from when I was doing analysis of branch line abandonments.  The expenses weren't much of a problem.  We could determine the crew pay, the maintenance on the branch, the taxes, the fuel used, etc. pretty well .  But we couldn't match revenues to those expenses in any meaningful manner.

An example would be the branch line from Bloomigton, IL to Mason City, IL.  Right at 45 miles long.  Six days a week a crew would go on duty in Bloomington and take very few cars to and from the various small towns between Bloomington and Mason City.  Now, those cars weren't going to or comming from Bloomington.

If we received a carload of lumber destined to the branch from the Union Pacific at Council Bluffs we had to haul it about 626 miles to get it to Bloomington.  Then a maximum of 45 miles on the branch.  93% of our haul was off the branch.  If we got $600 to move the car from Council Bluffs to destination, just how much of that $600 could be "matched" to the branch's expenses?  We certainly couldn't haul the car from Council Bluffs to Bloomington for nothing.  Any answer would have to be subjective, not objective. 

On a straight mileage pro rate only $42 would be subjectively allocated to cover the branch expenses.  On that basis the branch was a dead weight looser.   The government regulators, ever mindful of politics, had to come up with a different formula for revenue allocation.  And they did.  We were to arbitrarily allocate 50% of the revenue to the branch.  They had no real basis for this arbitrary allocation. But they wanted to avoid the political heat from branch line abandonments.  (The 50% figure applied across the board to all branches.)

So, according to government mandated accounting, we hauled the lumber 626 miles for $300, then another 45 branch line miles for another $300.  It was a totally arbitrary, politically movitivated, form of accounting.  In any event, the branch still came up a looser under the government mandated accounting system.  And it is thankfully gone.

The point is that there is a real element of subjectivity in accounting.   People need to understand that.  Good managers will look at the accounting numbers, understand their context and subjectivity, and make decisions accordingly.  People such as Phillips seem to just get confused.

 

 

 

[schlimm]

Since Amtrak is a corporation, a quasi-governmental one, it should use these accounting standards.  The most authoritative source of generally accepted accounting principles (GAAP) developed by FASAB for federal entities is contained in The FASAB Handbook of Accounting Standards and Other Pronouncements, As Amended (FASAB Handbook).    Past violations of accounting standards (Enron, etc.) does not mean the attempt to follow uniform accounting procedures should be abandoned, any more than the fact that drivers violate traffic laws means those should be abandoned.

[henry6]

That's my point, Balt...accounting is a manipulation of numbers and figures so designed to defend or tear apart anything you want anyway you want.  In this case Boardman is doing just that to get what he feels he wants and needs for Amtrak.  And he does this from the point of being the most politically savvy Amtrak president.  

[BaltACD]

And Wall Streets accounting methods were so pristine that the financial melt down of bank bail outs never happened.

Figures lie and liars figure.

[henry6]

I get the feeling at Don Phillips mistrusts Boardman quite a bit.   But because Amtrak is a step child of Congress rather than Wall Streeters, no one will ever get a straight or common answer, especially for accounting purposes, from Amtrak...but come to think of it we don't from private enterprises today either.  Amtrak being a political puppy just makes it all the easier to use different methods of accounting for political purposes than we are used to.  It is playing with the half full/half empty conundrum on an as needed or as can be adapted basis.

[BroadwayLion]

LION is monk, lives in monastery. Congregation said all monasteries in the Congregation will use the same standard accounting methods. End of story.

[diningcar]

The Phillips column in the June issue takes substantial issue with accounting methods used by Amtrak in reporting the profitabilty, or lack thereof, for different Amtrak operations. This is an issue which concerns those of us who through the years have acquired at least a rudimentary understanding of this discipline.

On this issue at another RR site I suggested that Congress mandate that Amtraks accounting firm, Ernst & Young I believe, establish an accounting proceedure for Amtrak which would be similar to or identical with those used by, for example, Chevron, BNSF or perhaps JB Hunt. Further that Amtraks officers would not be able to influence those accounting proceedures and practices. Then perhaps Congress and we taxpayers would have a viable comparison of Amtrak with other businesses.