Amtrak accounting

mmi16 wrote:There is more than enough 'wiggle room' within 'Generally Accepted Accounting Principles' that you can operate a railroad through.

Senior Management tells the 'accountants' what the financial narrative they want presented and with the backing of GAAP, Senior Managements financial story will be told. Senior Management, of every corporation that presents financial reports, has some story they want their accounting to present, as well as some things they want hidden - GAAP allows this to happen.

Any 'activist' investor can tear apart any financial statement they set their mind to.

I am really not getting into the weeds of this discussion, but Amtrak's accounting is unique and a little open to interpretation, shall we say.

Perhaps the internal accounting staff may have to write what they call white papers to justify senior management's "beliefs" and "statements" on how they perceive certain accounting treatment of expenses or revenue etc., but ultimately, this has to ALL pass the smell test and the desk of the audit firm that comes in annually to comb through the books. And sure, for internal management accounting reports, there could be some creativity, but it will be flushed out come audit time. Amtrak's current auditors may not agree with the white papers to jusityf the accounting treatment and year-end adjustments and re-calculations will then be performed. However, Amtrak may not go back and "re-state" all their monthly accounting reports. Hence why all internal or any interim accounting reports will be headlined with "unaudited financial statements."

However, at the end of the day, Amtrak is audited on an annual basis - used to be KPMG, but now it is Ernst and Young (EY) - my alma mater (yikes!). Senior management may "tell" the accountants their financial narrative, but at the end of the day, the accountants have to get comfortable with everything in order to make any adjustments to the numbers and express an opinion. If public accounting firms learned ANYTHING from the whole Enron ordeal, EY is not going to lose their reputation by not being able to justify their audit opinion. It's the auditors that will tear the accounting records apart because the audited financial statements for Amtrak HAVE TO BE in compliance with GAAP - or at least be defensible in compliance. I say that in that fashion only because Amtrak is a unique beast. Some items are not so straight forward. But the days of slipping the envelope are gone. When the auditors are done reviewing the books and the "audit" is done and published, it has to past muster and management can't be presenting their "story" to accounting for them to gloss over and accept. Not sure what's meant by "hiding things" and "GAAP allows this." GAAP is Generally Accepted Accounting Policies and the whole basis of GAAP is establishing uniformity among accounting rules so that presentations are kept standardized. GAAP doesn't allow inappropriate hiding of accounting misstatements - let me just say that much. Again, management can write a book on their justification of various accounting treatments, but at the end of the day, the auditors need to make sure the accounting records are in compliance with GAAP and accounting records are accurately reflected. Otherwise EY just took on a HUGE risk in their audit opinion. Auditors/accountants do NOT like any type of risk, and try to minimize or mitigate it.

Being all said, can Amtrak's records be "open" to interpretation, yet still conform to GAAP and be accurately stated - yes. I don't want to get into Amtrak's audit or accounting methods, but let me also say, that in an audit report, the auditors are going to disclose the reader what the accounting policies or treatments are that have been taken. So that is at least stated upfront. At the same token - is an audit of Amtrak's financial records (by EY) necessarily looking to see that the Auto Train as a long distance train is operating at near break even, and that the NEC is operating at near break even on an "above the rail" basis - not necessarily.

Personally - too much risk in Amtrak's accounting. If I supreme leader of one of the four public accounting firms, not sure I'd want to take them on as a client. But someone has to do the job, and at the end of the day, you hope that risk is minimized and the audit opinion has no risk and can be adequately defended. That's way more than I wanted to say on this matter. Do know that there is a difference in calculating a train's profitability on an "above the rail" basis and "below the rail basis." Once you start looking at "below the rail" - there are some HUGE costs (most of which are capitalized as a result) to consider. An "above the rail" calculation is often easier to calculate and certainly favors break-even analysis for NEC, while having a more negative impact on the long distance trains. If you allocate all the costs to maintain the NEC (repairs, maintenance, renewals, overhauls, etc.) to those trains operating on the NEC - that calculation will negatively impact those trains. But Amtrak is allowed to "capitalize" costs and "allocate" costs. And they have to have their basis solidified on the accounting side regarding what is capitalized and how the allocation method is done for given costs. It can make your head spin, and by no means do I claim to be an expert.

Haven't read the recent Trains article on Amtrak's accounting, but look forward in doing so. Been a while since I've read an audited Amtrak financial report so just printed out the last one done, Sept 30, 2017. And remember - if EY comes up with adjustments to the accounting records, not sure as to what Amtrak's policy is to go back and re-state any of their "interim" or unaudited monthly financial statements, particularly any debt/bank covenants and such that may exist. Each company has their own internal policy and policy with the bank and debt companies as well. Frankly, the interim reports may never get corrected and therefore is the right information even being picked up properly for proper review and analysis (the corrected audited financial data)? Amtrak's year ends Sept 30, 2017. The EY audit report was not issued till for four months later in Jan 2018. That's a pretty quick turn around to be honest. Seems to me KPMG, or whoever the previous auditors were took a LOT longer to get the audit report out!

An "activist investor" and an the "EY auditors" should be tearing apart any financial statements - not because they set their minds to it m but because it is also their job!!!

Financial reports show whatever 'The Boss' wants them to show! Costs will be shown or hidden wherever 'The Boss' wants them.

Financial reports when it comes to a organization like Amtrak are a flight in Financial Fiction!

mmi16 wrote:Financial reports show whatever 'The Boss' wants them to show! Costs will be shown or hidden wherever 'The Boss' wants them.

Financial reports when it comes to a organization like Amtrak are a flight in Financial Fiction!

That has to be one of the more ignorant statements I've ever seen regarding financial statements...

Reports won't show whatever "the boss" wants, mainly because the CFO and CEO are now liable for jail time if they're found to be false representation, and have been that way for over 15 years.

eolesen wrote:
That has to be one of the more ignorant statements I've ever seen regarding financial statements...

Reports won't show whatever "the boss" wants, mainly because the CFO and CEO are now liable for jail time if they're found to be false representation, and have been that way for over 15 years.

Yeah, that's why Immelt and Flannery, etc at GE are in jail right now. Among others.

Oh wait, they're not. And everyone knows GE's been cooking the books, for years. Just like a lot of companies. Hell, the running joke about Computer Associates was that CA stood for 'Creative Accounting'.

As a friend of mine likes to point out about these financial wizzards you hear about on TV...if they're beating the average consistently, they're either really really lucky, or they're doing something illegal. Guess which one's more common...

I think there is a need for clarity here.

1. Know the diff between cost accounting and financial reporting.

Cost accounting is to a degree subjective. It is literally still a science under development. Cost accounting tries to divide the costs, both direct and indirect, among the product lines. It's pretty easy to say that the fuel and labor on board a train should be assigned to that route, but it's much harder to assign track maintenance costs. Is it apportioned by weight? Ridership? Axle count? Speed? One could make a case that the higher speeds required by Amtrak require an entirely higher order of magnitude of track maintenance on the NEC, but one could also make the case that the far more frequent and heavier NJT trains cause more wear. A recent innovation called "activity-based costing" seeks to better use different cost drives to assign semi-variable overhead costs like track maintenance and station staffing.

2. Know what the law (And GAAP) mean.

You can indeed get creative with GAAP, it's not an airtight set of rules. However, publicly traded companies require an outside audit by an accounting firm. If the firm, such as Deloitte or KPMG, gets too creative and helps management lie, they can either lose their license or their reputation. Business would suffer dramatically. Think of a surgeon that lost his/her license to practice because of creative medicine. It's the same thing. The learned professionals do not want to lose their license or they're going to have to find a completely new job. Look at the collapse of Andersen after the Enron problems.

3. What happens when laws are broken by too creative accounting

Sometimes nothing. Sometimes a lot more. Martha went to jail. Immelt has not been convicted of anything, so of course he's not going to jail. GE has basically collapsed, and I bet Immelt isnt' too popular at his country club. Recently, a few CEO's facing jail time committed suicide. This includes Ken Lay of Enron and Aubrey Mclendon of Chesapeake Energy. Carlos Ghosn of Nissan is under arrest in Japan for failing to report a large part of his compensation.

4. What is a "bad deal" and what is the "business judgement rule"?

You cannot go to jail for making what we laymen call a bad deal, provided it doesn't break the laws and is reported properly. For example, Immelt bought too many companies for GE at a high price. The business judgement rule says you can't get arrested or jailed for sh***ty deals, only things that break the law. Not reporting a bad deal is breaking the law within certain bounds. Another good example of this was Tom Downs and George Warrington trying to put Amtrak on a glidepath to self sufficiency. It was a really dumb idea and almost bankrupted the carrier (and ruined their state of repair and timekeeping) but it wasn't at all illegal.

Where does this leave Amtrak?

Good question. On the surface, it appears like they are creative with allocating costs among the product lines, especially when you hear about snow removal costs in Miami or lack of track maintenance allocation to Acela. I don't doubt the states are paying too much for what they receive. This is not necessarily illegal provided the overall financial reporting (end of year total profit and loss, along with operating and investment results) is per GAAP. Also, it raises the question of "is a quasi-governmental company required to even use GAAP?". Three freight roads own all the preferred stock but because there is no expectation of receiving earnings from those shares, there might be no reason to use GAAP.

Overall, creative accounting is not necessarily illegal. Every company is creative to some extent. So are many individuals in their IRS/state tax filings. Provided it doesn't violate the black line rules, creative accounting is fairly common. '

Sometimes creative accounting is good

Consider Berkshire's BNSF acquisition a few years back. By GAAP standards, it was looking bleak that year. Cash flow was horrible. BNSF's quarterly projections were rotten. But Buffet realized that BNSF would thrive if it were taken off the quarterly treadmill/hamster wheel and allowed to function with a long-game view. If you don't believe me, read Matt Rose's article in Trains Mag this month. It saved a lot of jobs compared to the CP/CN/CSX slash & burn of Precision Scheduled Railroading. It probably is better for all stakeholders, including shippers, employees, and local residents of BNSF towns that would otherwise see much more truck traffic.

Great post ,Tadman. Only one thing I would query,my memory is That Warrington etc were responding to legislation, requiring Amtrak to achieve operational self sufficiency by a certain date. The date came, Warrington departed , and the "goal'' quietly went away. Certainly, Gunn would have none of it anyway.

An interesting view on Amtrak World penned by AMTRAK VP Stephen Gardner in Railway Age https://www.railwayage.com/passenger/in ... we-see-it/" onclick="window.open(this.href);return false;

David Benton wrote:Great post ,Tadman. Only one thing I would query,my memory is That Warrington etc were responding to legislation, requiring Amtrak to achieve operational self sufficiency by a certain date. The date came, Warrington departed , and the "goal'' quietly went away. Certainly, Gunn would have none of it anyway.

Thanks. I agree that Downs and Warrington were working within that legislation. One thing that's interesting there - what would happen if they didn't follow that legislative mandate? You can't send them to jail, it's not a criminal activity. So you have to look at the chain of command. Managers are elected by the board, who is appointed by congress. The board can fire the managers that are not performing, and the congress can replace board members that don't have the guts to fire managers, but it's not a direct chain of command that can change direction tomorrow.

David Benton wrote:Great post ,Tadman. Only one thing I would query,my memory is That Warrington etc were responding to legislation, requiring Amtrak to achieve operational self sufficiency by a certain date. The date came, Warrington departed , and the "goal'' quietly went away. Certainly, Gunn would have none of it anyway.

Warrington played fast and loose with accounting rules and eventually had to mortgage penn station to meet payroll. Projects were rolled out without a haphazardly (Express) and gunn was brought in to clean up the mess. That said warrington was right on the acela.
In reading the article it is mostly smoke and mirrors. Is amtrak really allocating zero track maintenance costs to the acela? Seems unlikely. Most of the mistakes mentioned are minor, like snow removal in miami, used to undermine confidence in the overall financials without providing a smoking gun that would cover half a billion in losses. Long distance trains have good load factors because they are sized to demand which means cars are sidelined in winter months but anyone with a reasonable understanding of finances can see the employee customer ratio is extremely unfavorable. Airlines dont fly full service restaurants around the world for a reason...and last we forget amtrak is mandated to eliminate food losses by Congress.

Warrington (and Downs) were trying to get expenses OFF the profit and loss statement and moved to the Balance Sheet so they could be capitalized. Then instead of taking the expense hit all in ONE year, they could spread out the cost/expense hit over many years (based on the capitalization policy that was adopted. I hate to use the word creative accounting, but this was a form of creative accounting.....they did write up th policy and rules for how they would treat this type of expense. Sometimes CFO’s and even auditors would just write up a “white paper” or narrative to justify accounting treatment and poof, it became believable and OK. But as Tasman and I have also mentioned - the audit firm has to be in agreement of this!!!!!!

Even cost -accounting, which is at the heart of some of Amtrak’s accounting, is an art because - HOW do you allocate all these different costs over the profit and loss statement - hence activity based accounting.....

Gunn did re-program a lot of Warrington and Downs’ creativity of moving things from the Profit and Loss Statement to the Balance Sheet.......but that was also after the bluff was called - glide path to self-sufficiency was NOT going to happen! And something can also look profitable that is also cash poor or even broke - hence the mortgaging of Penn Station and hocking nearly all the rail equipment on lease-back arrangements. OIG and Congress should have intervened when assets (real estate and passenger equipment) started to be put in financial jeopardy on paper with banks.....

A Midwestern state’s 2015 privatization of equipment and food service on an Amtrak state-supported route ended when the private service provider sought increased subsidies after only 17 months.

Ouch, just spit in Indiana’s eye while you’re at it

Amtrak will obviously sell itself in a positive light, but this op-ed by VP Gardner (obviously vetted by Anderson too) speaks a lot of truth to the privatization mavens. I do wish he would have addressed LD service and particularly finances though, which has no proper comparison (a public corporation on private rails, running between 1/2 and 3x daily) except perhaps in Canada.

I'm still awaiting my January TRAINS so I can read the article. Clambake has said they will reship; what class of mail I know not.

But in the meantime, I think fellow CPA JP has set forth the limitations of both audited Financial Statements and any Responsibility System. Although Generally Accepted Auditing Standards (GAAS) has required greater review of Internal Control procedures, that review is mainly focused towards safeguarding assets, i.e. Tillie walking off with the Petty Cash box.

mtuandrew wrote:

A Midwestern state’s 2015 privatization of equipment and food service on an Amtrak state-supported route ended when the private service provider sought increased subsidies after only 17 months.

Ouch, just spit in Indiana’s eye while you’re at it

Amtrak will obviously sell itself in a positive light, but this op-ed by VP Gardner (obviously vetted by Anderson too) speaks a lot of truth to the privatization mavens. I do wish he would have addressed LD service and particularly finances though, which has no proper comparison (a public corporation on private rails, running between 1/2 and 3x daily) except perhaps in Canada.

ultimately it comes down to money. whether Amtrak or some private entity runs it, the system requires a great deal more capital investment than it receives. The national network is even more capital starved than the NEC and requires several times the amount the NEC requires and that is going to be the case regardless of who operates the trains. If long distance ran on time and with better average speeds they would lose dramatically less money per passenger. many short distance routes would hardly require operating subsidies at all. in my view, claiming Amtrak is cooking the books and somehow misstating the losses on the long distance network is counterproductive. when trains can't be counted on to be on time you have fewer passengers, more staff, and require more equipment to provide the same amount of service..and that doesn't take into account actually improving the service.

On Amtrak trains that I’ve been over the last couple of days, I have heard Amtrak employees mentioning that Anderson is out come April. If this is true could this be a parting of the ways due to 1) the questionable handling of accounting and finances 2) alienating the long distance people and the private car people 3) wasn’t getting the results the board expectations or 4) Amtrak is to difficult of a job for a guy who can be retired and doesn’t need to deal with these headaches?

Sounds more like some wishful thinking on the part of line employees. I'd be surprised if his employment agreement was for less than three years, but Amtrak doesn't have to file those like a publicly traded company would.