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SEP 3-1919
RAILROAD
CORPORATE ACCOUNTING
DURING FEDERAL CONTROL
BY FRANK NAY
Vice-President and Comptroller
Chicago, Rock Island and Pacific Railway Co.
An address delivered at the 31st annual meeting of the
Railway Accounting Officers Association
New York City, June 11 and 12, 1919
LIBRARY OF CONGRESS CARD
THIS PAMPHLET IS PUBLISHED AND DISTRIBUTED BY THE
RAILWAY ACCOUNTING OFFICERS ASSOCIATION
1116 WOODWARD BUILDING
WASHINGTON, D. C.
Reclass, 5-6-30 A.V.M.
RAILROAD CORPORATE ACCOUNTING DURING
FEDERAL CONTROL
Frank Nay
The United States Government took possession of the
railroads of the United States under proclamation of President
Woodrow Wilson, at 12 o'clock noon, on December 28, 1917,
but for the purposes of accounting, the possession dated from
12 o'clock midnight on December 31, 1917. Mr. W. G. McAdoo,
Secretary of the Treasury of the United States, was appointed
by the President, Director General of Railroads, and Mr.
McAdoo's General Order No. 1, issued under date of Decem-
ber 29, 1917, provided that all officers, agents and employes
of the transportation systems, should continue in the perform-
ance of their regular duties, reporting to the same officers as
theretofore, and on the same terms of employment. General
Order No. 2 issued on the same date, reads as follows:
General Order No. 2.
Washington, D. C., December 29, 1917.
To the Chief Executives of the Railroads:
Pursuant to the authority vested in me by the President of the United
States in his proclamation of December 26, 1917, wherein it was stated
that for purposes of accounting, possession and control of the railroads
shall date from 12 o'clock midnight on December 31, 1917, you are
notified that, until otherwise directed, no changes in the present methods
of accounting as prescribed by the Interstate Commerce Commission
will be required. The accounts of your respective companies shall be
closed as of December 31, 1917, and opened as of January 1, 1918, in
the same manner as they have heretofore been handled at the close of
one fiscal period and the beginning of another, and in the same manner
that you should have handled your accounts had the Government not
taken possession and control.
WILLIAM G. MCADOO,
Director General of Railroads.
Under that general order, the railroad accounting officers
handled both corporate and Federal accounts; in fact, at that
time they had no knowledge as to the difference between a
corporate account and a Federal account. They continued, for
several months, to perform their duties exactly as prior to
Federal control. January 1st being the beginning of the cal-
endar year and of the fiscal year established by the Interstate
Commerce Commission, was the most propitious day on which
to inaugurate the period of Federal control. Naturally the
2
accounts for the year 1917 separated themselves from the ac-
counts for the year 1918, barring certain over-lapping items
which will be considered later.
Corporate and Federal Accounts.
For some months there was indecision as to whether or not
it was necessary to make a complete separation of the accounts,
such as has since been decided upon. The undersigned was
asked by an official of the United States Railroad Administra-
tion if he could fairly and impartially keep the accounts of
the road which he represented, for the corporation and for
the Director General, and give a square deal to both. The
answer was in the affirmative, and reference was made to the
many joint agencies of various kinds existing all over the
United States, filled by men who have for years been serving
two or more railroad companies, and have been giving each
railroad company served, a square deal. However, further
consideration of the matter led the Administration officials to
the conclusion that it was desirable and necessary to have not
only a complete separation of the accounts between the cor-
porate accounts and those of the Administration, but that they
should be administered by separate accounting forces, in
charge of separate accounting officers; or, to put it another
way, the Administration desired to have their accounts kept
by men who were 100% Administration, and who had no
official connection with the corporations. With this in mind,
General Order No. 17 was issued, under date of April 3, 1918.
This order provided for a complete separation of the accounts
of the corporation from those of the Director General, and
required that they be written in separate sets of books. This
was done, and when the work was completed, the corporate
books were turned over to the corporation, and it was then
necessary for the corporation to have an accounting officer who
would take charge of the corporate books, as the accounting
officers of the Administration were prohibited from keeping
them further without special permission from the Admin-
istration.
Corporate Accounting Departments Organized.
About July 1, 1918, the separation of the sheep from the
goats began. At that time Federal Managers were appointed
for the various railroads, complete Federal organizations were
established and the Federal officers were required to sever all
3
connections with the railroad corporations, as officers, di-
rectors, or otherwise. That action obliged the corporations to
create organizations entirely separate and distinct from the
Federal organizations. One of the first essentials of the
separate corporations was adequate provision for corporate
accounting, because it was extremely important that the ac-
counts of the corporation should be given proper attention.
As illustrating how the corporate executives felt, I quote the
following from a letter dated October 26, 1918, from Mr.
Samuel Rea, President of the Pennsylvania Railroad Com-
pany, addressed to a number of Presidents of other large
railroad companies, in connection with the proposed forma-
tion of a corporate railway accounting officers' conference:
You will appreciate that the contract is in large part an accounting
matter. It lays down the general basis and principles of the relation
with the Government, but the details for carrying it out will devolve
largely upon the Accounting Officers.
I imagine very few corporate accounting officers at first had
any grasp upon the conditions and situations which confronted
them. I confess to you that when I was appointed corporate
accounting officer, or rather, retained in that position, because
no change was made in my title and no change in my duties,
except the separation of accounts relieved me from the detail
of the operating accounts-I said to my assistant, something
like the following: "Joe, I believe you and I can handle the
corporate accounts for the Rock Island; there will not be very
many journal vouchers, and we may have to get a clerk or two
to work on the subsidiary accounts and check the lap-overs,
but you and I can do the general work without any difficulty
at all; in fact, I rather welcome the idea of getting a chance
to make some entries on the books again; it has been so many
years since I actually took my pen in hand to make entries on
ledgers."
Today I have in my corporate accounting office for the
Rock Island, 34 clerks; they are all kept busy and many of
them are working overtime. By actual count we record just
as many journal vouchers on our books as prior to Federal
control. Up to this time I have not personally made any
entries on the books and it looks as if I would not be able to
do so during Federal control; in fact, I give you my word that
I have never worked harder in my life than during the last
year, and I may add, I have never had less to show for hard
work.
4
In taking up this corporate accounting work, we had an en-
tirely new proposition. None of us had had experience with
a similar accounting situation, and we had to blaze the trail.
We were also confronted with the difficulty of obtaining ade-
quate and competent help. The very cream of the young
railroad men of our country had eagerly offered the supreme
sacrifice to help win the war, and there was a great shortage
in railroad accountants.
Compilation of Standard Return.
One of the first things to which the attention of the cor-
porate accounting officer was applied, was the compilation of
data to demonstrate prior to the signing of the contract cover-
ing Federal control, whether or not the average net railway
operating income as reported to the Interstate Commerce Com-
mission for the three years ended June 30, 1917, was the true
income for that period. It should be stated that the Presi-
dent's proclamation hereinbefore referred to, was followed
by an Act of Congress, approved on March 21, 1918, which,
among other things, fixed the compensation to be paid to the
railroad corporations for the use of their property during
Federal control, at the average net railway operating income
for the three-year period ended June 30, 1917, called the "Test
Period." It is a matter of common knowledge that owing to
the voluminous details, the frequent negotiations of contracts
or arrangements which are made effective prior to the date
on which the agreements are executed, construction of addi-
tional lines and additions and betterments, congestion of traf-
fic, etc., the net railway operating income as reported to the
Interstate Commerce Commission for any period, is not an
exact figure, such as contemplated by the President and Con-
gress in their utterances. If the figure for any such period
should be revised and completed in accordance with later and
more accurate information, the net income might be greater
or less than the amount originally stated. It is assumed that
when the President issued his proclamation and when Con-
gress passed the Act of March 21, 1918, fixing as the com-
pensation for the use of the railways, the average annual net
railway operating income for the three years ended June 30,
1917, the actual net income as nearly as might be ascertained
without completely re-working all of the detailed figures, was
intended. In the case of carriers where that net figure was
over-stated, due to the omission of some charge or to an ex-
5
cessive credit, which would be adjusted in a subsequent period,
unless adjustments are made, such carriers would receive a
rental in excess of the amount intended by the President and
by Congress. In the case of a carrier whose net income as
stated to the Interstate Commerce Commission for the period
named, was less than the actual figure, due to items similar
to those hereinbefore mentioned, such a carrier would be
underpaid unless proper adjustment was made. As the Inter-
state Commerce Commission was required to certify to the
President, the average net railway operating income for the
three years ended June 30, 1917, it would seem natural that
the Interstate Commerce Commission would make an effort to
locate the relatively important items which should be adjusted
and thus produce a net figure which would more nearly repre-
sent the actual net railway operating income than the one
which was reported to the Commission.
It should be said right here that when the statement is made
that the net operating income reported to the Commission,
is not the actual, the impression must not be created that any
intentional omissions or errors were made or that the net
figure that was stated was intentionally greater or less than
the actual, but owing to the large volume of items entering into
the net operating income of the carrier during the year, or
during the three-year period, and the complications in connec-
tion therewith, it is a practical impossibility to state the net
income of the carrier on an actual basis within the time pre-
scribed for rendering the reports.
Along in the summer of 1918, the Interstate Commerce
Commission became aware that certain carriers had
included in their accounts, subsequent to June 30, 1917,
certain Adamson law payments, which accrued prior to June
30, 1917, and should have been charged against the expenses
of the three-year period ended June 30, 1917. Further, they
were aware of the fact that under the income or war tax law
of October, 1917, the carriers could not possibly have included
the taxes under that law which accrued during the first six
months of the year 1917, in the accounts for that period. The
very fact that the law was not enacted until more than three
months after the close of the period, precludes the possibility
of including the figures within the period. Therefore, the
Interstate Commerce Commission sent out a communication to
the chief accounting officers of the various carriers, requesting
them to modify their previous reports of the net railway op-
erating income for the three years ended June 30, 1917, by
6
deducting therefrom such omitted Adamson law payments as
had accrued within that period, and also by deducting there-
from one-half of the war taxes under the Act of October,
1917, for the year 1917. This action was commendable and in
harmony with the spirit to determine a figure for the net
railway operating income for the three years ended June 30,
1917, which should be as nearly as practicable the actual figure
for that period. The carriers responded with the corrections.
requested, and then later, certain carriers called to the attention
of the Interstate Commerce Commission items which were er-
roneously included as a charge against the net income of the
test period, and to revenue which was erroneously omitted
from that of the test period; the adjustments requested would
have the effect of increasing the net railway operating income
for the test period. However, the Interstate Commerce Com-
mission declined to make any further adjustments unless it
could be shown that the accounting rules of the Interstate
Commerce Commission had been violated. The Interstate
Commerce Commission initiated the move to decrease the net
railway operating income by deducting therefrom the two
items mentioned the omitted Adamson law payments and the
one-half of the 1917 war taxes, neither of which constituted a
violation of the accounting rules of the Interstate Commerce
Commission, but the Commission has so far declined to make
adjustment of similar items subsequently brought to their
attention.
Lap-overs..
Under General Order No. 17, certain items affecting the
income accounts of the corporations prior to midnight of De-
cember 31, 1917, were classed as lap-overs.
On the expense
side, these lap-overs were very clearly defined by General
Order No. 17, and accounting bulletins and circulars. They
referred to all payments by the Director General for expenses
which were incurred prior to January 1, 1918, which if they
had been paid prior to Federal Control, would have been
charged to operating expenses or income account of the cor-
poration prior to such control. In other words, the lap-over
expense items were allocated according to the date on which
the service was performed or the liability incurred.
The general orders and circulars of the U. S. Railroad
Administration provided that such lap-overs would be paid by
the Administration, and charged against the railroad corpora-
tions, and that the railroad corporations would simultaneously
7
credit the U. S. Railroad Administration on the corporate
books. This is an entirely equitable method of handling
these lap-overs as the Administration had taken over the cash
on hand January 1, 1918, and had collected all operating funds
accruing to the corporations on and after that date; in fact,
the Administration collected all moneys, whether operating or
corporate, that accrued to the corporations for several months
after the beginning of Federal control, and naturally, it was
incumbent upon the Administration to pay the liabilities of the
corporations.
Ôn the revenue side, however, the lap-overs have not been
clearly and equitably defined. In General Order No. 17 it
was provided that the Administration would continue to reve-
nue the freight, passenger and other traffic in the same manner
that the corporation had accounted for such revenue, taking
into the Administration treasury, the revenue that would have
accrued to the corporation in the months during Federal con-
trol. As to passenger service, the revenue on which is accrued
largely on a forwarded basis the corporations are credited with
more than their proper proportion of the revenue on lap-over
passenger traffic. The average journey per passenger is shown
in the reports of the Interstate Commerce Commission to be
anywhere from 20 miles to 100 miles in the different sections
of the United States, and therefore, on the average, because
of the short journeys and because passengers do not become
congested at terminal points, like freight, the method of deter-
mining passenger lap-overs as prescribed in General Order
No. 17 does not miss the mark very far, but as heretofore
stated, it is not exact, and is on more or less of a hit-or-miss
basis. However, neither the revenues of the corporations nor
the revenues of the Administration would be seriously affected
by the application of General Order No. 17 to the passenger
business, assuming that exactly the same method of ticketing
passengers and of accounting for passenger revenue will pre-
vail at the end of Federal control as at the beginning of Fed-
eral control.
As to the freight traffic, the method proposed in General
Order No. 17 of revenuing freight at the beginning, during
and at the end of Federal control, in accordance with the prac-
tices of the carrier prior to Federal control would cause cer-
tain carriers or corporations to suffer heavy losses in their
revenues, and the U. S. Railroad Administration to have the
advantage of similar gains. At the time that the railroads
were taken over by the Administration, freight was interrupted
8
en route and congested at many terminal points. This was
due to the increased movement of traffic on account of trans-
portation for the War and Navy Departments and by orders
given to expedite the movement of certain classes of traffic,
which resulted in the delay and congestion of other classes of
traffic. In fact, at December 31, 1917, there was an unusual
congestion and freight was delayed en route to a much greater
extent than in the ordinary course of business, and the accrued
earnings on such freight delayed en route, amounted to many
millions of dollars. In the case of the few railroads which
accrue their freight revenues on the "forwarded” basis, that
is to say, those which put into their revenue and income ac-
count the earnings when the freight starts on its journey, these
congestions would have no effect, but the large majority of
roads which accrue their revenue on a "received" basis, that
is to say, those which credit their revenue or income account
when the freight arrives at destination and the transportation
service is complete and the contract fulfilled, would suffer a
very large loss of revenue under the provisions of General
Order No. 17. Of course, the losses to the corporations would
be minimized, if the congestion at the close of Federal control
should be as great as at the beginning of Federal control-a
condition which is scarcely possible because at the close of
Federal control, under peace conditions, there will not be the
cnormous volume of traffic and priority orders that caused the
congestion and delay which existed at the beginning of Fed-
eral control. However, as to lap-overs, that order was framed
on an unsound accounting basis, and provided a hit-or-miss
division of the freight revenue between prior or corporation
account, and the accounts of the Federal Administration. This
condition was later modified by the contract, see Section 4,
paragraph (b), and by accounting circular No. 53 of Decem-
ber 2, 1918. The accounting circular No. 53 is still on a hit-
or-miss basis, although it does provide for an adjustment of
certain delayed carload shipments which had reached destina-
tion prior to Federal control but the accounting delayed
until during Federal control. However, accounting circular
No. 53 does not take care of the large number of shipments-
carload and less than carload-that were delayed in transit
which had not reached destination at December 31, 1917.
Take for example a carload shipment moving via the
Baltimore and Ohio Railroad from Chicago to Baltimore.
which reached Pittsburg in December, 1917, and lay there
until, say January 10, 1918, when it moved out to desti-
nation, the settlement being made on the "received" basis. .
9
The Baltimore and Ohio Railroad included in its operating
expenses, the cost of transporting that shipment from Chicago
to Pittsburg, but never have, and according to the present
attitude of the Railroad Administration, never will receive a
dollar for such transportation. An offset will result at the
end of Federal control if a similar car is en route from Chicago
to Baltimore, reaches Pittsburg just prior to the end of Fed-
eral control, and lays there until after the end of Federal
control, and then moves to destination after Federal con-
trol, the revenue being taken into the accounts of the corpora-
tion after Federal control. If a sufficient number of such
cars move just prior to the end of Federal control, to produce
the same lap-over revenue as that produced by delayed cars
which moved just prior to the beginning of Federal control,
there would be an offset, but considering the congestion that
existed at the time the railroads were taken over, and that
probably there will be no congestion at the end of Federal
control, it is inconceivable that there will be anything like the
number of such cars en route at the end of Federal control
as at the beginning of Federal control. It has been urged that
to make a separation of the accounts between the carriers,
would require additional clerical expense, and of course, it is
true that to prepare an account accurately requires more cler-
ical work than to guess at it. It is my judgment that the rail-
roads as a whole will lose millions of dollars because of the
failure to separate the freight revenues at the beginning and
at the end of Federal control on the basis of the service per-
formed; that is to say, take the case of the shipment, Chicago
to Baltimore, hereinbefore referred to; the revenue from
Chicago to Pittsburg should have been credited to the cor-
poration because the expense of that haul was charged to the
corporation, and only the revenue from Pittsburg to Baltimore
should have been credited to the Federal Administration be-
cause the Administration paid the expense of that haul. The
increase of 25% in freight rates would require that 80% of
the freight that was delayed en route at December 31, 1917,
should be delayed en route at the end of Federal control; that
is to say, where there were 100,000 lap-over cars from certain
points to certain points delayed in transit at certain points,
at December 31, 1917, there should be 80,000 lap-over cars.
from the same points to the same points, delayed in transit at
the same points, at the end of Federal control in order to give
the corporation an erroneous credit which would offset the
erroneous credit given the Railroad Administration at the
10
beginning of Federal control. If there should be less than
80% of such cars delayed in transit at the end of Federal
control, the corporation loses revenue; if there should be more,
it will gain revenue, but such methods are unbusinesslike and
are not good accounting methods. I daresay that the account-
ing between the U. S. Railroad Administration and the War
Department, Navy Department, or any other department of
the same Government, is not conducted on a basis as loose as
that. Of course, as to the less than carload shipments, the
average haul is shorter, the amount of money involved is
smaller, and the expense of separation is greater. The majority
of the less than carload shipments of freight are handled on
the "received" basis, while the passenger business is handled
on the "forwarded" basis. The less than carload business
might be ignored and any loss to the corporation thereon be
considered as an offset against the gain in the passenger busi-
ness. In those two cases, the amount of revenue involved
would be comparatively small, and although it is unbusiness-
like not to make any attempt at a separation on the basis of
service performed, yet accountants must be practical, and
where the expense is liable to be more than the amount
involved in a separation of accounts between the railroad and
the Government during the time of war, there would be no
serious objection to waiving the strict accounting practices in
such cases. However, the expense of apportioning the revenue
on carload shipments substantially in accordance with the
service performed, would not be seriously burdensome and
where millions of dollars are involved, good accounting and
businesslike methods should not be sacrificed.
Another question regarding these lap-overs relates to the
proper accounts to be charged and credited by the corporation
after the amounts have been determined. A bulletin was put
out by the Committee on General Accounts of this Associa-
tion, stating that Mr. Alexander Wylie, Chief Examiner of
Accounts, of the Interstate Commerce Commission, had ruled
that these lap-over expenses and lap-over revenues should be
charged and credited to the income accounts of the carriers,
while a large number of railroad accounting officers maintain
that they should be charged and credited to the profit and
loss accounts of the carriers.* The theory on which the in-
structions to charge and credit the income account is that if
the corporation had been operating the properties, these items
would have been taken into the income account under the
*At the meeting at which this paper was read the Railway Accounting Officers
Association voted in favor of charging and crediting these prior items to Profit
and Loss.
11
head of operating expenses, operating revenues, etc. In other
words, the decision is based on an "if" statement, but the "if"
goes the wrong way. The corporations are not operating their
properties and have not operating expenses, operating revenues,
etc., in which to include those items. Furthermore, the cor-
poration's income account is based on the average net railway
operating income for the test period, which theoretically is
complete and represents the complete income for those three
years including the lap-overs from the beginning of the period
and excluding the lap-overs at the end of the period. An
average of three complete years makes the complete income
account so far as the operating accounts included in the stand-
ard return are concerned. Hence, any lap-overs added to the
income account or deducted therefrom, cause a misstatement
of the income of the corporation.
Another reason for requiring such items to be debited and
credited to the income account of the corporation, was to
offset the corresponding debit or credit to the income account
of the Administration, so that when the two accounts were put
together, these lap-over debits to expenses and credits to
revenues would disappear in the consolidated account, off-
setting each other. However, I have learned recently that it
is the intention of the Administration, and I want to express
my commendation of their proposed practice, not to charge
and credit these items to the Administration income account,
but to set up reserve accounts which will take care of similar
items that will be charged and credited to the Administration
after Federal control. It is evident, of course, that at the end
of Federal control there will be lap-overs in expenses which
must be charged back to the Federal Administration, and lap-
overs in revenues which must be credited back to the Admin-
istration. If these items are put into the income account of
the Administration currently, it will be necessary for the lap-
overs to be put into the income account of the Administration
a long time after the close of Federal control, which might
prove very embarrassing to the Administration because they
will run into millions of dollars. It seems to me to be very
wise, good business and sound accounting for the Administra-
tion to charge and credit these lap-over items to a reserve
account against which they will charge and credit similar items
after the end of Federal control.
Corporate Transactions.
Certain debits and credits are made to the corporations by
the United States Railroad Administration under the head of
12
"Corporate Transactions." These debits and credits represent
payments or receipts by the Federal officers which are charge-
able or creditable to accounts outside of those comprised in
the standard return. Such debits and credits should be care-
fully examined by the accounting officers to determine whether
or not they are properly chargeable or creditable to the cor-
porations, and the principle to govern is whether or not the
item is properly chargeable or creditable to an account which
is not embraced in the standard return.
Verification of Accounts with U. S. Railroad Administration.
One of the principal duties in connection with corporate
accounting is to check the debits and credits made against the
corporation by the U. S. Railroad Administration, to deter-
mine the accuracy of the lap-overs, the charges for additions.
and betterments, the charges against corporate transactions,
and in fact, all debits and credits made against or in favor of
the corporation, in order to see that the corporation's revenues
and income are properly protected so far as its accounts with
the United States Railroad Administration are concerned. Of
course, this does not mean that the corporate accounting officer
is to neglect in any way whatever his usual functions with
regard to strictly corporate transactions which are not handled
by the Federal Railroad Administration, but this section of
the paper is to lay emphasis on the necessity of checking the
accounts with the Federal Administration. Not only should
the items which are charged and credited to the corporation
be thoroughly audited and their accuracy completely deter-
mined, but the accounts of the Federal books should be ex-
amined with a view of determining whether or not omissions
have occurred, which would affect the accounts with the U. S.
Railroad Administration.
As to the lap-over items, the principal work will be in the
freight and passenger departments, and that work diminishes
as time goes on, because naturally there would be more lap-
overs in January, 1918, than in any subsequent month, and so
on until the present time, the lap-over items are very small.
However, as most of the railroad corporations did not get
their corporate accounting departments on a working basis
until the latter part of 1918, it is probable that the work of
checking the lap-over debits and credits and the accounts to
determine whether omissions have occurred, has not been com-
pleted to date by very many carriers. For this purpose, first-
class accountants should be employed. Any lack of ability on
the part of the accountants checking the accounts with the
13
Government may result in heavy losses in revenues to the cor-
poration. It is much better to defer the work to some later day
than to employ inferior accountants for that kind of work. In
the event an inferior accountant is, through an error in judg-
inent, employed on this work, he should be taken off of it just
as soon as his lack of capability is discovered. In such a case,
no squeamish notions should be allowed to interfere with the
duty of the accounting officer, which is to protect the revenues
of the corporation which he serves. It is unnecessary to point
out to the corporate accounting officers the details of this
checking, and the time for this paper is too short for that, even
if the necessity existed. The paper would not be complete
without mentioning the subject and emphasizing its import-
ance, and the necessity for the most thorough auditing by com-
petent accountants.
Another item of verification which will not diminish during
Federal control is the net charge to additions and betterments
made to the property by the United States Railroad Admin-
istration. The accounting rules of the Interstate Commerce
Commission describe in a very complete and accurate manner
the divisions between operating expenses and additions and
betterments. So many additions and betterments jobs involve
charges to operating expenses, such as renewal of bridges,
renewal of buildings, and other structures and appurtenances
that it is very easy to charge something to the additions and
betterments that should be charged to operating expenses.
The corporate accountant should bear in mind that a dollar
charged to additions and betterments on a job approved by the
corporation means that the corporation must repay that dollar
to the United States Railroad Administration, and that a dollar
charged to operating expenses in connection with additions
and betterments jobs will be borne by the Administration;
therefore, if ten dollars, or one hundred dollars, or one thou-
sand dollars are erroneously charged to additions and better-
ments instead of to operating expenses, the corporation
thereby suffers a direct loss for which the accounting officer is
directly responsible.
The rules of the Interstate Commerce Commission, which
under the contract with the U. S. Railroad Administration
govern the separation of expenditures between operating ex-
penses and additions and betterments, should be restudied very
carefully in order that the provisions of the contract may be
carried out strictly and that the corporation will not suffer
loss of revenue.
14
As to the interest on additions and betterments, pro and
con, that is the interest charged by the Administration for
advances to the corporation for additions and betterments
until such advances are repaid, the interest allowed to the cor-
poration during construction as a part of the cost of the addi-
tions and betterments, and the interest on such expenditures
creditable to the corporation from the time the facilities are
put into operation until the end of Federal control, the rules
have not yet been completely covered by general orders or cir-
culars of the Railroad Administration. It seems to me that
the fairest and least expensive way of computation would be
to compute such interest quarterly. The compensation to the
carriers is payable quarterly, and interest does not begin to
accrue on such unpaid compensation until after the end of the
quarter during which it accrues; that is to say, the compensa-
tion payable to a carrier which was earned in January, Feb-
ruary and March, 1918, and which is supposed to be payable
out of the revenues collected by the Administration during
those three months, if unpaid, does not begin to draw interest
until April 1, 1918. Theoretically, it is out of this compensa-
tion that the Administration pays for additions and better-
ments, lap-over items and corporate transactions, and inas-
much as interest does not begin to accrue on the compensation
or on lap-over items until the end of the quarter, it would
seem perfectly fair and reasonable to begin to accrue interest
on expenditures for additions and betterments against the cor-
poration at the end of the quarter, instead of at the end of any
one month. If interest on advances for additions and better-
ments and interest during construction should begin to accrue
at the end of each quarter, then it would also be fair to begin
to accrue interest on completed jobs at the beginning of the
quarter following that in which the facilities are put into
operation. That is to say, a track or facility which was com-
pleted any time during the quarter ended June 30th, would
begin to bear interest on its cost in favor of the corporation on
July 1st, regardless of whether the facility was put into opera-
tion in April or in June. It would seem that the payment of
compensation quarterly establishes a principle which should be
observed in connection with additions and betterments expen-
ditures both in favor of and against the corporation. Such a
method would also simplify the computation, thereby reducing
clerical work.
In connection with additions and betterments, it is recom-
mended that the corporate accounting officers keep a separate
15
•
account of those not approved by the corporation, and that the
U. S. Railroad Administration be credited on the books of the
corporation only with the amount that has been approved by
the corporation. It is recommended that the entire expendi-
tures, whether approved or disapproved by the corporation,
should be charged to additions and betterments because the
tracks, structures, etc., have been actually added to the prop-
erty. However, on the credit side of the balance sheet it is
recommended that those expenditures covering jobs that are
disapproved by the corporation, shall be carried under the head
of Miscellaneous Credits, which include items temporarily car-
ried under that head until sufficient information is received to
determine the account in which they should finally rest.
Up-Keep.
Another item which may receive serious attention by ac-
counting officers is the matter of up-keep road and up-keep
equipment. The contract provides that the Director General
shall return the property at the end of Federal control in sub-
stantially as good condition as at the beginning, and in sub-
stantially as complete equipment. It contains a proviso, how-
ever, that if the Director General shall expend and charge for
labor, material, depreciation and retirements per annum as
much in the aggregate as was expended during the test period
by the corporation, it shall be taken as a fulfillment of the
obligation to return the property in as good condition and
complete equipment as at the beginning of Federal control.
If the Administration takes advantage of this proviso, then the
matter of settling the up-keep section of the contract becomes
largely an accounting proposition, in which the corporate en-
gineers may render substantial assistance. If the Administra-
tion does not take advantage of this proviso but stands on the
original proposition that the property shall be returned in as
good condition and complete equipment as at the beginning of
Federal control, then the up-keep section of the contract be-
comes a matter almost exclusively for determination by the
corporate engineers and executive officers for the reason that
the condition of the property at the beginning and at the end
of Federal control is the thing to be determined, and that must
he largely by actual knowledge of the conditions and by engi-
neering records.
Property Retired.
Another important item to be looked after is that of prop-
16
erty retired and the proper credit to the corporation therefor.
Under the existing orders of the Interstate Commerce Com-
mission, also of the U. S. Railroad Administration, the cor-
poration is credited for property retired on the basis of the
original cost, while the contract provides that the credit shall
be on the basis of the value of the property at the time of re-
tirement. It was necessary to have some working basis so as
not to delay the accounting for property retired and cause a
large accumulation, and so the original-cost basis was adopted
temporarily until some other basis is substituted. The matter
has received much consideration, but has not been finally
determined. Each accounting officer should see that this
matter of the proper credit for property retired, is in the end
allowed. As depreciation is only an estiinated amortization
of the retirement charge, whatever allowance or equation is
made in connection with retirements should also be made in
connection with the charges for depreciation of property still
in existence. Of course, in the case of property that has been
retired, the amount that is finally determined upon as the
retirement credit to the corporation, will be reduced by the
amount previously credited for depreciation, and the final
credit will be correct, but as to depreciation on property which
has not been retired, some equation factor will undoubtedly be
found to increase that credit in substantially the same ratio that
the credit for retirements is increased. This equation of re-
tirements and of depreciation enters into the up-keep proposi-
tion which has not been determined as between the corpora-
tions and the Railroad Administration, but the accounting
officers should be careful to see that promptly upon such deter-
mination, the accounts are properly adjusted from the original-
cost basis on which the credit was previously written, to the
agreed basis.
In this connection it is suggested that careful attention
should be given to the credit for retirements just prior to and
subsequent to the beginning of Federal control. As, for ex-
ample, suppose a building was retired in the accounts of a
carrier in December, 1917, but the actual work of constructing
the new building was not commenced until January, 1918.
If such instances are not carefully watched, the corporation
will be charged with the entire cost of the new building as
additions and betterments, and will not receive credit by the
Railroad Administration for the value of the old building
which was retired. The reverse situation might occur; that is
to say, the construction of a new building might be commenced
17
in December, 1917, and be nearly completed during that month,
while the entries covering the retirement of the old building
might not be made until January or February, 1918, at the
time the new building is completed. Owing to the fact that,
especially in the northern part of the United States, not much
construction work would be in progress at the first of the
calendar year, probably not many of such cases existed,
but it is recommended that each accounting officer should ex-
amine carefully all work in progress at about that time to
determine that the credits for retirements are properly made,
either prior to or during Federal control.
From time to time during the period of Federal control,
property will be abandoned or retired, and not replaced. It is
important that the accounting officer should see that a proper
record is made of all such abandoned or retired property
which is not replaced, in order that same may be made good
at the end of Federal control and that the corporation may
receive the proper credit for such property which is abandoned
or retired, which is not returned at the end of Federal control.
It is unfortunate that the Railroad Administration does not
require an authority for the abandonment of every piece of
property, because such authority, if required, would provide a
good record of all property abandoned. This makes the duty
of the corporate accounting officer a little more difficult to
perform with regard to property abandoned, but does not re-
lieve him from the responsibility of looking after it in a
thorough manner.
Depreciation.
Another point for the accounting officer to bear in mind is
that the amounts charged for depreciation during the period
of Federal control should be exactly the same as those charged
during the test period. In other words, if a railroad charged
4% per annum for depreciation during the entire test period
the Administration should charge 4% per annum during the
entire period of Federal control on all equipment turned over
to the Administration on December 31, 1917. If the rates
were changed during the test period, then a proper average
of the rates during the test period should be ascertained and
that average used during the period of Federal control. The
Administration has fixed 42% as the rate to be charged
during Federal control on all equipment acquired by the car-
riers during Federal control. Letters of the Director General
18
dated November 25, 1918, and December 3, 1918, state clearly
that the amounts charged for depreciation are creditable to the
carrier, and may be applied on payments for equipment ac-
quired during the period of Federal control, or for the pay-
ment of equipment notes issued prior to Federal control and
payable during Federal control. Therefore, the charge for
depreciation on equipment during the Federal control period
is a direct credit to the corporation, and it is important to see
that the rates and computations thereof are made with accu-
racy and on the right bases.
Miscellaneous Rents.
Another point to be looked after by the corporate account-
ing officer is the matter of miscellaneous rents for right of way,
for buildings and for other purposes. Any such rents that were
during the test period properly creditable to the income ac-
count of the carrier outside of the accounts included in the
standard return, should be collected in cash by the corporation
and the money put into the corporate treasury. In some cases
this may involve a revision of the standard return. During
the test period some roads credited miscellaneous rents to the
revenue account, No. 142, which according to the rules of the
Interstate Commerce Commission, were creditable to income
account No. 510. In such cases, the standard return will be
reduced by the U. S. Railroad Administration and such rents
during the period of Federal control should be paid over to
the corporate treasurer in cash. It is the duty of the account-
ing officers to see that these rents are properly accounted for,
to the end that the revenues of the corporation are fully pro-
tected.
Taxes.
Another item to which to give careful attention is the matter
of taxes. The accounting officer should see that all taxes
(exclusive of war taxes) which were charged to Railway Tax
Accruals during the test period and therefore, deducted in
arriving at the net railway operating income for the test period,
should be paid and assumed by the U. S. Railroad Administra-
tion. In order that the corporation revenues may be properly
protected, a careful scrutiny of the classes of taxes that were
charged to Railway Tax Accruals during the test period,
should be made and then all similar payments (not war taxes)
during the Federal control period should be charged by the
19
Railroad Administration against its own expenses, and not
against the corporation. The railroad corporations pay so
many different kinds of taxes that unless this matter is watched
very carefully, the corporation may suffer a loss. In this
connection I might say that whenever a voucher is presented
to me for approval, whether for taxes or anything else which
might have been within the accounts comprising the standard
return, I require a certificate by an accountant in my office to
the effect that similar items during the test period were not
charged against the accounts embraced in the standard return.
This necessitates an investigation in connection with each indi-
vidual payment and I believe is a good way of safeguarding
the revenue of the corporation.
Material and Supplies.
Another matter in which the accounting officer is directly
interested is the inventory of material and supplies on hand at
December 31, 1917, and turned over to the Railroad Admin-
istration. The contract provides that at the end of Federal
control, such material shall be replaced in like quantity, re-
gardless of whether the prices used in the original inventory
may be more or less than those prevailing at the end of Fed-
eral control. In other words, the U. S. Railroad Administra-
tion contracts to return as many hundred pounds of spikes and
as many tons of rails, as many pieces of timber of the various
kinds, etc. Therefore, it is important that the inventory should
be very carefully preserved, and no sheets thereof lost or mis-
placed, in order that at the end of Federal control, the proper
amount of material and supplies may be turned over to the
corporation by the Railroad Administration, or otherwise
made good to the corporation. Unless this matter is very care-
fully watched, the corporation may suffer a severe loss.
Furniture, Fixtures, Tools, Etc.
In addition to the inventory of material and supplies, there
should also be an inventory of furniture, fixtures, tools, etc.,
that have been charged out but are in existence, in order to see
that at the end of Federal control, all such furniture, fixtures.
tools, office supplies, etc., are returned to the carrier; as, for
example, if an office was equipped with 100 desks of a certain
type, they should all be returned at the end of Federal control.
If only 90 desks are in the office at the end of Federal control,
a proper record of the shortage of 10 desks should exist, so
20
that the Railroad Administration may be called upon to make
good the 10 desks which have disappeared.
Price of Fuel, Oil, Etc.
Another point to be watched is the adjustment of prices of
fuel, oil, etc., in connection with contracts made under which
the corporation obtained reduced prices during the test period.
The standard contract, paragraph 8, section 4, provides that
the U. S. Railroad Administration shall be substituted for the
corporation in such contracts in order that the Administration
shall have the benefit during the period of Federal control that
the corporation had during the test period. The contract con-
templates that such advantage during the period of Federal
control shall be only to the extent necessary to offset any
increases in the standard return growing out of the reduced
prices during the test period. Therefore, it is incumbent upon
the accounting officer to see that the reduction in prices during
the period of Federal control is sufficient and only sufficient to
offset the increase in the standard return due to such reduced
prices during the test period. If this matter is not carefuly
watched, an unjust settlement which may cause a loss to the
corporation or the U. S. Railroad Administration, will result.
Corporate Books to Harmonize With Federal Books.
As to keeping the books of the corporation and of the Fed-
eral control, it is recommended that they be kept in complete
harmony; that is to say, that an account on the corporate books
shall show exactly the same balance due to the Administration
as the charge shown on the Federal books against the corpora-
tion, and vice versa. If the two sets of books are kept in
harmony in that manner, any statements which go to the ex-
ecutive officers or to Washington, from either set of books,
will always be in harmony and prevent confusion and useless
discussion. It may be that the Federal Auditor will make an
errnoneous charge against the corporation, but my recommen-
dation would be that the corporation also record such erro-
neous charge in order to keep the books in harmony, and then
call the matter to the attention of the Federal Auditor, who
will make proper correction in his books and concurrently the
same correction should be made in the corporate books.
Co-Operation of Corporate and Federal Accounting Officers.
Throughout this paper, reference has been made to the pro-
21
tection of the revenues of the corporation. This has been done
for the reason that the subject assigned to me was "Corporate
Accounting during Federal control." The accounts between
the U. S. Railroad Administration and the corporations involve
hundreds of millions of dollars resulting from transactions
which must be recorded on the Federal books. Hence, the
Federal accounting officer is interested in protecting the reve-
nues of the corporation to the extent of seeing that all his
accounts with the corporation are recorded with the great-
est degree of accuracy. From my personal knowledge of the
honesty and fair dealing of the railroad accounting officers of
the United States, both Federal and corporate, I know that
during Federal control the Federal accounting officers have
been diligent and faithful in their efforts to record all trans-
actions with the corporations, with the greatest degree of ac-
curacy and thus to render substantial assistance in protecting
the revenues of the corporation. If any Federal accounting
officer has intentionally deprived the corporation of revenues
to which he believed it was justly entitled, whether through
erroneous debits or through omission of proper credits, then
such accounting officer is unworthy of his profession and is
unworthy of membership in this great Association, but I will
not believe that such an one exists.
Director of Accounts, U. S. Railroad Administration.
While in this paper I have criticised a few of the accounting
provisions of the Administration, it is not intended to create
the impression that I think the Administration has a weak
accounting department. On the contrary, I think it has a
strong accounting department, administered in its details by
men of recognized accounting ability. It would be a miracle if
all of the accounting provisions of the Administration were
beyond criticism. I also want to pay a tribute to Director
C. A. Prouty at the head of the Division of Accounts of the
U. S. Railroad Administration, in his administration of that
department. The magnitude of his duties prevents him from
giving attention to details, but the policy of his administration
has been broad and fair-minded.
Conclusion.
Many other things could be said with reference to corporate
accounting during Federal control; this paper has attempted
to touch simply a few of the high spots as they appeared to
22
the writer. It would be an insult to the intelligence of the
many experienced accounting officers if I should attempt to go
into the details and try to touch upon every phase of this sub-
ject during Federal control. If my paper has resulted in sug-
gesting trains of thought which may be of benefit to the cor-
porations and to the U. S. Railroad Administration, the effort
has been amply repaid.
Gaylord Bros,
Makers
Syracuse, N. Y.
PAT. JAN. 21, 1908
UNIVERSITY OF MICHIGAN
3 9015 07374 9890
}