Open the books!

Submitted by martin on 9 February, 2008 - 5:30 Author: Josephine Maltby

There are a lot of myths about accounting. Some of them accountants don’t like — which have to do with their being drab failures as human beings. But they put up with those myths, because they make such a lot of money out of the other set of myths.

The other mythology says that accounting is not only dull but also fiendishly complicated financial engineering. So the accountants who write and decipher companies’ financial reports deserve massive salaries: civilians would be baffled and bewildered if they tried to join in.

Some accounting is startlingly dull, some is difficult. Quite a lot is neither: instead, it is rather informative about the private lives of companies.

Capitalists don’t like to feel too exposed to the world, but they do like to monitor their investments, and the last 200 years of UK company law and financial regulation has been a struggle between those two warring impulses.

The result has been the requirement for companies to produce annual accounts and for those whose shares are traded on the UK Stock Exchange (listed companies) to disclose a lot of data in the balance sheet, the income and expenditure account, and copious notes breaking down the details of the major statements. For the majority of these companies, the accounts are available on the company website (usually behind a tab called Investor Relations). The urge to secrecy means that the accounts will include large swathes of complexity, but they will also answer some straightforward questions quite readily.

For example, First Great Western, “Britain’s worst-performing rail route” (Times online 10 January 2008), attacked on the same day by Bob Crow for “heavy-handed and confrontational management… undermining our members’ jobs” (

Who owns First Great Western? Google will tell you rapidly that its parent company (i.e. owner) is the First Group, the largest rail operator in Great Britain. And the First Group’s website will rapidly take you to its most recent annual report — going up to March 2007.

How well is it doing? Start with the page one of the report, “Financial Highlights”, to discover that First

• Increased its revenue by 22.4% on 2006

• Increased earnings per share (profit divided by the number of shares in issue) by 9.1%

• Reduced its borrowings from £704 to £516 million

• And finished the year with a share price 56% up on the previous year (from £4.25 to £6.65)

All good. But how can it do so well when it allegedly lets its passengers down and attacks its employees?

Accountants know these things. So look at the Finance Director’s review (pages 17 to 21) for a breakdown of results. We know about First’s UK rail and bus divisions, but the Finance Director also reports (page 18) a set of divisional results. They show that in 2007 North America contributed just under 22% of its revenue (£803 million out of £3709 million) but more than 26% of its profits (£68 out of £259 million). This is good going. So who are the North American moneymakers?

Now look at the “Chief Executive’s Review” (starts on page 3) for his take on the big operational picture. You rapidly see that the main North American business is called First Student. They run the school buses.

Thanks to First Student, First can illustrate the Review with a photo of a little yellow school bus and a cute ethnically diverse little schoolboy. And the chairman can sound really over-excited about the North American market. The statement includes a lot of technical remarks about tuck-in and infill acquisitions, but the main message is that North America offers “significant growth opportunities” — so more corporate takeovers of school bus provision are on the way in the US.

The latest one — in mid-2007 — was the Laidlaw transport business, which was opposed by the Teamsters. The Chief Executive doesn’t mention that, but his statement gets quite sweaty and flustered with excitement: taking over Laidlaw is “a transformational deal with considerable prospects for value creation. This is a unique opportunity to… generate significant value and returns for shareholders”.

Significant value is getting generated, and the School Bus Workers website tells what happened next: in October 2007, a poster to the site comments that:

“First Student has had a major problem with allowing their employees to unionise…

“Many First Student locations are run like a low budget flick! They want to run the routes as cheaply as possible, whether it means using unsafe equipment or not purchasing supplies that are needed to keep the operation running smoothly. When the mechanics have to ask to purchase motor oil or the company fails to pay their bills and lose service or the privilege of charging fuel there’s a major problem somewhere in this company”


The School Bus Workers and the Teamsters say that First Student has an anti-union policy, and the buses are filthy, the routes mean it can take kids an hour to get to a school a mile away, schools have to cut their day because the buses are so late (all at the same link as above).

Just under the cute yellow bus photograph, the FirstGroup chairman says that the North American strategy is “to continue to improve our product offering and closely manage our cost base in order to offer a compelling service to our customers, parents and students”. What’s compelling about the service is that FirstStudent is the largest school bus carrier in North America, with contracts with 500 school districts. They can run a crap service because passengers have no choice: and they threaten and bully union members because they want to “generate significant returns for shareholders.”

Does it remind you of anything transport-related anywhere nearer home?

FirstStudent isn’t the only reason First is coining money — but it gives a nice illustration of the set of policies that First is pursuing so successfully in the UK market, whilst swearing blind that it loves its customers and it treasures its employees. And all that fell out of the financial report without even getting as far as the balance sheet. Financial accounts are full of good things.

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