Fraud In The Forest

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Waste, fraud, and abuse of accounting standards are in the news – and not just at Enron and WorldCom.

For decades, the Forest Service claimed to be one of the few federal agencies that earned a profit. But its calculations of profit depended on the same accounting tricks practiced by Enron and WorldCom.

Like Enron, the Forest Service inflated its revenues by counting as receipts the cost of national forest roads built by timber purchasers. The U.S. Treasury never saw a dime of this 1/ revenue,” but it appeared in Forest Service reports to Congress every year.

Counting roads as in-kind revenue might be okay if they also showed up on the cost side of the ledger. But the Forest Service argued that roads were a capital investment, so it didn’t have to count them as operational costs.

While standard accounting practice would amortize capital costs over a few years or a few decades, the Forest Service argued that many road costs didn’t have to be counted at all because the roads would last forever. In effect, the agency amortized these costs over eternity – something even WorldCom didn’t dare to do.

Now that national forests sell only about 18% as much timber each year as they did before 1990, the Forest Service has declared many of these “eternal” roads to be surplus and is removing them as fast as it can – at taxpayer expense, of course.

Correcting for this and similar accounting tricks reveals that the Forest Service did earn a profit – in 1969 and a few years in the early 1950s. Otherwise, taxpayers heavily subsidized the national forests.

The Corps of Engineers and Bureau of Reclamation have long used such deceptive accounting to justify their dam projects. More recently, America’s urban transit authorities routinely confuse capital costs and operating costs.

Because most federal transit subsidies are for capital projects, many transit agencies push to build capital-intensive modes such as light rail. Outside of Manhattan, buses almost always work as well as rail at a tiny fraction of the cost. Yet transit officials in Portland, Salt Lake City, Denver, and many other cities are building rail empires by claiming, II federal dollars are free.”

To further cloud the issue, transit agencies count a significant share of rail operating costs as capital costs. Railroad beds, tracks, and other infrastructure must be rebuilt every few years. The agency that runs the Washington, D.C., subway system, which cost $9.7 billion to build, says it needs $10 billion to purchase new railcars, replace escalators, and otherwise keep the system in shape over the next few years. Counting such routine costs as capital costs allows transit agencies to claim that rail costs less to operate than buses. This helps gull local taxpayers, who must subsidize most of the operating costs, into supporting rail construction.

There are two differences between government and corporate accounting abuses. First, when corporations cook the books, the main people who are hurt are its stockholders and bondholders. When government agencies lie, every taxpayer must contribute to the loss.

Second, corporate shenanigans are self-correcting: companies must eventually admit their losses or go bankrupt. But congressional appropriators reward gov-

The Forest Service even argued that many road costs didn’t have to be counted at all because the roads would last forever. The agency amortized these costs over eternity – something even WorldCom didn’t dare to do.

 

ernment bureaucracies for wasting money by throwing good money after bad year after year, decade after decade. Although Forest Service timber sales have fallen more than 80% since 1990, Congress actually gave the Forest Service more money for timber sales this year than in 1990.

Certainly, accounting standards need improvement, and the private sector is already moving in that direction. Arthur Andersen is practically out of business, and companies on various stock exchanges are all hastily reviewing their books to ensure they aren’t guilty of Enron- or WorldCom-like practices. Meanwhile, hardly anyone looks at the books of government agencies.

The Forest Service and transit agencies maintain their credibility because special interest groups, such as timber purchasers and rail construction firms, lobby Congress to look the other way. Attempts by Congress to set corporate accounting standards give interest groups new opportunities to lobby for special loopholes for their deceptive plans. When caught, they just say, “We only did what the federal government told us to do.”

Before trying to dictate accounting standards to the private sector, Congress should get its own house in order. If it can’t, it has no business telling others how to run their businesses.

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