In its annual results for 2007, the company reported regular business expenses, including train refurbishment and legal and professional fees for train franchise bids, as 'exceptional' or 'nonrecurring' items. A report in The Times claimed no other British rail firm follows the same practice and alleged such practices were 'highly aggressive'.

FirstGroup said it had used such accounting techniques before and added the practice was totally legitimate.

'Our accounts are prepared in line with international accounting standards, they have been audited, they are consistent with previous years and with generally accepted accounting principles and they represent appropriate and completely transparent disclosure to our shareholders and other users of the accounts,' FirstGroup said in a statement.

Full details of the firm's accounting methods were listed by its auditor, Deloitte & Touche, in the rail company's annual report, which was released last week.

FirstGroup listed 19.3 million sterling as 'nonrecurring bid costs' but said these related to the start of the First Capital Connect and First Great Western franchises.

'Rail franchise bid costs vary year to year and are not everyday business costs. In 2005/06 -- when we were bidding for First Capital Connect and First Great Western -- rail franchise bid costs were 28.5 million sterling. In 2006/07, franchise bid costs were just over half that at 14.5 million sterling. In 2007/08 it will be a fraction of that amount,' FirstGroup added.

FirstGroup also classified a further 22.3 million sterling as other 'nonrecurring items', excluding the amount from the firm's operating costs.

The Times report claimed the inclusion of both sets of costs as regular business expenses would have lowered FirstGroup's stated 259.2 million sterling operating profits by 16 percent to 217.6 million sterling.

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Questions raised over FirstGroup’s ‘aggressive’ number-crunching

The Times: June 18, 2007
Robin Pagnamenta and Joe Bolger

FirstGroup, one of Britain’s biggest transport companies, has been accused of overstating its annual profits by millions of pounds by using unusual and “highly aggressive” accounting practices.

The company is reporting regular business expenses, including train refurbishment and legal and professional fees related to its bids for train franchises, as exceptional or “nonrecurring” items.

No other British rail company follows the same practice, which has aroused the interest of MPs on the Public Accounts Committee.

“It’s nonsense – these are not exceptional items at all, but everyday business costs,” Chris Cheek of TAS Partnership, a specialist public transport consultancy, said.

This year, the practice used by FirstGroup led to the exclusion of £19.3 million of “nonrecurring bid costs” and a further £22.3 million of other “nonrecurring items” – including rail refurbishment – from its operating costs.

FirstGroup describes these as “rail transition costs” related to the start of the First Capital Connect and First Great Western franchises. It says that they included one-off “refurbishment, redundancy and other mobilisation costs”. Including these costs as regular business expenses, in common with the rest of the industry, would effectively lower FirstGroup’s stated £259.2 million operating profits by 16 per cent to £217.6 million. The company also included £28.5 million of “nonrecurring bid costs” the previous year. Stripping out this figure would cut FirstGroup’s reported 2006 operating profits by 12 per cent from £229.7 million to £201.2 million.

Nick Hood, a partner at Begbies Traynor, the accountant, said that “while, clearly, no laws have been broken . . . this is highly aggressive accounting”.

Full details of the accounting technique are listed by Deloitte & Touche, FirstGroup’s auditor, in the annual report, published last week. There is no suggestion of any wrongdoing.

John Pugh, a member of the Public Accounts Committee, said that the practice “brought no credit on them or the industry”. He called for rail companies to adopt industry-wide reporting standards.

Mr Cheek said that TAS ignores FirstGroup’s nonrecurring items in a regular report that it publishes on UK rail industry finances. He said that other transport companies use different, but similarly aggressive accounting policies, particularly when reporting subsidies.

FirstGroup said in a statement that its results were reported in line with international accounting standards, which “represent appropriate and completely transparent disclosure”.