68
the cost of marine accidents over the short run, the appropriate accounting recog-
nizes the inevitability of marine accident costs over the longer term.
FINANCIAL SELF-SUFFICIENCY
In implementing the Panama Canal Commission, Public Law 96-70 required fi-
nancial self-sufficiency, as did the legislation establishing the Panama Canal Com-
pany. In addition, Public Law 96-70 included a requirement for an accounting as an
appropriated agency.
When implementing legislation was being considered, I urged in testimony before
this Committee that the requirement for sound accounting be continued. This I re-
ferred to as enterpirse accounting which is a comprehensive accounting for all costs
and revenues over a long-term in order to measure financial performance. Enter-
prise accounting was essential since the legislative objective was that the Panama
Canal Commission continue to be a self-sufficient, financially viable entity providing
service to world shipping.
Public Law 96-70 does establish the requirement for enterprise accounting for
purposes of measuring financial performance and in the setting of tolls. In addition,
as a measure of control, there is the requirement for an accounting for appropri-
ations. From the perspective of financial management, each accounting method has
a role to play and the respective roles must be understood. Otherwise, there is po-
tential for confusion. Clearly stated, appropriation accounting is not a proper basis
for setting of tolls nor for the accounting for costs in measuring long-term financial
performance.
COST RECOGNITION AND TOLL SETTING
The financial viability of the Canal Enterprise is dependent upon the process of
setting a proper level of tolls. As established by law, the present policy regarding
the tolls level is to set tolls to recover costs. Cost is interpreted to be a comprehen-
sive accounting for all costs, including the recovery of plant (capital).
The economic value of the Panama Canal to world shipping comprises a number
of factors. These include its reliability for planning purposes, its ability to pay its
own way, the economic diversity it provides and savings realized by its users. The
assurance that prices will be set based on cost gives the user confidence in the reli-
ability of the price-setting process. He is assured that tolls will be rationally set and
thus he can predict his future course of action with more reasonable certainty. This
permits him to make the required long-range plans for investment in facilities such
as ships, with more reasonable assurance that his investment can be recovered.
Thus, through its reliability, the Canal is able to permit users to control their risks
and have a basis for long-range planning. This is a positive economic contribution
and is essential for a service such as the canal to be able to attract users.
From an accounting standpoint, the tolls formula requires that all costs of main-
taining and operating the Panama Canal be recognized (reflected in the accounting
records). Costs which are not recognized cannot be reckoned with in the toll-setting
process. It should be appreciated that the accounting process for a rate-regulated
utility such as the Panama Canal has special significance in that the level of cost
recognized through the accounting process establishes the price to be charged for
the service. Thus, the accounting process has a direct relationship to the actual cash
received. This is in contrast to a profit-oriented company wherein the accounting
process serves the principal function of measuring the level of profit earned.
REQUIREMENT FOR ESTIMATION
The accountant constantly deals with the requirement for cost estimation. Deci-
sions on when to recongize costs require the exercise of judgement based upon the
understanding of financial realities and the application of generally accepted ac-
counting principles. However, the alternative of not recognizing incurred costs or
recognizing such costs only after some physical event has occurred certainly ignores
economic facts, and is wrong.
The limitation of appropriation accounting is that accounting does not take place
until a physical certainty or legally defined act has occurred such as the signing of a
contract, or the issuance of a check. This does not mean that appropriation account-
ing is wrong, but that appropriation accounting serves a role different from that of
cost measurement. It deals with the control of governmental funds.
For a sound basis of cost measurement, the accountant must make estimates
based upon the assumption that the enterprise is a going concern. Months or years
before a check is drawn, the accountant must measure costs for such things as prod-