This section is from the book "Business Finance", by William Henry Lough. Also available from Amazon: Business Finance, A Practical Study of Financial Management in Private Business Concerns.
We have spoken above of charges for repairs, renewals, maintenance, and depreciation as being properly included in operating expenses or in deductions from gross income, and have emphasized the necessity for liberal allowances. There is, however, a possible, although not so frequent, danger of going to the opposite extreme. Depreciation charges may be too high, and thus the showing of earnings may be unduly depressed. Boards of directors sometimes find it to their advantage to see that reports of low earnings are given out to stockholders and to the public over a given period, so that they may take advantage of this misinformation to buy up the company's shares at bargain prices.
Again the various accounts included under the general headings of "Repairs," "Renewals," and "Maintenance" may be stretched so as to include outlays for betterments. In this case earnings are apparently depressed and the capital accounts remain stationary although the capital assets are at the same time being built up. Something of this kind has happened most frequently in the management of railroad companies in the United States. Conservatively managed companies have frequently included in their "Maintenance" accounts, expenditures for reballasting, for laying heavier rails, for putting in permanent culverts and even bridges and for purchasing new locomotives and cars. After this practice has been carried on over a period of years and the property has been put into excellent condition, the statements of earnings are allowed to expand to their correct proportion and the stockholders of the second period are perhaps given enlarged dividends or a "melon" of some kind.
A notable instance is the Lehigh Valley Railroad Company under the management of President Walter from 1898 to 1904. During these six years the stockholders noted in each year's accounts that the charges for maintenance, repairs, etc., were growing to unprecedented heights and that the net profits were correspondingly reduced. They suspected the truth - that expenditures for betterments were being charged into maintenance accounts - and many of them protested, but without effect. After the close of the Walter regime, the property was found to be in remarkably good condition and the subsequent financial history of the Lehigh Valley has been one of progress and good earnings!