Auditing.

Professional education has been so splendidly carried out of late that general lectures are nearly played out, and general lecturers find their occupation almost gone. The thorough, systematic, and continuous attention devoted during the past six or seven years to the public discussion of such general subjects as Book-keeping, Auditing, Company Law, Bankruptcy Law, and the like, has made it almost impossible for the writer of a paper on such subjects to achieve anything like a fair measure of success, unless he deals with bank, colliery, building society, or any other distinct type of accounts as a specialist, or unless he concentrates his remarks to a separate part of a general subject; Such as the extent and the manner in which stocks ought to be examined and tested; the best means of so arranging the routine of an audit as to prevent in the ordinary course the commission of well-known and common forms of fraud, or any other matter of a similar kind. But a fresh generation of students arises every five years at least, to whom old and tried lessons have to be repeated; moreover, there is nothing haphazard about the arrangement of the London lectures, a fact which those who manage the affairs of other student societies should take cognisance of. We can predict, without knowing it to be the fact, that the course of the year’s operations of the London Students’ Society is carefully reviewed in perspective, and that, as the result of reflection, it was decided that the lecture, which we reported in our last, was required, and, being required, was obtained. It is a good lecture, and as part of a year’s work it will appear to even better advantage when seen as part of a whole in its place in the Transactions and side by side with contributions dealing with subjects of a special kind. Mr. Trevor says nothing new, nor indeed could he be expected to do, but he arranges in a clear and attractive form a good deal of sound matter, and he corrects some unsound views which the members may have contracted from erroneous teaching in the past. As Mr. Trevor has now a special interest in the matter, we take advantage of his remarks on the importance of book-keeping, to repeat a suggestion made more than once in these columns, that it should not form part of the Final Examination, but should, if possible, be made of even more importance than it now is in the Intermediate. The encomiumspassed on the form of accounts prescribed for railways are well deserved. Any professional accountant who has ever read the accounts of the frauds perpetrated on railway companies forty or more years ago, when railway enterprise was in its infancy, might be excused for supposing that the use and meaning of simple multiplication tables were at that time unknown by the investing classes in England, much less the principles of bookkeeping. In those days—the good old times some wags call them—a managing director thought nothing of pocketing two or three thousand new shares and realising £40,000 or £50,000 on them; if he, or any brother director, found himself short of pocket money at a holiday season, a cheque for ten, twenty or even forty thousand pounds would be drawn and charged to works; and if a company earned—as one did—about £6,000, it was supplemented by a transfer of £97,000 charged to capital, making a fund available for dividend of £103,000, and so on. In truth, the state of the accounts of our great railways in 1840–58, can scarcely be conceived by us of the present day. When, in 1857, Mr. Deloitte was called in to unravel Redpath’s frauds on the Great Northern Railway, it was found that the registers had never been adjusted for 11 years. Redpath had issued a quarter of a million of fictitious stock, on which the company had regularly paid dividend; but the wonder is not that he did it, but why he was so moderate, because an odd million more or less, would, apparently, never have been found out in the ordinary routine of the office work. The defect in principle in railway accounts at present is, that they do not provide that a proper charge for depreciation should be made. This defect once, and not so long ago, brought the Lancashire and Yorkshire very low; in fact, in this respect we depend on the honesty of the directors—are practically at their mercy; and there is not the slightest reason why it should be so. We agree with Mr. Trevor’s opinion as to the point where the auditor’s work begins; but in connection with it, we may record our impression that many frauds are carried out because accountants, or their clerks rather, are utterly ignorant of the work which precedes the entries in the Sales, Cash and other Books, and as ignorance is said to be bliss, there is “fear that this blissful state of things will not soon or easily pass away.” Another reason why frauds are so frequently carried out successfully is to be found in that kind of “audit” which consists in seeing that a balance sheet apparently agrees with the books. The balance sheet may be correct enough, but the company may have been robbed of £10,000 or £20,000. An examination and verification of the balance sheet is, of course, all that can be done in some cases, notably banks; but if this can truly be called an audit, it is quite clear that some new term must be invented for use in those cases—the vast majority throughout the provinces, and, we think, in Scotland — where every posting is checked, every payment vouched, and the books examined throughout. There is absolutely nothing to prevent a bookkeeper from putting £10,000, or any smaller or larger sum, in his pocket, and still making his books balance perfectly; the mere checking of his trial balance with the balances brought down in his books would disclose nothing; and we know of a case where the postings of books that actually balanced, were regularly checked, and failed to disclose the fact that one of the book-keepers and cashiers had been systematically and ingeniously robbing for years. The most careful office arrangements should be made where the work is not thoroughly done; the auditor should regularly see that the arrangements are in force, and he should clearly put on record the fact that he does not check the postings (or whatever the omitted portion may be), and is not responsible for any irregularity that may arise from such omission. We doubt considerably if the practice of issuing notices to customers of commercial houses, stating the balances to their debit or credit, much less showing their transactions, will ever become universal; and if it ever does become general, that fact will condemn it, for the simple reason that every counting house would want an extra staff of clerks to deal with the work; on a small scale, it would resemble the rush attending the floating of a company. The thing has been tried in the North of England and failed. We doubt whether, in most cases, securities deposited by customers for safe custody, are examined by the auditor. The form of certificate given by Mr. Trevor strikes us as excellent, and as a great improvement on many forms commonly used. Nothing else occurs to us on the paper. We are always glad to read the publicly expressed opinion, as to hear the private utterances, of its author—they are, invariably, the result of great experience and reflection.