The Value of an Audit.

We reprint below, from the columns of The Western Press, an article that bears able tribute to the advantages that may reasonably be expected to accrue from the appointment of a professional auditor. The suggestion that Chartered Accountants might “draw up a statement of the duties that belong to an audit” has been frequently shown in these columns to be impracticable, and, moreover, it was not suggested that this point should be considered by a Royal Commission. The suggestion made was that a Commission should take evidence upon such questions as the meaning of “Reserve Fund,” etc.; and, if found practicable, prescribe form of Balance Sheets for general use. “Audited and Found Correct.”

The subjects discussed at the Conference of the Institute of Chartered Accountants yesterday are of concern to everyone who has anything to invest. After the Liberator crash, the ethics of auditing were much discussed, and the language used by a reverend gentleman who had been auditor of one of the unfortunate companies was naturally criticised very severely. For he had told the shareholders who relied upon him that he was the watchdog who would guard their interests, and when they found that their interests had not been watched, they were much incensed. But now that so much time has elapsed that controversies concerning the Balfour group have begun to cool, it may not be out of place to suggest that the shareholders themselves, who appointed a clerical auditor, when they might have appointed a professional one, were most to blame. Wisdom will not have been gained by experience if, as the result of recent disasters, investors who have money in concerns that are more or less speculative, and that are under the control of men of considerable business capacity, do not insist that the accounts shall be audited by a member of a recognised and honourable profession who has given proofs of capacity and guarantees for integrity. The amateur auditor is often tin unconscious ally,’ or, in other words, the blind dupe, of the dishonest director, and after the law has done its best to protect the public against dishonest enterprises, the investors may nullify these efforts for their own protection by omitting to select as auditors men who are thoroughly competent of undertaking a very serious and responsible position. The auditor is supposed to be, and he should be, a guarantee to the shareholder that the statements issued by the directors are correct. The remark was made at Liverpool! yesterday that it was immaterial whether he is appointed by the directors or not, and that is obviously so when he is a man of high character. But at the same time it is better in most cases for the theory to be adhered to by which the auditor is the caretaker of the interests of the shareholders, many of whom, as a gentleman at Liverpool remarked yesterday, are people having but little knowledge of business. It would be interesting to learn if it were possible, how many, or rather how few, of the average investors in joint stock undertakings give any sort of study to the Balance Sheets with which they are favoured. Many men who have the capacity have not the time to do more than hastily scan the columns that are nothing more than a source of bewilderment to the non-business investor, and all alike regard the signature of the auditor as an endorsement of the statements issued by the directors. This idea exists even when it should not exist. Men who know the value of the time of a first-rate accountant are often amazed at the smallness of the remuneration which some companies offer their auditor. They are not, apparently, ready to pay for the time and the skill that a thorough investigation of all the details of the Balance Sheet would demand, and there are many shareholder who have not yet realised that an inadequate fee to the official who is expected to exercise a check upon directorial Balance Sheets may be a disastrous form of false economy.

What is the audit shareholders have a right to expect? Mr. Fitch Kemp, the President of the Institute of Chartered Accountants, laid it down yesterday as a doctrine that no Chartered Accountant is justified in attaching his name to a Balance Sheet unless he is reasonably satisfied that such Balance Sheet conveys to the shareholders a true and accurate statement of the position of the company, and that if he feels in doubt he should not sign the Balance Sheet without bringing the doubtful matter before the shareholders. This is taking a very high standard. No investor could possibly ask for more than this, but it is certain that many auditors do not attain to this counsel of perfection. If they all agreed to do so, however, many reports would be less glowing than they are, and some dividends would be less—to the ultimate advantage of the shareholders. But the question certainly arises whether it is the duty of the auditor to carry the doubts of which Mr. Fitch Kemp spoke to the region of directorial policy. It may be conceded that it is the duty of an auditor of a bank, for instance, to satisfy himself that the reserve capital is invested in the securities mentioned, and that all the documents that have been submitted to him are faithfully described in the statement issued to the shareholders. But is it possible for him to test the usual declaration, “after making allowance for bad and doubtful debts?” Is it his business to investigate every advance or security, and to form an opinion as to the wisdom of the management in allowing credit? Have the shareholders any right to expect that he will check and criticise the policy of the Board, as distinguished from testifying that so far as documents are concerned, the statements of the directors are correct? These are questions which have, no doubt, often given anxiety to conscientious auditors, and the evidence that has been given in some notable cases of financial failure shows that some auditors have not taken the view of their duties which is held by Mr. Fitch Kemp. It is not a light matter for an auditor, coming into a place of business once in six months, to set his opinion of the value of securities against that of managers and directors who are presumably honest and capable; and it is absolutely impossible to lay down any hard and fast rule which is capable of adoption in all circumstances. Still, experience has shown that the tendency of auditors should be towards strictness rather than leniency, and the fact that the auditor is known to be a particular man, who will not be easily satisfied, and who will not be afraid of being disagreeable upon occasion, will often have the effect of inducing greater caution on the part of directors as to the statement which will have to be passed by the auditor before it is issued to the shareholders. Indeed, many shareholders may be today living in blissful ignorance of the fact that their interests have been safeguarded by auditors who have induced directors to take a less optimistic view of investments and resources. A series of commercial disasters may have some benefit, after all. They make directors more careful in their statements, and they make auditors more sceptical as to the figures they are asked to pass. What should be the form of words adopted by auditors is a matter of no little importance, and the present tendency is to depart from the bold simplicity of “audited and found correct,” to adopt—for the security of the auditor as well as for the benefit of the investor–a long sentence narrating all that the auditor has done. It was suggested yesterday that a Royal Commission should be appointed to examine the question of Balance Sheets; but this hardly seems necessary. The Chartered Accountants might surely draw up a statement of the duties that belong to an audit that will really safeguard the interests of investors, and it should be possible to give the public a guarantee that an audit of this kind is ensured, when it is conducted by a Chartered Accountant. Many companies would doubtless have to increase the amount they vote for an audit, but there should be little reluctance to pay adequately for the satisfaction of knowing that—save for the possible exploits of knavery by dishonest directors, who might deceive the most careful auditor—the statements that have been audited can be relied upon.