ABSTRACT
The query raised by “O. P. Q.” in our issue of the 9th inst. is of no little interest to accountants as being intimately connected with the points raised in the Kingston Cotton Mill case. It will be remembered that the President of the Institute (Mr. C. Fitch Kemp), in his recent presidential address, expressly cautioned members of the Institute to be very guarded indeed in placing their signature to a Balance Sheet under any circumstances, “unless they were fairly and “justly satisfied at the hands of these from whom “they could seek information that that informa-“tion properly conveyed the true position of the “concern.” He further pointed out that, in his own view, there was certainly a limited duty imposed upon an accountant who had to deal with the figures which were before him, that he should be reasonably and fairly satisfied that the stock properly represented the amount at which it was taken in the Balance Sheet. We have already, upon various other occasions, expressed ourselves to very much the same effect. We fully agree that auditors cannot possibly he expected to be omniscient, and we further admit that, in the great majority of cases, it is unreasonable to expect them to form any such opinion as to the value of stocks as would justify them in putting forward their own views upon so technical a matter in contradiction of the opinions which had already been expressed by reliable experts. Notwithstanding all this, when an auditor accepts the statement of an expert as to the value of certain assets (and we think it immaterial whether or not such expert be or be not an officer of the company, or otherwise interested, so long as the shareholders are aware of the facts), we think it reasonable to argue that he should support such statement by his own views or make some such qualification as that appearing in our Weekly Note of last issue, page 425. It has, however, now been held by the Court of Appeal that the auditor who does not attempt to verify a manager’s valuation of stock is not guilty of legal negligence. We must, of course, accept this ruling, but it does not estop us from enquiring whether a more thorough audit is not sometimes possible. The problem which has to be considered therefore is the extent to which it is practicable that an auditor shall carry his independent scrutiny of the valuations which are submitted to him of assets which, in the nature of things, it must be admitted he himself is not really competent to value; and so far as stock-in-trade is concerned, we pointed out in our issue of 25th January last how an auditor, by comparing the percentages of profits earned during different periods, may, up to a point, check the accuracy of the figures of stock-in-trade that have been submitted to him. The matter is dealt with in some detail in Dicksee’s Auditing, pages 50 to 5“and 174, and in view of what we have already said upon the subject it is perhaps unnecessary that we should repeat here the general principles upon which the auditor’s scrutiny should be founded. Suffice it to say that in every class of trade there is a percentage of gross profit which (with in limits) will be found to be adhered to under all but abnormal circumstances, and à fortiori the same remark applies when one particular undertaking rather than one class of undertakings is considered. If therefore the auditor finds, upon a comparison of the percentages of profit earned during different periods, that there is a material variation in the rate of such percentage, we think it may safely be taken that, whatever the actual law may be, it inexpedient that he should look upon the occurrence as abnormal, and set himself to enquire as to what circumstances may have occurred during the period in question which could possibly account for such a variation in the percentage as has been observed. It may, of course, be that there exists 1 very excellent reason for the difference in question, and where the auditor after enquiry has satisfied himself that the reasons which have been advanced to him, and which he is convinced have actually existed, are sufficient to account for the variation, it must, we think, be admitted that he has done all that an auditor can do towards veri-fying the valuation of stock-in-trade which has been placed before him.
