LOAN AND MERCANTILE.

Auckland Star, Volume XXV, Issue 139, 12 June 1894, Page 2

LOAN AND MERCANTILE.

EXAMINATION OF THE AUDITOR.

SOME DAMAGING ADMISSIONS,

The examination was resumed on Thursday) April 26th, when the whole day was occupied with the evidence of Mr Christopher Thomas Moore, a Fellow of the Institute of Chartered Accountants, who was one of the-London auditors of the Loan Company. Mr Moore had occupied a seat in the Court throughout all the previous inauiryi so that he might have been expected to be thoroughly prepared for the ordeal which he was to undergo. But when he" got into tho witness-box his memory seemed to be very often greatly at fault, and ho exhibited great hesitation in making admissions of a damaging' character, which were forced from him by the merciless persistence of Mr Bray, counsel for the Official Receiver, and the keen acumen of Judge Williams, who displays a wonderful capacity for mastering the intricacies of masses of figures, - sei-ing upon salient points, and drawing logical conclusions which place wifeoeeses in awkward dilemmas. In spite of his name, Mr Moore has a distinctly foreign type of countenance,. but he also has that alert, intent expression which so often characterises men who have been accustomed to long poring over: ledgers and balance sheets. '■ Between the searching questions of Mr Bray, and the light banv terfng tone, of the learned Judge—always artfully veiling some, embarrassing logical dednct_o_iT--Mr - Moore was often completely puzzled, and hesitated for several minutes before replying. " Was ib right." asked Mr Bray, referring to the method of entering the Loan Company's interest in the Land Company under Current Account. ♦' Well, it wasn't wrong," replied the witness, amidsb general laughter, in which the learned Judge and the Bar joined. " Come now," said Judge Williams, in his moßb suave and insinuating way, "don't be so coy,'* Whereat -poor • Moore distinctly blushed. "Suppose, now, I were a pupil, anxious to pass as a member of the Chartered Institute of Accountants, and yon were the examiner, whab answer would geb the marks ?" The witness looked nof-plussed, and a painful expression of misgiving crossed his features. " Well, I don'b" know how to answer that question." he at length murmured. "Bub you must, answer," persisted the Judge. "I mean to have an answer to my question. Come now, what answer would get. the marks I" The witnessed something which appeared to die away in an inaudible inarticulate 'whisper, and the Conrb wabebed the victim .with a smile. "You see, I am the pupil, and I want to pass in arithmetic. What am Ito answer ?" The words came with an .effort—" Well, ib was nob righb.'' "Then, I've gob the marks I" said the Judge. "Go on." The witness's evidence was as follows :— He carefully examined the Australian and New Zealand accounts when they came to band to see if the aribhmebic was'righb, and the appropriations asked for were correct. He made a general supervision of the Australian accounts,

Judge Williams : That word supervision istoo difficult for me to understand. I want to know what you did. Was nob a copy of the Australian accounts sent over ? Witness: I gob a copy .of.the, ledger bftlfinc&s Judge' Williams : And those you took for granted.- • Witness : Yes. .

Mr Bray : Was it your duty to investigate contingent reserve ? Witness : No, it bad been passed by the colonial auditors. It was in the accounts. I cannot ffiffi unde_u*wbicb head ..of- the balance-sheet it appears. W here there was any doubb aboub an item it is in Suspense Accouub or.taken off fcho. .asspb >sid,e. The item mighlfbe übdef "Current Account" or "Etc." Never saw such a provision under a separate head. Suspense Account would mean no liability, Contingent Account in '1891 amounted to £138,000. I bad nothing personally to do with the balance-sheet, . I made a personal investigation and looked for particulars. Judge Williams : I 9hould like to ccc you a little in the role of an auditor. You don'b seem to be auditing a bib now. Witness : The items aie in three different accounts, London, Australia, apd New Zealand. -.'Amounts were written off tho leasehold■ premises, Btores, plant, etc., for depreciation. The manager and accountant at each office would certify as to " etockß and shares." The London office produced certificates of the Loan Company's interosta in shares in the Land Company amounting to £400,000. They appeared under " Wool and Produce in Hand and to Arrive, Current Acoounb, etc." That is similar to the entry on the other side. Judge Williams: They are similar in the fact that they are both misleading. Witness: No, they are both covering items which do not go under their proper heading. I do not think ib was proper to put them under such a heading. Told Mr Paul I would like them shown separately. I must have, had a conversation with my colleague as'to the way they appeared. This item would appear in the course of genoral posting. My colleague agreed with- me that it should appear as "stock and sl^are investment." Mr Paul said the matter was not concluded, bub when ib was ib should appear separately. I understood the directors wished the account to remain

in suspense. I. made a note protesting against the way it appeared on sth January. Accounts signed on the distinct understanding that the items of loanf. to the Company now amounting to £495,000 should come under Bills for Collection, Loons, etc., and that the purely real estate oltheNewZaaland Land Association investment's should come under another and v more appropriate heading. The debt due ijy the Land Company appeared as " Secured Loans." Paul told me bhe direc-

tors wished it to appear aa ib did. Could not say he told me why. I judged they x had nob decided what other properties should be taken over by the Land Aesooiatidn, and, therefore, it was not desirable to say anything to the shareholders until it'was decided. . As a chartered accountant'l admit' that did hot appear'to me a.sufficient reason. Id was a mistake of the auditors that they did not draw the attention of the directors to the fact. Mr Battley took tho New Zealand properties from under that heading of Wool and

Produce Advances. They had never appeared in the London Office under that head before. It was not tho idea of the auditors that tbey should so appear. Judge Williams : You certified that the balance-sheet contained a full and fair statement of the accounts of the Company. , Witness: Yes.

And yet you knew thab pome of the items were put under a wrong heading ? I cannot say that pro vet, ted the statement being a full and fair one. Do you Say ib was a full and fair statement? I can hardly answer that. I cannot eeo there Was anything misleading. Judge Williams : Aa a chartered accountant? , , Withes*'. lam bound to say it is nob a fair statement. If the £490,000 had appeared under the proper heading, it would have led to discussion. It was thought better the directors should nob refer to tho matter at that particular moment. The eha.es'in the English and Australian Pastoral Laatt Company would appear on the -the. sftie, that certain advances were made against whfth they held these shares amounting to £300,000. .It apoeared as •J Set_t*& Liana." Z" ; ' Judge' Williams: Do • you pledge your

reputation as a chartered accountant thatj io is right? „ Witness: lb is right. Mr Paul told me ib included all the share? and debentures. It is advances' on property secured by shares. There was no liability only .to themselves, bnt if they sold them, to anyone else there would be a liability. The shareholders did not know the Loan Company held all' the shares and debentures^ If I had been free I should not, as an accountant, have pub ib under the heading " Secured Loans'" If those two items had appeared under "stock and shares" it would have amounted to about £700,000. I did nob see that these two matters concerned the shareholders, or that they should have been informed of them. It was the duty of the auditors to see whether the debts were good or bad. We could nob do so in regard to the colonies. We did so in regard to London. We. simply took note of the appropriations asked for,in the colonial reports. They asked for a certain sum to be applied out of profit and loss to appropriations. The London Board would decide on the advice of their manager. The auditors never, heard of those deficits. We constantly asked for information, seeing the increasing debib balances. We were told the deficits were caused by rabbit fencing and improvements. We were never told they were through non-payment of interest. We understood there was no permanent deficit.

Judge Williams : It is clear from your colleague's notes he was of opinion that the losses, had occurred through the insolvency of the mortgagees, and the property being worked at a loss. Witness : No necessity was shown for writing otf. In 1891 the unproductive capital amounted to £960,000, £450,000 in Australia and £509,000 in New Zealand, and against that there was £310,000 reserve. Nothing was written off on account of that. In IS9O the shareholders were informed that the reserve was gone. Therefore, tho auditors did nob think it necessary to draw attention to the fact in the nexb year's accounts. The fact that there were £1.56,000 of bad and doubtful debts was nob laid before the auditors. Between 1890 and 1892 the auditors acquired information from Paul which they did not possess in previous years. If tli9y had had that information before, they would nob have sanctioned the balance-sheets. The information should have been laid before them in 1890. The only'figures laid before the auditors in 1892 were those relating to the unproductive capital. They did nob think it necessary to ask Paul for further information as to .what accounts should be written off. In 1893 they wanted the unproductive capital stated separately in the balance-sheets. They had a general conversation with Paul about the alterations for the next year. Tho auditors did not press their view* that the item should appear separately. Their object in altering was to inform the shareholders. Did not understand from Mr Paul that he had communicated with the directors on the subject. He was to do so at the nexb meeting, on January 12th. The real question* to be brought before the Board was the transfer from contingent reserve to profit. The balance of that fund in 1892 was £85,000. It appeared under the head of " Secured Loans," on the other side as a deduction from the gross amount of the loans. The total amount written off the Australian accounts for 1892 was £22,192. That was interest credited to profit and loss. They were unable to do that here. The auditors were never shown the progress reports of the different properties. Had asked constantly for a statement of the interest on them, On one item, in 1891, three-fourths of interest due was carried to profit and loss, and tho balance to Suspense Account. Tho documents containing full information in the Interest Account were nob shown to the auditors, thdugh they asked for it frequently. They did not put a footnote at the bottom of the balance-sheet to that effect, because that would be going behind the colonial auditors.' If the auditors had known that these accounts were in the books in London they would not have passed the accounts without seeing them. The property only earned £1,000. out of £6,000 due for interest. Was never supplied with the deficits in the General Account. The item of £14,000 unearned interest on Woolorina, which was carried to protib and loss, was : never shown to the auditors. They accepted the audit of the Australian accounts showing £38,000 interest. They took the figures as to profit and loss from the schedule of secured loans. In 18.92 the Interesb Account of these properties was so bad that it was not carried to Suspense account. Out of £108,000 in Suspense Accounb, £24,000 was carried to profit and loss. The reason given the auditors was tbab the properties had improved. The amount represented unpaid interest. The Suspense Account was a matter in the discretion of the directors to deal with. Io was thoughb the properties would be sold at a price to cover interest. Judgo William. : Do you think ib is the duty of nn auditor to simply accept a resolution of the directors ? Witness: Yes. Judge Williams: Then will yon tell me what is the übo of an auditor ? Witness : Had asked for a resolution of the directors, but did not get it. (Letter read from Paul to auditors, stating that the directors approved of the transfer of £21,000.) Bnt for that £21,000 the dividend would have been only 5 per cenb. instead of 10. In respect of the Land Company, £11,000 was brought to profit and loss, though no dividend had been declared in 1892, If the auditors had. known this, they f. -uld nob have included it. The proms were cabled from the colonies. Judge Williams: Do you mean an untruthful telegram? Witness: It was not supposed to be untruthful at the time; bub afterwards proved so. For that year 15 months were included, the balance-sheet closing on 31sb March, whereas it had previously been 30th September. The cable merely gave the estimate. That assumed 3 per cenb. In 1892, £144,000, expense of debenture stock was placed to Reserve Fund. Ho agreed with Mr Pixley that the reserve fund Should represent the surplus of assets over liabilities. He considered the £144,000 worth the amount because ib had to be made good out of future income. That item should have been eoparately entered in the balance-sheet. The shareholders? knew that this and other heav^ items appeared under Stock and Share Account. Judge Williams : In the preparation of a balance-sheet, is ib right to take into consideration information which the auditor assumes tho directors have got ? Witness: Mo. Bub the auditors added " Stock and debentures, which should have suggested to the shareholders to make inquiries. The sum of £18,000 was carried to profit and loss from the three Australian properties aba time when they showed a loss. He could nob explain why that was done. The auditors in London had to rely on the reports of the Australian auditors. It was easy to be wise after the event. The liability of the old shareholders in the Land Company was reduced from £97,000 to £15,000, and the burden thrown on the Loan Company was £188,000, including the forfeited . shares. The Loan Company was to bo relieved from further advances, bub after that it advanced £80,000 to the Land Company. The debenture issue of the latter was to be raised.from £200,000 to £250,000, bub the extra £150,000 was never raised, because negotiations were proceeding for including the' Australian properties. In November, 1891, a call of 15. per share was made on the" shares held by the Loan Company, but no calls were made upon the other shareholders. That was Mr Battley's arrangement.* ,'"■ Z , •. J. .*:

i The Court) adjourned until next day.