AUDIT.

Press, Volume XXXIX, Issue 5703, 29 December 1883, Page 3

AUDIT.

TO THB BDITOB OF THB FBESB. Sib,—The humbug of the present system of audit as applied to large companies was the subject of some very plain speaking a few months ago, on the occasion of a meeting of shareholders in a local institution in Dunedin. Mr Edmund Smith, Secretary of the Otago Savings Bank, and Mr James Smith, a weU known barrister, both condemned the system in vogue as not only useless, but po—tively misleading. They pointed out that while the accounts of companies were checked more or less! efficiently, according to the conscience or ability of the auditors, the valuation of the assets was left to the companies' own officers, and might or might not be correct. The question is a mo3t important one, not only tor shareholders but even more so for depositors; for while shareholders have the power to attend meetings and demand information, depositors are not so satisfactorily placed, and have to take on pure faith the yearly or half-yearly statements put forth as to the position of the institutions trading on their money. So far as the existing system of audit goes, it is nothing more than a verification of correct bookkeeping, and the experience of business men all over the world has taught them that merely correct book-keeping may possibly exist at the same time with reckless trading or dangerously speculative investments. Nay, more, that the former may be used to cloak the latter in the hands of an experienced accountant. And yet while the book-keeping—which in these days I none but the veriest bungler at swindling would attempt to falsify—is checked, the -value of assets, upon which depends the solvency of investing institutions, is taken on trust. It is as well to write plainly on ' the subject. Auditing is necessary because reckless trading and swindling unfortunately are not unknown ; and to be effective it should offer such checks as to render the chance of loss by either causes as little likely as possible. And this the present system fails to accomplish. But if the interests of shareholders demand an efficient valuation of assets by outside competent valuators, how much more, in the interests of the depositors, is this necessary. I have said that shareholders have the means, if they chose to adopt it, to enlighten themselves as to the value of the assets of any Company in which they may be interested. But not so depositors. And yet it is upon the funds belonging to this latter class that many of our large monetary institutions are mainly trading. For every million belonging to shareholders that is at stake, there are fully five millions belonging to depositors in the same position, the only security of the latter being the lesser amount invested by the shareholders, and the integrity of the various officers and Directors. It is fortunate that as a rule the gentlemen wielding these large interests among us are men of high character and probity, but still while the necessity of auditing is admitted even by them, it is no disparagment to them for mc to urge that the auditing should be effective and not merely a sham, and that not only the minor point of accounting should be properly checked, but also that immensely more important question of the value of assets should be decided by disinterested authorities. Yours, Ac, M.