Companies’ Audits.

Evening Star, Issue 7753, 26 October 1888, Page 4

Companies’ Audits.

A northern writer, touching the recent bank business, says But what guarantee is there that other public companies, hanks, insurance offices, loan associations, or any other bodies that lend their capital onsecurities, arc thoroughly solvent ? The present system of auditing is rot and rotten.

In England, about forty years ago, there was an immense rush for promoting insurance companies. They came out by the hundred. The names and titles of the aristocracy were bought and sold to head the prospectuses ns chairmen, etc. Wonderful tables of intricate calculations as to the value of lives and the lowest premiums were the subject of competition. Accountants who had kept the books of commercial firm;; wore suddenly raised from their low degree, and became great authorities in life insurance business. Retaining and other fees poured in, and the bookkeeper who had for years past thought himself well paid with L2OO a year, rapidly became the recipient of LSOO a month and more. A large number of persons were smitten with the names of grandees and a splendid prospectus, and paid their deposits on shares. The bubble burst and the usual ruin followed. When the crash came a few of the companies stood their ground for a time, A Mr Sheridan, who had started as a life insurance accountant, conceived the idea of amalgamating some of these companies, and he succeeded beyond expectation. His commission was enormous, and at a general election he went to a northern constituency, and was, to the surprise of the nation, elected a member of Parliament to represent the insurance interest. Previously to this speculative abomination, established companies appointed auditors from the body of the shareholders, being men having a large pecuniary interest in the concern and holding a leading position in the financial market, and quite independent of any undue influence or povertystricken necessity, and without fear of the directors or anyone else ; they went into the accounts and securities thoroughly, and there was no suspicion of a delusive report being certified to. The subsequent movement, as before related, opened up a new profession, and the insurance accountants formed themselves into firms of accountancy, and secured a monopoly of the important office of auditors, which at once gained the confidence of the public; and without the name of one of these firms nothing financial was considered genuine, and the more flattering-the reports of the auditors the larger their connection became. Their system of figures was perfection, and although a Glasgow Bank case occurred now and then, the bookkeeping was grand, so the auditors retained their celebrity. The books were correct, the securities examined and found to correspond with the amount advanced. The solicitor to the company vouched for the legality of the deeds and documents; but the securities in fact and the securities in figures were taken for granted to be identical. That is where the trouble comes in. The auditor knows nothing about any difference between the nominal and the actual value of the securities; that is no part of his business, the directors are supposed to see to that, and the accounts are duly passed as correct. The auditors should be absolutely beyond the control of the directors, and for the time be masters of the situation, and they should be valued in their operations in proportion to their discovery of errors, mismanagement, or the slightest suspicion of any sort of irregularity. By the present method it is more than an auditor’s nose is worth to issue a report, however true, similar to that of the Commission which has disclosed the state of affairs of the Bank of New Zealand.