Disclosing cost of doing business Financial statements made out in uniform style Inventories scrutinized Records honestly kept Verifying statement of large creditor Enactment of false statement law in each state Sufficient working capital Not affected by fear or favor Credit men suggesting to smaller firms the ser vices of a public accountant No common interest 3 2 2 2 I I I I I I 4 Every accountant and indeed most business men will probably agree that the one greatest single service he may perform for them is furnishing a certified balance sheet of a debtor's business. Twenty-four expressed this thought. And, indeed, as the children say, "it is the truest thing in the world." A balance sheet is an expression of opinion about the condition of a business at a given time or date; but the attention this opinion commands is not always as great when the statement is prepared by parties at interest as it is when compiled by disinterested accountants, especially after a searching examination of the records. Add to this a sweeping certificate over the signature of a well-known accountant firm and, if justified by the conditions, your merchant or other business man has in his hands a superior reason for his being granted a line of credit, either by the bank or a wholesaler. To those not informed, it may be explained that an unqualified certificate attached to a balance sheet generally denotes that the business is not only as stated, but that the conditions may be easily proven to the intending lender or investor. An unqualified certificate attached to a balance sheet rests upon the reputation of the signatory accountant. This it may easily tarnish or add to it an additional lustre. The certified balance sheet is perhaps the most invaluable financial statement. Mr. David Forgan, president of the First National Bank of Chicago, voices this when he says: The movement among bankers to encourage, if not demand, that statements made by borrowers as a basis of credit should be verified by an audit of their books and certified to by public accountants, has my heartiest sympathy and support. Many of our best borrowers voluntary supply them, and their number is constantly increasing. For their own protection and satisfaction they regard an annual audit necessary and the certified balance sheet furnished their bankers becomes a source of pride to them. Mr. Oliver J. Sands, president of the American National Bank of Richmond, Va., one of the most eminent financiers in the southeastern states, referring to Mr. Forgan's remarks, has to say so much of interest to the accountants that I quote it in full: Mr. Forgan's expression seems to be the general opinion of many who replied to the inquiries made by the American Association of Public Accountants. I think the rules of the federal reserve board will require all persons whose paper is offered for rediscount to the federal reserve bank to file statements which have been certified to by licensed accountants. It seems to me that credit men should co-operate with the C. P. A.'s in the matter of a uniformity of statements, etc., so that the reports of the accountants can be made most valuable to the credit men. We have filed with us frequently statements made by accountants, which do not cover many of the important points which enter into questions of credit and a little keener appreciation of these facts by the accountants would make their statements of more value. Mr. Battin, secretary of the Milwaukee association, agrees with Mr. Sands. He says: Now that the new banking and currency law has been passed and arrangements are being made to put the same into operation, I am satisfied that the public accountant is going to come into closer relations with business, particularly large business, than heretofore. My opinion is, in view of the fact that commercial paper will undoubtedly be used largely between banks and the reserve banks, that the public accountant will find more than ever to do, as banks will undoubtedly more and more require carefully prepared and certified statements and reports when accepting notes and extending credit. This seems reasonable in view of the fact that undoubtedly these notes will frequently find their way to reserve banks on account of the necessity of additional currency and a note with such a certified statement attached, it appears to me, will be of more value in the banking and credit world. Mr. Enoch Rauh, president of the Pittsburgh Association of Credit Men well expresses the idea by stating that the professional accountant may best serve the credit man by: (a) Installing for business houses generally such systems of accounting as will readily enable a statement to be taken from the general books showing at a glance the assets in the order of their realizability, and the liabilities in the order of their liquidation. (b) The arranging and grouping of the assets and liabilities so as to show the reserves for depreciation, bad debts, etc., to the end that the net valuations of the assets may be readily determined. (c) By refusing to certify to the correctness of any financial statement on any other evidence than "professional knowledge" of the true facts relating thereto. Mr. E. G. Lecky of the Portland, Oregon, association, states it well by saying: It being generally acknowledged that the keystone of all lines of credit, whether in the nature of loans, stocks, bonds or merchandise, is the property statement, it behooves those responsible for the credit to make certain of the correctness of the figures appearing upon the statement, and these can only be verified by the certificate of a competent accountant. Perhaps most of us have exalted ideas of the value of our own property and an applicant for credit might, and sometimes does, in good faith, make statements which must be discounted at least fifty per cent before even approximating market value. Many business men do not take into consideration any depreciation, which in the case of machinery, is particularly heavy. Others make no mention of contingent liabilities, while the system of many, even of the larger companies, is such that it is virtually impossible even to approximate their standing. If banks and the larger business houses were to insist upon certified statements, there is no doubt that the annual loss from bad debts of some one hundred odd million would be substantially reduced, to say nothing of the increased security afforded stock and bond holders. Twenty-one credit men thought that in the devising of suitable accounting systems, the accountant was at his highest mark of service to them. Devising accounting systems is not, of course, the same kind of work as preparing a balance sheet. One is an act of immediacy, so to speak, whilst the installing of an accounting system is more like the gradual working out of a thought. Mr. L. O. Emerick, chairman of the credit information committee, Charleston, West Virginia, Association of Credit Men, thinks: If the debtor's books have been audited and his system examined at least once a year by a public accountant, and a statement taken of his business by this accountant, the credit man will feel he is safe in extending the line of credit on such a statement. I would suggest that I think it would be a very good idea for every credit man to have printed on his stationery, that the debtor's books should be audited at least once a year by a public accountant. If this were done, it would add fifty per cent to the value of his worth. Mr. I. K. Schnaitter, secretary, Cleveland, Ohio, Association of Credit Men, states: The credit man and the accountant are after facts. Correct accounting enhances the value of a credit risk and teaches a concern to be more careful with its credits and is of general value in that respect. Mr. John McClelland, of the Houston, Texas, Credit Men's Association, writes that: It is often a fact that many concerns can not secure a line of credit unless their books and accounts have been gone over by a public_accountant and an unbiased statement made of their standing. Corporations that have a large list of stockholders and float their paper on the open market have yearly audits made by public accountants. Why? The management and the stockholders want to know what the year's business has produced and that the statement they make is correct in order to secure credit. When a concern is in financial trouble, the first move the creditors make is to have an accountant and see how they stand. Other associations of credit men expressed practically the same ideas, but these have been selected as showing how widespread is the sentiment. Nine credit men thought the accountant could give good service as a business advisor. This, of course, is unquestionably true. A prominent western accountant has well expressed this thought in the following language: The accountant should have, or study to acquire, a sixth sense, to pick out the weak spot in any business. It frequently happens that the general books are well and neatly kept, and a careful analysis of the gross income and expenditure fails to indicate the source of the weakness. In such cases it behooves the careful accountant to study conditions outside the book records, in order to do full justice to his client. It may be that he is so fortunate as to have in his own office the figures of some other concern doing a similar business, with which he may make comparisons; if so, a clue to work on may be obtained without a breach of confidence, provided he does not in any way expose the · business of the former client. A lawyer uses the decisions of one or more cases to guide him in the conduct of others, and an accountant has the right to use his records for his own guidance. Mr. M. W. Henley, of the Syracuse, New York, association writes: In my opinion the public accountant should endeavor to make enough of an accountant of the credit man to enable him intelligently to examine a customer's ledger, or other books of account, so as to be able to tell whether or not the concern is in a good financial condition; and if not, to be able to point out to the customer what should be done to improve his condition; whether there was too much in accounts receivable, or whether he was over-buying. It would seem to me that the public accountant could assist the credit man in this way at the beginning by calling the attention of the credit man to the condition of his books of account at the time of making an examination or regular audit; that is, instead of the customary simple certified report, give the credit man a detailed report of the condition of his books in relation to merchandise on hand and accounts receivable versus amount of business done by his house. If the credit man properly understands the balance that should be maintained in his own case, he should be competent to pass judgment on the books of his customers when called upon to do so. Mr. Clarence Braden, president of the Louisville, Kentucky, association, thinks that it is not within the power of the public accountant to ascertain the liberality or lack of liberality of the credit man in the extension of credit, but if the percentage of losses appears excessive, the fact may be due not to the bad judgment of the credit man in extending the initial credit, but in connection with handling the account after it has been placed on the books. He thinks that possibly more accounts have been lost by inattention after the sale has been made than by bad judgment on the part of the credit man in the original extension of the credit. It may not be too much to say that if the question were put to the average practitioner of many years' experience, he would probably answer that as a business advisor he could serve the world best. Who better than the trained accountant, the business economist, could advise the intending investor whether or not he should put his money into a certain business, the present condition of which was disclosed by a balance sheet in evidence? Or, in the case, say, of a dissatisfied partner desiring to get at the true status of affairs and wanting an unbiased opinion? Again, a disgruntled minority shareholder, misled by suspicion or greed, may well have such feelings allayed by the conscientious accountant. I think that it is as the business advisor the accountant finds his highest mark of usefulness. We all know that when a business fails auditors are generally called in, unless such failure is thoroughly disastrous and there is nothing left wherewith to pay expenses. Now how much better would it be to forestall or perhaps reduce the total loss and call in the advisory or consulting accountant before the failure occurs? I am satisfied that the net loss to the business public will be considerably reduced if such a plan be followed. The figures which the accountant sets down, particularly when he presents an analytical study of costs and returns, may go far toward explaining the values with which he deals and the success or failure of the undertaking of which he is a part; but when the accountant goes beyond his figures into the discussion of causes and effects, he ceases to be an accountant and becomes a practical economist or business advisor. And who could be better fitted to give expert advice than a thoroughly trained accountant who has, in addition to his knowledge of accounting, a general business training, a special knowledge |