of the business in which he is employed and some knowledge of economic theory? Five credit men thought that considerable service could be rendered them by work leading up to the ascertaining of the collectibility of the accounts and bills receivable. Mr. W. C. McKain, manager and counsel of the Youngstown, Ohio, association writes so interestingly on this point, that I am quoting him in full. He states that: While my official position brings me in touch with credit men, yet I do not, of course, feel their individual pulse beats and heart throbs. However, it seems to me that the public accountant is in just as splendid a position to coach the credit man and perform a most valuable missionary work as is the credit man to perform the same service with his customers. In other words, the public accountant, by reason of his position, should be able to talk to the credit man advisedly when from an examination of his accounts he finds that he is over-stepping the prescribed bounds of safe credit granting. If he finds ledger balances on a non-rated or off-rated account in excess of the customary fixed limits, and not supported by a financial statement, he is in a position to say to the credit man that in his opinion he is erring in judgment. If he finds a customer, who from the looks of the account, is making unjust claims, and is still carrying a first grade of credit, it should be his duty to say to the credit man that he is not doing his duty in not reporting same to the mercantile agency. The public accountant is also in position to urge and expect simple but uniform methods of accounting, just the same as the credit man recommends to his customers and assists them in bringing the same about. I believe the public accountant should check the credit man's signed statements and see how generally he secures them—see if he is extending credit to customers who are carrying no, or inadequate, insurance. Mr. Vernon Hall of the Dallas, Texas, association, gives us a sharp slap on the wrist. He writes that he has frequently noticed that public accountants will thoroughly audit the books of a firm or corporation and state in the certified balance sheet the correct amount of the assets of the concern and the correct amount of the liabilities. Frequently, however, the accountant does not take into account in his balance sheet, contingent liabilities, such as liabilities for paper discounted at bank, or liabilities incurred by reason of endorsement of the obligations of other firms or corporations, and thus fails to show the true condition of the indebtedness of the concern whose affairs have been audited. This mistake, as the writer sees it, is sometimes made by the public accountant's failure to analyze and properly give the value of the assets. More particularly is this true of the bills receivable. Sometimes a firm will carry on its books as assets book accounts which are from one to five years old. Frequently the accountant will make an audit of the books and certify to the correctness of the bills and accounts receivable, but give the credit man no information whatever as to their value. The credit man presuming that the audit has been made by a competent accountant, as is nearly always the case, will take it that these bills re ceivable and accounts receivable represent the value stated in the balance sheet. This is not true and it will be found that many of the accounts and bills receivable are against persons who are insolvent, or who had counter-claims against the firm or corporation, or who have declined to pay the bill on account of some dispute as to the amount of the account, or as to the value of the goods which were received and which the account represents. The writer would suggest that the accountant could be much more helpful to the credit man, if in addition to presenting a balance sheet, he prepared a summary of all the assets and a complete history of all the large accounts which are represented in the balance sheet as accounts receivable or bills receivable. If the account is past due and is of enough importance to warrant that much attention, the accountant, it seems, should state the reason for its not having been paid, and should also give the financial standing of the debtor so as to enable a man examining the balance sheet to determine whether or not this particular account will be collectible. Answering Mr. Hall's criticism that the accountant does not take into consideration secondary liabilities, such as discounts and endorsements, and that he fails to set up the true value of the receivables, I might quote the old saw, "Hindsight is better than foresight." This is with respect to the receivables and written humorously. The careful accountant should and will give effect on the balance sheet to contingent and secondary liabilities. He will not, of course, be able to foresee whether a particular account or note receivable will be collected, but his reserve for bad debts should be sufficiently great to cover every reasonable chance of loss. Three credit men laid stress upon the services of the accountant in bringing out the cost of doing business. Mr. Walter Brooks, of the Grand Rapids, Michigan, association writes: I think one of the greatest points of service, if not the greatest, is the fact that the public accountant is teaching the business man in a large measure the necessity of keeping a correct account of his business, which includes, of course, an accurate expense and a correct summary of every thing. This lesson being taught, it follows down the line to the retailer and smaller business man, and they are now beginning to realize the importance of knowing what it costs them to maintain their business; and in fact, it will be only a matter of a few years until the man who does not know what his business is costing him will be eliminated from the field. Take it in our particular line (brass works)-practically ninety per cent of the failures that we have to be interested in by having small accounts with them are due to the lack of a thorough understanding of their business. The public accountant has taken the initiative on the line of progress and is teaching the general public, as well as the big manufacturer and business man, conservation in cost. The public accountant by his articles on this subject is coming in touch with the credit men and they are co-operating to bring about good results. Mr. Roy M. Jamison of the New Castle, Pa., association says: My experience has led me to believe that the average retail merchant is a very poor bookkeeper and that this is one reason for a number of failures, as such merchants do not know whether they are making or losing money. It is really surprising how differently men estimate the cost of doing business. Some of them set up standards which are best described by stating them as incomplete. The real cost of doing business can only be determined by counting up what you have and what you owe, then deducting your liabilities from your assets- -if you are fortunate enough to have more assets than liabilities. This plan shows the present worth of the business, or the present deficit, as the case may be. Its success depends upon the statements being prepared by experienced people. Then, when the profit shall have been shown and if this amount agrees with the difference between the sales and general expenses, our merchant will know his exact cost of doing business. But he cannot positively prove it in any other manner. Two credit men emphasized the importance of making out audit reports in uniform style. Mr. W. D. Vincent, of the Spokane, Washington, association, says forcibly: Another thing that a credit man would appreciate is a simplification of some of the reports that public accountants often make. Occasionally a public accountant will make a report that it takes a certified public accountant to understand. Mr. Oliver Sands, whose letter I have already quoted, also brings out his point. It may be accepted generally that the rule governing the making out of financial statements is the one expressed by Mr. Enoch Rauh, of the Pittsburgh association, which has already been quoted in this article. Speaking generally, most accountants of experience frame their balance sheets along these lines. The other points of interest brought out by various writers were the importance of accountants' scrutinizing inventories; their verifying statements submitted by large creditors; their help in getting enacted a false statement law in each state; the determination by them of the sufficiency of working capital; the value of their services in the examination of bankruptcy cases and in seeing that books of record are honestly kept. Mr. E. L. Adams, president of the Atlanta association, expresses this idea very forcibly when he states that: If the public accountant in pursuing his labors drives home the idea that books of account must be honestly kept, and that along with the honesty and integrity of the credit seeker must go a financial statement that will make his obligations good, he will be serving the credit man most effectively. The letters received from the various associations contain too great a number of interesting suggestions to allow their use in the space at my disposal. As may be seen from the foregoing, they cover a very wide range of thought, from four associations, which thought there was no common interest between the credit man and the public accountant, to the ideas of Mr. J. W. Pettyjohn, secretary of the Jacksonville, Florida, association. He writes: For instance, suppose a public accountant should show tabulated clearly the following figures to the credit man of any concern: The percentage of loss to the average receivables. The percentage of loss to sales. The percentage of loss to sales to customers rated and unrated. The percentage of loss to the net profit of the business. Perhaps not all merchants and business men think it necessary for the accountant to go as far as this. One of the greatest difficulties the accountant encounters is in the handling of the merchandise inventory of stock on hand. This has been well described by Mr. Edward L. Suffern, an eminent accountant of New York, as follows: It seems to be commonly expected that the accountant should be able to prove this class of assets as accurately as he does the cash, and so he can, approximately, where a complete, scientific system of accounts is kept accounts which show the amount of everything on hand currently accounts which show cost of all goods produced at any stage of production and which present clear and intelligible figures upon which calculations can be made. Where such accounts exist, it is possible to be reasonably accurate as to all forms of merchandise counted as assets. Unfortunately, however, such accounts are quite exceptional. Ordinarily, it is exceedingly difficult to ascertain close values otherwise than by taking an actual inventory, and this is almost always a tedious and expensive undertaking. It is rarely the case that the accountant is associated with the force engaged in taking the inventory even when the date at which it is taken coincides with that upon which an audit terminates. This places upon the accountant the necessity of checking the inventory by the best means available after it has been completed and frequently at a much later date a process which in most instances precludes him from forming more than a general opinion as to its accuracy and forces him to rely upon the assurances of others that it has been taken carefully as to count and truly as to values. In such circumstances the accountant is justified in making his certificate qualified as to such matters which he can not positively verify. Where an examination is made independently of an audit and at a different period, it is clear that the accountant can do little more than to make and accept estimates as to the correctness of the values placed upon merchandise (except in the cases described above, where proper accounts have been kept). The associations at Minneapolis, Minn. and Omaha, Nebraska, both bring out an important point. Secretary Badger, of Minneapolis, writes: Where large or excessive lines of credit are granted, I believe that the credit man should have the financial statement verified by a competent, disinterested public accountant. There are too many opportunities for fraud and deception. No applicant for credit will state what he knows to be detrimental to his interests. The credit grantor should be in a position to judge whether the cost of doing business is in a safe proportion to the amount of business transacted, and this can be determined only by a thorough audit of the books. I could cite instances where the debtor had an expense account of fifty per cent of his sales; but this did not show up until liquidation, and then the creditors received but very small dividends on their claims. Other instances of "sculduggery" could be unearthed by a shrewd, competent public accountant. I do not believe that this matter has been brought sufficiently to the attention of credit men, as it is easily recognized in the subsequent fail ures. Mr. L. L. French, of Omaha, confirms the same thought when he says: In instances where the house seeking credit is large and a certified public accountant might secure the opportunity to investigate the conditions existing, I can readily see where the advantages to the credit man would be of great value. To sum up the whole matter the consensus of opinion favors the having of a certified balance sheet by a public accountant, the devising of a suitable accounting system and the accountant's acting as a business advisor. |