13. Investigation for receivers and those in charge of reorganizations.—Investigations may be made by auditors for receivers or for those in charge of reor ganizations to determine the cause of failure and the prospects of rehabilitation. Such an investigation might uncover unscientific methods or it might show that the failure was due to carelessness in extending credit or to lack of capital. On the basis of past expe rience with the information furnished by, the audi tors, it would be possible to determine whether or not the business could be rehabilitated.
14. Investigation for the benefit of a retiring part a member of a firm is about to retire, dif ficulties regarding the disposition of his business fre quently arise and may easily be the cause of serious dispute, or even litigation. It is evident that the serv ices of a disinterested expert are likely to prove help ful in such a case. Probably there is no business re lation that results in more litigation and dispute than the partnership relation, and in many instances the contending partners would be very much better off in pocket and otherwise if they selected a reliable audi tor as arbitrator, rather than indulge in expensive liti gation which may cause the loss of a large part of their capital.
15. Investigation for banker might arrange with a prospective borrower to have an exam ination made, the report of which should be submitted to a banker as a basis for making a loan. Competi tion between banks has often resulted in the neglect of this precaution with considerable loss to the bankers. A case came to light recently in which a business con cern maintaining in three banks in New York an ag gregate bank balance of $1,100 had succeeded in bor rowing without security from three separate banks the sum of $10,000. The corporation was a close corporation, and among the assets were accounts re ceivable from other corporations organized by the members of the first corporation. The receivables were absolutely worthless ; among the notes receiv able appeared certain notes marked demand notes, which upon investigation proved to be notes given by a realty company, also organized by the members of the first corporation, and practically valueless as liquid assets. One of the bankers became suspicious and arranged with the borrower for an investigation before he agreed to renew the loan. It is needless to say that upon the report of the auditor the loan was not renewed.
16. Investigations for special purposes.—A busi ness undertaking may enter into contract with an other undertaking and there may be a stipulation that the first undertaking shall submit for audit an ac count of its dealings. Thus, for example, a local factor might receive consignments of Italian marble to be sold in this country, and the contract might stipu late that the shippers would have the right at any time to verify the amount of stock on hand as well as the amounts they were entitled to receive from the factor on account of sales of marble. Where a con
tract of this kind is entered into, it would be well for the business firm to employ an auditor to devise a set of accounts which would enable the necessary in vestigation under the contracts to be made without disclosing other 'important features of the factor's business.
A salesman might have a contract allowing him a commission on all sales made in a certain territory whether the result of personal solicitation or mail or ders. The contract might also contain the right of audit, thereby protecting the salesman against fraud, and unintentional errors in crediting the sales made. Should the proprietor be required to submit his ac counts for an audit, the auditor representing the salesman has a right to demand access to the sales record showing the distribution of the sales, and to the customer's accounts in the territory reserved to the salesmen. He would also have the right to see that the trial balance of the sales ledger agreed with the trial balance of the controlling account in the gen eral ledger, but he would have no right of access to the general ledger for any other information. Thus it will be seen that the investigation should be con fined to the specific work to be covered. Where a business man has entered into contracts like those illustrated above, lie should not permit the auditor for the other party to the contract to make an examina tion of any other records except those pertaining to the particular matter under investigation.
17. General is well for the busi ness man at the time the work is commenced to have a thoro understanding with his auditor of exactly what work is to be done. For example, an auditor might agree to undertake a balance sheet audit and if it subsequently developed that a defalcation had occurred which should have been detected by a thoro analysis of the profit-and-loss accounts, the business man might feel that the auditor was at fault in not uncovering the defalcation. As a matter of fact, under the terms of his engagement, the auditor would not be expected to make the detailed analysis of the profit-and-loss account which would be re quired by a detailed audit. It is encouraging to know that the great majority of trusted employes are hon est and that defalcation and fraud are not usual. It is also true that many defalcations and frauds have been uncovered thru accident rather than thru de sign on the part of the auditor. An experienced audi tor will also have his intuitive faculties highly devel oped, and as the result will often detect dishonesty. Having selected the proper type of man to make the audit or investigation and having explained fully to the auditor his own ideas, the proprietor should allow his auditor to make the necessary survey and be guided to a great extent by his judgment regarding the scope of the proposed work.