Business men have granted credit upon the strength of accounts prepared by an auditor, without closely examining his certificate, and without noting the re sponsibility with which he charged himself for the items appearing in the report.
A business man must, therefore, respect the audi tor who may take such necessary steps to safeguard his professional reputation. The client must remem ber that the auditor can never be sure of the purpose for which his balance sheet may be used. It follows, then, that the auditor can certify only to that which he believes to be true.
7. Difference of opinion between client and auditor —an illustration.—In certain instances it may happen that a serious difference of opinion will arise between a client and his auditor. The case is related of a very prominent accounting practitioner in New York City who was called upon by a client to prepare a balance sheet which was to be submitted to a bank as the basis for a loan. When the balance sheet was delivered to the client, the latter found to his dismay that the auditor represented him as insolvent. The client was insolvent, but he had apparently reckoned in his own mind, that the auditor, in exchange for a fee, would prepare a favorable report. The audi tor rendered his bill in due course and the client re fused to pay it. The client subsequently submitted statements to his bankers, prepared under his own hand, in which he declared himself solvent. Shortly afterward, the client went out of business by way of the bankruptcy court, and the attorney for the prin cipal creditors, noting that the claim of the account ant was in the list of unsecured creditors, paid the accountant's fee and secured a copy of the report.
It is evident that this information was all that was necessary to convict the bankrupt in a criminal action for obtaining credit on a fraudulent statement of fi nancial condition. If the auditor had been paid, the client could, of course, have suppressed the auditor's report with the probability of escaping conviction for criminally uttering a fraudulent balance sheet.
8. Graphic method of presenting financial results. —Auditors are using, to an increasing extent, the graphic method of presenting financial facts. It is not uncommon to find, as a part of a report, a chart, showing the fluctuations in purchases and sales, or portraying the fluctuations in gross revenues, operat ing costs and net income.
If comparative figures for preceding periods are available, the auditor will probably prepare his report in comparative form, showing the assets and liabili ties, and expenses and income, for one or more pre ' ceding periods. Probably the greatest service which the auditor can render to his client is to interpret the result of operation, and to make comparisons with preceding periods. Thus, if the gross profit on sales is less this period than last, and the turnover remains the same, the auditor should show his client the causes responsible for this business condition.
9. Auditors as not the least important service of the professional auditor is that which he may perform as an arbitrator in dispute between partners or between business men. Innu merable examples might be cited where bitter dis putes and expensive litigation have been avoided thru arbitration by auditors.
If care is used in the selection of the proper type of man for a service of this kind, the results will ordi narily prove more satisfactory than those obtained by prolonged and expensive litigation. The work of preparing accounts, which are the subject matter of litigation, will be expensive for both parties to the issue. Even when the accountants have performed their tasks in matters of this kind, with all the pro fessional skill of which they are possessed, the work may be largely nullified thru the incompetence of an attorney. Lawyers are, as a rule, ignorant of ac counting to a great degree. The failure of an at torney representing a litigant to grasp the significance of the facts developed by the accountant has lost a number of cases.
10. Is an auditor justified in relying upon state ments made by the proprietors or officers of an under taking?—As a practical matter, it is almost impossi ble, in the great majority of cases, for the auditor to verify exhaustively all the assets and liabilities of a business undertaking. Considerations of time as well as of expense operate to prevent such thoro investi gation, however desirable it might be, and an auditor is frequently forced to rely upon the statements made by the proprietors or officers of an undertaking. The question then arises as to the liability of the auditor for negligence, if it should subsequently appear that the statements upon which he relied were false.