4. Auditors of partnerships should be named in the articles.—In the case of copartnerships, disputes over the interpretation of some of the articles of co partnership frequently arise and the firm may be dissolved at considerable loss. The services of a pro fessional auditor are, in such cases, well nigh indis pensable. As an outsider he may be depended upon to follow strictly the articles of copartnership and the intention of the members as expressed therein, and to see that the proper status of the individual members in respect to salaries, drawings and division of the profits is fairly stated. In the case of a limited part nership, where the law provides that the special part ner has no right to interfere in the active management of the business, an audit would seem absolutely neces sary in order that the limited partner may be sure of having his property rights safeguarded.
5. Advantage of certified statements in securing bank loans.—The great majority of business firms find it necessary from time to time to seek accommo dations from bankers. The fact that the applicant for a bank loan has been accustomed to have his ac counts audited by a reliable accountant, and the fact that he is able to present a properly certified balance sheet and statement of income, is an indication to the banker that the applicant is a careful business man. In the first place, the presentation of such a certificate removes the necessity of the banker's asking for one.
In the second place, the banker will have a better basis for judgment as to the ability of the borrower to pay the loan when it becomes due.
6. Certified statements aid in the sale of a business or in the raising of new capital.—When a business is about to be sold the purchaser not only desires to know the value of the assets and the amount of the outstand ing obligations, but also the profitableness of the en terprise during a series of years and the probability of the continued enjoyment of profits.
The purchaser would be unwise to rely absolutely upon the statements of the vendor. An independ ent examination of the assets to determine whether or not they are truly stated, and whether or not the proper provisions for depreciation have been made, as well as to obtain a knowledge of the outstanding obligations and commitments is absolutely necessary. Furthermore, the vendor may be convinced that the profits are not likely to be continued, and may en deavor to sell the business on the basis of past results.
While it is generally true that when a man has parted with value on the basis of untrue statements recovery may be had, yet on the other hand, the in tention of the vendor to deceive may be difficult to prove. Therefore, the wisdom of selecting a reliable
auditor for this purpose is apparent, for he will not only see that unusual profits are not included in the income account but will also give due prominence to any unusual loss sustained. He will examine into the fluctuations in profits, especially with a view to their continuance. He will see that all the proper expenses of management have been charged; that extraordinary economy in expenditure for repairs and renewals has not resulted in increased profits during the past period at the expense of the future. He will see that proper provision for depreciation of fixed assets, as well as circulating assets, has been made and whether items which should have been charged to revenue have been charged to capital to pad capital accounts.
The audit will disclose whether or not the inventory has been properly valued, and whether the basis se lected for valuation is correct. It is evident that the inventory forms an important part of the income ac count, and that an incorrect method of treating the inventory will not only affect the profits shown, but also the purchase price of the good-will of the business.
7. Auditor's duty in the matter of estimating antici pated economies.—While it is hard to lay down a gen eral rule that will apply invariably in practice, it is doubtful if any attention should be paid to estimates made by an auditor regarding profits which are an ticipated as a result of future economies. It often happens that the anticipated economies are not real ized. In view of the fact that the auditor has no control over the situation, his estimate cannot be re liable, except in cases in which the management has definitely pledged itself to adopt certain reforms which will inevitably result in savings. Even where the vendors have retained a substantial interest in the business, they are seldom sufficiently concerned to in sure the promised economies. While it may be con ceded that the accountant is probably in a better po sition than any other individual to forecast the future in this regard, and altho the management may pledge itself to adopt radical changes in policy and may work honestly and laboriously for the future good of the new consolidation, there are so many unforeseen con tingencies that may arise that a careful and prudent auditor will not venture too far into the field of proph ecy;.