20. Valuation, of intangible assets.—With refer ence to patents, copyrights and trade-marks, the audi tor's main concern is to see that they are not overval ued, and that adequate provision has been made for their depreciation. He must also see that the rights have not been assigned or disposed of. If the amounts debited to patents, trade-marks and good-will have been used to conceal an issue of watered stock, the auditor will insist upon giving the account a new name that will indicate the actual facts.
Patents can be very accurately valued in the great majority of cases, and copyrights can be valued upon the basis of their earning power. The use of a trade mark results very often in the creation of good-will, and while the author does not approve of the arbi trary creation of good-will upon the books of a going concern, nevertheless, there are many cases in which corporations have capitalized the good-will of a trade mark, have issued common capital stock against it, and have consistently paid dividends out of earnings on these stock issues. In any event, the facts should be clearly set forth by the auditor in his report. He will not certify to a balance sheet in which the in tangible asset, good-will, is merged with the tangible assets of plant and property. Such action on his part would be misleading and therefore reprehensible.
21. Verification of deferred assets.—It will not, as a rule, be difficult for the auditor to verify the accuracy of the items which are shown under the caption of de ferred assets or deferred charges to operation. These will comprise such items as interest paid in advance, organization expenses, and unexpired insurance pre miums. The auditor will examine insurance policies, note the property covered, and compare the amount of insurance carried with the valuation of the property insured, to see whether or not adequate insurance is provided on both the fixed and the movable property of the corporation. He will then calculate the valua tion of the unexpired insurance premiums in order to be able to state them as an asset in the balance sheet.
Discounts or interest paid in advance will be veri fied in connection with the investigation of the obliga tions upon which these items depend. With respect to organization expense, the auditor will see to it that only items which are properly chargeable to this ac count have been charged to it. Losses on operations should not be charged to organization expense.
22. Sinking fund, cash and investments.—The au ditor will verify the amount standing at the debit of these accounts by examining the actual securities and verifying deposits, if the sinking fund created is in the hands of the debtor corporation. In the majority of cases, however, the sinking fund and its manage ment are placed in the hands of a trust company act ing as trustee. The auditor will fortify himself by
securing from the company a certification of the state of the funds, showing the securities contained therein and the amount of cash. In certain instances bonds of the debtor corporation are purchased out of the sinking fund. In this event, the auditor must verify the actual existence of bonds of this character, if they have been allowed to remain alive ; or if the bonds have been canceled, he must verify that fact, and must see to it that proper precautions have been taken to prevent the illegal use of these instruments.
23. General rules as to verification.—The foregoing outline sketches the practice of the auditor in regard to the verification of the assets mentioned. The prin ciples to be employed in the valuation of them are dis cussed in the Text on "Financial and Business State ments." In brief, the auditor must make such ex amination as will reasonably prove that the assets shown by the books are in actual existence, and that the title to them vests absolutely in the undertaking whose accounts he is auditing. He must also see that all liens and hypothecations are set forth. Some busi ness executives may have a tendency to resent the searching investigation that the auditor must make.
But they should realize that the auditor makes himself liable in law to a client who suffers a loss thru the dis honesty of an employe, if it can be shown that the auditor performed his work in a careless and negligent manner, and that the error was one which the auditor should have discovered.
The auditor who carelessly or fraudulently certifies to a balance sheet when he should not do so, may pos sibly be held also liable to an individual who, relying upon the auditor's certification, was swindled in an enterprise. The business executive should not regard as any reflection upon his own honesty the thoro veri fication of the assets which the auditor insists upon making, nor should he think that the auditor is doubt ing his word. In fact, the thoroness with which the auditor checks such information as he may obtain from the business manager and from the accounts, is merely an indication that he is working for the best interests of the concern.
But the auditor is often perfectly safe in relying upon the statements of the business executive without specially verifying them, or at least he is often justified in verifying them only in a general way, altho no general rule can be laid down. The matter is one which must be decided by the auditor himself ; he must rely largely upon his intuition and experience when brought face to face with actual conditions.