8. Auditor's report regarding statement of re sponsibility as to trade debts.—If the report of the auditoi contains an unqualified certificate in respect of the amount due from customers both on open ac counts and notes, it may be assumed that not' only has the auditor verified the amount, but that he has made adequate provision for all doubtful debts. Absolute verification of the amount due can only be obtained from the debtor, thru the medium of confirmation statements. In many instances, clients object to this practice of obtaining confirmation statements from their customers, under which circumstances the au ditor cannot give an unqualified certificate. In these cases, other methods of verification are open to him. In the absence of any suspicious circumstances the auditor is justified in accepting the amount as stated in the account. He will probably certify to the fact that, having made a test of the "accounts re ceivable" and having reconciled the customers' ledgers with the respective contfolling accounts, they appear to be properly stated. He will also probably com ment upon the sufficiency of the provision for doubt ful debts.
9. Interpretation of phrase "properly drawn up." —The certificate of the auditor implies also that the balance sheet which he prepares has been drawn up in such a manner as to exhibit truthfully the financial condition of the undertaking. The term "properly drawn up" implies that the amounts due from trade debtors are not to be merged with the amounts due for the loans made to officers or stockholders of the undertaking, or to partners. It does not include amounts due from stockholders on unpaid subscrip tions to the capital stock of the undertaking.
Thus, the term "accounts receivable," while ordi narily a broader term than that of "trade debtors" or "customers' accounts" should include under it only those amounts due from trade debtors.
10. Omission to furnish auditor's certificate in pub lished reader has undoubtedly noted statements in a prospectus or in the report of a com pany to the effect that the accounts of a company have been audited by Messrs. Blank and Company, Certi fied Public Accountants. The mere statement, unac companied by a publication of the auditor's certificate, that the accounts of a company have been audited, should be viewed with suspicion. The auditors may have made all manner of qualifications in their report of which the stockholders, investors or creditors would be ignorant unless they adopted the rather unusual step of demanding a copy of the report.
A dishonest board of directors may put forth a bal ance sheet which, while purposely misleading, may be issued in such a manner as to prevent the directors' indictment for fraud; at the same time the statement may be made that the accounts of the company have been audited by reliable accountants. The layman, in the majority of cases, would be deceived by this practice.
11. Meagerness of information in published re ports.—Criticism is sometimes heard of the meager
ness of information disclosed in published reports of auditors. It must be borne in mind that published re ports should not disclose, concerning the affairs of an undertaking, such information as would be to the ad vantage of competitors. Even tho the report may be meager in respect of the information disclosed, the stockholders may be reassured if the published bal ance sheet is that of a reliable firm of auditors and if a favorable or unqualified certificate of the auditor is attached. The auditors can be depended upon to pre pare such statements as the stockholders ought to have but which, at the same time, will not disclose information of vital importance to competitors. Hence, it is, that stockholders or creditors should con sider seriously the nature of the auditor's certificate where the published report fails to give sufficient in formation as will enable one to analyze the financial condition of the undertaking.
12. of profit.—Not infrequently one finds in a prospectus issued to aid in the sale of se curities, a statement to the effect that, based upon a report prepared by Messrs. Blank and 'Company, auditors, the profit will be sufficient to provide for twice the amount necessary to meet interest on bonded debt and sinking fund charges.
The reader must bear in mind that Messrs. Blank and Company, the auditors, may not have made this unqualified statement, but the promoters or managers of the undertaking may have drawn a conclusion from a certificate of profit or a report prepared by the auditors. It is doubtful if any reliable firm of audit ors would permit their own certificate of profit to be used for such speculative prediction. Auditors are justified, however, in preparing a report for the pro moter or manager; the latter assumes all responsi bility for the conclusions which are drawn from such a report. The investor must clearly understand that the auditors are not certifying to the profit to be realized in the future.
In preparing a statement of profits, an auditor is justified in eliminating certain items which may ap pear in the profit-and-loss account of an undertaking. In the first place, he may eliminate all sums paid for borrowed funds, on the theory that the concern in tends to raise an amount of owned capital sufficient in amount to avoid the necessity of borrowing money. The sum paid for interest on borrowed capital is a penalty for not having a sufficient amount of owned capital in the business. Furthermore, the auditors may, for the benefit of the promoter, estimate the sav ings to be anticipated as a result of combination thru the consolidation of selling activities and the elimina tion of a great deal of the administrative expense. It has often happened, however, that these anticipated economies have not been realized and good-will based upon the anticipated saving in many instances has been greatly over-valued.