Recurring Issues in Auditing (RLE Accounting)

Professional Debate 1875-1900

Roy A. Chandler, J. R. Edwards, Roy A. Chandler, J. R. Edwards

• Publisher: Routledge
• Year: 2014
• ISBN:
  9781134608041
• Edition: 1
• Topic: Business
• Subtopic: Governmental Accounting
• Index: Business

This book gives a flavour of the issues that concerned auditing practitioners more than one hundred years ago and whichretain a certain relevance to us today. The material is arranged chronologically and thereby emphasizes the interconnections between the issues as well as conveying the overall depth and flavour of the debate.

AUDITORS.

No. 1.—AUDITING.

One of the most important requirements in an Accountant is the capability of fulfilling faithfully and with satisfaction to his clients and himself, the manifold duties which he undertakes in accepting a position of the above nature. To look over, in a hurried and cursory manner, the accounts rendered for inspection, was at one period frequently the mode of conducting an audit, but this fashion of auditing has proved to be entirely insufficient. Errors and discrepancies, unavoidably passed unnoticed, in the course of a short and superficial investigation, were subsequently exposed in the settlement of business transactions; consequently professional men have found it absolutely necessary to alter in its entirety the system of auditing, and to adopt a more perfect method of determining the accuracy of the various accounts placed in their hands for verification. It would be out of place, in these columns, to refer particularly to the enormous frauds that have remained for great lengths of time undiscovered, owing rather to the laxity or ineffacacy of the system of Audit, than to the want of efficiency or fidelity in the Auditors; but that many such malpractices have been unwittingly favoured by the former cause cannot be disputed. For many years a fraud may have been creeping gradually along in the security afforded by the want of thorough examination; when the stringent exercise of their duty by those employed to detect irregularities and discrepancies, would have checked it in its infancy. There are many systems now in use, one, the most general, being to follow and check the various items, which culminate in the details forming the Balance Sheet, or whatever Statement requires authentication; another and more laborious mode is to analyze the whole of the transactions in abstracts specially prepared for the purpose, something in the manner adopted in compiling a statistical return. Some Auditors however, are satisfied with simply checking the totals here and there of the Cash and other books, ascertaining that the statement rendered, agrees with the Ledgers, and that the result tallies with precedents. There exist many more ways of auditing, some more or less complicated, but the three quoted will serve to illustrate the work of an Auditor, who, notwithstanding the smallness of his fee, is expected to verify accounts which, perhaps on a thorough investigation would be found teeming with errors and inaccuracies. In a subsequent article I propose to refer in detail to the duties of auditors, and in a third contribution to their responsibilities.

AUDITORS AND AUDITING.

A correspondent; writes to us as follows:—“I am glad to observe that this subject has been taken up by a writer in the ACCOUNTANT, who promises two more articles thereon. I am sure it is one which demands attention, with the view to defining what the duties of an auditor really are, and the value of the service, when properly rendered. It would be well for Accountants’ Societies generally to move in this matter, as also in that of accountants’ charges, which like the duties of an auditor, require to be defined with the object of securing uniformity. I believe no dozen men would have the same view as to the said duties; nor do directors, or the public, appreciate as they ought, the immense value of them, if honestly performed. Many consider an audit has nothing more in it than certifying to the agreement of balances in a balance-sheet with those in the ledgers from which they are taken; and that cash at the bankers is stated conformably with the pass book, (cash in hand being in some cases absolutely ignored). An auditors’ duties are much more important, and should embrace his right to have the accounts kept on such a system that he can really get at the essence of affairs; and that his supervision should extend throughout a year, and not merely at the end of it. His signature to a balance-sheet then would mean something, and responsibility in the shape of a guarantee, would rest upon him towards the shareholders, for which fees should be paid equivalent. See the various forms of certifying accounts, daily appearing on balance-sheets, and you at once detect how very vague are the views of the different parties signing the accounts on the subject. At any rate, whether I take a wrong view of the matter or not, it is certainly one which must sooner or later be discussed. The public as well as the profession (which would gain also in status very considerably), would be gainers by the duties of an auditor being properly understood, defined, and performed as a bona fide service, instead of, as it appears to be a mere sham, and as fees paid and various forms of certifying prove it to be at present.”

Our correspondent adds: —“I am glad also to notice an article in the ACCOUNTANT of 2nd inst., on those who style themselves accountants, professing at the same time to be Jacks-of-all-trades, and touters accordingly. What we want is a feeling of esprit de corps, in the profession, and a determination on the part of its respectable members to set their faces against anything of the sort. Touting should be denounced, and those descending to it should be shown up. I am in hopes that the profession of a P. A., may some day be looked upon as the most honorable of honorable callings.

AUDITORS

No. 2.—(THEIR DUTIES.)

In continuation of the article on the above subject, we now proceed to deal with the duties and obligations of professional auditors. For the purpose of avoiding complication, it must be borne in mind that there are two distinct classes of general audits, which, for the sake of convenience, may be briefly characterized, one as of a restricted, and the other of an unrestricted, nature. Regarding the former, it may be taken for granted that a definition of the duties is at the outset arranged with the client; and the extent and period of the investigation determined; and it follows that any subsequent dissatisfaction and personal responsibility become disposed of so long as the mechanical work undertaken is performed as agreed. Such audits, however, being mere affairs of routine and of but little practical value, need not be further discussed, it being obvious that unless an investigation can be carried on in an unrestricted and independent manner its utility is insignificant. One of the most essential qualities in an auditor should be astern determination to fulfil his obligations in a free and unfettered manner. In far too many cases personal feelings tend to bias the professional man in the performance of that which should be divested of the minutest taint of partiality. Again, he may find himself obliged to co-operate with unprofessional men, who, however praiseworthy their intentions may be, are unfortunately so carried away by the fact of holding an appointment, or are so flustered and timid in consequence of their inexperience in matters of business, that it verges almost on the impossible to maintain a systematic regularity in examining accounts under such circumstances. Hence arises the imperative duty of ascertaining beforehand the qualities of the colleagues with whom it may become necessary to act. In public companies the inconveniences of such associations is more particularly manifested, and the Accountant-auditor should use every endeavour to clear himself from the opinionated impedimenta known as co-auditors. To those who are young and growing up in the profession, it cannot be too strongly pointed out that officials and others having some latent purpose to serve, will, by a plausible argument, or an off-hand representation, seek to hide the importance of an auxiliary book or document, thereby successfully concealing transactions which, if brought to light, might possibly lead to an awkward exposure of carelessness, neglect, or fraud. Consequently, the principle of self-reliance is by no means the smallest of the qualifications for the post of Auditor. Referring more particularly to the auditing of companies’ accounts, it must be remembered that a large portion of the public will as a rule rely more implicitly on the Report of the auditor than on any other statement submitted to them, so that the authentication of this class of accounts should not be undertaken without the strictest scrutiny. Many whose tendencies lead them to a connection with concerns cither for the purposes of investment or speculation, place the utmost faith in the auditor’s certificate, and rather than permit the publication of half-audited accounts, his testimony of their correctness should decidedly be withheld. To detail the duties of those who make this their special business would be impossible in these columns; but among the general matters requiring careful scrutiny may be mentioned the vouchers, and cash securities. A code embracing the most important points relative to the duties of auditors, drawn up and adopted by the various London and Provincial Societies, would without doubt, give universal satisfaction. This would demonstrate to the public the amount of security afforded by the employment as auditors of Accountants actuated by a full appreciation of their obligations and duties.

X.

The Accountant.

MAY 8, 1875.

The meeting of the Manchester Society of Accountants has been followed by the meeting of the Institute of Accountants; and the reports which we gave of the proceedings on both occasions cannot fail to prove highly gratifying to all who are interested in the well-being of the profession. There was the same strongly marked feeling that the time had come for the decided recognition of accountants as a body, and the same marked determination to uphold their position and their privileges. These meetings, and the publicity given to them, do much towards the great step of thorough union and consolidation. The remarks of the Chairman at the Institute gathering were especially valuable, as directing attention to one very important branch of an accountant’s duties, that of auditing. The cry against accountants is, that they are in reality a body of men who have sprung into existence since the Bankruptcy and Companies’ Acts, and flourish simply on the ruins of once prosperous undertakings, and the wrecks of private fortunes. This cry is echoed, not only in the columns of more professional organs, which may naturally be expected to utter shrieks of indignation at any thing which may threaten their interests, but obtains a wider publicity by letters to the daily press. It is true, of course, that the accountant is the man to whom is entrusted the task of saving as much as possible out of the fire; but there is another aspect of his duties to which we have frequently directed attention, and on which Mr. Kemp dwelt at some length, —that of protection of shareholders and creditors by means of fearless and rigorous auditing. Here Is a ground on which no professional jealousy can give rise to any hostility, and on which the public can yield to the profession a sincere and hearty support. It is not too much to say, that but few of the terrible financial scandals which have sprung into such disgraceful notoriety could have taken place, if a thorough and independent system of auditing had been in force. Let the Institute follow up the principles enunciated by Mr. Kemp. Let them hold the professional honour of an accountant to be so high, that it forces him to decline to certify to the correctness of any accounts where he has not been allowed the fullest means of investigation. Let them stand by the man whose fearless discharge of his duty has brought about his dismissal, and let them insist upon his reinstatement. In this course they will carry with them the warm sympathy of the public; and they will find that those whom it is most necessary to hold in check, will soon cease to contend against them. The fact of an auditor of any company having been dismissed, and all men of eminence and standing in their profession refusing, with the support of the general body, to succeed to his post, will be proof positive to the world that the affairs of the company in question are not able to bear the light of publicity, and the necessary inferences will be readily drawn. Moreover, shareholders and investors will scrutinise carefully the audited account, and see the first threatenings of an impending danger which they may avert or escape from in time. A sound and solvent company need not fear the closest scrutiny into its affairs; and in answer to any alarming or disquieting rumours as to its stability, may point calmly to the signed approval of the auditors. A shaky concern will dread submitting its accounts to the keen eyes of a trained investigator, for fear of having its instability exposed to the world; and the dread of independent examination will tell its own tale. If the Institute of Accountants will persist in directing attention to these points, they will have done a very great service to the world, and laid the foundations of a really sound commercial prosperity. But they must attempt to educate the mind of the public. The idea of the importance of the post of auditor must be thoroughly grasped; and the necessity of his utter independence of any influences which may colour his conclusions, must be insisted upon. Where the auditor or examiner is a mere official of the company, his results cannot invariably be implicitly relied on.

It is to be hoped, also, for the honour and dignity of the profession, that the Council of the Institute will receive that support which they have a right to expect. The name of accountant is often used as a term of reproach, and he is wilfully and maliciously confounded with the outsiders of every calling who do the dirty work, if any. But to be a member of a large and influential body, trained for his work by a well-directed course of study, subject to the keen checks of professional restraint,—to feel that his fiat is looked upon as the test of the stability of many a seemingly prosperous undertaking, and that to his honour, integrity and skill numbers look for the safety of their fortune,—is a position, beyond all dispute, as high as can well be attained. The movement has now fairly began; the progress towards the realisation of the wishes of the chief and best members of the profession is rapid; and we shall soon see, we trust, all working towards the same end, to place the profession of an accountant on the same level as those older professions which may be at present more dignified, but in no degree call forth greater skill or deeper responsibility.

The Accountant.

JUNE 12, 1875.

In speaking of an audit, it is of the first importance to distinguish whether or not a thorough and efficient one is meant, and also to consider how far the matters to be audited admit of exhaustive treatment, without such heavy expense as would be considered intolerable by any body of shareholders. Many accountants appear to consider that in demonstrating that they really understand book-keeping by double entry, and that they can, if left to follow their own course and take their own time, fully explore all the intricacies of a business concern,—they have shown their fitness for the highest tasks. And many shareholders, on the other hand, practically adopt the idea that they have secured all the advantages of a true audit when they have voted a sum for that purpose, which so far from sufficiently remunerating a careful and plodding inquirer, would hardly pay a man of genius for accountancy for the trouble of superficially glancing at their accounts.

There is a rudimentary kind of audit, which consists in ascertaining that some sort of voucher can be produced for every payment, and that the printed balance-sheet corresponds with balances which can be found in the ledger. Such an audit is supposed to be completed by checking the additions of the cash-book and balance-sheet, and glancing at the banker’s passbook. It was in the days when such audits were common, and were frequently performed (as well they might be) by unprofessional men, that the custom of voting a trifling pittance of ten or twenty guineas to the auditor originated. At the other end of the scale is the audit which, whilst relying on the certificates of skilled officials for the quantity and value of stocks and plant, exercises a certain supervision even over matters such as these, and includes a thorough analysis of all ledger accounts, particularly the impersonal ones. An auditor who does his work well, endeavours to watch every thing with the eye of a prudent and careful master, not flattering himself with the existence of profit until every unfavourable possibility has been gauged. We have known cases where the ill-judged parsimony of shareholders has failed to hinder an effectual audit, because the directors chose to regard the honorarium voted to the auditors as a mere fee due in respect of the responsibility assumed by them, and the personal superision they bestowed; paying them in addition a much larger sum for the time and travelling expenses of their clerks. But the directors, we believe, would have done no such thing, had not their sense of responsibility been quickened by the fact that they themselves hold enormous stakes in the concern. It is more common by far to find that the small fee paid is accepted on the footing that services of corresponding value are expected, and that any investigation of accounts, however desirable in itself, which would render the auditorship a losing affair, is to be left undone. No doubt, the most cursory examination of a balance-sheet by a trained accountant must tend to prevent gross mistakes; but the professional man little considers what is due to himself, who accepts a task (on whatever terms) without a fixed determination, cost what it may, to perform that task effectually. A resolute adherence to this principle would soon lead to important results; for auditors of any eminence would either free themselves from the most anxious and responsible of their professional duties, or they would enforce the payment of an adequate fee.

Some of the artifices against which an auditor has to be on his guard, are very difficult of detection. He has to rely on human testimony after all, and cannot hope to do more than excite a salutary terror in the breasts of evil-doers. There was once a case, for instance, of a railway company, whose officers presented a schedule showing the tonnage of unused rails in stock. The piles were some of them minutely described, the number and lengths of the rails being given. Other piles were briefly stated to consist of so many tons. The auditor’s suspcions were excited; he demanded to see the man who had made out the inventory, and at length elicited that some of the piles were purely imaginary. Renewals or other expensive outlays had taken place in the past half-year which some official thought it expedient to place to a certain extent against the revenue of the next half-year; hence the creation of this imaginary asset, which it was meant should be written off before the next audit. Small blame would have attached to the auditor, in the minds of reasonable men, had he been taken in by such a contrivance as this: for the possibilities of deceit are infinite, whilst the vigilance of any man must necessarily be finite.

In the case of banks an enormous mass of details must be taken for granted, unless the expense of the audit is to be very much augmented. The auditor can, and does, compare as many pass-books as he can obtain with the balances in the ledgers, and he examines the securities, and the profit and loss account: but any one who knows what it is to count bonds and other securities by thousands, must be aware that errors are possible—at the least, coupons may be missing; and the accounts of individual depositors may be manipulated by clerks, who will know how to secrete, temporarily, the pass-books of such depositors. Worst of all, the counting of coin, and of securities takes place at a date which is foreknown by all concerned; and there is nothing to prevent a deficiency being momentarily covered by a short loan of cash, to be re-taken out of the bank till, soon after the auditor’s scrutiny is over.

We need not comment on the fact that the amounts due to banks and other institutions on current bills and loans (or overdrawn balances, so common in the North) may or may not be recoverable. An auditor can never know who is insolvent or embarrassed, except by mere chance, until some visible sign of difficulty appears on the face of the accounts. The chance of detecting any rottenness in the assets is much diminished when the debtors reside in distant cities; and, again, when a Company may have entered into contracts of the most hazardous nature, in respect of which no entry can be made in a bal...