The Influence of Accountants' Certificates on Commercial Credit DEI The Influence of Accountants' Certificates on Commercial Credit EDITED BY A. P. RICHARDSON Secretary, The American Association of Public Accountants Price 50 Cents THE AMERICAN ASSOCIATION OF PUBLIC. ACCOUNTANTS 55 LIBERTY STREET, NEW YORK 1913 Copyright, 1913, by The American Association of Public Accountants INTRODUCTORY NOTE The contents of this book constitute a most in- teresting addition to the literature concerning the relations between bankers, note brokers and bor- rowers in transactions based upon what is techni- cally known as commercial paper. The opinions of more than eight hundred bank- ers, representing banks in all parts of the United States, are given ; and the views expressed are ar- ranged under various headings and sub-headings which make the information readily available. A report submitted by a committee of the American Bankers' Association in 1908 discussed at length the desirability of accountants' certifi- cation of statements presented to banks by bor- rowers or by note brokers, and the substance of this report was to the effect that such certification should be encouraged and wherever possible made obligatory. Five years have passed since the date of that report, and in that time a considerable change has taken place in the dispensing of credit. More and more the tendency spreads to give preference to borrowers' statements which are supported by accountants' certificates. iii iv INTRODUCTORY NOTE The American Association of Public Account- ants, recognizing the rapidity of the change, re- cently appointed a committee to ascertain bank- ers' opinions at the present time, and the result of that investigation is embodied in this volume. An overwhelming majority of replies will be found in favor of the idea of certification of all statements submitted by borrowers ; and bankers, in many cases, go further than a mere academic approval of such a proposition and give sugges- tions and recommendations for the realization of the plan. Letters from six of the leading bankers of the country are given over their own signatures. In other cases the names of the bankers and banks are not published, but the town or city in which the bank is situated is given. In an early part of the book will be found the entire expression of opinion which is opposed to the idea of certification by accountants, and the reader can see at a glance the character of the opposition and the reasons alleged by those few bankers who do not favor the idea. Then follows a series of extracts from replies received from bankers in all parts of the country. This in turn is followed by the replies of bankers to specific questions, the most important of which, from the public point of view, is the actual effect which certified statements have upon the terms, rates and general acceptability of commercial paper. INTRODUCTORY NOTE. v At the close of the book will be found several suggestions by bankers for the further better- ment of credit conditions. In publishing this symposium of bankers' opin- ions, the American Association of Public Ac- countants is animated by a desire to hasten public recognition of the value which in modern banking practice is attached to the certified statement of financial condition. A. P. R. [New York, August 1, 1913.] TABLE OF CONTENTS CHAPTER I Page Modern credit conditions Report of committee of American Bankers' Association on Certification of Borrowers' Statements Special committee appointed by American Association of Public Accountants to investigate conditions Letter ad- dressed to three thousand five hundred bankers Inquiry blank submitted to bankers 11 CHAPTER II Replies received from eight hundred and fifty bankers Classification of replies, showing great majority in favor of certification Opposition analyzed Adverse replies quoted Many replies from bank- ers not interested in commercial paper 17 CHAPTER III Prominent bankers endorse certification Letters from presidents of National City Bank of Chicago, Fourth National Bank of New York, National City Bank of New York, Mercantile Trust Company vii viii CONTENTS Page of St. Louis, First National Bank of Chicago, Northwestern National Bank of Minneapolis Replies giving personal opinions of one hundred and nineteen representative bankers 23 CHAPTER IV Opinions of bankers as to requiring statements to be certified Sentiment in larger cities most favor- able to compulsory certification Banks classified according to capital and surplus of institutions Opinions of bankers in many States showing strong preference for certified statements 53 CHAPTER V Opinion of borrowers in regard to certification In larger cities small objection raised Extracts from replies Borrowers not inclined to furnish certified statements voluntarily Proportion of certified statements increasing in all parts of the country Summary of replies relative to proportion of state- ments certified 64 CHAPTER VI Effect of certified statements upon terms and interest rates In some cases better rates granted In others better terms General desirability of paper CONTENTS. ix Page almost always affected Bankers' replies, showing preference for certified statements Analysis of replies classified according to capital and surplus of institutions 72 CHAPTER VII Suggestions of bankers for betterment of credit rela- tions Integrity of accountant must be above question Inventories should be certified En- dorsement of bankers' suggestions by accountants 87 Geographical Index 95 The Influence of Accountants' Cer- tificates on Commercial Credit CHAPTER I Modern business conditions have rendered im- perative a thorough change in the system and a vast increase in the machinery for the extension of credit. The exigencies of the present financial and commercial conditions are such that credit, not gold, is the life of trade. Cash or cash trans- actions have taken a secondary place in the busi- ness world; and, accordingly, it is with the ques- tion of credit facilities that the man of business or finance is most closely concerned. In banking, more than in any other department of activity, the adjustment of credit is vital, and anything which tends to better the conditions or to perfect the system is of direct value to the banker and his client and indirectly to the advan- tage of stockholder and depositor. For many years efforts have been made to 12 ACCOUNTANTS' CERTIFICATES increase the protection accorded bankers in their extension of credits, and various excellent reports and suggestions have been made dealing with proposed improvements; but there has been a regrettable lack of action. One of the most important phases of bank cred- its relates to the verification of the statements submitted by borrowers in support of their so- called "commercial paper," whether such paper be submitted direct or through the agency of a note broker. The American Bankers' Association, through one of its committees, has given serious consider- ation to the question of borrowers' statements, and several trenchant recommendations have been made, which, if acted upon, would lead to the protection of the banker, the assistance of the borrower and the greater stability of trade. But, unfortunately, the keenness of competition among bankers has precluded the enforcement of such regulations as have been suggested; and fear of offending customers or of diverting their business to other banks has been effective in perpetuating a system, or lack of system, which is universally recognized as undesirable. The question of verification is one that appeals strongly also to the public accountant, and the American Association of Public Accountants, the national organization of the profession, lately appointed a committee to make investigations, to AND COMMERCIAL CREDIT. 13 canvass the leading bankers of the country, and to report upon the result of its inquiries. The committee addressed three thousand four hundred bankers whose institutions have a capital of $100,000 or over, in all States of the Union, and propounded certain questions to which replies were solicited. Accompanying this inquiry was a letter explaining its objects. The letter and the blank form circulated among the bankers follow: Circular Letter DEAR SIR: The American Association of Public Accountants invites your personal consideration of the question of the certifi- cation of borrowers' statements by public iccountants. With the idea of eliciting the opinion of the leading bank- ers of the country upon the subject, this association is addressing a large number of bank presidents, and ear- nestly requests that the questions enclosed herewith be answered. It will be within your recollection that the Committee on Credit Information of the American Bankers' Associa- tion, in its report of 1908, strongly endorsed the idea of requiring independent certification of borrowers' state- ments and statements presented by note brokers. The substance of the report is summed up in the following extract. "They (the committee) respectfully urge that every mem~ ber exert his influence to have all paper purchased from note brokers presented with the accompanying statements 14 ACCOUNTANTS' CERTIFICATES audited by certified public accountants and note brokers certificates of paper outstanding at the time of purchase. We would ask that the association, by the adoption of this report, recommend that its members, in purchasing commercial paper from note brokers, give pref- erence to such names as furnish accompanying statements audited by certified public accountants and certificates signed by the note brokers of the amount of paper out- standing at the time of purchase." In an address delivered before the New Jersey State Bankers' Association in 1905, James G. Cannon made the following statement in regard to the question of compul- sory certification: "The trend of every science is toward exactness. The advance to this point justifies a further step in advance. How shall this next step be taken? By estab- lishing the custom of requiring statements of financial condition to bear joint certificates of a certified public accountant and of an engineer. "The certified public accountant has come into promi- nence within the past ten years, and his profession has the guarantee of law in most States of the Union. He concerns himself with the books of account, and records and statements prepared by him have the support of such books, and the banker has the sense of security due to the disinterested and impartial nature of the accountant's position. He may be called the referee in accountancy and the expert on cash valuations. "In brief, our next step is in the direction of accuracy. This is to be accomplished by having statements subjected AND COMMERCIAL CREDIT. 15 to searching analysis certified by certified public account- ants and engineers, and then credit will be extended strictly on the merit of the individual applying for loans." David R. Forgan, President of the National City Bank, Chicago, speaking before the American Association of Public Accountants, in September, 1912, dealt with the relations between bankers and accountants. He said in part: "In self-protection against . . . deception, bankers have, within recent years, begun to demand, or at least encourage, the practice of having statements for credit certified by public accountants. Only keen competition prevents this practice from becoming universal, as it ought to be." It is recognized that, as pointed out by Mr. Forgan, competition is preventing a strict adherence to the recom- mendations of the American Bankers' Association that borrowers' statements should be certified by certified public accountants, but it is the desire of the American Associa- tion of Public Accountants to ascertain to what extent the practice of requiring independent certification is increasing or decreasing. Accordingly, you are requested to answer the questions enclosed herewith and address your reply to A. P. Richardson, Secretary, 55 Liberty Street, New, York. Yours very truly, (Signed) A. P. RICHARDSON, Secretary. 16 ACCOUNTANTS' CERTIFICATES Inquiry Blank THE AMERICAN ASSOCIATION OF PUBLIC ACCOUNTANTS SPECIAL COMMITTEE ON CREDIT INFORMATION What is the attitude of your bank in regard to requiring that statements submitted by borrowers or note brokers shall be certified by public accountants? Where this is required how is it regarded by the bor- rowers of your bank ? To what extent do you find that borrowers voluntarily submit certified statements? Other things being equal, do certified statements have a favorable effect upon the terms and interest rates granted by your bank to borrowers? Do you notice an increase in the proportion of borrow- ers' statements certified by public accountants ? On the basis of the foregoing questions will you be kind enough to give us the benefit of your personal opinion on the general question of certification of borrowers' state- ments ? (Signed) President. Address reply to A. P. Richardson, Secretary, 55 Liberty Street, New York. AND COMMERCIAL CREDIT. 17 CHAPTER II No better indication of the interest taken by bankers in this subject can be given than the ready response which this circular and set of ques- tions received. Approximately eight hundred and fifty of the bankers addressed replied to the questions, and in many cases did not content themselves with merely formal sets of replies, but gave extended expression of their opinions. Replies received have been classified under five headings, Strongly in Favor, Favorable, Op- posed, Strongly Opposed, and those by bank presidents who from lack of experience in this matter could not express an opinion. This classification of replies gives the following result: Strongly in Favor 121 Favorable 501 Opposed 15 Strongly Opposed 5 Non-committal 202 It will be seen by a glance at the foregoing statement that the amount of opposition to a 18 ACCOUNT ANTS ' CERTIFICATES proposal for the requirement of certification of borrowers' statements is so small as to be incon- siderable, but in order that the nature of the oppo- sition may be clearly seen the following extracts from the replies of opponents are given: " Nothing needed, thank you." " I think it's a proposition to magnify your own job.'* " As a rule borrowers say they can get any statement they choose to make, certified, if they pay the charges." The three foregoing are from banks situated in small cities, and are evidently written under the impression that the inquirer was asking for business. Of a better informed character is a letter from a bank of some importance in the Middle West. In this the President states, in part: "We have felt for many years that the practice of loaning large sums of money purely upon the strength of a statement furnished by borrowers, without any independent verifica- tion or corroboration, is fraught with more or less danger; and the frequency with which failures occur, disclosing utter misrepresentation of facts in statements previously put out, tends to prove the correctness of this view of the matter. On the other hand, frequent single failures are taking place, where the liabilities run into the millions, of firms and cor- porations whose statements have been audited and verified by so-called public accountants, while the actual condition of affairs bore no resemblance to the picture painted by the AND COMMERCIAL CREDIT. 19 statement and the auditors' verification thereof. We, there- fore,, feel that until audit companies are required to have a certain fixed capital, and are held personally liable in a sub- stantial sum for losses incurred by reason of their misrepre- sentation of facts, and are required to give bond to cover such losses, the audit will be of little practical use. In the meantime, bankers and lenders of money will continue to grope around in the dark and make their own investiga- tions, as they are doing now." Another banker in the Middle West writes : " I believe that the business you are in is a legitimate one, and one that ought to bring forth good results, if in the hands of men of character and integrity. "The most money this bank has ever lost has been in loans made on the basis of public accountant statements, or parties who claim to be public accountants or expert ac- countants. Within the last ten years we have suffered greatly by loans on these statements. In one instance we got about S3 cents on the dollar. " It seems to me if this public accountant business could be placed upon some sort of legal basis, with penalties attached for false and padded statements, it could be made of great benefit to banks, but many of these state- ments have been palmed off on the public as being made conscientiously, when in fact it appears that they were made only for the purpose of strengthening the parties' credit, when they really did not deserve any sort of high rating, and were not even worthy of ordinary credit. " We are very highly prejudiced against these methods of 20 ACCOUNTANTS' CERTIFICATES loaning money, and would not loan money to anyone on a statement made by an expert or public accountant, where the parties are not known to us." The foregoing excerpts from letters constitute the only strong opposition to the idea of requir- ing certification of borrowers' statements, and it will have been noted that of these the only two worthy of consideration are written by men who have been unfortunate in their experience with one or more public accountants in their vicinity. Under the heading Opposed,, the opposition seems to be due generally to failure to understand the purpose of the questions. The following extracts will indicate the sub- stance of the arguments against the plan : "We think we know the value better than you." "We know our borrowers, and their moral risk is what we consider." "Our experience has been that such statements afford us but little protection, ... If these certificates could be relied upon as correct or true, notwithstanding the balance sheet of the borrower, they could more safely be relied upon." "We might place more credence on the statement of a customer certified to by a C. P. A., but prefer our own examination to quite a few statements from C. P. A. that have come to our notice." AND COMMERCIAL CREDIT. 21 "We have a satisfactory system for the consideration of our borrowers' statements. We are not interested in the question of certification by public accountants." "Not favorable." "We have no use for anything of the kind." "We believe it to be a good idea where we are sure of the accountants' honesty." "In a place the size of , would not think a certified statement by accountants would be of more value than would one of the people's own make, as they are personally known, and do not think the certification of the public accountant would add security to it." "In the case of large corporations or firms who are heavy borrowers it would undoubtedly be very effective, but in the majority of transactions in a community like this it would, in my opinion, be entirely impracticable." "Do not think it necessary where your trade is local and the character of the borrower is known." "No objection, but it is merely a matter of bookkeeping. Statements cannot validate inventories or prices at which goods are held, nor the character of the persons in busi- ness, which is more important than any statement, as we. have found in the past." 22 ACCOUNTANTS' CERTIFICATES "Not interested." "It has some advantages, but is not of vital importance." "Nothing doing in this territory/* The opposition contained in the foregoing ex- tracts from letters, as has been pointed out, is due chiefly to failure to appreciate the intent of the question asked or to a doubt in the mind of the banker as to the trustworthiness of the public accountants with whom he has to deal. The extracts have been given at some length and no letters of opponents have been omitted, so that the opposition may be seen at the outset and its value properly estimated. Under the heading, Non-committal, a large number of replies must be classified. These re- plies are almost identical in phraseology. They are from banks whose activities are confined to small towns or cities and whose loans are made solely to local business men. They universally express themselves as unable to form an opinion because they are not in the market for commer- cial paper and have no dealings with note brokers. More than one half of them, however, state that on general principles they would be inclined to favor compulsory certification of borrowers' statements if it could be made universal, but qualify this by saying that they do not speak from experience. AND COMMERCIAL CREDIT. 23 CHAPTER III An overwhelming majority of the replies in which opinions are expressed is in favor of requir- ing borrowers and note brokers submitting com- mercial paper to present certified statements of financial condition. It has not been considered judicious to specify the names of bankers whose opinions are given in the following pages, but in order that there may be no question as to the influence and standing of those members of the banking community who are in favor of this proposition several prominent bank presidents have consented to give their views over their own names, and these signed expressions of opinion may fitly take the lead in the presentation of the affirmative side of the proposition. Particular attention is drawn to the force and unanimity of the following letters : 24 ACCOUNTANTS' CERTIFICATES THE NATIONAL CITY BANK OF CHICAGO PRESIDENT'S OFFICE. JUNE 2, 1913. Mr. A. P. Richardson, Secretary, The American Association of Public Accountants, 55 Liberty Street, New York City. DEAR SIR: Yours of the 29th ultimo is received: When we consider that more than half of the loans made by commercial banks are based on the statements of the borrowers, and that the competition between banks themselves, and be- tween banks and commercial paper brokers, is, in ordinary times, very keen, I should think it would be difficult to find a banker who does not approve of the efforts your Asso- ciation is making to have all borrowers' statements certi- fied by public accountants. This is one of those happy cases which combines with the furtherance of your own interests as accountants the purifying and strengthening of the entire system of credits through which nearly all modern business is transacted. I hope, therefore, you will continue your good work until it is as common to have borrowers' statements prop- erly certified as it is now to have a title examined before purchasing property. Yours very truly, (Signed) DAVID R. FORGAN. AND COMMERCIAL CREDIT. 25 THE FOURTH NATIONAL BANK OF THE CITY OF NEW YORK MAY 29, 1913. Mr. A. P. Richardson, Secretary, American Association of Public Accountants, 55 Liberty Street, New York City. DEAR SIR: Referring to your letter of February 20th, respecting the certification of borrowers' statements by public account- ants, we strongly advocate and prefer to buy the paper of those concerns whose accounts are audited by established firms of accountants. We find that where this is required the suggestion is generally well accepted and acted upon. It is difficult to state to what extent borrowers volun- tarily submit certified statements, but a large number of statements received are certified, and the percentage is constantly increasing. The matter of certification or non-certification has not reached a point with us where it affects the rates charged. The question of increase or decrease in the proportion of certified statements of borrowers is covered, we think, by our statement that the percentage is constantly increas- ing. It is our belief that the time is not far distant when the demand for an audit of all statements by certified public accountants of established reputation will be prac- tically universal. Very truly yours, (Signed) J. G. CANNON, President. 26 ACCOUNT ANTS ' CERTIFICATES THE NATIONAL CITY BANK OF NEW YORK NEW YORK, March 6, 1913. [COPY] THE AMERICAN ASSOCIATION OF PUBLIC ACCOUNTANTS, SPECIAL COMMITTEE ON CREDIT INFORMATION Inquiry Blank No. 1899. Q. What is the attitude of your bank in regard to requiring that statements submitted by borrowers or note brokers shall be certified by public accountants? A. We prefer, in all cases, to have certified state- ments, but only insist upon it in cases where we feel the indebtedness is becoming disproportionately heavy or we have reason to suspect some irregularity. In all such cases we do insist. Q. Where this is required how is it regarded by the borrowers of your bank? A. As a rule, the borrowers are willing to submit their business to audit and furnish certified statements when we insist upon it. AND COMMERCIAL CREDIT. 27 Q. To what extent do you find that borrowers volun- tarily submit certified statements? A. Not to any considerable extent, but the practice is increasing. I should say probably not more than 5% of the whole furnish certified statements voluntarily. Q. Other things being equal, do certified statements have a favorable effect upon the terms and interest rates granted by your bank to borrowers? A. Certified statements, where they exhibit sound and solvent conditions, have a favorable effect upon the amount of loans granted to borrowers, but have no effect on interest rates. We do not lend in any case unless we believe the borrower is good, and being good he is entitled to the same rate that any other good borrower would receive, whether furnishing a certified statement or not. Q. Do you notice an increase or decrease in the pro- portion of borrowers' statements certified by public accountants ? A. In our observation, the proportion of borrowers' statements certified by public accountants is increasing slowly. We believe the practice eventually will become nearly universal. Q. On the basis of the foregoing questions, will you be kind enough to give us the benefit of your personal opinion on the general question of certification of borrow- ers' statements? 28 ACCOUNTANTS' CERTIFICATES A. Our opinion of the general question of certification of statements is that their usefulness and reliability have, in too many cases, been brought into question by reason either of inefficient, incompetent or careless work on the part of accountants. Dispensers of credit have often been deceived in this way, and it should be the aim of members of your association to be much more careful, not only in investigation but in general efficiency and thor- oughness, than has been the case heretofore. (Signed) Jos. T. TALBERT, Vice-President. MERCANTILE TRUST COMPANY SAINT LOUIS JUNE 3, 1913. Mr. A. P. Richardson, Secretary, American Association of Public Accountants, 55 Liberty Street, New York City. DEAR SIR: I am most heartily in favor of all firms and corpora- tions that borrow without collateral filing with banks and trust companies from which they borrow statements of their business certified to by public accountants. We have several customers of that kind now, and not only feel more comfortable with their business but actu- ally do give them a larger ratio of credit and better rate of discount by reason of the fact that we know their statement is unquestionably true. AND COMMERCIAL CREDIT. 29 Every bank and trust company of the country is obliged to undergo expert examination at least once (and in many instances three times) each year. Their officers are obliged to make sworn affidavit of the correctness of the statement, the banking laws making it a penal offense if they swear falsely. Why should not the banking fraternity not only expect, but exact and demand, the same examination of those to whom they lend their money without collateral? I hope you will push the good work until it becomes the universal custom of all borrowers, large or small, to have their books and accounts examined and certified to by public accountants. Yours respectfully, (Signed) FESTUS J. WADE, President. THE FIRST NATIONAL BANK CHICAGO JUNE 4, 1913. Mr. A. P. Richardson, Secretary, American Association of Public Accountants, 55 Liberty Street, New York City. DEAR SIR: I have your favor of 29th ultimo. You can use the following as a statement from me in regard to the desirability of having certified statements from borrowers: 30 ACCOUNTANTS' CERTIFICATES The movement among bankers to encourage, if not demand, that statements made by borrowers as a basis of credit should be verified by an audit of their books and certified by public accountants has my heartiest sym- pathy and support. No longer is it regarded as discreditable, but the reverse, to furnish such statements. Many of our best borrowers voluntarily supply them, and their number is constantly increasing. For their own protection and satisfaction they regard an annual audit necessary, and the certified balance sheet furnished their bankers becomes a source of pride to them. Very truly yours, (Signed) JAS. B. FORGAN. THE NORTHWESTERN NATIONAL BANK MINNEAPOLIS JUNE 6th, 1913. Mr. A. P. Richardson, Secretary, The American Association of Public Accountants, 55 Liberty Street, New York, N. Y. DEAR SIR: Replying to your favor of May 29th, will say that I am a firm believer in the audit by certified public account- ants of books and business of borrowers, whether paper is taken direct by the bank or through brokers. Of course, this check is not absolute, but it is an additional safeguard AND COMMERCIAL CREDIT. 31 to the lenders of money. This practice is generally fol- lowed here with very general satisfaction. Yours very truly, (Signed) E. W. DECKER, President. In reply to the general question which comes last on the inquiry blank the replies have been most satisfactory and convincing. The question reads : "On the basis of the foregoing questions, will you be kind enough to give us the benefit of your personal opinion on the general question of certification of borrowers' state- ' ments ?" Replies from which quotations will be made represent a considerable diversity of approach to the question but are unanimous in the final view. It is not practicable to give the personal source of these opinions, but at the head of each will be found the name of the city from which the reply emanates : Omaha, Neb. "I believe it would be a great help to banks, and our losses would be much less, by requiring a public account- ant's statement, and I personally will say that it saved our bank last year about $40,000 by making the require- ment of a borrower who afterwards declined to furnish 32 ACCOUNTANTS' CERTIFICATES it, and we collected and other banks took on the account and made the loss." St. Louis, Mo. "During this year we have found that three of our borrowers falsified their statements. The net loss to us was about $20,000. Certified statements would have saved us that sum. We strongly favor all statements being signed." Sacramento, Cal. "I unqualifiedly endorse the idea, and borrowers whose books and accounts are all right should have no hesitancy in accepting such a condition as the basis of asking for the accommodation they require." New York City. "I regard such a practice as beneficial to the highest degree both to the lender and the borrower. To the lender for obvious reasons, and to the borrower because of the increase in confidence of his creditors." "We urge and would gladly join any movement looking to the unanimous adoption of such a rule by all financial institutions." Cleveland, 0. "We consider certified statements a great aid in intelli- gently extending credit, and firmly believe that all banks should co-operate in requiring their large borrowers to furnish such statements." AND COMMERCIAL CREDIT. 33 Syracuse, N. Y. "The practice of auditing statements by expert account- ants will, no doubt, soon be so universal on account of the benefit to the borrower that there will be a temptation to get audits that are not as strict and impartial as they should be. I trust your Association realizes the great harm to be done to your profession if discredit were thrown upon audit statements by the fact that auditors could not be thoroughly depended upon by persons giving credit to their clients." Cincinnati, 0. "We believe all large concerns should have their books audited at least twice a year by certified public account- ants." Philadelphia, Pa. "The gradually extending ramifications of our financial system, involving the necessity of granting credits at long range, without personal touch with the borrower, make audited statements a necessity to the large bank, and the borrowing margins of profit in manufacturing and mercan- tile lines make exact accounting and the advice thereon which an expert alone can furnish essential in modern business and banking practice." "Needless to say we are highly in favor of the certifi- cation of borrowers' statements, but feel that perhaps the accountants, rather than the banks, are in a better position to further the movement. Our only regret is that the tendency toward this practice is not more marked. How- 34 ACCOUNTANTS' CERTIFICATES ever, we feel that an accountant should not merely certify that the balance sheet is in agreement with the books, but should state that the financial statement reflects the true condition of the concern and sets forth all debts of every character, including indirect and contingent liabilities on account of endorsements, guarantees, etc." Patvtucket, R. I. "We give preference, in buying brokers' paper, to state- ments certified to by public accountants, particularly those accountants well and favorably known to us. We think membership in your association should give tone and stand- ing to its members, and a list of members should be placed with the banks and all others who are apt to use such service.'* Nashville, Tenn. "A certification of borrowers' statements is always to be desired; an independent audit must, in the very nature of things, be impartial, and more satisfactory to the lender of money." Seattle, Wash. "I have for the past several years been an advocate for and a firm believer in the policy that all commercial paper brokers should be required to exact from their patrons from whom they are taking paper for sale and to banks throughout the country, at least an annual, if not a semi- annual, audit, inventory and report by well established certified public accountants of known standing and reli- ability, believing such a policy would be a safeguard to the interests of the banks." AND COMMERCIAL CREDIT. 35 Denison, Tex. "It is a step in the right direction. The time may come when every prominent firm of note brokers will be compelled not only to require that statements of their cli- ents be certified by a public accountant, but, as Mr. Cannon has suggested, the certificate of property and of value by an engineer or some one qualified to pass upon the physical properties will be required." Spokane, Wash. "We have been very keen to have our customers' state- ments audited by a certified public accountant, and it is gratifying to note that they are inclining that way more and more; in fact, it is getting to be accepted as a neces- sity. It is only recently that one of our customers brought in his statement properly certified, and said, 'I was "hot" when you insisted two or three years ago on having our accounts properly certified, but now I would not be without it under any condition. The accountants have given me a better insight into my business than I ever had before, and they have been constructive about it, as they have pointed out how we can save money and make money.' I think this is the unexpressed opinion of a number of others that we have been instrumental in getting to adopt the system of being properly examined." Madison, Wis. "We would much prefer, in buying commercial paper, to have the paper certified by public accountants of known character and standing. The question of the borrower's statement is one of the strong elements of danger in the purchase or acquisition of commercial paper." 36 ACCOUNTANTS' CERTIFICATES San Francisco, Cat. "We think that it will not be long before it will be considered a necessity for borrowers either to submit a statement by public accountant or by the accountant that the bank suggests." Denver, Colo. "I hope that the day is not far distant when inde- pendent certification will be required." New Milford, Conn. "If it were not for keen competition it would undoubt- edly become a universal rule among bankers." Winsted, Conn. "We believe that the adoption by borrowers of certified statements of their financial condition, and the enactment by the State legislatures of a uniform false statement law with a heavy penalty for violation, would be a distinct advantage to the credit grantor." Utica, N. Y. "We have long been in favor of borrowers' statements, and the writer introduced, a number of years ago, a form of statement blank in use in this section of the State. These statements should be prepared by certified account- ants, or at least followed up by such accountants' exam- ination and verification. This, in my opinion, is one of the important things to protect the bank in granting loans." AND COMMERCIAL CREDIT. 37 Los Angeles, Cal. "We are heartily in favor of commercial houses using public accountants to make up their credit statements, as it gives us more confidence in the figures submitted, and they are usually able to make up a more intelligible state- ment." Merced, Cal. "We heartily favor it. Have just suffered a loss on account of a false statement made by a merchant." Pomona, Cal. "The average individual is inclined to overestimate his values. If certification of reliable accountants was re- quired it would have a tendency to 'keep them nearer the earth.' " San Francisco, Cal. "Heartily in favor of it and am doing all in my power to make it general." Denver, Colo. "It would have a tendency to facilitate extension of credit in proper cases." Hartford, Conn. "We firmly believe it to be a step in the right direction." Naugatuck, Conn. "It's the only true basis for credits." 38 ACCOUNTANTS' CERTIFICATES Atlanta, Ga. "We always prefer statements certified by a public accountant, and when taking on a substantial commitment, in which the borrowers' responsibility is an important fac- tor, it is our custom to require an audit." Macon, Ga. "I think every money-lending institution should protect itself by requiring all the light possible." Cairo, III. "Think all borrowers of large amounts should make statements certified by a reputable C. P. A." Chicago, III. "I should like to have them all certified, but it is not practised, as sentiment and personal feelings are still strong elements in the relations existing between borrowers and lenders." "We are heartily in favor of it, and welcome any move in the direction of encouraging this practice. . . . We purchase more or less commercial paper through note brokers, and we often take pleasure in remarking to the broker that the statement is certified by some well-known firm of accountants. I, for one, do not feel that any firm or corporation or business house has any right to offer its paper in the open market unless a statement is sub- mitted, and many a name have I refused to purchase for our bank because of the lack of a statement." AND COMMERCIAL CREDIT. 33 "They should be universal in cases where the paper is offered through brokers, and the personality of the borrower is therefore unknown." "Certification of statements by certified public account- ants of high standing is undoubtedly advisable, and I wish that it were customary for banks to insist upon such certi- fied statements. I am a great believer in the good work of certified accountants, not only for mercantile and manu- facturing concerns, but for banks and public corporations which ask credit in any way from the public." "Very heartily in favor of it, but there are a number of poor accountants. These you should eliminate from your ranks." Decatur, III. "We would much prefer to have all borrowers have their statements certified to by public accountants, which we believe would reduce the interest rate to such bor- rowers." Joliet, III. "We would appreciate it very much could we have a trustworthy statement of every borrower's business." Lincoln, III. "I believe it eminently proper and good business, as we have had too much wildcat commercial paper offered by brokers, who had nothing but personal gain, in the form of commission, in view." 40 ACCOUNTANTS' CERTIFICATES National Stock Yards, III. "Believe in it thoroughly." Evansville, Ind. "Good for both borrower and lender, and should be a requirement when lending money." Indianapolis, Ind. "Certification of borrowers' statements as shown by their books is not sufficient. There should be an audit of inventories and independent certification of accounts receivable. When brokers sell paper of borrowers they, the brokers, should be required to certify as to amount issued and sold." New Albany, Ind. "We heartily endorse and favor the plan. Believe that the prejudice in certain quarters can be speedily overcome by co-operation among bankers." Boone, Iowa. "Should be required, and banks should decline advances except upon such statements." Great Bend, Kan. "We deem it of the highest importance, and shall not become purchasers of commercial paper until it comes into general vogue." Louisville, Ky. "We would be glad to have this system a requirement by the banks of our country. It would be a great comfort AND COMMERCIAL CREDIT. 41 to the banks to have such statements. They would feel a greater confidence in extending credit, and we would most heartily approve any movement to that end." "If we dealt in paper of this kind we unquestionably would favor your proposition. We think it would add very materially to the strength of the paper and be a very great protection, worth much more than it costs, to the banks and institutions purchasing such paper." Shreveport, La. "It is my opinion that the time is not far distant when country banks buying commercial paper wilj insist on certified statements." Portland, Me. "Would be glad to see a rule adopted universally by brokers not to offer, and by banks not to buy, paper unac- companied by certified statements." Baltimore, Md. "It is most desirable to the honest borrower and to the lender." "Whenever the faintest shadow of doubt arises as to the financial status of any of our borrowers we immedi- ately request them to have an audit made by certified public accountants. I am in favor of certification of bor- rowers' statements as one of the surest means of protecting banks against deception." 42 ACCOUNTANTS' CERTIFICATES "Believe it would be a great advantage. Have always advocated examination by expert accountants in any com- pany in which I personally am interested." Boston, Mass. "We prefer such statements, but do not insist on them in every case with our patrons." "Should be certified, so dependence can be placed upon them." "Hope in a very short time that banks will all insist on it." Lowell, Mass. "In line of safeguarding banks and investors would help some corporations to understand their own true con- dition." Peabody, Mass. "Personally I strongly favor the plan and am doing what I can to hasten the day which is surely coming when all large borrowers will furnish certified statements." West Newton, Mass. "We believe that the practice is becoming much more general, and will, as it should, eventually become universal. This cannot, in our opinion, fail to have a wholesome effect on business in general." Battle Creek, Mich. "Every statement submitted by a note broker should be on the authority of certified accountants, with an affi- AND COMMERCIAL CREDIT. 43 davit of two leading officers of the company that the figures submitted and the property in the various ware- houses throughout the country was absolutely true accord- ing to their best knowledge and belief. We are heartily in favor of your system." Duluth, Minn. "The time is not far away when all large borrowers must furnish certified statements of accounts and verified inventories." St. Paul, Minn. "I am strongly in favor of certification of borrowers' statements, and am impressed with the fact that they would be much more valuable to the lender if an appraise- ment or inventory by experts accompanied the statement." Gulf port, Miss. "We think it is an absolutely good thing, and believe that eventually it will be required generally by the banks as they gradually get their customers educated to the fairness and necessity of it." Kansas City, Mo. "We think it certainly must come, and to our mind the sooner the better." "We would be glad to have certified statements from every borrower, no matter how small the business. Bor- rower often does not know really how his business is going until such statement is made to him." 44 ACCOUNTANTS ' CERTIFICATES "When we receive a statement certified by competent accountants we deal with greater confidence with the bor- rower who submits such statement. We believe, therefore, that the custom of submitting such statements will grow." St. Louis, Mo. "In my opinion it is very desirable, and to the highest development of credit it is essential." Miles City, Mont. "I have always believed we should have them [certified statements], and especially so of late years, as the amount of commercial paper is increasing so rapidly." Omaha, Neb. "We believe the practice should be encouraged, and the writer thinks that an amendment to the banking act requiring it for all paper taken within certain fixed limits would be of more service to the public than constant bank examinations." "In connection with the purchase of commercial paper we lean by preference very strongly toward the paper of those concerns that do furnish statements certified by public accountants, and endeavor to use what little influ- ence we may have in increasing the custom of submitting such statements." Newark, N. J. "Recommend it highly." AND COMMERCIAL CREDIT. 45 Buffalo, N. Y. "We believe in the plan. A bank cannot have too much information on any name. An audit by a good firm often brings out things not shown by a mere statement." Mount Vernon, N. Y. "Certification by public accountants should become general." New York City. "We prefer to have certified statements whenever we can get them." "We do not insist on it, but would like to have it become a universal custom. Very desirable." "We believe that borrowers who offer their paper through note brokers should have their original statement certified to by public accountants, and the copies submitted to intending purchasers should state that fact. "Except where we know the borrowers personally, we consider certified statements essential." "We favor certification of borrowers' statements by reliable accountants." "We would be willing to give you our hearty co-opera- tion in this matter, but are of the opinion that unless all the banks come to a mutual understanding in this respect it will be almost impossible to obtain the desired results." 46 ACCOUNTANTS' CERTIFICATES "Will you allow the writer to wish you hearty good luck in your endeavor to bring before banks the importance of co-operating in the requirement of the certification of the statements rendered by borrowers?" "It would be desirable if such a practice could be put into general use." "If the size of the borrower, financially, warrants, cer- tified statements should be insisted upon. We recommend our customers to do so." "I believe that the certification should be more specific than at present, and tell just what the accountant has done besides simply auditing the books." "It is a step in the right direction." "In the case of outside notes offered by brokers, in which we have no sentimental interest, we are very apt to look for the accountant's certificate before considering the figures. If the large paper-buying banks would co- operate with note brokers in requiring certified statements from all concerns whose paper they handle losses would be minimized and commercial paper would find a readier market." Ogdensburg, N. Y. "I cannot commend too strongly the suggestion which prompted the enclosed inquiries. The benefit to both borrower and buyer is apparent, and need not be pointed out to either." AND COMMERCIAL CREDIT. 47 Ossining, N. Y. "We think that the idea is a very good one, one that would work to the advantage of money lenders, without a doubt." Rochester, N. Y. "We should like to see the custom become general, the accountant, of course, being capable and reliable." Asheville, N. C. "Have always urged it in connection with the enter- prises in which I have been interested, and I feel that nothing else has done so much to establish for them a high credit standing and low interest rates. It has been my desire and purpose to give public utterance to my views on this subject at some time in the near future." Charlotte, N. C. "We endorse it heartily." Fargo, N. D. "We approve the idea, and hope for its general adop- tion by all borrowers." Dayton, 0. "Certified statements are much more satisfactory and convincing than the ordinary kind." Findlay, 0. "We think it is growing each year, and eventually may become universal." 48 ACCOUNTANTS' CERTIFICATES Sandusky, 0. "I believe that good banking really demands such cer- tification of all statements." Springfield, 0. "If all would see the advantage to themselves it would be a good thing, but that is a matter of education." Youngstown, 0. "We very much favor its uniform adoption, especially with brokers' paper." Muskogee, Okla. "We favor the certification of borrowers' statements." Altoona, Pa. "For the protection of our depositors and stockhold- ers I advocate requiring certified statements; then loans can be selected on merchandise, manufactured supplies, that are classed as necessities, and are always in demand." Bangor, Pa. "I believe it would be an exceptionally good thing for banks if they could, in every case, require such statement before extension of credit." Donora, Pa. "This is a question which must be decided on the merits of each individual application; in our case, we have a direct knowledge of the habits of our borrowers, in almost every case; such a knowledge would, of course, be out AND COMMERCIAL CREDIT. 49 of the question were we a large institution, or located in a city. As a general proposition, I feel safe in saying that if a certified statement were required in every case the prospective borrower would have no reason to object to the requirement if he were worthy of having the accom- modation extended to him, while the undesirable applicant would be deterred from taking the time of the banks' officers by a knowledge of the fact that he would be re- quired to submit to a test which he could not hope to satisfy. If this be true, the interests of the banker and of the borrower who is worthy of credit are protected when a certified statement is required." Du Bois, Pa. "Good thing, of course." Lancaster, Pa. "We are strongly in favor of statements made by public accountants for firms borrowing through note brokers. . . . We think that large business firms should issue certified statements, and note brokers should not handle paper not so certified." Lemoyne, Pa. "We should like to see the plan become general." Lewistown, Pa. "Statements should be submitted regularly, and the banks cheerfully informed, for the borrowers' own benefit." 50 ACCOUNTANTS' CERTIFICATES Philadelphia, Pa. "The certified statement of some reliable certified ac- countant should be an absolute essential by all banks prior to consideration of any credits." "We deem them a future necessity." Pittsburgh, Pa. "In favor of it, and think that all bankers should encourage the practice." "Every account of any consequence should be certified by public accountants, and all receivables should be item- ized. This statement is based on past experience." Reading, Pa. "We have more confidence in the statements so certified, and would prefer if this practice could be uniformly adopted by the note brokers." West Chester, Pa. "Right, beyond question." Providence, R. I. "We heartily approve of the certification of statements, and think in many cases the appraisal of a competent expert in merchandise values should accompany the state- ment." "We believe this a proper requirement, and hope that the time is not far distant when the borrower will under- AND COMMERCIAL CREDIT. 51 stand that his first step in applying for a line of credit at a bank is to have prepared by a responsible accountant a properly certified statement." Dallas, Tex. "I think the time is coming when all large borrowers will feel the necessity of providing statements by pjablic accountants." San Antonio, Tex. "It is the only safe way.*' Norfolk, Fa. "We never lose an opportunity to urge the certification of borrowers' statements by public accountants." Richmond, Fa. "I firmly believe that the time will come when very few banks will grant considerable lines of credit except upon statements certified by independent accountants in whom they have confidence." Bellingham, Wash. "I would like to see the time when all statements would have to be certified." North Yakima, Wash. "I should be glad to see the practice become general. We have lost money loaned on statements which perhaps were correct as to books, but misleading and inaccurate in a way that an analysis would have uncovered." 52 ACCOUNTANTS' CERTIFICATES Spokane, Wash. "We think the plan should be adopted as fast as it con- sistently can." Racine, Wis. "It is our opinion that all corporations or firms selling their paper through a broker should have their books audited at least once a year by certified public accountants." AND COMMERCIAL CEEDIT. 53 CHAPTER IV The extracts contained in the foregoing pages demonstrate incontestably that there is a prepon- derance of opinion in favor of certification of bor- rowers' statements. A small minority, however, has gone still further and has introduced the rule that statements must be certified. Many others wish that such a rule could be enforced, but fear to make the attempt until the custom has become more general. Naturally, the greater development of the idea of compulsory certification is to be found in the larger cities, but it is gratifying to note that the sentiment in favor of this provision is distributed over a considerable portion of the country. The following extracts are selected from the opinions expressed in reply to the first question on the inquiry blank, viz. : "What is the attitude of your bank in regard to requir- ing that statements submitted by borrowers or note brokers shall be certified by public accountants ?" It is of much interest to view these replies first in the light of the financial status of the banks from which they emanate, and in the following statement the various kinds of opinions expressed are separated into four classes and these classes again separated according to the combined capi- tal and surplus of the banks concerned: 54 ACCOUNT ANTS ' CERTIFICATES *' 10 P g S3 V d be S3 a a I! I rt I a a 8 =4-1 O o % 1 cu '3 o 8h s II rQ dT a > AND COMMERCIAL CREDIT. 55 It would be instructive to reproduce all the replies to this important question, but the follow- ing selections may be taken as fairly indicative of the trend of opinion : New York City. "We prefer to have them [statements] certified by pub- lic accountants." San Francisco, Cat. "We are using every legitimate influence to bring this about." New York City. "We prefer statements submitted by reliable public accountants." "We believe that they should be required, but on ac- count of competition do not feel we can insist on it. I think that the commercial paper brokers can probably do more than the bankers towards accomplishing this end." San Francisco, Cal. "We are trying to educate our borrowers and brokers to furnish statements certified by public accountants." Wilmington, Del. "More and more inclined only to buy paper accompanied by such statements." Chicago, III. "We favor it strongly, and give the preference to paper accompanied by certified statements." 56 ACCOUNTANTS' CERTIFICATES Boston, Mass. "We prefer such statements, but do not insist on them in every case with our patrons." Peabody, Mass. "We favor the idea and are doing what we can to educate borrowers to it, but local conditions here prevent our requiring the certification." St. Paul, Minn. "We regard statements certified by public accountants with much more favor, and require same wherever prac- ticable." Kansas City, Mo. "We require them whenever we can do so." St. Louis, Mo. "We strongly favor, and always urge, that statements be made and certified by public accountants." Newark, N. J. "We continually recommend them as desirable, for their own protection as well as ours." Rochester, N. Y. "We have not insisted in a general way, but wish all statements were certified by public accountants." Charlotte, N. C. "Required in cases of corporations and most individ- uals." AND COMMERCIAL CREDIT. 57 Fargo, N. D. "In purchasing commercial paper of brokers we always give that paper preference that is sustained by reports of public accountants." Cleveland, O. "We endeavor to have all our large borrowers file state- ments that have been certified by public accountants, and in the purchase of paper from note brokers we prefer the names that have certified statements." Sandusky, 0. "We always demand it in case of brokers." Altoona, Pa. "When in doubt as to the financial standing of borrowers we request a statement. Purchasing commercial paper from some note brokers, we ask for balance sheet certified by public accountants." Lemoyne, Pa. "We require such statements to be certified by public accountants." Lancaster, Pa. "We are strongly in favor of statements made by pub- lic accountants for firms borrowing through note brokers." Philadelphia, Pa. "We come more and more to give preference to names with audited statements." 58 ACCOUNTANTS' CERTIFICATES "It is not our custom to require certified statements from borrowers without exception, although we encourage the practice wherever possible. Keen competitive methods in the banking business tend to hinder banks from demand- ing certified financial statements." Pittsburgh, Pa. "We require it only in special cases, but would like to see the practice more general." Providence, R. I. "We much prefer paper of concerns whose statements have been made up by certified accountants of recognized ability." Nashville, Tenn. "We have no requirements, but much prefer statements made by certified public accountants." Dallas, Tex. "We do not require it, but when certified statements are furnished us we put more confidence in them." Norfolk, Fa. "We require statements from practically all of our cus- tomers, and think all parties selling paper through note brokers should furnish them; and statements by certified public accountants are decidedly preferable." Camden, N. J. "We do not require it, but would much prefer to have all statements certified." AND COMMERCIAL CREDIT. 59 Lincoln, Neb. "We insist upon a certified statement when we purchase commercial paper." Greenville, Miss. "Not in a position to require it, but would like to be." Battle Creek, Mich. "Have never required the certification of statements, though look with favor upon statements that have been certified by disinterested public accountants." Holyoke, Mass. "We demand it." Baltimore, Md. "We do not require it. However, when furnished it creates a better impression." Wichita, Kan. "We do not require audited statements, but give a de- cided preference to paper supported by such statements." Geneva, N. Y. "We require them in almost every instance where a line of discount is granted." Albany, N. Y. "When purchasing paper through commercial brokers we require statements signed by certified public account- ants when possible." 60 ACCOUNTANTS' CERTIFICATES Rockford, III. "We do not require i't, but are more willing to purchase paper thus certified." Green Bay, Wis. "It is not possible always to insist upon it, but we recommend it." Carthage, N. Y. "We do, except in cases of a few local concerns with which we are in close touch." New York City. "We always require certified statements/' "We are requiring from note brokers that the statements of all firms whose paper we purchase be certified to by public accountants." "Required on paper purchased from note brokers." Los Angeles, Cal. "We favor such statements." Denver, Colo. "Request is often made, and in some cases required." Atlanta, Ga. "It is our custom to require an audit." Chicago, III. "We get certified statements where we can." AND COMMERCIAL CREDIT. 61 "Always prefer them." Joliet, III. "We require statements." Indianapolis, Ind. "Custom and competition lead us to indifference with most of our own customers. We are more exacting when buying paper through brokers, and discriminate in favor of statements certified by public accountants." Shreveport, La. "In buying out of town commercial paper we give preference to concerns whose statements are certified by reputable firms of public accountants. Baltimore, Md. "Have, as yet, no definite policy to prefer certified state- ments. Whenever the faintest shadow of doubt arises as to the financial status of any of our borrowers we immedi- ately request them to have an audit made by certified public accountants." Boston, Mass. "We' insist on it as far as we are able." St. Louis, Mo. "We encourage and urge where it can be done, in view of bank competition." Omaha, Neb. "We prefer that the statements submitted by borrowers should be statements of public accountants." 62 ACCOUNTANTS' CERTIFICATES "We prefer them, and always ask for them from brokers." Philadelphia, Pa. "We get them when we can, and prefer them, but do not at present make them essential." Hoboken, N. J. "We have not made this an established rule except when purchasing commercial paper." Webster Groves, Mo. "We require it." St. Charles, Mo. "Require statements." Kansas City, Mo. "We insist upon it in considering paper offered by brokers." Joplin, Mo. "We do not require it. We, and all others who take commercial, should." Minneapolis, Minn. "Always glad to get them, but do not insist in every instance." Taunton, Mass. "We think it would be an additional safeguard, but do not propose to insist upon it." AND COMMERCIAL CREDIT. 63 Cumberland, Md. "Requested when lines of credit reach certain figures." Baltimore, Md. "When possible, get certified statements from our cus- tomers." Emporia, Kan. "We would like to insist on this method." Cedar Falls, Iowa. "We believe this would be a very good thing, but ques- tion whether we could enforce it in a town of this size." Berkeley, Cal. "We would prefer certified statements, but do not exact them. Custom here places us in a position to pass upon each case without applying a general rule." Waterville, Me. "The profession of certified public accountant is not known here, and it would therefore be useless to require certified statements from our borrowers." 64 ACCOUNTANTS' CERTIFICATES CHAPTER V The second question on the inquiry blank sub- mitted to bankers is one that elicited a wide va- riety of replies. The question reads: "Where this [certification] is required how is it re- garded by the borrowers of your bank?" Many bankers expressed the opinion that it would not be practicable to enforce such a rule unless it were universal, because of the dissatis- faction which would be caused among borrowers. Other bankers believed that it would be better to offend an occasional borrower than to run the risk of accepting unverified statements. Still others and these are principally in the larger cities- report that they have found no objection what- ever to the requirement, inasmuch as borrowers are learning that by submitting certified state- ments they are strengthening their own position. Nearly every reply received from bankers whose institutions are interested in commercial paper gave expression of opinion on this point. In order to present a fair comparative view the following extracts are taken at random from re- plies received: AND COMMERCIAL CREDIT. 65 New York City. "We have yet to hear of a single objection." "It is being taken in the right spirit and we are adding to the number every year." "Many borrowers are not yet ready for this as a general requirement, but an increasing number look at it with favor." Utica, N. Y. "Favorably in our experience." Los Angeles, Cal. "Have not met with many objections." San Francisco, Cal. "Nearly all our customers look upon it with favor." St. Paul, Minn. "Our experience is that some borrowers fear the ex- pense; others feel well repaid for having their books audited by public accountants." St. Louis, Mo. "What objection there is could be removed by a cam- paign of your association, the banks and commercial paper brokers." "Broad-minded and broad-gauged borrowers always agree." 66 ACCOUNTANTS' CERTIFICATES Cleveland, 0. "Our small borrowers would object to the expense." Newark, N. J. "Where the advantages are fully explained we find that in most instances it meets with approval." Buffalo, N. Y. "A few seem to think it 'O K.' The many take excep- tions. It is a campaign of education." Cleveland, 0. "As a rule, borrowers do not object." Springfield, 0. "Some would withdraw their business from us entirely." Denver, Colo. "Some take the suggestion very kindly, others resent it the latter changing their bank accounts." San Francisco, Cal. "Resisted by many, particularly the old-fashioned." Hartford, Conn, "They fear the expense of the examination." Altoona, Pa. "No objection if they are confident they can submit satisfactory statements." AND COMMERCIAL CREDIT. 67 Lewistown, Pa. "Are inclined to resent the requirement. It is more a matter of education." Philadelphia, Pa. "It depends upon the borrowers' relations to us. If large enough to be independent of our facilities they must be handled carefully to avoid creating a resentment. Other- wise, they are inclined to acquiesce more gracefully. We have never been refused." West Chester, Pa. "Rarely have any difficulty." Philadelphia, Pa. "Where a client retains a certified public accountant as the result of a suggestion on the part of the banker the true value of the audit is appreciated, and we do not know of an instance in which the practice, once started, has been discontinued." Tipton, Ind. "If they complain we should not care to buy the paper We have very little complaint about it." Geneva, N. Y. "I think the prejudice against it that was common some years ago has disappeared." Canton, N. Y. "Our observation inclines us to the opinion that the stronger the financial position of the borrower the more 68 ACCOUNTANTS' CERTIFICATES likely he is to welcome the suggestion. Many of the best seem to appreciate its value to themselves." Canandaigua, N. Y. "Some of the most responsible borrowers take a satis- faction in being able to furnish certificate by a public accountant." Racine, Wis. "We find a growing sentiment of customers in favor of certified statements." Greencastle, Ind. "No objection to it by solvent concerns." El Paso, Tex. "We have never found a good one to object." Kansas City, Mo. "Borrowers, as a rule, object to it, alleging that it imposes unnecessary expense upon them." "Our borrowers seldom take kindly to the suggestion in the first instance." Las Cruces, N. Mex. "Where statements are asked, the borrowers show re- sentment. They need education." Milwaukee, Wis. "In a few instances where we have requested such statements our customers have not apparently taken kindly to the idea." AND COMMERCIAL CEEDIT. 69 Spokane, Wash. "In most cases it is objectionable on account of expense, annoyance, etc. Modesto, Cal. "Not objected to by good concerns." Buffalo, N. Y. "Willingly consent." The third question on the inquiry blank reads : "To what extent do you find that borrowers voluntarily submit certified statements?" This is answered to a great degree by the re- plies to the preceding question. In the large cities, and in some of the smaller cities in the districts adjacent to large centres, the practice seems to be quite prevalent; but in outlying dis- tricts the general report is that borrowers are not acquainted with the advantages of certified state- ments, and in some instances are not even cognizant that certified statements are ever sub- mitted. In such cases the idea of a certified statement voluntarily prepared and submitted is out of the question; but wherever the situation is understood, and the submission of certified state- ments is recommended by the banks, there is a considerable number of borrowers ready to con- form to this modern practice. 70 ACCOUNTANTS' CERTIFICATES Some of the replies were in terms of percent- age. For example, a banker in New York re- ports that not more than 5% furnish certified statements voluntarily. Another New York banker estimates the number at slightly less than 5%. A California banker estimates 10 %. A Chicago estimate is 15%. A Baltimore banker estimates 5%. From Boston comes an estimate of 10%. A banker in St. Louis says, "About 75% of those who give us certified statements do so voluntarily, but unfortunately only about 10% have done so." Omaha is more fortunate; a banker there reports that one-half the borrowers voluntarily submit certified statements. In Fargo, N.D., a banker reports 20%. A Philadel- phia estimate is 5%, and another from the same city 25%. A Norfolk banker reports, "Most of our borrowers now furnish statements without our asking for them." The foregoing extracts are fairly indicative of the replies from those who report the existence of voluntary submission of certified statements; but by far the greater number of replies state that borrowers do not voluntarily have their state- ments certified before presenting them to the bank. As has been seen, there is satisfactory evi- dence of a tendency toward certification in various parts of the country, but the fact that the esti- mates are chiefly from 5% to 10% of the total number of borrowers on commercial paper shows that a great deal of education is required, and AND COMMERCIAL CREDIT. 71 that bankers, note brokers and accountants have a considerable work before them to demonstrate the necessity for what should be sine qua non in the case of applications for loans not supported by collateral. Closely related to the two foregoing questions is No. 5 on the inquiry blank, which reads as follows : "Do you notice an increase or decrease in the propor- tion of borrowers' statements certified by public account- ants?" The reports on this question may well be sum- marized in the form of a tabulated statement showing those bankers who report an increase, the number reporting no change and the number reporting a decrease. It will be noted that a considerable number of the total replies failed to answer this particular inquiry. One of the greatest banks in the country reports : "We believe the practice eventually will become uni- versal." The following is a summary of replies to ques- tion 5 : Increase. No Change. Decrease. 307 58 1 72 ACCOUNTANTS' CERTIFICATES CHAPTER VI Probably the most important question in the series submitted by the American Association of Public Accountants to the bankers of the coun- try is that which deals with the effect of certified statements. The question reads : "Other things being equal, do certified statements have a favorable effect upon the terms and interest rates granted by your bank to borrowers?" Here we have the crux of the whole matter. And yet, in a way, the interrogation is not alto- gether satisfactory, because it is found that in a great many cases while no difference in the terms or interest rates may be made there is a far greater readiness to make a loan upon supported paper than upon unsupported ; accordingly, in or- der to know the true state of affairs, it is almost necessary to bear in mind the general replies in regard to the attitude of the bank in the matter of certified statements and to read the quotations which follow in the light of the information pre- viously gained. AND COMMERCIAL CREDIT. 73 In nearly every case the banker who prefers certified statements is ready to extend better terms and in some instances better rates to the borrower whose affairs have been investigated by an independent accountant. The following quotations from bankers' replies fairly illustrate the opinions for and against the idea that certified statements should have a favor- able effect: New York City. "It goes without saying that certified statements do have a favorable effect upon the terms and interest rates of this bank granted to borrowers." Richmond, Va. "Other things being equal, certified statements have a very decided effect upon the terms granted to borrow- ers. They do not, however, affect the interest rates, as a general thing." Denver, Colo. "Undoubtedly increases our confidence in such bor- rowers, and in consequence they can depend on greater consideration and more liberal treatment." Portland, Me. "Always give preference to certified statements. Dif- ference between certified and uncertified statements almost if not quite as great in its influence in taking paper as that between a statement and no statement." 74 ACCOUNTANTS' CERTIFICATES Chicago, III. "I do not know as they do at the present time, but they surely will in times coming." Louisville, Ky. "It would, undoubtedly." Chicago, III. "Everything else being equal, I believe that those bor- rowers who have their statements certified to by public accountants would obtain slightly better terms and rates than those who do not." St. Paul, Minn. "Certified statements unquestionably have a favorable effect upon the terms and interest rates granted not only by our bank but all banks to borrowers." St. Louis, Mo. "Certified statements have a decidedly favorable effect upon us, and undoubtedly secure better interest rates." Asheville, N. C. "Yes, very much so." Philadelphia, Pa. "Other things being equal, the fact of loaning may be affected by certified statements terms and rates of interest by the market." Pittsburgh, Pa. "No effect on rates. Loans are more readily accepted." AND COMMERCIAL CEEDIT. 75 Philadelphia, Pa. "As to lines of accommodation, yes; and also slightly as to interest rates." Pittsburgh, Pa. "Yes, a thoroughly itemized statement would give con- fidence, and no doubt lessen interest rates to concerns furnishing same." Nashville, Tenn. "Other things being equal, certified statements have preference both as to terms and interest." Bellingham, Wash. "The borrower has a better chance of getting the loan. The interest would be no less, because our demand is largely more than we can take care of." Racine, Wis. "We have not made any special rates on account of the certified statements, the companies furnishing them always commanding the lowest rates in the market. We believe, however, that the certified statement would warrant a better rate than the ordinary statement furnished." Phillipsburg, N. J. "All things considered, we would be inclined to shade the rate." Camden, N. J. "They certainly have the preference, and it often affects the rate charged." 76 ACCOUNTANTS' CERTIFICATES Jackson, Miss. "It would have very material and favorable effect." Emporia, Kan. "Would establish a better line of credit to borrower; would not affect rate." Chicago, III. "Sometimes results in more liberal lines of credit, but has no effect on interest rates." Crawfordsville, III. "Most certainly." Kansas City, Mo. "Do not think such statements would perceptibly affect the interest rate, as compared with other paper of equally good quality." Mount Vernon, N. Y. "Not necessarily on terms or rates. Chief value is that lender feels that the report has been made by a dis- interested party." New York City. "Always prefer to have them." "Yes." "No." "No, and yes." AND COMMERCIAL CREDIT. 77 "It would." "To some extent." "Yes, to a slight extent, although the effect on our willingness to lend is more important." "No." "It all depends upon the borrower and our judgment of his character and responsibility. A certified statement is a favorable indication." "They do." Ogdensburg, N. Y. "Yes, in making outside loans." Utica, N. Y. "Yes." Los Angeles, Cat. "Yes, we have more confidence in the statements of concerns certified by public accountants." Pomona, Cal. "Yes." San Francisco, Cal. "Yes." "It has its effect on the terms but not the rate of interest." 78 ACCOUNTANTS ' CERTIFICATES Denver, Colo. "It might have a bearing." Hartford, Conn. "Yes." New Milford, Conn. "Yes." Wilmington, Del. "Yes." Macon, Ga. "Yes." Cairo, III. "No, but are looked upon with more favor." Chicago, III. "Certified statements improve the desirability, and therefore help the sale of paper in brokers' hands, but have very little effect upon the terms and interest rates." "Yes, decidedly." Joliet, III. "Might make easier terms but do not affect the rate of interest." Lincoln, III. "Most assuredly." AND COMMERCIAL CREDIT. 79 Indianapolis, Ind. "Yes." Boone, Iowa. "Yes." Shreveport, La. "Yes." Baltimore, Md. "Yes." "They would probably save delay of further investiga- tion and make us somewhat more willing to loan. Do not believe they would materially affect rate." Boston, Mass. "No." "It gives a bank a better impression at once to have a certified statement." Peabody, Mass. "Yes, decidedly." Duluth, Minn. "Yes." Gulf port, Miss. "Yes." 80 ACCOUNTANTS' CERTIFICATES Kansas City, Mo. "They would have a beneficial effect upon us." St. Louis, Mo. "Yes." Omaha, Neb. "They do." "Yes, they do." Buffalo, N. Y. "Yes, if certified accountants are of good repute and experience." Charlotte, N. C. "Yes." Fargo, N. D. "Yes." Cincinnati, 0. "They do." Cleveland, 0. "Yes." Findlay, 0. "Interest rates are not affected." Springfield, 0. "They do not. The rate is regulated by the balance they carry with us." AND COMMERCIAL CREDIT. 81 Bangor, Pa. "Yes." Lancaster, Pa. "No, but we favor the certified statements.*' Providence, R. /. "Cannot say that we have discriminated as yet in making interest rates." Denison, Tex. "It may not cut any figure in the rate, but of two offerings of equal merit where the statement of one is certified by a public accountant would give the preference in purchase." San Antonio, Tex. "Yes." Norfolk, Fa. "Certified statements influence us very largely in the amount of accommodation extended to customers." Spokane, Wash. "Yes." "They do." Paterson, N. J. "Have no influence on rates." Harrison, N. /, "Yes." 82 ACCOUNTANTS' CERTIFICATES Manchester, N. H. "Not much/' Hastings, Neb. "They do." Butte, Mont. "Yes." Webster Groves, Mo. "Condition, as shown by statement, affects rate.*' St. Joseph, Mo. "Yes, they usually give them preference." Corinth, Miss. "It certainly would have." St. Paul, Minn. "Yes." Sault Ste. Marie, Mich. "A favorable certificate tends to give borrowers the most favorable rate of interest." Worcester, Mass. "Yes." Dorchester, Mass. "Yes." Cumberland, Md. "Most assuredly, yes/' AND COMMERCIAL CREDIT. 83 Boston, Mass. "Yes." "Rates are not influenced." Baltimore, Md. "Unquestionably they do." "Very little effect as to rates; but, of course, certified statements inspire confidence as to amounts we would loan." Lawrence, Kan. "Not much effect on the rate, as a rule, but a certified statement approved by the lender would lubricate transac- tions, give more confidence, and lead to a preferred class." Sioux City, Iowa. "Have no effect on rate." Martinsville, Ky. "We believe in them.*' Vancouver, Wash. "No." Berkeley, Col. "Decidedly." Los Angeles, Cal. "Yes, indeed." 84 ACCOUNTANTS' CERTIFICATES Fulton, N. Y. "Yes, if the statement shows up well." Albany, N. Y. "No. We are influenced more by the reports from banks and trade generally." Ridgewood, N. J. "Slightly better." Red Bank, N. J. "They should." Oshkosh, Wis. "I think so." Las Cruces, N. Meat. "Very likely." Hammond, Ind. "As a rule." Springfield, III. "Yes, better satisfied." Jersey Snore, Pa. "Yes, it would." Spokane, Wash. "A certified statement is always preferable." AND COMMERCIAL CREDIT. 85 Houston, Tex. "We think it would." Galveston, Tex. "Think well of them, but they do not affect rates." Little Falls, N. Y. "Yes, on paper which we buy." From many parts of the country the reply to the question concerning the effect of certified statements upon rates and terms is simply "Yes." In the foregoing excerpts an effort has been made to show opinions from widely separate points. The capital of the banks whose officers have expressed opinions on tfiis subject is of consider- able moment, and the following statement, com- prising the numbers of replies in which this ques- tion was answered, will be found of interest : 86 ACCOUNTANTS' CERTIFICATES |!l C* C<1 CO CO CD IO STl rH CO CO Oi M W iH CO b- iO TH TH o o