'i''i .'■.'\'^, '''■.''■■.'■ i /. N-' AUDITING A PRACTICAL MANUAL FOR AUDITORS. BY LAWRENCE R. DICKSEE, M.Com., F.C.A. \ (Of the firm of SELLARS. DICKSEE & CO.) Formerly Professor of Accounting at the University of l]irminp;hc]in : noi^' Lecturer at tlie Loudon School of Econnniics and Political Science (University of London). NINTH EDITION. » >' ■ ,' » ", > ', » > J ,0 London : GEE & CO., Printers and Publishers, 34 Moorgate Street, E.C, 19 12, BY THE SAME AUTHOR. "^'^Edmonr'' ^^^ Accountant Students." (Sixth " ^''EdrS'"' ^°'' Company Secretaries." (Fourth " ^TS^d EdftSnT""' '" Accountant Sxubhnts" ''""TThTd^ditionr^ '^'^^^^^^^ '.^ ^— -'• "^Td^o"^) ^'''^^ ''^ Accountancy." (Second "^TdSr '^'"'^^^'.^ ^^^.^^^ Book." (Second "Auctioneers' Accounts." (Second Edition) ! 'iL "Solicitors' Accounts." (Second Edition) - L "^Ts?conTEl'tio'nr^""^' ^^.^ "^^.^^'^ ^--•" "Advanced Accounting." (Fourth Edition) - •.' //! "Hotel Accounts" . 3/6 PRICE 1 0/6 5/- 3/6 5/6 2/6 3/6 G££ &. CO.. PrinUrs and Publishers, 34 Moorgate Street, London, B.C. CONTENTS. 112 162 PAGE Preface to First Edition ... ... ••• ••• '^" Preface to Ninth Edition ... ••. ••• ••• ^^ I. Introductory: Auditing up to the Trial Balance... ... ••• ••• ••• ^ • II.— Methods of Account suggested in the course of Audit ... ••■ ••• 4^ in._SPEciAL Considerations in Different Classes of Audits ... ••• ••• ••• 7o IV. — The same (continued)... V. — The same {continued)... VI.— From Trial Balance to Balance Sheet ... 190 VII. Forms of Accounts and Balance Sheets ... 249 VIII.— What are Profits? ... ••• ••• ^^^ IX. The Attitude of the Auditor ... ••• io4 X. The Liabilities of Auditors ... ••• 335 XI. — Investigations ... ••• ••• •" ^^i XII. — Income Tax .•• ••• ••• ••" ^^"^ Memoranda (space for)... ••• ••• "• •*' '^°' Appendix A. (Extracts from Statutes, Sec.) :— Larceny Act 1861... ••• ••• ••• "• '^^'^ Falsification of Accounts Act 1875 ... ... — 4iS Prevention of Corruption Act 1906... ... - \^9 Partnership Act 1890 ... ... — ••• ^^^ Limited Partnerships Act 1907 ... •.• ••• 4^4 Companies (Consolidation) Act 1908 43" Clauses Consolidation Act 1845 ... ••• 474 Act 1863 ... — ••• 477 » 1869 +79 250395 IV. CONTENTS. ppENDix A — continued. PAGE Licensing Act 1904 ... 479 „ Rules 1904 ... 483 Stannaries Act 1869 ... 484 „ 1887 ... 485 Assurance Companies Act 1909 ... 488 Gasworks Clauses Act 1S47 ... 537 H „ „ I87I ••• 539 Waterworks Clauses Act 1847 ••• 545 Metropolis Water Act 1902 ... 546 Electric Lighting Act 1882 548 „ „ Clauses Act 1899 ... ••• 557 Railway Companies Securities Act 1866 ... 558 ,. „ (Scotland) Act 1867 560 „ „ Act 1867 560 Regulation of Railways Act 186S ... 561 „ „ „ „ 1889 ... 572 Public Health Act 1875 ... ... 573 Local Boards Accounts Order 1880... 582 Municipal Corporations Act 18S2 ... ... 587 Local Government Act 1888 ... 595 „ ., „ 1894 ••• 597 Apportionment Act 1870 ... 603 Intestates' Estates Act i8go 603 Judicial Trustees Act 1896... 609 Public Trustee Act 1906 ... 610 Hospital Accounts (prescribed form for) 618 Building Societies Act 1874 621 „ „ ,, 1894 623 Friendly Societies Act 1896 ... 636 „ 1908 ... 659 Trustee Savings Banks Act 1863 ... 659 Savings Banks Act i8qi ... 668 CONTENTS. V. Appendix A — continued. i'age Industrial and Provident Societies Act 1893,.. ... 669 Collecting Societies and Industrial Assurance Com- panies Act i8g6 ... ... ... ... C^jz Finance Act 1907... ... ... ... ... 673 Finance (1909-10) Act 1910 ... ... ... 679 Appendix B. (Legal Decisions) : — Leeds Estate Building and Investment Society, Lim. V. Shepherd ... ... ... ... ... 685 Lee V. Neuchatel Asphalte Company, Lim. ... ... 686 Bolton V. Natal Land and Colonisation Company, Lim. ... ... ... ... ... 693 Lubbock V. The British Bank of South America, Lim. 694 Edinburgh United Breweries, Lim., and others v. James A. Molleson (Nicholson's Trustee) and another (Scottish Appeal) ... ... ... ^96 Verner v. The General and Commercial Investment Trust, Lim. ... ... ... ... ... 699 Wilmer v. M'Namara & Co. ... ... ... 704 London and General Bank, Lim. ... ... ... 706 Kingston Cotton Mill Company, Lim. ... ... 730 Western Counties Steam Bakeries and Milling Com- pany, Lim. ... ... ... ... ... 735 Citizens' Auditor v. The City Council, Manchester Corporation ... ... ... ... ... 73^ Wilde and others v. Cape and Dalgleish ... ... 742 Martin v. Isitt ... ... ... ... ... 743 Cox V. Edinburgh and District Tramways Company, Lim. ... ... ... ... ... 745 Regina 1/. Williams ... ... ... ... 74^) Thomas ti. The Corporation of Devonport ... ... 750 Moxham and others v. Grant ... ... ... 752 ^^^^rish Woollen Company, Lim. v. Tyson and others ... 755 Maynards, Lim. v. Maynards and others ... ... 766 Joseph Hargreaves, Lim. ... ... ... ... jy6 Foster v. The New Trinidad Lake Asphalte Company, Lim. 780 VI. CONTENTS. Appendix B — continued. page Ebenezer Roberts & Sons. Lini. ... ... ... 782 Burleigh v. Ingram Clark, Lim. ... ... ... 791 • Dovey and others V. Cory ... ... ... ... 793 Bond V. The Barrow Htcmatite Steel Company, Lim.... 803 Bellerby v. Rowland and Marwood's Steamship Com- pany, Lim. ... ... ... ... ... Sii Boaler z/. Watchmakers' Alliance, Lim. ... S16 Rex z/. Whitaker Wright ... ... ... ... 819 Towers v. African Tug Company, Lim. ... ... 825 Short & Compton i;. Brackett ... ... ... 829 London Oil Storage Company, Lim. v. Seear, Hasluck & Co. ... ... ... ... 831 Smith V. Sheard ... ... ... ... ... 849 Stevenson v. Bexhill Corporation ... ... ... 869 Newton v. Birmingham Small Arms Company ... 889 Gedge v. Ye Mecca, Lim. ... ... ... ... 896 Re Liverpool and Wigan Supply Association, Lim. ... 910 Roman v. Quilter... ... ... ... ... 914 Ivex t^. Oliphant ... ... ... ... ... 915 Rex V. Solomons ... ... ... ... ... 919 /?£> James Williams (rf^a/.) ... ... ... ... 920 The Attorney- General v. Corporation of West Ham ... 922 ' Re Spanish Prospecting Company, Lim. ... ... 927 /?e Arthur Francis, Lim. ... ... ... ... 933 Rex y. Locke ; ex parte Bvidgt: ... ... ... 934 Henry Squire (Cash Chemist), Lim. v. Ball, Baker & Co.; Mead w. same ... ... ... ... 936 Cork Mutual Benefit Terminable Society v. Atkins, Chirnside & Co. ... ... ... ... 977 Mead v. Ball, Baker & Co. (Appeal)... ... ... 981 Cuff V. London & County Land and Building Co., Lim. 991 The Same (Appeal) ... ... ... ... 993 Appendix C— Extract from "Tretyce off Husbandry " ... 996 D. — Depreciation Tables ... ... ... 999 Index... 10.-^3 PREFACE TO FIRST EDITION. A LTHOUGH the present \ulume has considerablv exceeded the limits originally arranged between myself and the publishers, 1 (^annot but feel that the vast subject to which I ha\e addressed mvself is very far from being exhaustively treated in the following pages. In particular. I feel that the chapter dealing with the audit of different classes of under- takings is, in spite of its considerable length, \ery far from com[)lete ; and, further, I regret that space has altogether failed me for a more full discussion of the various legal decisions that affect the duties and responsibilities of the profession. On the other hand, I \enture to hope that the present attempt to combine, within the limits of a volume of con\enient size and reasonable price, the leading principles that should guide the Auditor in the course of his investiga- tions, together with the special points that require his consideration in the case of any particular concern, will be found not only of \alue to the Accountant Student — whose opportunities of gaining experience are, naturally, somewhat limited — but also of .some utility to practising members of the profession, both in the ordinary course of their daily routine, and also — more especially — when they find themselves face to face with the accounts of a business with which they have hitherto been unfamiliar. VUl. PREFACE TO FIRST EDITION, If it should be thought that the standard I have throughout advocated is somewhat Utopian in character, and unattainable in practice, I can only reply that I maintain that, to me, an incomplete investigation seems worse than useless ; and I am convinced that it is only by voluntarily accepting, and even increasing, the responsibilities of our position that we can hope to maintain and to increase the large measure of public confidence we at present enjoy. It would be impossible for me to specifically acknowledge my indebtedness to all the \arious members of the profession whose valualile opinions have so materially assisted me in the production of this work ; but. none the less, I desire to thank them most cordially for the benefits I have received from tlii^ir experience. In conclusion, I would wish to add that, as I have laid no claim to completeness in this work, so also do I wish to dis- claim any assumiJtion of absolute finality; and, accordingly, I shall consider myself greatly indebted to my readers for any suggestions and opinions with which they may be pleased to favour me, which, I need hardly add, shall receive every attention upon the publication of a new edition. Lawrence R. Dicksee. j^tJi July 1892. PREFACE TO NINTH EDITION. ''PHE Eighth Edition of this work being now exhausted — representing a Siule of upwards of 16,000 copies — it has become necessary to prepare a Ninth. Advantage has been taken of this opportunity to revise care- fully the whole of the text, and to re-write or re-arrange those portions that have been affected by recent legislation or decisions. In the Appendices various important additions have of necessity been made to the extracts from Acts of Parliament, and reports of all important cases since the last edition was issued have been added to Appendix " B." It has been a source of great satisfaction to the Author to observe that the sales of this work show that, while it continues to be regarded with steadily increasing favour by professional accountants in all English-speaking countries, there appears to be a growing demand for it among business men and economists, both at home and abroad. The increased attention that has been given to this important subject of late years outside the ranks of professional accountancy will, there can be little doubt, prove of great and lasting value to the community. In the United States of America the demand for this work — which has always been favourable — has so increased as to justify the issue of a special American Edition. This has been X. PREFACE TO NINTH EDITION. prepared under the Author's supervision by Mr. Robert H. Montgomery, C.P.A., and was published first at New York in September 1905 ; a second (and revised) edition was issued in December 1909. It is satisfactory to observe that, while the local conditions in the States make much of the detailed matter contained in the present volume inapplicable, the principles of auditing, and the practice of professional accountants throughout the world, are sufficiently uniform to enable this work to rank as a standard text-book in both hemispheres. The Author gladly lakes advantage of the opportunity afforded by this Preface to express his indebtedness to numerous members of the profession for valuable suggestions received in the past, and to express the hope that a similar kindness will be extended to him in the future. Lawrence R. Dicksee. 48 CopihalL Avctiuc. Loudon, B.C. I i th J id V 1911. I First Edition {i,ooo Copies), August 1892. Second Edition (1,000 Copies), October 1895. Third Edition (1,000 Copies), August i8g8. Fourth Edition (1,000 Copies), October igoo. Fifth Edition (1,500 Copies), October 1902. Sixth Edition (1,500 Copies), November 1904. First American Edition (1,000 Copies), September 1905. Seventh Edition (1,500 Copies), April 1907. First American Edition (Reprint of 500 Copies), May 1907. „ „ „ (Reprint of 2,000 Copies), Jan. 1908. „ „ „ (Reprint of 750 Copies), April 1908. Eighth Edition (1,500 Copies), October 1909. Second American Edition (3,500 Copies), December 1909. Ninth Edition (5,000 Copies), March 1912. AUDITING. CHAPTER I. INTRODUCTORY. AUDITING (up to the Trial Balance). PRELIMINARY CONSIDERATIONS.— The first point that claims attention is the method, or system, upon which an audit should be conducted ; and here, on the outset, one is brought face to face with some very considerable differences of opinion and practice among members of the profession. It is mentioned by Mr. G. P. Norton, F.C.A., that the practice of his firm (Armitage & Norton) is to have " certain printed instructions of a general character which are bound in small note-books, together with a number of spare blank leaves for memoranda. At the commencement of a new audit one of the note-books is appropriated to it, and the general instructions are carefully revised and special instructions supplemented. The clerk who has this book with him is thus shown precisely what are his duties with regard to the audit upon which he is engaged." The late Mr. C. R. Trevor, F.C.A., in a lecture of somewhat earlier date, advocated a similar practice. He said : " The practice of having an Audit Book for each audit is highly important, with columns for the initials of each person who has performed the work, and made himself responsible for its having been correctly and thoroughly done. By this means much labour is saved on a second audit, and thorough continuity secured." It may be noticed that Mr. Trevor made no mention here of any ' ' instructions, ' ' but his B AUDITING. remarks clearly pre-suppose the Audit Book to contain a definite list of duties to be performed. Since the issue of the first edition of this work the author has published an " Audit Xote-Book," the demand for which is sufficient to pro\e that the use of such a book is very general a.mong the profession. On the other hand, it has been suggested "that if a com- petent clerk is sent to undertake an audit (and none but competent clerks sJioidd be sent), it is much the better way to leave him unfettered with printed instructions, but allow him to go thoroughly into the whole system in operation, and from the nature of such system, and from what he sees, let him outline his own method of procedure. By this means there is not so much danger of his getting into a semi-careless groove of working, and moreover he feels that more responsibility is placed upon him, which acts as an incenti\-e to do the work more thoroughly than would be the case were he working to ' rule of thumb.' " There is, doubtless, something to be said upon this side of the question ; but if so much be left to the clerk, it is a little difficult to see what the principal is expected to do himself. In any case, however, the book is useful as a record of the routine work performed and of the queries raised in the cour.se of audit. It is believed that, in point of fact, some sort of Audit Note-Book is almost invariably used by mo.st accountants at the pre.sent time. The importance of a systematic record of queries was emphasised by Mr. (noAv Lord) Justice Vaugiian Williams in the London and General Bank case. The late Mr. David Chadwick, F.C.A. — after an experience of upwards of fifty years — was distinctly in favour of a stereo- tvped set of in.structions. The set used in his office (which. is given below) is especially full and complete; and although, of course, but a mere indication of an Auditor's duties, it will be found extremely suggestive : — AUDITING (up to THE TRIAL BALANCE). 3 INSTRUCTIONS FOR AUDIT. 1. In commencing a new audit j'ou should obtain a list ot all the books kept, and of all persons authorised to receive or pay money and order goods. 2. In the case of a joint-stock company, examine the articles and board minutes respecting the receipt and payment of money, and the drawing of cheques, acceptances, &c. 3. Ascertain and take note of the general system upon which the books are constructed, and the plan of checking the correctness of the accounts paid, and whether exclusively or generally by cheques. 4. Report if the accounts and vouchers have been submitted to the board of directors by an account committee or otherwise, and whether they have been systematically checked and certified ; and note any discrepancies. 5. Examine all the items in the Cash Book with the Bank Pass Books and vouchers, and put 3'our usual audit initials in the Pass Book and to every item in the Cash Book. Ascertain if the Bankers' Pass Book is frequently entered up and examined, 6. Note any unusual or extraordinary payments or receipts. 7. In regard to the payments for wages and petty cash, note any unusual items, and see that vouchers for all payments are kept and produced. 8. Report whether a rough Cash Book is kept, and whether the fair Cash Book is regular!}' and punctually posted and balanced, and if the balance is checked. 9. Report also if the entries in the fair Cash Book are in arrear, on account of the current year; and if so, to what extent, and why. 10. In all cases where branch establishments are included in one business you will be careful to examine into the mode of bringing the returns of work, accounts, and expenses to the head office. 11. Examine all the Day Books, and see that the proper returns of purchases and sales are made by each department, and that the Bought and Sold Books are properly entered up ; that the invoices are properly checked as to quantities and prices ; obtain a declaration, or otherwise satisfy yourself, that every liability of the year is brought into account. 12. The postings in the Personal Ledgers must be checked from the Bought and Sold Day Books and the Cash Book, and also from the Bill Books and Journal. 13. The postings in the Nominal or Impersonal Ledgers must be checked from the journalising of the Bought and Sold Day Books, the B 2 4 AUDITING. Bill Books, the Invoice Books, and the Cash Books, and the mode and correctness of the journalising must be carefully proved. 14. Examine the Bills Receivable and Bills Payable Books, and note any item of past due, renewed or dishonoured bills, and make list of same and of the securities, if any. 15. Examine the entries and transfers passed through the Journal, and check the postings ; and although you are not held responsible for the details of classification, it is desirable you should make any sugges- tions required, and note anj'^ discrepancies, especially in relation to the division of expenditure on account of Capital and Profit and Loss Accounts respectively. 16. Examine the Share Register, and see that the amounts received for calls agree with the entries in the Bank Pass Books, and that they are correctly posted to the credit of the respective shareholders in the Share Ledger : that all transfers from the transfer deeds are duly stamped and entered in the Register of Transfers ; and also that the amount of the subscribed and paid-up capital and arrears corresponds with the Balance Sheet. 17. Examine the register of all mortgages on the compan3''s property, and all debenture bonds issued, and note and check the amount of capital paid in advance of calls, and of the receipts and payments in respect thereof with the Bank Pass Book. 18. In the accounts of stock-taking see that all stock sheets and returns are duly signed by the heads of departments, and that the same are correctly carried forward to the General Stock Account ; and ascertain and note whether goods finished or in progress are taken at cost price or otherwise ; also report whether in large concerns an independent check clerk or valuer has verified the stock returns in regard to prices and quantities. 19. In checking the Profit and Loss Account, note whether the usual and proper deductions are made for wear and tear and depreciation, and for recouping of capital on works or premises held on short leases. 20. Take care that in the Balance Sheet no additions are made to expenditure on Capital Account, except such as are duly authorised by the board of directors, and note the distinction between new works and mere replacements. 21. Ascertain whether the conveyance deeds and other securities specified in the agreement of purchase and articles of association have been duly executed, and the sums paid by the company on account of purchase have been duh- endorsed thereon or otherwise acknowledged to the satisfaction of the solicitors or board of AUDITING (up to THE TRIAL BALANCE). 5 directors ; also that the existence and safe custody of these documents have been duly certified ; ascertain by application to the bankers the correctness of any balances, bills, or securities lodged with them. 22. Ascertain the correctness of the cash balances, bills, and other securities in hand, and take note of every exceptional transaction. To sum up, then, the matter may be stated thus :- — At the commencement of an audit the principal should, if possible, go over the ground personally, and decide what work requires to be done. A list of such work (together with any other special notes that may seem desirable) should be entered in the Audit Xote-Book, which should be ruled in columns, so that the initials of a clerk against any item may clearly .show that he is responsible for the correctness of that item for the period named at the head of the column. In most cases it is prac- ticable to keep books ready printed which, with but slight alteration, will answer the purposes of any audit ; but there will usually be some special circumstances connected with each audit that distinguish it from others, and these circumstances will usually involve some modification of the customary routine obtaining to that class of accounts. Some sort of definite system is undoubtedly preferable to leaving things too much in the hands of the audit clerk, as there is, in the latter case, always a danger, either of dis- satisfying the client, or else of leading him to prefer a change of principals to a change of clerks, if one of the two be inevitable. For this reason, if for no other, the principal should always endeavour to keep the reins of every audit in his own hands, or, at least, out of the exclusive control of any one audit clerk ; for, although objection may legitimately be taken to the latter being kept at a continual game of " General Post," it cannot be denied that it is a mistake to invariably send the same clerk to the same audit. Before leaving the question of Audit Xote-Books, attention may be directed to the following, which is employed in the office of Messrs. G. X. Read, Son & Co., F.C.A. : — AUDITING. s>[ii;uid>{ jiaiaiduioo o/y dn U3nuA\ J33p9"I aiRAUjJ S30UB[Eg .i33pa-[ uiStiog niuooov >I30)S JUatUABcJ 10} SilUIJSOJ puc pauuuExji S^UlllH [Riutiof ^uoijtppv puc sSupsoj s>(oog sujnw>i suoijippv Suusoj >(OOg 30IOAIII suoijippv pUB s3uUS0rI O .ia3p9T jqjinog sSuusoj >looa qsBO >(oog i(SK3 sjjL(3no.\ sjaqono/^ jaSpa'I iqUdog sjaqonoA jjoog qsR3 P39j3e aouEiBg >(UBg p33UP|Hg qsH^ a '- 2 - i! y s ■-1 a> — J O (L 2, ^ 2 - o s = — _ K ■^~ ^— =— = O O C lU — ,i ^. < ^ _, j:,< X O iC 3 AUDITING (up to THE TRIAL BALANCE). y It will be seen that the above differs from the specimens already described in much the same manner as a Ledger differs from a Jom-nal. Instead of a separate book being employed for each audit, a folio of the Audit Xote-Book is devoted to that purpose, and it will further be seen that the specimen ruling shown provides for a monthly audit extending over two years. As this is an office book, rather than a portable one, it is w^-itten up from memorandum books, one of which is devoted to each audit, or it may be written up from the diaries of the audit clerks. In any case, however, it would seem that some sort of Audit Note-Book would require to be kept for each separate matter, in which memoranda and queries might be recorded ; but it will be obvious that, if the audits are fairly uniform in character, the information afforded by the above book would be of the greatest convenience to principals in supervising the work of their \arious audit clerks, and generally ascertaining the state of the various matters in hand. It may be added that a Card Diary provides a very convenient means of recording the state of current audits. THE OBJECT AND SCOPE OF AN AUDIT.— The next point to be considered is the object and extent of an audit. The object of an audit may be said to be threefold : — (i) THE DETECTION OF FRAUD. (2) T]IE DETECTION OF TECHNICAL ERRORS. (3) THE DETECTION OF ERRORS OF PRINCIPLE. On account of its intrinsic importance the detection of fraud is clearly entitled to be considered an " object " in itself, although it will be obvious that it can only be concealed by the commission of a technical error, or of an error of principle. It will be appropriate, therefore, to combine the search after fraud wdth search for technical and fundamental errors ; but it can ne\er be too strongly insisted that the auditor ynay find fraud concealed under any item that he is called upon to verify. His research for fraud should therefore be unwearying and constant. 8 AUDITING. It has been asserted by some that the whole duty of the Auditor is to ascertain the exact state of his client's affairs upon a certain given date. This is, in effect, the same thing as saying that he is only responsible for the correctness of the Balance Sheet. Even if this be the case — and it is open to considerable doubt, as the extent of an Auditor's duties depends entirely upon the terms of the express or implied contract between himself and his client — the Balance Sheet cannot well be verified without a proper examination of the Revenue Account, which in its turn in^•olves a complete examination of the books. The detection of fraud is a most important portion of the Auditor's duties, and there will be no disputing the contention that the Auditor who is able to detect fraud is — other things being equal — a better man than the Auditor who cannot. Auditors should therefore assiduously cultivate this branch of their functions — probably the opportunity will not for long be wanting — as it is undoubtedly a branch that their clients will most generally appreciate. Before dealing with the various methods to be adopted to ensure the detection of errors, it will perhaps be not out of place to inquire what is the extent to which an Auditor is expected to carry his research. This will naturally vary according to the circumstances of each individual case ; but, even allowing for this, the greatest diversity of opinion obtains, some claiming that an Auditor's duty is confined to a com- parison of the Balance Sheet with the books, while others assert that it is the Auditor's duty to trace every transaction back to its first source. Between these two extremes every shade of opinion may be found ; and, among others, the opinion of most practical men. Were the Auditor's functions limited to a certification that the Balance Sheet submitted to him was in accordance with the books, it would be difficult to concei^•e why the old-world amateur Auditor should have been found so lamentably wanting ; on the other hand, it cannot be denied that (except in concerns of comparati\'e insignificance) AUDITING (up to THE TRIAL BALANCE). 9 a minute scrutiny of every item would be quite impossible to the Auditor. Nor indeed is such a detailed audit often neces- sary, although it is in the highest degree desirable that every undertaking should possess the means of enabling the staf to make such an examination for itself. Upon this subject the opinion of the late Mr. Joseph Slocombe. F.C.A., will be found valuable. " There are some cases," said JNlr. Slocombe, " wherein an audit, to be efficient, should comprehend an examination of e\ery entry in the books ; there are others — more numerous — Avherein the accuracy of the accounts may be \erified by tests which render the checking of e\ery posting unnecessary. Speaking generally, the Cash Book, which is in truth the root and foundation of all. should be exhaustively examined, both as to receipts and payments, and checked into the Ledgers and other books of account under review. The whole of the post- ings of the Nominal and Private Ledgers should also be checked, and the nature of the entries in them scrutinised." This is, probably, as much as can be said upon the subject generallv, but it raises two points which claim attention before proceeding further. The " tests " spoken of by Mr. Slocombe clearly include some sort of system by which each Ledger may be balanced separately, and its correctness thereby (presumably) veritied. This is a matter that will be dealt with at some length later on, and its further consideration may be postponed until that time. The second point is of great importance. It is in the highest degree necessary that the Auditor, before commencing his investigation, should thoroughly acquaint himself with the general svstem upon which the books haxe been kept. It is very usual for the Auditor to be supplied with a list of the books in use (by Section 7 of 42 _ & 43 Vict. c. 76 — now repealed — this was compulsory in the case of Banking Companies registered under the Act, and a similar pro\ision is contained in the articles of association of many companies), and such a practice is, indeed, most desirable. But it cannot lO AUDITING. be too strongly insisted that such a list can only be of any real utility when the Auditor thoroughly grasps the uses, and the possilile abuses, of which each book is capable. Numerous instances have been known of an audit entirely failing through neglect in this respect. Ha\ing thoroughly made him.self master of the general system of accounts in use, the Auditor should look for its weakest points, " Where is fraud most likely to creep in?" he should ask himself ; and, if he can tind a loop-hole, let him be doubly vigilant there. But never let him for a moment suppose that, because he sees no opportunity for fraud, none can exist. To the intelligent Auditor who has grasped his sy.stem thoroughly, it is generally practicable to dispense with so/lie portion of the mechanical means of checking. To what extent this can be done with safety must always remain a ques- tion fur each Auditor's own intelligence and experience to answer, and it may be added that probably he must take the risk of any consequences that may ensue ; but, so far as the matter can be dealt with in a general treatise, its solution will be sought after in these pages. Before leaving this subject, it may, perhaps, be well to add that under the expression "mastery of the general system" are included perusal of the partnership articles, memo- ramlum and articles of association and registered contracts, deed of settlement, special Act of Parliament, and any and all other documents that, per sc, affect the general constitution of thi- concern uitder review. ADVANTAGES OF AN AUDIT.— The question has been raised from time to time as to what advantages may reasonal)lv be expected from a proper professional audit of accounts. In addition to those mentioned in the preceding paragraph, as coming under the head of the primary objects of auditing, it may be pointed out that the proprietor or [)roprietors of a business will not only ha\e the advantages of having placed before them an accurate statement of their affairs, together with a Profit and Loss Account showing how AUDITING (up to THE TRIAL BALAN'CE). ir this position has been arri\-ecl at ; but that thev would also have available certified accounts as to profits which cannot fail to be of the greatest convenience, either in the event of their wishing to sell the business to a private trader or firm, or to a limited company, or in the event of one of the partners dying or wishing to retire. Under each of these circumstances the importance of a thoroughly reliable statement of profits cannot well be over-estimated, and the convenience it aft'ords — as well as the enhanced price which can be obtained in the event of a saiC — will under all normal circumstances more than com- pensate for any slight expense which the audit may have originally involved. So far as pri\ate firms are concerned, an efficient audit possesses the further advantage that, by reason of its ensuring the periodical preparation of reliable accounts, it tends to minimise the risk of partnership disputes, with all their attendant annoyance and expense. Accurate accounts are also valuable as pre\enting an over-assessment for Income Tax, or enabling Tax o\'er-paid in error to be more easilv recovered : they are also of the greatest possible value to both sides in compensation cases. In the case of companies the audit assumes a slightly different application owing to the special nature of the contract and to the statutorv regulations affecting the matter. The company Auditor is not expected to act as the financial adviser of the undertaking — a position that is frequentlv thrust upon him in connection with prixate audits — his duty being rather that of an Auditor appointed in the intt-rests of a sleeping, or "limited," partner. It dr-\ol\es upon him to examine the accounts of their stewardship, prepared by thf active partners — i.e., the directors — and to rt-port to the shareholders whether in his opinion those accounts are correct, and fullv and fairly disclose the position of affairs, or in what re>pects they fail to do so. In addition, it may be pointed out that \ariou3 cases reported in Appendix '" B " to the pre.sent work show that in the event of an Auditor, through his negligence, failing to discover fraud 12 AUDITING. or embezzlement on the part of the employees of the client, he may be held liable in damages for the amount lost as a result of his negligence. This liability involves, of course, a corre- sponding benefit to the persons in whose favour the liability accrues, and is consequently a factor that ought not to be lost sight of in weighing the advantages of an audit. It is, however, perhaps hardly necessary to add that the Auditor does not " insure "" the honesty of his clients employees : on the other hand, many professional accountants insure themselves against losses arising from errors of judgment or negligence on the part of their own clerks. In an address to the ^Manchester Chartered Accountants Students" Society {vide Accouiiiajit, 22nd February 1902) Mr. Ernest Crewdson, F.C.A., expressed dissent from these views, and pointed out that the duty of an Auditor is merely to " stand between the shareholders and the board." Were this definition to be accepted, it would follow that there could not be such a thing as an audit apart from a joint-siock company, whereas Auditors art", of course, of far older origin than companies {vide Appendix " C '"). The duties of company Auditors are. howe\er. in some respects of a special character, being — at all events, in part — defined by statute. Such legisla- tion as exists must, of course, be respected, and in practice the protection it affords may prove useful ; but it must never be forgotten that there is a broad distinction between the bare limit cf pecuniary responsil>ility. as defined by the law, and the reasonable requirements of a high standard of professional efficiency. These points are more fully considered in Chapters IX. and X. METHOD OF AUDIT.— A comparison of the relative merits and disadvantages of continuous and periodical AUDITS is worthy of more attention than it lias attracted in some quarters. THE COXTIXL'OUS AUDIT (or running audit) some- times includes the preparation of the periodical accounts by the Auditor's staff. It> advantages may be said to be : (i) The AUDITING (up to THE TRIAL BALANCE). 1 3 examination occurs sooner, and consequently any errors com- mitted are more quickly detected and rectified; (2) the periodical \-isits of the Auditor keep the bookkeeper closer up to his work ; (3) a more detailed audit is practicable ; (4) the audit can be completed soon after the closing of the books, without undulv hurrying the examination. On the other hand, there is always a danger of items that have been checked by the Auditor being altered (either ignorantly or fraudulently) before the final audit ; and it is therefore necessary that the clerk in charge of a continuous audit be very wide awake, and have a very clear idea of the system under which he is working. It has been found a good plan to adopt a special " tick " for the verification of all figures upon w^hich a correction appears, as, if this plan is adopted, a correction made after the tick has been affixed will be more readily discovered. It goes without saying that the difference in the two ticks should be as slight as possible, and the bookkeeper should not be told what the difference implies. THE PERIODICAL AUDIT (by which is meant the audit begun after the periodical accounts have been completed) obviates this difficulty to a certain extent, and, if the books remain in the Auditor's sole custody during the audit, entirely ; but the drawbacks it presents (which are, naturally, the advantages of the continuous audit) render its adoption imprac- ticable, except in small concerns or in partial audits, unless the books can be so arranged that very little detailed checking has to be done by the Auditor. The risks involved in leaving the books in the hands of the bookkeeper during the audit are undoubtedly very consider- able ; but, so long as these difficulties are not lost sight of, there is but little doubt that common sense and a general alert- ness will save the Auditor from this — as well as many another — danger. Moreover, where the Auditor himself closes the books — and this will not infrequently be the case in small audits conducted continuously — it should be difficult for fraud on the part of the staff to escape detection altogether. 14 AUDITING. It would be well to mention here the extreme importance of comfleting each item of the audit as soon as possible after it is begun. Extensive frauds have escaped detection because the Auditor checked the balances of a Ledger one day, and the additions of such balances on the next — some of the items having been altered in the meantime. It will be obvious that had the additions being checked on the same day as the extraction of the balances, and a note taken of the total, the fraud would have been impossible. ^Vhat may be described as the " ideal "' audit is one com- bining the two modes of investigation just described. It is sometimes attained Ijy the employment of two independent Auditors, one performing a continuous and the other a periodical audit ; but more frequently the continuous audit is done by " staff " Auditors, or l>y the client's ordinary •employees under a good system of internal check. In the ■case of companies registered under the Companies Acts, the Auditor has " a right of access at all times to the books and accounts and vouchers of the company '' : this right would .appear to involve a corresponding duty in all cases where such a course seems necessary in the interests of the company. CALLING BACK POSTINGS.— Having now cleared the ground of various jireliminary considerations, the manifold points arising in the course of an ortlinary audit will be dealt with. It has been seen that in e\ery instaiK'e it will be necessary for at least some of the jjostings to be called over; and inasmuch as by that means the Auditor will at once acquaint himself with the nature of the transactions that have occurred, the calling back of such i)oslings will form an appropriate starting-point for examination. .\LTny ])i'rsons prefer to start with an examination of the Vou(~hers, and, if the Vouchers are rich in detail, it will frequently l>e desirable to take them first ; but when — as is often the case — they are mostly bare receipts for so much money, it will generally be best to start -with the postings. AUDITING (UP TO THE TRIAL BALANCE). 15 It is well to commence with the postings of the Cash Book, even when all the postings are to be checked, as by this means a general idea of the business done is most quickly grasped ; ■which is very desirable. The calling over of postings can hardly be too carefully done, and although the work is decidedly mechanical — and, consequently, somewhat somniferous — it must be most conscientiously performed. In particular, care must be taken not to pass any item already ticked, unless it be certain that it has been ticked inadvertently in the regular course of audit ; also any items remaining unticked after the calling over is completed should receive most careful attention. Inexperienced clerks are apt to " suppose " they ought to have ticked an item, or to " suppose " they ticked such-a-one instead of such-another. Either " supposition " may cause a fraud to remain undetected, or (which will, perhaps, appeal to the voutliful mind more powerfully) may keep the junior late at his Avork night after night, while his senior hunts up ami down for an error in the Trial Balance. When the error is dis- covered to be a mistake in the posting that was passed in calling back, it is possible that the unfortunate junior will l)e even more sorrv that he ever ventured to " suppose." Where it is intended to check every posting, it is a good plan, after the Cash postings have been checked, for the remaining postings to be called back from the Ledger into the Day Books, &c. ,; and it will probably save time, while going through tlie Ledgers, to check the additions and balances at the same time, and so finish each Ledger at a sitting. This method, howexer, is not always con\enient, or even possible, and much must therefore be left to the discretion of the clerk in charge. If this method be employed, there can be no possible objection, from the Auditor's point of view, to the introduction of Card or Loose-Leaf Ledgers, or to any reasonable adaptation of the Slip System either to Ledgers or books of first entry. Bad or Ambiguous Figures should always receive close attention, as it not infrequently happens that they are posted as one figure and added up as another. Corrections, too, l6 AUDITING. require careful attention. Erasures should always be strictly prohibited ; and where hand-made paper is used they should be keenly watched for, as in that event a perfectly clean erasure may easily have been made. It is very important that the room used by the Auditors be well lit, or mistakes may easily occur, ^^'here a correction has been made, care must be taken to insure that the addition and posting have both been altered. In a continuous audit this is especially important, but — as it has already been noticed — it need not now be dilated on. It may seem almost superfluous to say that the clerk calling back should always speak clearly, but experience teaches that this is a matter tliat frequently does not receive the considera- tion it deserves. Such a mistake as ^^20 3s. pd. being posted ;^23 9s. od. may be guarded against by emphasising the last syllable of the pounds, thus — " Twen-ty, three, nine." It is important that the clerk calling should learn to " pull with " the one who is turning over the folios. This is a habit much more readily acquired by some juniors than others — in many respects it resembles the art of accompanying music — and the senior who has found a youngster to suit him will not willingly make a change, as the economy of nervous force consequent upon perfect accord is very considerable. Of late years "Check Figure" systems have been coming into use as a means of detecting errors of postings or additions. They are ingenious, and perhaps sometimes of value to the bookkeeping staff, but quite useless to the Auditor, who has to check many things besides the literal accuracy of the figures recorded. Properly speaking, the work of the Auditor only begins after the books have been balanced. CHECKING ADDITIONS.— In all cases it is desirable, although it is not always practicable, that all the additions should be checked. In every case, however, the additions of the Private Ledger, Nominal Ledger, Cash Book, Bill Books, Petty Cash Book, and Wages Book will require to be verified. This should ahvavs be done when the other work connected AUDITING (up to THE TRIAL BALANCE). 1 7 with the same book is being done ; for if the bookkeeper has power to make alterations meanwhile, he can afford to laugh at every safeguard against fraud. It is hardly necessary to add that the checking of additions, though purely mechanical, is most important work. It is especially necessary that the " carried forwards " be checked on to the following page, as errors frequently occur here. Also, when checking the additions of a book with several columns of figures, it is important to see that the distinction between the various columns is observed when carrying forw'ard totals from one' page to another. THE PREVIOUS BALANCE SHEETS.— While the junior clerk is checking additions, the senior will have time to see to many matters which require his attention. Foremost among these will be the comparison of the Ledgers with the last Balance Sheet — unless, indeed, the principal has already dealt with this point. It is very generally conceded that no Auditor can be made liable for the acts or omissions of his predecessor in office ; but this rule must, of course, be applied strictly, and an Auditor who adopts and perpetuates the mistakes of his pre- decessor would not on this account alone escape the consequences of his own negligence. It is important, there- fore, to carefully scrutinise those items which, in the ordinary course, are brought forward as balances from one year to another. In so far as their correctness cannot be tested by an examination of the accounts under review, the present Auditor is probably not responsible ; but in cases where a careful investigation of the current accounts would ha\e disclosed an error in the previous accounts, it would doubtless be held that the discovery ought to have been made, and that failure to make it was the result of negligence. It is not thought neces- sary to pursue this subject in detail. It may be pointed out, however, that the mere existence of a Ledger Account headed " Reserve Fund," with a balance to the credit thereof, should 1 8 AUDITING. not be taken as conclusive evidence that a corresponding amount of profits available for distribution has been trans- ferred to Reserve ; while it would be only prudent to see that proper Depreciation had been written off all wasting assets in prior years, as well as in the year under review. It need, perhaps, hardly be added that it is important that the Auditor should see that he begins his investigation at the exact point W'here the previous investigation left off — that is to say, the opening balances of the period under review should in all cases be checked and agreed with the previous Balance Sheet. This applies whether or not the accounts for the previous period were checked by the same Auditors. Under normal circumstances this checking of the opening balances would probably be done as a matter of course, but the question as to its necessity might sometimes arise where it is the custom to start an entirely new set of books with each financial year — more especially if the auditing is done at the Accountant's office, and not at the client's place of business. By way of showing the extreme importance of adopting this somewhat obvious precaution, it may be added that, some few years since^ a case of somewhat extensive fraud transpired, extending over a long period, which might have been discovered at any time, had the Auditors checked the starting balances with the previous year's books. In these days of Loose-Leaf Ledgers, this point is perhaps of greater importance than it ever was before. VOUCHERS. ^ — Much might be written, and, indeed, has been written, upon the important subject of Vouchers : it is, however, impossible to treat the matter exhau.stively in the space at disposal. A paper by Mr. Howard S. Smith, F.C.A., upon the subject was reproduced in Tlie Accountant of 14th January 1888, which may be consulted with advantage. Much useful information of the detailed work of vouching will also be found in " A Municipal Internal Audit," by Mr. Arthur Collins. AUDITING (up to THE TRIAL BALANCE). 19 The present work would, however, be incomplete without some mention of the matter, which, for convenience sake, will be dealt with under the following heads : — (a) Receipts. (b) General Payments. (c) Petty Cash. (d) Wages. (e) Bank Account, &c. (/) Journal Entries, &:c. Each of these involves, for its complete consideration, the question as to the form of accounts employed, but the relative merits of the various forms available will be more conveniently dealt with at a later period. In general terms it may be men- tioned that the process of "vouching" consists of obtaining evidence (usually documentary) that the transactions recorded in the books are facts. {a) RECEIPTS.— It is part of the Auditor's duty to ascertain, as far as possible, that all cash received has been entered to the debit of the Cash Book. The usual mode of verification available will be a comparison of the counterfoils of the Receipt Books with the Cash Book entries. Counter- foils should always be numbered, and the bookkeeper should mark the Cash Book entry with the number of the receipt. It is necessary that the Auditor should notice that the numbers of the counterfoils run consecutively, and if there are any numbers missing, or any counterfoils left blank, a satisfactory explanation must be found. If a receipt has been cancelled, the body should remain attached to the counterfoil ; for it need hardly be pointed out that this is much more satisfactory than any other explanation possible. The receipt for two accounts paid together should be acknowledged on two separate forms. If there be no hard and fast rule, there is nothing to prevent the collector from using separate counterfoils while only using one receipt, which, of course, leaves him an extra receipt form to use for another acknowledgment which he need not account c 2 20 AUDITING. for. Defalcations have frequently arisen, or remained undetected, from a neglect of this precaution. On the other hand, there are some cases where it may prove better to forbid the use of two receipts for two payments made the same day. This course, however, leaves it open to the collector to account for the two payments on different days, and so gain possession of a blank form. In either case, the special point is that there should be one fixed rule, which should be rigidly maintained. But whatever precautions be taken, the method is by no means infallible, and in consequence many Accountants have advocated the issue of a circular to all customers, requesting a verification of their respective accounts as quoted. This method is, of course, quite impracticable with a retail business, but among wholesale houses would probably prove a valuable precaution. As a rule, however, wholesale accounts are run upon certain known terms as to credit, so that any irregularity would be apparent to the observant Auditor. In any case, the Auditor must not communicate with his client's customers on his own responsibility ; and, as a rule, the practice is thought undesirable save in cases of grave irregularity, when some special inquiry becomes absolutely necessary in order to ascertain the actual position. It need hardly be added that the mere statement by a customer that he has paid his account cannot always be regarded as conclusive. The dates of the counterfoils should always be compared with the Cash Book entries. Manifold carbon Receipt Books have of late years very largely taken the place of counterfoil books. In spite of the suspicion with which they are regarded in some quarters, it is thought that upon the whole they are more efficient. It has, unfortunately, become the custom of many large firms to send their own form of receipt with remittances, and the efficacy of counterfoil Receipt Books is thereby much impaired. So far as possible, the Auditor should ascertain what firms do AUDITING (up to THE TRIAL BALANCE). 21 adopt this practice — and here he will, perhaps, find the know- ledge gained at one audit may help him to detect something V. rong at another. Dividends and compositions in Bankruptcies, &c., will inevitably have been accompanied by a special form of receipt : if, therefore, such entries be found upon a receipt counterfoil, the circumstances may well give rise to suspicion. The counterfoil of the dividend notice should always be produced as a voucher. Cash Sales require very careful scrutiny, and the method of internal check adopted should always be ascertained, and, as far as possible, perfected. Where practicable, it is most desirable that the clerk who writes up the Cash Book should not be the one who receives the money. Special items of receipt will be more conveniently dealt with when considering the audit of various kinds of accounts. ib) GENERAL PAYMENTS, other than those for wages and pettv cash, should (where possible) invariably be made by cheque payable to " order," and crossed. Even where the amount is only a few shillings this method of payment will, in the vast majority of cases, be simpler, as well as safer, than cash pavments. Such payments by cheque hardly require " vouching," but it should nevertheless be done, nor will the process be difficult. Receipts can readily be obtained for all ordinary payments, which should be numbered consecutively (the numbers of the cheques are very useful for this purpose), as should also the items in the Cash Book. A receipt on the payee's own printed form is very much better evidence that he has received the amount stated, than a receipt on the form of the payer, although, doubtless, a uniform type of voucher will save the Auditor's time slightly. From both points of view, it is not desirable that 'payers should provide their own form of receipt ; be this as it may, how- ever, the practice exists, and will probably continue to do so. 22 AUDITING. Some special payments cannot be vouched in the usual way {e.g., insurance premiums on a new policy); but satisfactory evidence that the payment was actually made, and value received, should always be obtained. An Auditor whose practice is mostly in one particular industry will soon get to know the signatures of most trade houses : and, doubtless, this knowledge might often prove valuable ; for, although any clerk is frequently deputed to acknowledge receipts, yet the endorse- ments of the cheques will usually be done by one hand alone. (c) PETTY CASH.— Whatever system of petty cash be adopted, the vouching of petty cash, as a whole, will be the only possible real verification of the payments made from cash to petty cash, and the whole matter may appropriately be considered here. The actual inspection of petty cash vouchers may, or may not, be undertaken by the Auditor, as he thinks fit. In the former case, a responsible person must certify the whole of the items en bloc; and in the latter case, a similar person must pass each separate voucher. Important frauds are hardly likely to occur in petty cash ; but, as likely as not, petty peculations will arise, if an efficient supervision be not exercised. No Auditor can properly supervise the petty cashier, and it is well to acknowledge the fact fully ; he may, however, see that every payment has been duly authorised by the responsible head, that the payments made by the cashier have been duly acknowledged, that the additions of the Petty Cash Book are correct, and that the balance unspent is in hand. Beyond this he should not attempt to go. Some clients have a very bad habit of making comparatively large payments through petty cash. This should be dis- couraged as far as possible. Some have a still worse habit of allowing the petty cashier to receive small amounts ; this is a very bad system, and should be most vigorously contested. All receipts should be banked, no matter how trifling in amount, and a clerk in charge of cash receipts should never be in charge of cash payments. AUDITING (up to THE TRIAL BALANCE). 23 (d) WAGES. — Instances of fraud in the payment of wages are among the most frequent of those that come under the notice of an auditor ; but, from the very nature of the case, direct evidence of proper payment is all but impossible. Signatures may be, and frequently are, required from each man receiving wages ; but some men can only sign 1 )y means of affixing their " mark," while many others would not be above " going shares " with the paying clerk in anything they could get over their due. Circumstantial evidence is thus the best available for the Auditor, and this will consist in a good system of control, w"hich renders fraud quite improbable by reason of the number of persons concerned in the prepara- tion of the pay-sheet and the subsequent payment. Particulars of time worked, or piece-work done, should be certified by the foremen ; the calculations of wages worked by one office clerk, and checked by another ; the cash for the wages made up by the cashier, and the wages paid by him or his deputy in the presence of a works manager. Where possible, a cheque should always be drawn for the exact amount of wages required. The Auditor should inquire as to the particular system adopted, and should ascertain that it is really carried out; sometimes it might be well for him to unexpectedly put in an appearance when the wages are being paid. The Wages Book should always be added, and a week or two's wages should be taken at random, and checked up and down. A case of some interest to Auditors, in connection with frauds in wages was tried before Mr. Justice Jelf in the Liver- pool Assize Court in December 1902. The evidence showed that these frauds had been going on for upwards of sixteen months, and that during that time .sums of money, amounting in some weeks to over ^70. were stolen from the Mersey Docks and Harbour Board by means of bogus Wages Tickets, which were brought into existence by the prisoner Lynch. The total wages in the Engineers' Department, in which the frauds were committed, usually amounted to upwards of ;£"i 0.000 per week, and in the sixteen months ;^3,2oo was stolen. The prisoner 24 AUDITING. Lynch was a time-keeper, wliose duty it was to enter up the time worked by the various men in his district in a Time Book kept by him. The prisoner Rous was a ticket clerk, whose duty it was to attend every Saturday on the payment of wages to the men in the district to which Lynch was sent in the first period, to give out the Wages Tickets. During the first period Lynch' s men received their wages at Xo. 2 pay-station, where Rous was ticket clerk. The men were divided into two classes, "permanent" and "extra" — the latter being taken on for temporary jobs, and "therefore" not going through the Board's books in the same way as the permanent men. It was by using the names of fictitious " extra " men that Lynch per- petrated the frauds. As time-keeper it was his duty to take the time of the men in order to provide a check on the Time Sheets sent in by them, and in order that the necessary provision might be made for the payment of wages (which were always paid one week late), it was his duty, towards the end of the current week, to go to the Time Ofiice and dictate to a time- bookkeeper the names, time worked, and the rate of wages of the various men whose times he had so taken, and this dictating of the names was the only step in the Board's system of internal check that was not automatic. The especial importance of this point arises from the fact that frauds may naturally be expected to occur at the weakest point in any system. Lynch's plan was to dictate bogus entries, along with genuine ones, to the time bookkeeper, who (having no precise knowledge of the facts) naturally entered whatever particulars were dictated to him. On Mondays the Time Book was sent to the Wages Bill Office in order that Wages Tickets might be prepared there in accordance with the Liverpool Time Book. In due course these tickets and wages were provided week by- week for all names contained in the Time Book. It was Lynch's duty to send to the Engineer Time Sheets certified by him as correct. These were entered up by him from his Time Book so as to include the bogus as well as the genuine names. Rous, as ticket clerk at the No. 2 pay-station, ought to have given tickets only to workmen who claimed them ; but AUDITING (UP TO THE TRIAL BALANCE). 25 in point of fact he enabled Lynch to get possession of the \\'ages Tickets made out in respect of the bogus names, and Lynch having obtained possession of these tickets secured payment of corresponding sums as wages by sending various persons to cash them at the pay-liut. In April 1902 Lynch was transferred to the Dockyard, while Rous remained as ticket- clerk at the No. 2 pay-station. This circumstance draws atten- tion to the advantage of occasionally varying the duties of employees, as apparently with the transference of Lynch these particular frauds ceased altogether. Lynch thereupon appears to have cast about for a new method of falsification. In his new district there were no '"extra" men employed, and his former system was therefore inapplicable. He accordingly took the names of men on sick leave, or of men who had only recently left the Board's employ, which names were, of course, familiar to the bookkeeper, and therefore in the absence of any direct system of check aroused no suspicion. Till August 1902 he appears to have resorted to various methods of wages payments in use by the Board, e.g., for reissuing tickets not claimed or for issuing tickets and paying wages on Friday nights. To effect these frauds he was obliged to resort to forging or alter- ing various documents used by the authorities for the issuing of tickets and the payment of wages. Both prisoners pleaded guilty, and Lynch was sentenced to .seven years' penal servi- tude, while Rous, who was merely his accomplice, escaped with a more lenient punishment of six months' imprisonment, with hard labour. The case is of especial interest, partly on account of the length of time that the frauds remained undis- covered, and partly because the system of internal check in force was regarded as being completely adequate. The above particulars, however, will show sufficiently clearly exactly where the system broke down in practice. {e) BANK ACCOUNT, &c.— All payments into the Bank should be checked off against the Pass Book. The composition of a few such payments (as shown by the counterfoil paying-in book) may be advantageously compared with the items which 26 AUDITING. they purport to represent, anel any irregularity carefully followed up. The credit side of the Cash Book should also be checked off against the Pass Book, and any disagreement of the names should receive careful attention. The Bank Balance must, of course, be verified, and if the Auditor has not him- self received the Pass Book from the Bank, he should make a point of either obtaining the Bank's certificate as to the balance standing on the date of the account, or take it back to the Bank, in person; otherwise he will run the risk of never having seen the real Pass Book at all. If there be a balance of cash in hand it must be verified, and the Auditor should ascertain that it has not been made good by means of a cheque drawn since ihe books were closed. In a continuous audit, the vouching should always be kept as close up to date as possible, while the Bank and {all) Cash Balances should be verified at everv visit. An audit that is never up to date is valueless as a means of detecting fraud. A Cash Balance will sometimes be found to consist largely of "I O U's " ; this should always be discouraged as far as possible, and it may be necessary to call the attention of the chief to its undesirable preponderance. In any event, the "10 U's " should be initialled by someone in authority. (/) JOURNAL ENTRIES, &c.— The modern Journal being the book of first entry in which comparatively unusual transac- tions are recorded, it becomes just as important that the journal entries should be fully vouched as it is that those relating to cash receipts and payments should be subjected to the same scrutiny. If the correctness of all Ciitries passed through the Journal be taken for granted, there is absolutely no limit to the amount of falsification that might be committed with impunity. Improper Journal entries might be made with one of two objects — namely, (i) to conceal defalcations, as, for instance, when customers are improperly credited with the amount embezzled, and a corresponding debit made to Allow- ance or Bad Debts ; (2) to fraudulently exaggerate the profits of the undertaking — e.g., by crediting nominal accounts and AUDITING (up to the TRIAL BALANCE). 27 debiting real accounts with payments that cannot properly be capitalised. It is impossible to deal in detail with the vouch- ing of Journal entries, on account of the very various nature of the transactions that might be recorded in this book ; it may be stated, howe\er, that only the evidence of some disinterested party — or, that l^eing unobtainable, the evidence of some person absolutely above suspicion — should be accepted as a voucher, and in the case of all important entries the Auditor should take steps which will enable him to form a definite opinion of Jiis own with regard to the matter. GENERALLY. — A practical consideration in connection with vouching is with regard to the actual marks an Auditor should make to indicate that this work has been performed. In the first place, the voucher should be so marked that it cannot afterwards be used in support of anotner entry ; and, in the second place, the entry that has been vouched should be so marked that the Auditor can afterwards readily ascertain what items remain un vouched. With regard to the marking of the vouchers, the following methods are in use : — (i) A large " tick " across the face of the voucher. (2) The Audit Clerk's initials. (3) A rubber stamp bearing the name of the firm — either with or without the clerk's initials. As the main object is to so disfigure the \oucher that it cannot be again used in support of another entry, it is not very material which of these three be employed. It may be remarked, however, that initials necessarily take longer to make than a tick or an impression from a rubber stamp. The first method is, it is thought, generally preferred ; but where two firms of accountants are joint Auditors, the use of a rubber stamp is desirable, as indicating clearly who is respon- sible for the cancellation. In other cases the record in the Audit Note- Book ought to be sufficient for this particular pur- pose. With regard to the marking of the entries in the books as being vouched, some firms employ a distinct " V," which 28 AUDITING. has the advantage of being clearly distinguished among various classes of ticks, and so enabling a list of missing vouchers to be more readily compiled. Sometimes, however, an imperfect voucher is accepted, and in such case it seems desirable that a special form of mark should be employed, so as to guard against the real voucher being produced in support of another entry. Many firms, therefore, employ the following marks by way of a " cross-tick " against the ordinary posting tick : — ^^'here a regular voucher has been produced \/ Where the only voucher is an endorsed cheque Where payment was made on a bearer cheque, but the entry has been traced to the credit side of the Bank Pass Book X X Where the Auditor suspectb irregularities that he is unable actually to detect, he may frequently gain his point by feigning laxity in his method of vouching ; this will often serve to induce that carelessness on the part of the defaulter that is necessary for his detection and exposure. The author, who has had a considerable experience of frauds of all kinds, has found this method work admirably ; it is, however, necessary that it be practised with discretion, if one wishes to avoid a charge of negligence. BILLS OF EXCHANGE.— A few words on the subject of Bills will not be out of place. iULL.S PAYABLE will present but little difficulty; the returned Draft forms, of course, the \oucher for the payment of Bills matured, while the Bills running (as shown by the Bills Payable Book) will explahi the balance of the Bills Payable Account in the Ledger. B1LL.S RECEIVABLE require more careful consideration. The Bills Receivable Book should be dealt with seriatim; all Bills matured or discounted should be traced into the Cash Book, and, if dishonoured or renewed, back to the debit of the AUDITING (up to THE TRIAL BALANCE). 29 customer. All Bills dishonoured, or still running and undis counted, should be in hand, and this fact must be verified. Discount deducted from Bills discounted should be looked into to a certain extent, although not necessarily exhaustively ; also, the important questions of the liability upon Bills under discount, and the value of Bills dishonoured, must not be lost sight of. Both these points require to be considered when the provision for bad and doubtful debts is dealt with. Dishonoured Bills should never be allowed to remain on the Bills Receivable Account of the Ledger. CONSIGNMENTS.— It is very desirable that all points connected with consignments be checked up and down as much as possible; and for this purpose letter-files, copy letter-books, nnd accounts current should be freely consulted. There is, however, nothing particular in the nature of the transactions (save the question of foreign currency, which is dealt with else- where) that calls for special comment here. THE TRIAL BALANCE.— It should be the Auditor's aim, so far as possible, to carry each department of his investigation right up to the Trial Balance at the same sitting. Of course, in an important audit, this can very rarely be accomplished ; but the Auditor must always remember that there is danger in leaving any portion unfinished in the hands of bookkeepers or cashiers, who — for all he can know to the contrary — may manipulate the figures during the course of the audit. He should, therefore, endeavour to fix everything up as he goes along, and where he cannot finish the same day, he will do well to keep possession of the books and documents until he can. In fact, he should, so far as possible, keep everything in his own hands until the audit is completed as far as the Trial Balance. Having once secured a Trial Balance that he knows has not been tampered with, the Auditor may cease to trouble himself about the materials from which it was built up — they may be manipulated and altered up and down, but he holds in his own hand the key of the whole position. Nor need the course indicated cause offence, or even excite 30 AUDITING. suspicion, if carried out with tact. It is generally an easy- matter to hang on to a list of balances, and not often difficult to •' take home " a book so as to get it finished. And, even where this cannot be accomplished unostentatiously, a few notes and private marks will often serve the purpose. It is not a difficult matter to acquire a " tick," which, while looking much the same as any other, can be instantly distinguished from a forgery. A man forging ticks will be much less careful as to their form than a man forging initials, and can thus be more easily detected. It is not a bad plan to carry about one's own coloured ink, and to take care that it is a different make from that in general use at the offices where the audit is con- ducted. The Auditor, however, must be careful not to talk about these things ; and he should also be careful not to leave his ink about. It is often a great advantage to employ ink of a different colour lo that used at the preceding audit. BALANCING. — In the foregoing paragraph it has been assumed tliat an exact balance has been arrived at by the book- keepers before the Auditor commences his investigation. This, of course, is as it should be, for clearly it is no part of the Auditor's duties (as such) to balance the books. The question arises, however, as to whether an Auditor is ever justified in passing accounts that do not exactly balance. Obviously, accounts that do not balance cannot, in the nature of things, be entirely accurate ; but so long as the Auditor is satisfied that the discrepancy arises from one error, and not from the combined effect of numerous errors, and so long as the differ- ence is so small as to have no practical effect upon the ultimate result, the absence of an accurate balance may sometimes be disregarded. Here, as elsewhere, however, much depends upon circumstances; a Nominal or Private Ledger — or, indeed, any Ledger with less than, say, 500 accounts — ought certainly to lialance exactly; on the other hand, it is hardly practicable to ensure an absolute balance with a large Trade Ledger — hence the importance of these balances being tested at frequent intervals, say, monthly at least. AUDITING (up to THE TRIAL BALANCE). 31 METHODS OF BALANCING.— Tn private audits it not infrequently happens that the Auditor is requested to balance the books The detection of errors in balancing is thus a matter with which an Auditor occasionally has to deal, although it does not in any sense form part of the actual audit itself. There are two modes of seeking for errors in balancing: — I. By localising the error. II. By tabulating the Ledger Accounts. LOCALISING THE ERROR.— This is, of course, best accomplished by framing the system of accounts upon such lines that each separate Ledger is "self-balancing." Where this has been done, it is a very simple matter to see in which Ledger or Ledgers the discrepancy arises, and the field is at once narrowed accordingly. It may easily happen, however, that the various Ledgers have not been framed upon self- balancing prisciples; even then it does not necessarily follow that the error cannot be localised. If the Cash Book be in tabular form, or if there be separate subsidiary Cash Books, the equivalent of an Adjustment Account can almost always be constructed ; transfers from one Ledger to another may com- plicate matters, but unless such transfers are much more numerous than is usual, they will hardly present any very serious difficulty. On the other hand, it is not often prac- ticable to apply this method if it necessitates an analysis of the Cash Book. When the books of first entry have not been in the first instance so formulated as to lend themselves readily to tlie construction of self-balancing Ledgers, a method of check described by Sir J. G. Craggs, M.V.O., F.C.A., in his " Heavy Trial Balances made Easy," will be found of con- siderable value. A complete description of this system would be impracticable here; but it may be mentioned shortly that the system consists in requiring the clerk calling back from the book of first entry to the Ledger to compile, as he calls 32 AUDITING. hack the various entries, a list of the amounts posted into each separate Ledger. By tliis means the total amount posted into each separate Ledger, and the sources from which it is posted, may be readily ascertained. The system also provides a con- venient means of quickly discovering any clerical errors that may have been made in the compilation of the abstracts. Where a large set of books has to be balanced for a com- paratively long period this system will be found most us.eful, the more so because^ — so far from adding to the time required for calling back the postings — it utilises the time of the junior which would otherwise be wasted, and thus directly tends towards both accurate and expeditious work. TABULATING THE LEDGERS.— This is a method which is sometimes adopted where the number of Ledger Accounts is not large, and, where practicable, it is extremely thorough. It consists of making an abstract of every Ledger Account upon sheets, which are virtually Tabular Ledgers. When the abstract has been completed, the checking of the cross-additions proves the extraction of the Ledger balances, while a comparison of the longitudinal totals with the opening balances, Day Book totals, total of Cash received, &c., will show in which direction the error lies. Thus, if the total " Goods Sold ■' does not agree with the total " Sales Account " in the Nominal Ledger, there is clearly an error in the postings or the additions of the Day Books. Many accountants, how- ever, and among them the author, prefer to carefully re-check the Ledger, item for item, rather than adopt such a laborious process of localising the error — 'especially when it is remem- bered that even when the abstraction of the Ledger has been completed, the localisation has been directed, not to one Ledger Account, but to one subsidiary book. From the author's point of view, the chief value of the tabulation of the Ledgers is in the event of it being necessary to convert books previously kept upon single entry into double entry : this is a feat which is sometimes necessary when examining the books of an undertaking about to be converted AUDITING (up to THE TRIAL BALANCE). 7,^ into a limited company, or when endeavouring to frame a Deficiency Account in cases of insolvency. MODERN SYSTEMS OF BALANCING.— The employ- ment of '•'Check Figures" as a m.eans of testing the clerical accuracy of postings has already been referred to on p. i6. In the case of quite large concerns it would appear that there is some scope for this device in connection with systems of internal check; but it is thought that it is valueless from the point of \iew of the auditor, because it concentrates all atten- tion upon the accuracy of figures, whereas the figures, as such, represent only a portion of that which the Auditor has to check. Another mechanical means of checking postings — equally useful from the point of \'iew of internal check, and equally valueless from the point of view of the Auditor — is the mechanical Adding Machine. The process consists of calling back from the Ledgers to a clerk in charge of the Adding Machine all the amounts posted during the day. The totals of such postings, as shown by tlie Adding Machine, should of course agree with the totals of the corresponding book of first- entry. Assuming that the clerks in charge of this process are quite unconnected with those responsible for the original entries, this test may be regarded as conclusive, except that it provides no guarantee whatever that the items are posted to the correct accounts. Of course, as the items are called back to the clerk in charge of the Adding Machine they are ticked off, this process being necessary to enable the postings for the day to be readily distinguished from, those of previous days : the clerk in charge of the Ledger calls out all postings to which a tick has not been attached, as being those entered up since the last time that the process was gone through. At the tune of going to press the attention of the autlior has been drawn to an ingenious device for substituting purely automatic means for the calling back of postings in the manner just described. It is suitable only to Card Ledgers, and the principle is that the postings, instead of being m^de direct on the card, are made upon a band (or " tape ") fixed in a suitable D 34 AUDITING. "Posting Machine," which enables a record of the postings to be obtained on the band, while by the aid of a carbon roll a facsimile impression is made upon the card itself in the proper place. The addition of the entries on the roll at the end of the day, if it agrees with the total of the corresponding book of first entry, proves the mechanical accuracy of the day's postings. It would, of course, not be impossible to apply a Mechanical Adder to a Posting Machine of this description, thus eiuabling totals to be arrived at automatically. AUDIT OF JOINT STOCK COMPANIES.^The chief points arising in the course of the audit of a Joint Stock Company that do not occur in the audit of a private fimi may be divided under the following heads : — (a) The audit of Share Capital and Debenture Accounts (l?) The audit of Dividend and Interest Accounts. (c) Compliance with the various statutory requirements. (d) Compliance with the Memorandum and Articles of Association, general Statutory Provisions, special Act5 of Parliament, or Deed of Settlement. (a) THE AUDIT OF SHARE CAPITAL ACCOUNTS.— The main points are : (i) Does the stated amount of issued capital represent a valid allotment to l^orui fide applicants? To ascertain this, the Auditor must see that the amount is within the authorised issue, that the various classes of shares (if there be classes) are in accordance with the memorandum of associa- tion and prospectus, that the minutes of allotment are in order, that the allottees have agreed to become shareholders to an extent not less than the amount of their respective allotments, that the aggregate number of shares actually issued to the various allottees is equal to the total number stated to have been issued, and that the required deposit has been paid in cash. (2) Has the amount stated to ha\-e been paid up been actually received in cash, or else in kind under a valid contract duly registered pre^'ious to allotment in accordance with the requirements of Section 6 of the Companies Act, 1907? This AUDITING (up to THE TRIAL BALANCE). 35 requires the Auditor to satisfy liimself that the minutes making calls are in order, that the amount said tO' be paid up has actually been received in cash, that a valid contract has been registered for all shares issued as fully or partly paid up, and that shares liable to forfeiture, but not forfeited, appear — ^^so far as can possibly be known — to have been issued to bond -fide existent persons. PREMIUMS received on the issue of shares should prefer- ably be credited to a special Premiumis Account, and it is thought better that they should thus be shown as a separate . item upon all succeeding Balance Sheets. There is, however, nothing in the Companies Acts to forbid such premiums being credited to Reser^•e Fund, or e\-en to Profit and Loss Account. Since the ist January 1901 it has been legal for companies making a "' public " issue of shares to pay a commission on the underwriting or placing of shares, and provided any shares are offered to the public within the terms of the Act, such a com- mission may be paid not merely in respect of those, but also on all other shares issued by the company. For the payment to be valid, however, it is necessary that the somewhat compli- cated conditions of Section 8 of the Companies Act, 1900, and of Sections 7 and 8 of the Companies Act, 1907, be strictly complied with. The above relates to commissions paid out of the capital or shares of the company. Presumably there is nothing illegal in a company applying part of its profits towards the payment of commissions ; but, of course, commissions paid for out of profits would necessarily have to be charged agamst profits, whereas commissions legally paid out of capital might, as a matter of law, be capitalised. It has been held that the payment of a commission on placing or underwriting shares which is in effect an issue of such shares at a discount, is in all cases illegal ; but debentures may be validly issued at a discount, provided the amount thereof (in so far as it has not been written off) is stated on every Balance Sheet. D 2 36 AUDITING. At subsequent audits it should be ascertained that the Share Ledgers balance ; a full examination of the Share Ledger, and of the transfers registered, is no part of an ordinary audit. So far as the above remarks apply, they will serve to indicate the Auditor's duties with regard to Stock or Debentures. (p) THE AUDIT OF PAYMENTS FOR DIVIDEND AND INTEREST is not usually a difficult matter. A list of Shareholders should be handed to the Auditor, showing the number of shares held by each member on the day up' tO' which the dividend was declared, and the amount of di^'idend due. The additions of this list should be checked, and the totals agreed with the amounts of Shares issued and Dividends pay- able respectively ; it must also be seen that the rate of dividend is correctly calculated in toto. In the case of interest on deben- tures, Income Tax must have been deducted, as also in the case of dividends on shares, unless, indeed, the dividend be on ordinary shares and has been declared " free of Income Tax." A few of the larger amounts, taken at random, may advantageously be compared with the Share Ledger, and the calculations checked; but it is not generally essential that the whole list be exhaustively verified. Many large concerns draw one cheque for the whole amount of the dividend, and pay it into a separate banking account, against which the dividend warrants are issued. Where this method is adopted, it is a comparatively simple matter to vouch the pa}Tnents and verify the amount of outstanding dividends — which latter will, of course, agree with the balance of the (special) Pass Book. Where dividends are paid in cash, or by cheque upon the ordinary banking account, the vouching becomes merged in the vouching of the general payments. The outstanding dividends will not be so easily traced, but will present no special difficulty that requires particular mention here. Interest on debentures, dice., presents no further points for consideration ; but it is particularly necessary to bear in mind that Income Tax must always be deducted from interest, and AUDITING (up to THE TRIAL BALANCE). 37 from (maximum) dividends on preference shares, or the ordinary shareholders will suffer an injustice. (c) THE VARIOUS STATUTORY REQUIREMENTS, above referred to, together with the several sections enforcing their use, are as follow: — So far as companies registered under the Companies Acts, 1862-1900, are concerned: — (a) Register of Members (vide Section 25 of the 1862 Act). (^) Register of Mortgages (vide Section 43 of the 1862 Act, Section 14 of the 1900 Act, and Section 10 of the 1907 Act). (c) Annual List of Members and Summary Book {vide Section 26 of the 1862 Act, and Section 19 of the 1900 Act). (d) Minute Book (vide Section 67 of the 1862 Act). (e) Register of Directors and Managers (vide Section 5 of the 1862 Act, and Section 20 of the 1900 Act). (/) Annual Statement in the form of a Balance Sheet {vide Section 21 of the 1907 Act), The provisions of the Companies Acts, 1900 and 1907, as to prospectus, allotment, statutory meeting, audit, &c., should also be carefully followed. Companies incorporating the Companies Clauses Act, 1845 — that is to say, almost all companies incorporated by special Act of Parliament — are required to keep the following : — {a) Register of Shareholders (Section 9). (b) Shareholders' Address Book (Section 12). (c) Register of Holders of Consolidated Stock (Section 63). {d) Register of Mortgages (Section 43). {e) Registers of Transfers (Section 15). (/) Minute Book (Section 98). 38 AUDITING. The particulars required to be contained in each of these books may be ascertained upon reference to the sections named, which are reproduced in full in Appendix ''A.' In the case of all companies the following statistical books are practically indispensable, whether required by statute or not : — -Shareholders' and Debenture-holders' Address Books. Share Ledger. Debenture Ledger. Transfer Registers (for Shares and Debentures). Directors' Attendance Book. Applications and Allotments Book (one for each class of shares or debentures). Call Books (ditto). Strictly speaking, there is nothing to audit in these various books — because they are statistical books merely, and not books of account — but the Auditor should satisfy himself that the records are kept in the prescribed form, and, prima facie, correctly. In addition, he will do well to ascertain that all mortgages and charges that require registration have been entered fully in the Register of Mortgages, and a return filed with the Registrar of Joint Stock Companies. {d) COMPLIANCE WITH THE MEMORANDUM AND ARTICLES OF ASSOCIATION, SPECIAL ACTS OF PARLIAMENT, OR DEED OF SETTLEMENT.— Under this heading it is difficult to draw attention to specific points. It may be mentioned, however, that it is not merely expedient, but also absolutely necessary, that the Au(Jitor should care- fully peruse such if these documents as may relate to any par- ticular audit, with a view to modifying his course of action accordingly. The special points to which it will be necessary for him to direct attention are, so far as the capital is con- cerned, as to whether it has been duly authorised and expended AUDITING (up to THE TRIAL BALANCE). 39 upon the obj^ects for which the company was formed; so far as the accounts are concerned, that any special points raised in these documents are borne in mind when considering the method upon which the acct^Auits have been framed; and, so far as the question of profits available for dividend is con- cerned, as to whether all stipulations as to certain profits being carried to reserve, or applied (say) to the future redemption of debentures, ha\-e been dealt with properly. In the case of companies registered under the Companies Acts it is also desirable that particular attention should be directed to the various ci^ntracts connected with the original formation of the company. In all cases the prospectus, or statement in lieu thereof (if any), should be very carefully scanned, with a view to seeing that any special provisions laid down therein have been acted upon. It is naturally difificult, if not actuallv impossible, to speak exhaustively in this con- nection ; but it may be mentioned that, supposing a prospectus states that the directors will not take any fees unless the com- pany has made profits, or until a certain dividend has been paid to shareholders, then — whether or not a similar pro- \ision is contained in the company's Articles of Association or special Act of Parliament — it is necessary that the Auditor should see it has been complied with in the accounts which come before him for certification. On this point, however, nothing more than general hints can be given. The question of Secret Rt:\serves is dealt with in Chapter VI., and need therefore i;nly be mentioned here in passing. As bearing upon the question now under review, the decision of Mr. (now Lord) Justice Buckley in Xacioji v. The Birming- ham Small Arms Co., Liiu., aijpears to have been that ArticL-s of Association which purport to take away from the Auditor his statutory right to rc-jtort ti.) the shareholders in cases where moneys have been applied in contravention of the terms of the Memorandum of Association are ipso iacto in\alid. This seems to suggest that the duty is imposed upon the Auditor of 40 AUDITING. sec-mg so far as he can, from a careful inspection of the books, accounts, vouchers, &c. — that none of the acts of the dir'c'Ctors have been nllrd vires. In many cases this would appear to throw upon tlie Auditor a duty so onerous as to be ahnost impossible of performance ; but it emphasises the view laid down in previous editions of this work, that, so far as is reasonably possible, the Auditor should carefully consider this question of uJira vires, because an agent acting beyond his authority does not bind his principal, and thus the unautho- rised acts of agents can have no bearing upon the principal's accounts. CHAPTER II METHODS OF ACCOUNT (Suggested in the Course of Audit) It is not strictly any part of the Auditor's duty to offer suggestions or issue instructions as to the system of accounts to be adopted, but on account of his experience in such matters he is frequently asked to do so. The following remarks will, therefore, not be amiss in the present connection ; but it will, of course, be understood that the \arious questions now about to be considered are, for the most part, largely matters of indi- vidual opinion. The views stated in the following paragraphs are but those of the author, and it is by no means suggested that they should be accepted unquestioningly by the readers of this book. Circumstances notoriously alter cases, and in no state of existence is this more true than in the realm of accounts. GENERAL SYSTEM OF INTERNAL CHECK.— This is a matter that may \-ery prolitably engage the careful attention of the Auditor, for not only will a proper system of internal check frequently ob\iate the necessity for a detailed audit, but it further possesses the important advantage of causing any irregularities to be corrected at once, instead of continuing until the next visit of the Auditor, which — even in the case of a "continuous" audit — is clearly a consideration. It is very probable that tht- Auditor will be asked to make any sugges- tions that mav occur to him for the improvement of the existing system of accounts, or in the case of a new undertaking he mav be invited to prepare a system for the use of his clients. 42 AUDITING. In devising any system of internal check, there are three matters to he specially borne in mind : first the person in charge of the cash should never be in charge of any Ledger, or, at least, of any Trade Ledger; secondly, each separate Ledger should be made self-balancing, or at least should be so arranged that ir can be balanced separately ; and where this is for any reason not altogether practicable, it is absolutely essential that those Ledgers which are not checked in detail should be so arranged that they may be collectively balanced separately from those Ledgers that are ; thirdly, where tlie Trade Ledgers are numerous and are not checked in detail by the Auditor, the clerks in charge should be changed about frequently, so that if there be any irregularity it may be impossible for it to remain long undetected without implicating the whole staff. With a system of accounts arranged upon these lines, a detailed audit is frequently not necessary in its entirety ; but it is always desirable that the Auditor should satisfy himself that the system has actually been carried out as originally designed, and sections of the work should be fully checked at unexpected times. IXSTRUCTIOXS AS TO GENERAL SYSTEM OF ACCOUXTS. — It is usually desirable that the head book- keeper should be placed in possession of written instructions containing an outline of the system to be followed. These written instructions will naturally \"ary considerably according to circumstances, and it is imijossible to give here more than the barest outline of what may be rec^uired. The following points are. h()\ve\er. important ones, which will generally require to be included. (i) All cash received to be paid into bank daily. The cashier to ha\e no control o\"er any of the Ledgers. (2) All payments other than petty cash payments to be made by cheque, whatever the amount. (3) The Petty Cash Book to be kept upon the imprest system under the supervision of the cashier. The clerk in charge of METHODS OF ACCOUNT (SUGGESTED IN THE COURSE OF AUDIT). 43 the petty cash must on no account be allowed to receive any moneys for sundry cash receipts. (4) Proper Receipt Books to be used for all moneys received, and \ouchers obtained for every payment. (5) All cash and bank balances to be verified weekly, or oftener, and the adjustments recorded in a special Balance Book. (6) All Ledgers to be rendered self-balancing, and all Trade Ledgers to be balanced monthly. A maximum difference of (say) IS. to be allowed in any one Trade Ledger, subject to the approval of the head bookkeeper. All such differences to be recorded from time to time in a special book kept by the head bookkeeper. (7) An adequate system of Stock Accounts and Cost Accounts to be provided. (8) All invoices for purchases to be passed by the Goods Received Department, by the Buyer of the Department con- cerned, and by the Counting-House, before being entered in the Purchases Book. (9) Statements for trade payments to be passed by some responsible person, preferably one of the partners, or — in the case of a company — the managing director. (10) The calculations of all sales invoices to be checked in the Counting-House before the Sold Ledgers are posted. (11) Each time the Sold Ledgers are balanced a list of all accounts more than days overdue to be submitted to the head bookkeeper, and by him to one of the principals for further instructions. (12) A thoroughly efficient system of calculating and paying wages to be introduced, and closely adhered to. (13) So far as may be possible the duties of every member of the statf should be varied from time to time. (14) Every member of the staft' should be required to lake a holidav at least once a vear. 44 AUDITING. (15) No member of the staff should be allowed to perform what are (for the time being) the duties of another. In the case of a Company : — (16) The Minute Books to be fully entered up, and kept indexed to date. (17) All exceptional transactions to be reported to the Board at the next meeting for approval or further instructions. (18) The various books required by the Companies Acts to be kept written up, and the necessary returns to be made to the Registrar from time to time. COST ACCOUNTS.— Every system of Bookkeeping worthy of the name, that purports to record the transactions of a manufacturer, will provide some method of ascertaining the cost of the articles produced, while many systems recording transactions of a purely trading nature {i.e., buying and selling only) will likewise find a proper system of costing most advan- tageous. The fact remains, however, that Cost Accounts, as now arranged, are generally unsystematic, unreliable, and unaudited, and this statement is as literally true to-day as it was when the first edition of this work was published. It is not proposed to devote any large portion of space to the advocacy of a proper system of costing. Those who doubt its utility will do well to study a paper on the subject by Mr. John Mann, Junr., !M.A., C.A. (Glasgow), which appeared in The AccoKiitaiii of 29th August and 5th September 1891, and also a leading article that appeared in the issue of that paper for the 28th November 1891, and many others which have appeared in those columns more recently. The subject is also dealt with in the author's Advanced .Accounting. If these various con- tributions have produced no effect, the author doubts his ability to work a conxersion, and must, therefore, be content to pass- the matter bv. METHODS OF ACCOU^'T (SUGGESTED IN THE COURSE OF AUDIT). 45 FORM OF CASH BOOK.— A good form of Cash Book not only saves time and trouble every day of the year, but also — to an even greater extent — when the Ledgers come to be balanced. It is impossible to go fully into this matter here, but it is suggested that, in all businesses of any magnitude, the Auditor should consider the advisability of recommending the introduc- tion of various columns into the Cash Book that would facilitate the balancing of the various Ledgers employed. In an extreme case, the use of a Ledger might be almost obviated by the use of a numerous-columned Cash Book ; and in many cases a little ingenuity will suffice materially to reduce the labour of posting during the year, and to a corresponding extent facilitate the balancing of the Ledgers at the year's end. In large concerns a great sa\ing of time may be effected by assigning a separate Cash Book to each Ledger clerk. These separate Cash Books w-ill, of course, all work into the General Cash Book. (See further, under " Self-balancing Ledgers," ■postea.) DISCOUNT AND INTEREST.— A considerable amount of time may be sa\ed by a proper system in recording cash discounts. Every trading or manufacturing concern should have Discount columns in its Cash Book ; by which means the necessary number of postings may be considerably reduced. In every case the total of discounts received should be credited to Profit and Loss Account, and the total of discounts allowed debited. Although cash discounts are theoretically supposed to represent an allowance granted for a payment made before it is due, it is an almost universal custom to deduct discount from all outstanding accounts at balancing time, and to amend the Profit and Loss Account accordingly. The position is not very logical ; but where, upon the whole, discounts show a loss, there is much to commend it. Cash Discounts (so-called) received on account of Capital Expenditure by a Parliamentary Company are clearly a reduction of such Capital Expenditure. 46 AUDITING. IM EREST, received and allowed, requires to be separated in the Proiit and Loss Account, just the same as Discount ; and, where it is desired to reveal the whole effect of the working of a concern, it is advisable to separate Discount from Interest. The question of outstanding Discount and Interest is dealt with more fully in Chapter VI. I BAXK CHARGES.— Before taking leave of the Cash Book, it is well to note that the Auditor might with advantage roughly check the bank charges debited to his client, and see that the rate actually charged is in accordance with arrangements made. Unless thoroughly checked, bank charges have frequently a curious habit of increasing from year to year. : PETTY CASH. — The author is acquainted with two good systems of Petty Cash, and with numerous bad ones. It is not proposed to deal exhaustively with the latter, but a good system is sufficiently uncommon to merit a record in these columns. The system of debiting Petty Cash payments en bloc to Profit and Loss is bad ; and it is therefore assumed that, under each • of the following methods, the various payments are periodically analysed. Petty Cash should be balanced at least once a month, and frequently it will be found advantageous to balance at even shorter intervals. The analysis may be made either by ;' means of analysis columns in the book itself, or by a summary ^ written in the book after being prepared on loose dissecting ['* sheets, as mav be found most convenient. ^ Under one system the Petty Cashier is started with an I amount, say J^^o, which is supposed to be more than sufficient for the payments for the month (or whate\er other period be adopted). At the end of the month he hands the Cashier a summary of his payments, and receives a cheque for that exact amount. On the counterfoil of the cheque, the summary (or a reference to it) is written, and the cheque is written up in detail in the Cash Book, and thence posted direct to the debit of the various Ledger Accounts. Under this system no Ledger I METHODS OF ACCOUNT (SUGGESTED IN THE COURSE OF AUDIT). 47 Account is required for Petty Cash, but an account should in every case be opened for the initial balance, as, if it be left as a floating balance on Office Expenses, or any other Nominal Account, it is apt to get lost sight of. The Chief Cashier should thoroughly examine the Petty Cash Book each time he draws a cheque ; and when the cheque has been cashed, the initial balance should be shown him intact. The Auditor also will, of course, require to see this balance, or to have it properly accounted for. The other system is more suitable where the expenditure is too large for it to be deemed desirable to trust the Petty Cashier with an amount sufficient to cover a month's expenses. In this case, there will be a small initial balance, and when it becomes nearly exhausted a cheque will be given for the exact amount spent up to date. This system is thus similar to the former, but with shorter rests ; but to avoid numerous entries in the Cash Book the cheques drawn (including that for the initial balance) are posted to the debit of a Petty Cash Account in the Ledger. The result of the monthly summary is credited to Petty Cash Account, and debited to the \arious Nominal Accounts, either by being posted direct from the Summary, or by means of a Journal entry. The balance of the Petty Cash Account at the end of each month will thus always represent the amount of the initial balance. It will be noticed that debiting Nominal Accounts has here been spoken of. In the comparatively rare cases where it is desirable to make Bought Ledger, and other, payments (which involve the debit of a Personal Account) by Cash, every con- sideration of convenience will tend to the use of a separate Cash Book for this purpose, which will, of course, be kept upon similar lines to those indicated. Sometimes (as in the case of solicitors) it is better to keep only one Petty Cash Book, but in that case separate columns should be employed for expenses and for payments on account of clitnts. Both the above are varieties of the " Imprest System," so called from the demand (or imprest) presented to the Chief 48 AUDITING. by the Petty Cashier from time to time for a sum to reimburse him for his payments. RENTS (RECEIVED AND PAID).— Where a consider- able portion of the income is derived from the receipt of Rents, it is probable that some reasonable system of Accounts will be found in connection with them ; but where the matter is, so to speak, a side-issue, the probabilities are that there will be found to be no system whate\er. Cottages let to workmen are, perhaps, the most ordinary instance of a re\enue being inci- dentally derived from Rents Received ; and, as a rule, the accounts in connection with them will be found extremely primitive. The usual method is to deduct the amount of rent from each man's pay, and credit the total deductions to a Rent Received Account. This method might answer if the proper deductions were inxariably made ; but under such a system — if a man were allowed to get into arrear, or if no wages were due to him — the matter is \ ery liable to be lost sight of ; and, in any case, no proper record will he kept of any allowances made to tenants for taxes, repairs, &c. In every case, there- fore, a proper rent-roll should be kept. In general, this will be found an actual saving of time in the end ; and, in any case, it will probably save its cost in the increasing resultant revenue. Suitable rulings for rent-rolls (for rt^nts payable weekly, monthly, &c.) will be found in the author's Auctioneers' Accounts. The proportion of rent accruing, but nut due, should be included in the Balance Sheet as an asset ; as also should all arrears, unless, indeed, there is reason to believe that they will not be recovered. All accruing and outstanding liabilities for ground rent, rates, taxes, &:c., must also be included, and the Auditor must not be put off with any suggestion that " they about balance one another." What he has to deal with are the facts. In the case of cottage property, occupied by workmen, it is desirable to show the whole matter in a nutslifll in the Profit METHODS OF ACCOUNT (SUGGESTED IN THE COURSE OF AUDIT). 49 and Loss Account ; therefore show Rents, less Outgoings, on the credit side, and carry out only the net Revenue derived. Where only a portion of certain premises is occupied, and the remainder sub-let, a similar course should be pursued. That is to say, the total rent paid should be shown on the debit side, the rent receivable deducted, and the net rent paid carried out. It is considered in some quarters that a statement of the net amount is sufficient ; but the effect of the sub-let premises becoming vacant should be considered, for if this be neglected, the amount stated in the accounts would be liable to sudden and unexplained fluctuations. If accounts are intended to show the whole facts of the case, it will be seen at once how defective are statements containing the net amount only. RENTS PAYABLE. — Where the business is carried on in freehold premises owned by the proprietors, there is no reason why the Rent Account should not be charged with a fair amount for the use of the premises. This practically amounts to the proprietors giving themselves a lease of the property, which naturally leads to a consideration of the question of leaseholds. Where a Valuable Lease is held, for which a premium has been paid, the annual amount written off for depreciation may appropriately be charged to Rent Account, it being, in fact, merely a portion of the rent paid in advance; but it would be well for the accounts to state that this has been done. A useful Depreciation Table will be found in Appendix " D." (( < SELF-BALANCING" LEDGERS.— All Accountants— and, for that matter, most Bookkeepers — will be familiar with the method usually adopted for verifying the accuracy of each Ledger in a system of accounts. It would probably be the exception to find a set of books in which some device for the separate balancing of each Ledger was not in use ; on the other hand, the instances in which some properly organised system of applying this check has been adopted are probably more exceptional. 50 AUDITING. The usual method is to take the total of the list of Ledger balances at the previous time of balancing, allow for the total amounts that should have been posted to the debit and credit of the Ledger respectively, and the resultant figure should agree with the total of the present list of balances. This method is often of the greatest possible assistance when dealing with books that ha\e been more or less incompletely kept ; but it can hardly be called scientific, and is, at best, but a convenient makeshift : nor can Ledgers so kept be properly styled " self- balancing." Every Ledger should be so arranged as to possess within itself all the materials of a Trial Balance. That is to say, each Departmental Ledger should contain a '" General Ledger Adjustment Account,'' while the General Ledger should contain an Adjustment Account for each of the Departmental Ledgers. The detailed consideration of this matter is, how- ever, a question of Bookkeeping rather than Auditing; it will accordingly be found to be fully dealt with in the author's Bookkeefing for Accouutaiii Students. The Adjustment Account is a most valuable device, as by this means each Ledger can, at any time, be balanced with the minimum of trouble, and absolutely irrespective of the other Ledgers. Moreover, in the e\-ent of any Ledger not agreeing, the side (whether debit or credit) upon which the difference occurs can be readilv per- ceived. Again, the clerk keeping the General Ledger (naturally the clerk most to be trusted, if not actually one of the prin- cipals, or, perhaps e^•en the Auditors themselves) has a very good check on e\ery other Ledger clerk. // must, however, never be lost sight of that the oiil y reliable verification of the various balances of the Ad just me lit Ac counts in the General Ledger lies in the thoroug/i verification of the various Depart- mental Ledger balances. If this fact be lost sight of, there is a .serious risk of fraud ; but, if the sy.stem be intelligently applied, it is a distinct preventive of any kind of irregularity. The Auditor who once adopts this system will find it not only lessen his own work and tliat of the bookkeeper, but also add METHODS OF ACCOUNT (SUGGESTED IN THE COURSE OF AUDIT). 5 I to the completeness of whatever system may previously have been in use ; and, further, materially increase the pleasure attendant upon the investigation. Where the Auditor himself keeps the Private Ledger (a not uncommon practice where pri\ate persons and firms are concerned) the advantage of making each Ledger " self -balancing " must be sufficiently obvious to need no further demonstration. Where a Proper Stock Account is Kept, or there is a reliable means of estimating the amount of Stock on hand {cf. Stock Accounts), the existence of " self -balancing " Ledgers makes it possible for a reliable Balance Sheet and Profit and Loss Account to be prepared, at any time, in a few hours, or even minutes ; and the advantage of this — where no Cost Accounts can be kept — is hardly to be over-estimated. TABULAR LEDGERS.— Another form of self -balancing Ledger — to which indeed the term " self -balancing " may, perhaps, be more appropriately applied than to the kind described in the preceding paragraph — is the Tabular Ledger. This Ledger is suitable to those concerns in which accounts are rendered only at certain definite intervals, and where the number of customers is extremely numerous, while the number of transactions with each customer is but small. These limita- tions naturally reduce the general utility of Tabular Ledgers, but they are common with gas companies, water companies, electric light companies, and also for the purpose of recording the collection of rates made by various local authorities. \\\ each of these cases the account rendered to the customer virtually consists of a single item, but the same form of Ledger is sometimes found convenient in cases where a large number of items ha^■e to be recorded ; in these latter cases, however, a subsidiary Ledger has to be kept for the purpo.se of collecting the items which constitute the account to be collected. Under ordinary circumstances the extra labour involved would go far to pre\-ent the employment of tabulated Ledgers in such cases as this, but it sometimes occurs — e.g., in the case of a colliery — that the daily deliveries are only in^■oiced as regards 52 AUDITING. weight and quality, without being priced out, and that the sub- sidiary Ledger is also kept in quantities only, the pricing out being only done when the monthly statement of account is sent in ; and this being so, a tabulated form of Ledger might con- veniently be adopted in such a case, although probably the number of accounts would not be sufficient to render such a course imperative. Yet another form of Tabular Ledger is that in use at hotels. The especial object of this form is to make the Ledger do duty not only as a Personal Ledger showing the state of account between the hotel and the various visitors, but also as a Nominal Ledger showing the analysed receipts from day to day. This form of Ledger is especially applicable to hotels, on account of the large number of nominal accounts employed to analyse the income derived from various sources ; it is also most convenient on account of the fact that it presents the readiest means of keeping each account written up to date, with a minimum of labour. CARD BOOKKEEPING, &c.— Of late years the "Slip System " of bookkeeping has been steadily becoming more general, and there seems to be every indication that as its advantages become more widely known it will be utilised still further. A full description of the various applications of this system will be found in the author's Advanced Accounting, and would be out of place here. It is necessary, however, for the sake of completeness, to consider the matter now from the point of view of the Auditor. There can be no doubt that, unless a thoroughly efficient system of account-keeping prevails, the introduction in any form whatever of the Slip System is likely to make confusion worse confounded ;, but, given a properly organised counting-house, it seems that practically the only drawback that can be suggested is the increased responsi- bility that is thrown upon the Auditor of maintaining a vigilant outlook for fraud. A great deal has been made by some critics of the possibility of Cards, or Sheets, being destroyed, and replaced by others i METHODS OF ACCOUNT (SUGGESTED IN THE COURSE OF AUDIT). 53 containing falsified entries. With a proper system, however, such irregularities would be more speedily detected than would their equivalent under the old-fashioned system of recording all entries in bound books. Bound books are invariably paged or folioed consecutively, but it is safe to assert that no Auditor ever conceived it to be part of his duty to make sure that the pages or folios of each Ledger were complete. If a folio be neatly extracted from a Ledger, it is not unlikely that its absence might remain undetected for months, so long as it had not been removed until after all postings to that folio had been checked. This risk has been provided for under all adequate varieties of the Slip System ; and it makes but little demand upon the Auditor's time to satisfy himself that there are no cards or sheets missing, and that all those presented to him for audit are the ones originally issued by the bookkeeper. With both Card and Loose-Leaf Ledgers it is as a rule better to check the postings by calling back from the Ledger into the books of first-entry, as time can generally thus be saved ; while this sequence enables the Auditor more readily to satisfy him- self that the Ledger, as presented to him for audit, is complete. STORES AND STOCK ACCOUNTS.— In many busi- nesses it is quite practicable to keep a reliable record of all goods or stores in stock, and — wherever this is possible — it is clearly desirable that the Auditor should place before his clients the indisputable advantages of such a course. Full details as to the best method to be adopted in all cases would naturally involve a consideration of the particular stocks employed in various trades and manufactures, and would be out of place in this volume, but the following general recom- mendations (quoted from The Accouniajits^ Manual, Vol. II.) will doubtless prove sufficient for the purpose : — " (i) Debit and Ci-edit Accounts should be opened, as far as possible, for each description of Stores used. On one side of the accounts the receipts would be entered, showing the date, weight, quantity or number, and other particulars; and, on the 54 AUDITING. Other side, the stores given out from time to time would be entered, with such particulars as were necessary or suitable, the difference representing what ought to be in hand, or there- abouts — as, in accounts of this kind, the balance shown upon the accounts can hardly be depended upon exactly. " (2) It is the opinion of practical mill-owners and managers that in many cases a really efficient and exact check on Stores is not practicable. It could, no doubt, be devised ; but the detailed v/ork in connection with it, and consequent labour and expense, put it out of the range of every- day business, whatever theorists may say. But many useful rules may be laid down preventive of fraud and waste, amongst others the following taken from actual experience : — " (a) Where stores are distributed for use upon a specific joId, the job should be stated, with the weight, quantity, &c. At Newcastle-upon-Tyne lately, a vast system of fraud was dis- covered, which had gone on for years ; in part through the neglect to adopt the recommendation of the Auditors (Char- tered Accountants) that proper Store Accounts should be kept. " (Z*) If material of the same kind is distributed to various men for the same purpose, a comparison should be made between the results produced by each. If discrepancies are found inquiries should be made, and doubtless in some cases a good explanation could be given, e.g., old machinery or appliances, &c. " (c) The store room should be so situated that people going in and coming out would pass under the eye of the principal, manager, or some other responsible person. " (d) The principal, or manager, should make a point of examining at times the Stock Ledgers and taking a general supervision of the department. Frequent and unnotified visits should be made, and the storekeeper, if possible (it is not always possible), changed [occasionally]. " (e) Some kinds of stores should never be given out unless the used-up stores are returned. For example, a workman METHODS OF ACCOUNT (SUGGESTED IN THE COURSE OF AUDIT). 55 making requisitions for files, brushes, and like things, should only be supplied on his giving up the old articles. This is a very good check, when the nature of the stores will allow of its application." It will be perceived that the above considerations refer primarily to the stores purchased by factories for their own use; an ordinary amount of intelligence will, however, suffice to render the recommendations there made applicable to a trading concern— that is to say, a concern where the goods pur- chased are is.sued (sold) to outside persons. A simple system will be found fully described in the author's Advanced Account- ing. In designing Stock Accounts for trading concerns (and sometimes, also, with factories) it is possible to arrange for the keeping of the accounts in sterling as well as in w^eight or quantity ; and, where this can be done, it is clearly desirable — as it is then possible — to make the Stock Accounts part of the regular system of double-entry bookkeeping employed. It is, however, better to retain the record of weights or quantities wherever practicable, as otherwise a discrepancy in quantity might easily be concealed by an error in the values attached to the various stores. With some businesses (especially traders dealing in small articles broken from bulk) a regular system of Stock Accounts is not practicable. In such cases a different method of check must be employed. In e\ery trade there is a well-known per- centage of gross profit that ought ahvays to be earned, and can rarely be exceeded. If, therefore, the Stock Account is started with the actual stock on hand at the commencement of a period, debited from time to time (usually monthly) with the total purchases, and also with the aforementioned estimated gross profits on the sales, and credited with the sales, the balance shown will represent the stock on hand — estimated on the assumption that the nominal gross profit has exactly been earned. At the periodical stocktaking this estimate can, of course, easily be ^■erified, or corrected. Where an undertaking trades in various kinds of goods it is always desirable to dissect 56 AUDITING. the sales and purchases, so that the position of the various departments may be perceived. This system is in very general use, and serves two most useful ends, (i) It calls attention to any discrepancy between the actual and nominal gross profits, by means of a similar dis- crepancy between the ascertained and estimated stock in hand. (2) It affords most useful information as to the probable amount of stock in each department from month to month, and so serves as a guide to, and a check upon, the \arious depart- mental managers, as well as affording material for an interim Balance Sheet, if one be required. "^ It is, of course, impossible to give any definite information concerning the gross profits usually made in \arious retail trades. Naturally, everything depends upon the situation of the shop and the class of business done. The following table of estimated gross profits realised on so-called " Stores prices " by a leading London house will not, howe^•er, be without interest : — cent. Grocery 10 per Wines and Spirits 15 .'^ Cutlerv 15 Drapery 10 ,, Stationery 15 .. Jewellery 25 ,, Drugs 25 „ Provisions 8 Beer ... 10 ,, Tobacco 1\ „ Tailoring .. I2i „ Mantles and Dresses • i7i -, Meat ... 10 ,, Fancy Goods - 17* ,. It is not, of course, suggested that these rates would apply to all houses selling at " Co-operative prices " (for the very term itself is sufficiently elastic), but they will serve as a useful guide of the gross profit likely to be earned by a house doing METHODS OF ACCOUNT (SUGGESTED IN THE COURSE OF AUDIT). 57 a good class of ready-money trade. It is, perhaps, well to note that, in accordance with the invariable custom of traders, the above percentages are based upon the selling price of the goods, and not on the cost price. It may be added that a comparison of the ratio between the stock-in-trade and the sales during corresponding periods is often useful as a rough test of the accuracy of the stocktaking. In conclusion, it may be stated that the Auditor who has been requested to design Stock Accounts for any special busi- ness will do w^-.U to avail himself of whatever practical experience may be possessed by his clients, or their managers. Nevertheless, he should take the earliest opportunity of verify- ing the experience thus utilised by his own ; and, where he should be so fortunate as to possess some slight practical knowledge of the particular business in question — a knowledge he is \Qxy likely to have had the opportunity of acquiring in connection with the winding-up of insolvent estates — he will doubtless find it of the greatest assistance. STOCK AND SHARE ACCOUNTS OF COMPANIES. - — -With regard to these accounts much that might have been said has been anticipated under the heading of " Self- Balancing Ledgers " (q-v.). Each class of shares or stock should have an account opened for it in the General Ledger, and such account will, in fact, become the Adjustment Account for that particular Share Ledger. By this means all transfers are kept out of the General Ledger, and — after the issue has once been completed — no further entries are neces- sary. Should the issue be a large one, however, it is often preferable to open separate General Ledger Accounts for "applications," "allotments," and "calls," respectively. This system may be assisted greatly by the addition of an extra column to the debit side of the General Cash Book, the items entered in such column being posted to the Share Ledger, and the totals periodically extended into the Bank column and then posted to the General Ledger in the usual way. If this method be adopted, the duplication of entries is reduced to a 58 AUDITING. minimum, and the Auditor's work becomes not onlj^ propor- tionately lighter, but also much more certain. With large companies, whose shareholders are very numerous, it is usual to devote a special book to Capital receipts, and carry totals only to the General Cash Book. This system lends itself readily to the method advocated. For full information upon this subject the reader is referred to the author's Bookkeefing for Company Secretaries, or Advanced Accounting. SUSPENSE ACCOUNTS.- Most of the points com- prised under this heading will be found to be dealt with at a later stage, under the heads of " Outstanding Assets and Liabilities " and " Contingent Liabilities " ; but the following, which refer rather to questions of account than to general matters of principle, may be more appropriately considered here. All outstanding amounts due, or supposed to be due, either to or by an undertaking, should never be allowed to stand as balances upon a Nominal Account. The great convenience of bringing the balance down on the Nominal Account (as opposed to opening a Suspense Account which will naturally have to be closed the following morning) makes this method of bookkeep- ing — if, indeed, it can be called a method — a great favourite with a certain class of bookkeeper ; but the objections that can be raised against such a procedure are quite sufficient to out- weigh any advantages that it may be supposed to possess. From a bookkeeper's point of view, doubtless, the balance on the Nominal Account may be deemed to answer all purposes sufficiently well, but the Auditor must take a different view. In the first place, the balance is very apt to be lost sight of, and consequently no adjustment made, at the close of the next period — particularly where a standing balance of petty cash in hand is left open upon, say, the Office Expenses Account. Secondly, the method is open to abuse on the part of a fraudulent bookkeeper, and — in the absence of the suggestive headings of Suspense Accounts — the matter might possibly METHODS OF ACCOUNT (SUGGESTED IN THE COURSE OF AUDIT). 59 escape the vigilance of the Auditor. And, again, it is a distinct advantage to arrange the Trial Balance so that it may contain, in itself, all the information necessary for closing the books and preparing the Balance Sheet and Trading and Profit and ^ Loss Accounts, and this can only be effected conveniently by making the necessary adjusting entries, by means of Suspense Accounts, before the Trial Balance is extracted. THE TREATMENT OF BAD AND DOUBTFUL DEBTS. — An intelligent system of dealing with the difficult question of Bad and Doubtful Debts is of such assistance to all commercial houses that the Auditor should lose no opportunity ■of suggesting that the matter be put upon a scientific basis. A very good method is the following : — As soon as a debt becomes at all doubtful, or sufticiently overdue to merit special attention, it is transferred to a Doubt- ful Debts Ledger, which is ruled as follows : On the left-hand page are spaces for two or three ordinary Ledger Accounts, while the right-hand page is left blank for such memoranda as ''When applied for," "When sued," "When failed," and full particulars as to progress of subsequent realisation of the estate. When an account becomes hopelessly bad (either by reason of the Statute of Limitations intervening, or an execu- tion remaining unsatisfied, or a final dividend having been distributed, or a composition accepted), and not until tJien, the Account is written off to Bad Debts Account ; but on no account should an amount be written off until it is known to be irretrievably bad, as an amount, once written off, is almost ■certain never to be recovered. It will be noted that not the least of the advantages afforded by this system is the peculiar prominence it gives to all overdue Accounts, thus offering special facilities for their receiving the particular attention they so urgently require. \r\ a large concern, moreo\-er, it is an obvious advantage that overdue accounts should pass into the control of a different Ledger clerk. Where it is the custom to pass all overdue debts on to the solicitor for collection, their simultaneous transfer to the 6o AUDITING. Doubtful Debts Ledger provides a convenient record of all matters in the solicitor's hands. The necessary provision for loss upon Bad and Doubtful Debts may be made by means of the Reserve for Bad Debts Account, which may be credited with the estimated amount of such loss, while the Bad Debts (nominal) Account is debited in the usual way. The memoranda recorded on the blank pages of the Doubtful Debts Ledger will readily afford all available information upon which a proper valuation of the amount neces- sary to be written off may be prepared, and the systematic focussing of such information upon the method here described will generally admit of a much more reliable estimate being prepared than would otherwise have been practicable. Some persons prefer to base their valuation upon a certain percentage of the Sales, and so equalise the loss by charging each year only with an average amount. The argument in this case is that the loss was not really made in the year when it was discovered, but in the year when the sale was effected. The contention is ingenious, but not particularly sound. In any case, the Auditor should satisfy himself that the Balance Sheet he is required to certify does not overstate the amount of the Book Debts ; on the other hand, there can be no objection to a reasonable reserve being built up to meet losses that may be incurred in the future. THE USE OF THE JOURNAL.— The extent to which the much-abused Journal may be advantageously employed in modern commercial Bookkeeping is a question upon the discus- sion of which so much acrimony has already been unprofitably expended that it is with considerable diflfidence that the subject is approached at all. After all has been said, however, the fact remains that many classes of business may, without any considerable loss of labour, employ the Journal for summarising all kinds of General Ledger transactions except cash. In such cases — and, be it noted, such cases are referred to only — it appears to be i' TVIETHODS OF ACCOUNT (SUGGESTED IN THE COURSE OF AUDIT). 6 I 3. considerable advantage to pass the Cash totals through the Journal, and so obtam from the Journal the sum total of all transactions, which may be then checked against the totals of the Trial Balance, which will be taken out in four columns (upon the French method) for this purpose. Where this is done, an error in the Trial Balance may be localised, as being either on the debit or the credit side of the Ledger, and a considerable amount of time will thus be saved in effecting a final agreement. It is not, perhaps, very often that this method of balancing by totals will be found to be practicable, but it is, at the same time, much more frequently possible than some would appear to think ; and the safeguard it affords against fraudulent transfers in the Ledger, between Nominal and Personal Accounts, is an advantage not to be lost sight of where other circumstances are equal. Where this check of the totals of the transactions is not practicable by means of a regular Journal, it may often be effected by the Auditor constructing an equivalent for the Journal from the totals of various other books, and — where this is practicable — the Auditor should not let the opportunity escape him. WAGES AND SALARIES.— The best method of paying wages has already been detailed in Chapter L, and therefore nothing further need be said upon that subject here. SALARIES should, in large concerns, be dealt with in a manner as near thereto as practicable. The distinction made by writers between wages and salaries is by no means invariablv clear, and therefore some definition seems desirable. By Wages is meant the cost of labour, and also the cost of the immediate supervision of such labour (foremen, &c.), which would probably be paid for at the same time and in the same manner — in a word, cost of artisans' or labourers' work. By Salaries is meant the weekly or other payments to managers, salesmen, clerks, and other more educated workers. Thus, wages will be always an expense of production ; but salaries 62 AUDITING. may be an expense of production, distribution or administration,, although generally one of the two latter. The abo^•e definitions, are by no means universally accepted, but for present purposes- the classification according to method of payment and of audit appears to be the most con\-enient. A Salaries Ledger may be regarded as essential in all but the smallest concerns. An account should be opened for each person in receipt of salary, and the rate and time of payment stated at the head of the account. Each payment will be entered on the account as made, and duly signed for by the recipient. This Salaries Ledger has, it will be seen, no credit side, and is purely a statistical book. Many retailers, and others, make a special agreement with their hands so that they may be dismissed without notice ; where this is the case the form of agreement may appropriately be printed at the head of each account, and it will be convenient to ha\e a sixpenny agreement stamp embossed upon each page. The Salaries Book contains a list of each set of payments, the total corresponding to the amount of the cheque drawn, and the items bearing the folios of the various Ledger Accounts. The Auditor need not do more than check the additions of the Salaries Book and the postings of one or two weeks ; but he should take a look through the whole Ledger, page by page, and he should never volunteer to any of the staff the information that he does not check every figure. AGENTS' ACCOUNTS.— With books which are not kept by very skilled bookkeepers, the Auditor frequently has a con- siderable amount of additional, and wholly unnecessary, trouble in connection with the accounts between his clients and their agents, or between his clients (the agents) and their principals. It is therefore very desirable that Agency Accounts should be kept upon some definite and practicable system. The con- ditions of agency are so various that it is impossible to deal in detail here with every conceivable set of circumstances arising, in connection with this subject, but it may be pointed out, m METHODS OF ACCOUNT (SUGGESTED IN THE COURSE OF AUDIT). 63 general terms, that where the remuneration of the agent is dependent upon the amount of sales or purchases eftected by him every consideration of convenience is in favour of a special Sold or Bought Book being employed for his transactions ; or, at all events, a special column being devoted to these transac- tions in the general Sold or Bought Book, as the case may be. When, on the other hand, the remuneration of the agent is by way of profits, or a percentage on the profits earned (whether gross or net), the accounts should be so schemed that an " Agency " Account is opened in the General or Private Ledger, which virtually becomes the Trading, or Profit and Loss, Account in respect of the transactions with which the agent is concerned. From many points of view there is much in common between Agency Accounts and Consignment Accounts, and therefore the considerations obtaining under the latter heading will frequently be found in use in connection with the accounts between agents and principals, and may usefully be consulted before formulating any definite scheme upon which these latter accounts should be kept. CONSIGNMENT ACCOUNTS.— It has already been pointed out under the previous heading that the most con- venient method of dealing with many Agency Accounts is so to arrange the books that what is virtually a special Trading — or a special Profit and Loss — -Account should be kept in respect of these particular items. These remarks apply a fortiori to Consignment Accounts. The statement will be found in many text-books on bookkeeping (chiefly, however, of the unpractical order) that when a consignee receives goods for a consignor it is unnecessary that any entry should be made in his books in respect thereof. This, it will be ob\ious, is a complete departure from the fundamental rule of bookkeeping, which requires that it should be "a record of transactions," and this proposition seems so self-evident that no time will be wasted in more fully discussing it. Apart, however, from this 64 AUDITING. academical objection, it may be pointed out that every con- sideration of convenience requires that in the books of the consignee there should be two accounts for the purpose of recording his transactions vv^ith the consignor ; the one virtually a Trading Account, showing the actual result of the trading in the goods consigned, and the other a Personal Account, show- ing the position between the consignee and the consignor. Where several consignments are received from the same con- signor, a separate Trading Account should be opened for each, but one Personal Account will usually suffice. The same remarks apply to the books of the consignor him- self, except that — as he is dependent entirely upon the consignee for the record of transactions after the goods have once left his office — it becomes possible in some cases to record these trans- actions in a single account. In the vast majority of cases, how- ever, it will be found that two accounts are not only more convenient, but in the long run involve less time and trouble in the keeping. A fuller and more detailed exposition of the best method of dealing with these accounts will be found in the author's Bookkeeping for Accountant Students, to which the reader is referred. THE ACCOUNTS OF BRANCH ESTABLISH- MENTS. — This is a point upon which the Auditor will frequently experience considerable difficulty, by reason of the defective system of record employed, and it is therefore of especial importance in connection with the subject of auditing that a really practical system of bookkeeping should be dealt with in this connection. It may be stated at the outset that the accounts of Branch establishments may be ranged under two wholly different categories. In the first case, the accounts of the Branch are kept at the Branch itself, and are practically independent of those kept at the Head Office ; in the second case, a minimum possible amount of accountancy is employed at the Branch, A'ETHODS OF ACCOUNT (SUGGESTED IN THE COURSE OF AUDIT). 65 returns bting made to tlir Head Office, and the transactions of the Branch incorporated in the Head Office Books. The latter class of accounts, of course, presents no serious diffirultv. and, indeed, for all iiraclical purposes the bookkeeping is the same as though the Branch establishment did not exist, except that for statistical purposes it may be thought desirable that some of the Nominal Accounts should be di\ided up so as to show the transactions of the Branch separately for purposes of comparison. It is, however, with regard to the former class that most <.lifficulties are likely to arise. In this connection it may be pointed out that any difficulty or complication which can be conceived may at once be got over if the system of accounts at the Branch Office be regarded in precisely the same light as though the Ledgers recording these transactions were in point of fact kept at the Head Office in Self-balancing Ledgers, in respect of which Adjustment Accounts were to be found in the Head Office Ledgers themseh'es. These Adjustment Accounts in the Head Office Ledgers, which, of course, ^viIl be written up from returns made by the Branches, will provide the means of controlling the record of transactions in the Branch Ledgers, and at the same time combine the whole system of accounts into one entity. On the other hand, there should, of course, be Adjustment Accounts in the Branch Office Books, so that these themselves mav be made self -balancing. When balancing time comes it is necessary that a Trial Balance should be taken of the Branch Books, and remitted to the Head Office, and this will be found to explain and verify the Adjustment Account in the Head Office Books dealing with the Branch transactions. The Trial Balance at the Head Office can then be amplified .so as to give effect to these records. Before leaving the question of Branch Accounts it mav be pointed out that the balance of expediency lies in favour of the Branch's bank being a branch of the same bank as that employed at the Head Office, so that facilities mav he afforded (36 AUDITING. for a prompt return being made to the Head Office of the pay- ments into and out of the Branch's banking account. On the other hand, in many cases it will be found preferable not to employ any banking account of the Branch at all, but to receive and pay all accounts through the Head Office alone; and, where the nature of the business makes this possible, every con- sideration of expediency will \h- in fa\our of it being carried out. Another point which is well worth bearing in mind, where it can be applied, is that with certain classes of business — that is to say, those that deal with the sale of goods in bulk without the bulk being broken, it is of inestimable advantage for the purchases to be all made at the Head Office, and the goods supplied to the Branch Offices being supplied to them by the Head Office at selling price. The Stock Account at the Branch Office then becomes much simplified, and the balance of such Stock Account should represent the stock actually available on hand, without any adjustments being necessary in respect of estimated or actual gross profit. It is not necessary that this system should at all confuse the question of the profits actually earned by the Branch, because there is not the least difficulty in the goods supplied to the Branch being credited to a special account in the Head Office Books, instead of being credited to the general Sales Account. A Reserve must be made, how- ever, for the Gross Profit on unsold Stock. The mere fact that a business has numerous branches, instead of merely one, in no way alters the fundamental principles on which the accounts of these branches should be kept ; but it need hardly be added that it enormously increases the arguments in favour of these Branch Accounts being organised and rigidly kej)t upon a thoroughly sound basis of internal check, and one which renders itself readily awailable to the scrutiny and supervision of the Auditor. Full details of the manner in which Branch Accounts should be kept will be found in the author's Advanced Accounting. METHODS OF ACCOUNT (SUGGESTED IN THE COURSE OF AUDIT). 67 CAPITAL AND REVENUE.— The distinction bet^veen Capital Expenditure and Revenue Expenditure is one of primary importance, as bearing upon tiie fundamental question of what profits have actually been made by an undertaking during any given period. But it is thought that much unneces- sary complication has been introduced in discussing the subject, and that, when these wholly irrelevant matters are brushed aside, the fundamental question will be found to be simplicity itself. Shortly stated, the question can in any event be answered by finding the answer to the following question : " Has the particular expenditure incurred in any individual case been incurred for the sake of improving the earning capacity of the undertaking?" If the answer to this question is in the affirmative, then, and to that extent, the expenditure in question is Capital Expenditure. But if it has only had the effect of putting the earning capacity of the undertaking upon the same footing as that which had previously obtained (and which has since declined by the ordinary process of wear and tear, or the effluxion of time, in respect of which no provision has been made) it must be charged against Revenue. The precise mean- ing of this latter qualification is that the mere renewal of wasting assets, not otherwise provided for, cannot be called Capital Expenditure, but that any extension, or the acquiring of fresh assets, is in the nature of Capital Expenditure. It may be added that it is generally supposed that Local Authorities are allowed to issue loans to cover Capital Expendi- ture, but that all Revenue Expenditure must be met out of current Revenue — i.e., spontaneous income, trading profits, or rates. In general terms this is doubtless so, but " short loans " are not infrequently sanctioned for renewal purposes where some slight improvement is effected simultaneously — e-g-, repaving streets with a more suitable material. On the other hand, when considering Capital Expenditure that may be met by the issue of loans, it is the usual practice of the Local Go\-crnnient Board to disallow for this purpose all such 68 AUDITING. expenditure as represents Wages paid to workmen in the permanent employ of the Authority, even although such pay- ments are solely in respect of work which accountants would regard as pure Capital Expenditure. Business undertakings would see no difficulty in capitalising all expenditure which tended to improve, or enlarge, the general equipment of the business. For instance, an engineering company (unless it wished to create a Secret Reserve) would invariably treat as assets the machines or tools manufactured in its own factory for its own use ; and similarly practically all Capital Expendi- ture incurred by (say) a railway company would (in so far as it consisted of wages) be paid to permanent employees. The rule of the Local Government Board already referred to is doubtless convenient, and affords a safeguard against abuse that can readily be applied ; but it cannot be regarded as affecting in any way the principles underlying the proper distinction between Capital and Revenue Expenditure. INSTRUCTIONS AS TO PREPARATION FOR AUDIT. — As a fitting conclusion to the present Chapter, a brief list of instructions — such as might be prepared by the Auditor for the guidance of the bookkeeper, showing the work that should be done before the audit commences — is appended. Such a list is the following : — (i) All postings should be completed, all additions inked in, all balances extracted, and the Trial Balance agreed. (2) Vouchers for all pavments should be arranged in order, and available. (3) A complete list of all books with the names of the clerks in charge of each, should be prepared. (4) If possible, the casli in hand at the date of closing the books should be paid into the bank ; but, where this has not been done, the cashier must have his books written up to date, and the vouchers ready. (5) A complete inventory of the stock — priced, extended, added, and duly certified — should be ready. METHODS OF ACCOUNT (SUGGESTED IN THE COURSE OF AUDIT). 69 (6) All bonds, bills, deeds, and other securities should lie ready for production when called for by the Auditor, and a list thereof should be prepared. (7) A list of all overdue accounts, showing the provision (if any) which it is deemed necessary to make against possible loss, should be prepared. (8) A memorandum should be kept of any other matter to which it is thought desirable to call the Auditor's attention. (9) A draft Balance Sheet and Protit and Loss Account should be prepared. As has already been pointed out, some of the duties com- I)rised in the foregoing may devolve upon the Auditor in the case of a private firm or trader ; but in the case of a company audit it is particularly desirable that these matters should be completed before the Auditor commences his investigation, as it cannot be too strongly impressed upon all concerned that the accounts submitted to the shareholders are not the Auditor's accounts, but the accounts of the directors. CHAPTER III. SPECIAL CONSIDERATIONS IN DIFFERENT CLASSES OF AUDITS. In the previous chapters the rules laid down have been of as general a character as possible ; but it must not, therefore, be supposed that the audit of every concern is to be carried out on precisely the same lines. The opportunities for fraud will vary widely in concerns of a different character, while the chances of unintentional errors of principle and in detail will likewise vary extensi\-ely in diflerent classes of concerns. As has been already intimated, the Auditor who wishes to be of the greatest possible service to his client should avail himself of every opportunitv to become practically acquainted with the working of the business, as it will only be when he has some real acquaintance with the matter he is discussing that his opinion upon the accounts of any gi\en Ijusiness wdll possess any great weight ; for if he has no knowledge of the business carried on it is impossible for him to criticise intelligently the system of accounts that records the transactions effected, and if he has no knowledge of the nature of such transactions it is hardly to be expected that he .should be in a position to form any reliable opinion as to the risk that exists of the transac- tions not being correctly recorded in the accounts. These remarks will. ])erhaps, appear trite to many, but so much has been said about Accountants " confining themselves to their own proxince " that it has become necessary to point out the utter inefficiency of any audit which confines its investigations to an inquiry as to the academical correctness of the bookkeeping. SPECIAL CONSIDERATIONS IN DIFFERENT CLASSES OF AUDITS. 7 r The object of the following chapters is not to supply the reader with such special knowledge concerning each class of undertaking as it may be desiral)le for him to possess before presuming to certify as to tlie correctness of its accounts — such a knowledge cannot be altogether imparted by any book, and is beyond the scope (as it is beyond the compass) of the present volume — but in the following paragraphs the reader will find his attention directed to those points most worthy of liis con- sideration in each of the leading classes of accounts he is likely to be called upon to \erify. The special opportunities of fraud, and the points upon which an innocent misstatement of facts is most likelv to occur, will, so far as possible, claim attention ; while it may be added that Tlie Accountants^ Library pro\ides a series of handbooks dealing with the accounts of most of the leading industries, and is likely to prove useful to the reader^ \vhether practitioner or studeiit. With these preliminary remarks, the categorical considera- tion of the subject will be proceeded with. I. COMMERCIAL ACCOUNTS.— (^) MERCHANTS AND WAREHOUSEMEN'. —The chief openings for fraud in these accounts are : Theft of stock ; misstatement of cash sales ; fraudulent payment of bogus purchases ; misappropria- tion of moneys received in payment of accounts — such accounts being either left open or written off as " bad " ; petty theft by the raising of fictitious items of discount allowed on receipts, or bank charges or interest incurred on payments; and similar matters. Of what may be styled " innocent " errors, the most common are errors of principle in the valuation of stock-in- trade ; insufficient depreciation on leases and furniture ; omis- sion to allow for outstanding discounts and interest ; errors of principle in the valuation of foreign currencies; omission of liability on outstanding expenses, and on bills discounted ; insufficient provision for bad debts, &c. There are not nKiny trade details that the Auditor will require to be acquainted with in these accounts, but he will do well to ascertain the 72 AUDITING. terms ot" payment and discount arcord^d to. and l.y. his clients, and t'j make use of this knowledge continuously. Where the terms \ary — and they generally do \ary — they should be written in red ink at tlip head of each account in the Ledger. The Auditor should make himself acquaintt:-d with the percentage of })r()iit expected bv his clients, and should compare it, both with the actual results and the rate generally realised by others in the same trade. Stock Accounts can, almost invariably, be kept by merchants and warehousemen ; but this i,>. in practice, onlv o<:casionally dout-. The question of Patents or Trade-marks sometimes arises in these accounts, but the consideration thereof is more appro- priately dealt with in a later chapter. In a foreign merchant's business Consignment Accounts and Bill transactions will frequently assume considerable proportions : where\er possible they should be fully checked in detail. {!>) MANUFACTURING TRADERS.— Under this head- intr are intended to be included those manufacturers who ordinarily keep a stock of ready-made articles, and who do not manufacture exclusively (or principally; " to order." Such manufacturers are, clearly, also warehousemen, and conse- quently the preceding paragraph {a) will apply to the con- sideration of their accounts; but a few adilitional i)re- cautions are required in connection with their manufacturing departments. The item of ^^'ages, in particular, is one requiring the utmost care; and the question of Depreciation of Plant and Machinery Avill also require a full share of attention. A projjer system of " costing " becomes all Imt essential. It is probable that the Auditor will find some such system in operation ; but it is at lea.st equally probable that the actual system employed will be found both un.scientific and unreliable. {c) RETAILERS.— Retailers who give credit in many respects follow upon the same lines as the wholesale houses in tiie same traile ; but the increa.sed number of transaction.s SPECIAL CONSIDERATIONS IN DIFFERENT CLASSES OF AUDITS. 75 rfuders a detailed audit more difficult. It is generally quite impossible to call back all the postings of the Sold Ledger ; but the balancing thereof can be checked without diffi(nilty, and must always be done. Where practicable the posting of the cash received may be checked with advantage, and the list of balances should always be compared with the Ledger, and the additions checked. Where tlie business is very voluminous, the audit of the Sold Ledgers is frequently deputed to some of the counting-house .staff; but, in any case, the Auditor should not lose his grip of this department, and should axasionally check the balances him.self. To check, say, one or two Ledgers at random each vear will liave all the moral effect of checking the whole set. Many retail houses supply goods to their own assistants, &c., at reduced rates, and allow credit until the following pay-day. A separate "Assistants' Ledger " should always be kept in these cases, and the Auditor is usually expected to see that the pay- ment of these accounts is not unduly delayed. At every stocktaking he should be careful to ascertain that no amount stands to the debit of an employee who has left. The Bought Ledger is generally of comparatively manageable proportions ; consequently it is rarely impossible to check it i)i toto. \\\ any case the Bought Ledger payments should be checked, both as to postings and vouchers. In a continuous audit it is frequently arranged that the Auditor shall pass all the Bought Ledger statements for payment, and the system has much to recommend it. In addition to seeing that each item on the statements is also in the Ledger, the Auditor should make the Ledger-keeper initial — and so guarantee the correct- ness of — every statement that is submitted by him. The Auditor .should also compare the discount deducted with the terms of payment stated at the head of each account in the Ledger. It need hardly be added that this passing of the Bought Ledger statements for payment is not an integral part of anv audit, and — wheru i)erformed — it should command a siK''-ial fee. 74 .AUDITING. The vouching of cash received — whether for cash sales or Sold Ledger Accounts — may. under a good system of internal •check, safely be left to the care of the staff : but it is the Auditor's duty to see that the receipts are duly banked, and to verify the liank balance. A large retailer's audit will, almost invariably, he continuous ; and it is desirable that the bank balance, and also that of the Petty Cash, be examined at least •once a month. The examination of Petty Cash has already occupied atten- tion {vhie Chapter I. ). and it therefore only remains to add that — in addition to vouching for the ///''//a fides of all payments — it is essential that some responsible person be made account- .able for the correctness of the dissection of the items. The Departmental Accounts must not be lost sight of, as they form (me of the most important branches of the Auditor's duties. An account showing the sales, purchases, and •estimated stock should be submitted to the principals each montn. and the preparation of this account frequently devolves upon the Auditor. At the stocktaking the reconciliation of the estimated figures with the actual stock on hand may also profitably ocrupv the Auditor's attention. The postings of the Private Ledger should always be called back, and it is highly desirable that such Private Ledger should contain, within itself, all the materials for a Trial Balance. Bills l\rc( ivabU' will but rarely \'f found in connection with a retailer's business, but Bills Payable are almost certain to exist, and will require attention. The voucliing of i)ayments for salaries must not escape attention. Imt it calls for no special c(^mment here. In Cash Hi'sinesses the pr(jblem is somewhat simplified by the considerable reduction effecteil in the number of Sold Ledger Accounts. Indeed, these aci'ounts are, of course, naturally abolishee upon theoretical grounds — by reason of the fact that, so far as it is humanly possible to foretell the future, there .seems every reason to suppose that the receipts under these headings will be practically constant from year to year ; but in the case of a new institution it is obvious that the receipts under these headings will be far larger than the receipts of normal years, and in such cases at least they ought to be capitalised, for there can be no doubt that, properly regarded, thev represent a payment in advance in respect of benefits to be received during a number of years. In the case, however, of institutions not formed for purposes of profit, and therefore paying no dividends out of profits, the matter is only of importance in that an appearance of fictitious prosperity may be conveyed by the Revenue Accounts of the earlier years, when receipts under this heading are obviously above what may reasonably be expected to be the normal average figure. (//) THEATRE ACCOUNTS, c^'c— The most difficult feature in theatrical and similar accounts (from the Auditor's point of view) is the large amount of cash — i.e., coin — which is necessarily handled by all persons connected with the financial part of the management. It is not usual for the Auditor to be expected to xerify the cash takings ; this office is usually performed by the Treasurer, or (in a touring company) by the business manager, who is con- sidered a sufficiently responsible person for the performance of a function that requires integrity certainly, but no great SPECIAL CONSIDERATIONS IN DIFFERENT CLASSES OF AUDITS. 83 technical knowledge. It should be an invariable rule that all sums received are banked at least once a day, and the Auditor will probably iind no great difficulty in securing the adoption of this plan. Where this is done he will, of course, satisfy himself that the amounts so banked agree with the various returns that have been certified by the Treasurer. As these returns huve not lieen prepared by the Treasurer himself, they form a fairly reliable check upon that official, and — under a properly arranged system nf internal check — are sufficient for all practical purposes. Payments may be roughly divided into three classes — (i) Mounting Expenses. (2) Advertising, (3) Running Expenses, viz., (a) salaries and wages, (b) rent, gas, &c. &c. The first will almost entirely be paid by cheque, against accounts properly certified by the manager, and call for no special comment. The same remark applies to advertising, which, by the way, is almost invariably done by a contractor. Salaries and wages are always paid in cash, usually weekly ; separate pay-sheets are drawn up for (i) " Front of house," &c.. (2) principals, (3) chorus and ballet, (3a) " supers," (4) band, (5) wardrobe, (6) carpenters, &c. It is a good plan to have separate ■cheques drawn for each of these headings, and to let every employee sign for the amount paid him. " Supers " do not usually sign for their wages, however, the super-master's signature being accepted for the whole amount paid. (In excep- tional cases, however, the salary of some great ''star" will be paid into his or her banking account direct; such transactions are. of course, easily vouched.) It is not usual for the Auditor to \erifv the composition of the pay-sheets, but there would be no harm done if he did so occasionally — and unexpectedly. Advances, or " subs.," are frequently made to members of touring rompanies (and occasionally also in town companies), anil it generally happens that the result is chaos. The Auditor will do well to iiKjuire into the system in vogue as regards " sul)S.," and to see that it is such that the paymaster (and not the proprietor) loses by any careless omission to "recover a •" sub. " out of the following week's salary. G 2 84 AUDITING. The valuation of assets, especially of copyrights and per- forming rights, is, perhaps, almost the most ticklish matter in connection with theatre audits ; but the subject is so technical that it is necessary to dismiss it Avith a passing caution against over- valuation. It will be best for the Auditor to expressly state in his report that he does not accept any responsibility for the values placed upon these items. When a company is " on tour ''* the usual arrangement is to divide the gross receipts in fixed proportions (generally half each) between the " company '' and the provincial lessee, the latter paying rent, gas, &c., also " front of house " and car- penters' wages (sometimes, also the band), and advertising. The duties of an Auditor acting for either side are thus some- what reduced. When acting for the representati\es, or pro- prietors, of the touring company he will base his item " gross receipts " upon the joint-certified return of his client's business manager and the pro\incial treasurer (who is, not infrequently, stage manager and lessee as well). He must, of course, see that the proper percentage of these gross receipts is duly accounted for. Refreshments and advertising on programmes are usually sub-let; if not, see under Hotels (I. /) and Publishers (I. 7) in this chapter. (/■) PUBLISHERS.— The audit of Publishers' Accounts, presents a peculiar combination of complications. In many cases publishers will do their own printing, and in this respect they follow the rules of manufacturing traders (see under head- ing I. {b) above). Almost invariably, however, they will also be retailers, and then the considerations detailed under heading I. {c) will also apply. Many houses add the further occupation of trading — either wholesale or retail, or both — in the publica- tions of other firms, which, to a great extent, brings them under the heading I. {a) above; whilst almost every house will occasionally undertake the publication of authors' work upon such terms, as to royalty, &c., as make it absolutely necessary that both Stock Accounts and Cost Accounts should be carried * For this purpose suburban theatres rank as " provincial " theatres,, and the companies appearing there are said to be "on tour." SPECIAL CONSIDERATIONS IN DIFFERENT CLASSES OF AUDITS. 85 to perfection. In this respect Publishers' Accounts involve many of the considerations discussed under heading I. (d) when dealing with Contractors' Accounts. A complete audit of Publishers' Accounts is, on account of the multiplicity of detail involved, a practical impossibility ; the extent to which a partial audit may ad^•antageously be carried must, on the other hand, of necessity ^•ary with almost evefy individual case. The considerations involved in the previous paragraphs are the only ones that can be offered ; but it may be added that here — as in the case of all other partial audits — - the precise routine may be Taricd from time to time with the greatest advantage. Advertisements inserted in books, and also in magazines, are a source of income that must not escape attention. It frequently happens that the whole space has been sold out-and-out to an advertising contractor, which will naturally simplify the Auditor's work to a great extent: where, however, a firm of publishers runs its own ad\"ertising department — an unusual occurrence with books, but not an infrequent practice with magazines and reviews — the procedure follows that of the Newspaper audit, which will be considered next. As to how far the Auditor need go into detail here, must again be left greatly to his own discretion and the circumstances of the individual case. Permanent assets, such as buildings, plant, &c., must, of course, be subjected to proper depreciation, and Stock-in- Trade will require carefully valuing. It ought to be possible for the Auditor to obtain absolute proof as to the (juantity of Stock-in-Trade, but he can hardly be expected to check the inventory in extenso. The prices set upon unsold publications should never exceed the cost of production, and — in the case of periodicals at least — only a certain number are really worth more than waste-paper price. Care should be taken to ascertain that the Stock List is not unduly inflated by almost entire editions of absolutely 86 AUDITINX-. unsaleable publications that aw not ^vorth anything like the cost of production. ^Vith regard to the valuatimi dt ((.pyriglits for Balance Sheet purposes, it is usual for a scparatt- account to be opened for each publication, which is, in the iirst place, debited with the actual cost of production, inchnling. of course, the printing, binding, illustrations, &c. (aiK.l, wht're the copyright is pur- chased, the purchase-price thereof, together with that of any stock which may ha^•e been taken o\-er therewith). Many firms at balancing time review the debits to the ^-arious Copyright Accounts, depreciating some and appreciating others j that is to say, the system is adopted of \aluing the copyrights by inventory at each period of balancing, wholly irrespective of the actual cost. It is, of course, \evy desirable that where | necessary the cost should be written Jowti from time to time ; Ijut the arguments with regard to the writing up the value of a copyright are precisely those which might be — and, indeed, should be — invariably used against writing up the value of the asset Goodwill and crediting the difference to Profit and Loss Account. It may be perfectly true that a large revenue is expected from this asset in the f utin-e ; but that in itself can afford no possible argument for anticipating that revenue, and taking credit for it in the current period. On the other hand, it will probably be generally admitted that no great harm can Ije done l)y writing up such copyrights as have appreciated, so long as the actual effect of so doing i.^ not to increase the book- value of copyrights as a whoL'. In this connection it may be mentioned that with many houses there is a good general rule in use, to the effect that the value attached to any copyright should not exceed three years' purchase upon the gross profit earned therefrom during the past ytar. Sometimes, even when a puMicatinn is itself a failure, some residual value will attach to illustrations, &c., which have been } used in its production. It is very important, however, that no j; fictitious estimate should be put upon the value of such doubtful i. SPECIAL CONSIDERATIONS IN DIFFERENT CLASSES OF AUDITS. 87 assets as these, and of the two it seems infinitely preferable that they should be stated at ;/// in the Balance Sheet. The value of artists' original drawings (for illustrations) is often considerable, and has not infrequently been found to exceed the price originally paid for both original and copyright. It is hardly safe, however, to reckon such originals as assets — if valuable, they will generally be sold, and, if retained, the most that can be said is that they have a latent value. On behalf of his clients it may be thought desirable for the Auditor to thoroughly check all Royalty Accounts, but this does not form part of a regular audit. Newspapers anrl Periodicals present a few special features. In the absence of a staff-Auditor, the Auditor will require to satisfy himself that every advertisement is eventuallv paid for (unless, of course, a bad debt has been made), or else that it has been franked as " free " by some responsible person. The Commission Accounts of agents and canvassers should also always be examined. The " inside " of a paper is the work of the regular staff, or of "contributors"; the former are paid a regular salary (usually), the latter are paid for the actual work done. It would be a desirable thing to make sure that a contributor was never paid for a sub-editor's work, but no Auditor could ever ascertain such a thing for himself, and he must therefore rest content with the certified Contributors' Accounts as they are submitted to him. It frequentl}' devoh'es upon the Auditor to prepare weekly, or monthly. Statements, showing approximatelv the income and expenditure. Such work naturally commands a special fee. The printing of the publication calls for no special comment here ; when done by the proprietors they will, of course, be printers as well as publishers, and the Auditor must take his. stand accordingly. 88 AUDITING. The number of copies printed, issued, returned, exchanged, distributed free, and in stock, should always be certified by the publishing manager. From his returns the Trade Ledger debits may be A'ouched. Every periodical is started at a loss, and it is usual to debit this loss to an Establishment Account ; when the concern pays — and so acquires a goodwill — the cost of such goodwill is represented by the amount to the debit of Establishment Account, which thus virtually becomes a Goodwill Account. There is no great objection to this system, and it is much in favour on account of the information it affords to the intend- ing purchaser of a recently established paper ; but, when a periodical is once fairly started, the Auditor should require a very good reason to be furnished him before he sanctions the transfer of an unexpected loss to the Establishment Account : if such loss arises from an increase of matter (in quantity or quality) or a reduction in price, it may be in the nature of capital outlay, as tending to increase the permanent value of the concern, but an unexpected loss is likely to have the contrary effect. II. MINING ACCOUNTS.— (fl) COLLIERIES.— Better advice can hardly be given to the Accountant who is about to audit the accounts of a colliery for the first time than to suggest that he should make a tour of the whole works (both above and below ground) in company with the colliery manager. If he be of an observant turn of mind he will probably, by the end •of his inspection, have formed at least some idea of the scope of the undertaking, and he will doubtless find that the gloom of the underworld has thrown considerable light upon the records kept above ground. Even the Auditor experienced in Colliery Accounts will probably find that the thorough inspection of a new mine is really a wise economy of time; in fact, whate\er the nature of the business may be, the Auditor who acquaints himself with the manner in which it is carried on does wisely. A question of particular importance in these accounts is the treatment of the Capital Expenditure Account. Great care SPECIAL CONSIDERATIONS IN DIFFERENT CLASSES OF AUDITS. 89 must be taken to see that no expenditure properly chargeable against Revenue is included herein — indeed, it is always desirable to get the Capital Expenditure Account altogether closed as quickly as possible. The item " Minimums paid in excess of Royalties earned," which frequently occurs as an asset in the accounts of young collieries, requires some little explanation. The royalty pay- able is based upon the quantity of ore extracted — usually upon the number of tons, but sometimes upon the number of cubic yards, or the acreage of the seams worked — a fixed " minimum " or " dead " rent being payable in any event, whether the mines are worked or not. During the sinking of the shafts and first working of the mine, therefore, the rent paid naturally exceeds the normal percentage upon the output. Under ordinary circumstances this would represent a charge against Revenue in the usual way ; but, as the lessees are empowered to recoup themselves out of subsequent raisings, it is quite justifiable that the excess so paid away at first should be carried forward as a set-off against the output of later years. It is very necessary, however, that the Auditor should examine the constitution of the amount so carried forward. It not infrequently happens that the mine as a whole is comprised of several leases, some of which are not being worked, and never will be ; the minimum rent upon such portions ought, of course, to be charged against Revenue each year, and where, in the early days of the colliery's existence, an accumulation of such minimums has been allowed to be carried forward, it must be written off as soon as possible. Again, there is often a limit to the time during Avhich over-paid royalties may be recouped, and this limit, of course, must not be exceeded. It need hardly be added that the only justification for treating the whole — or any portion — of the balance of the Redeemable Dead Rents Account as an asset is the reasonable probability that it will be redeemed out of future workings within the time limit allowed by the lease. The question of Depreciation upon Mines is naturally one of no slight importance; but it would appear that — however 90 AUDITING, desirable it may be that an adequate provision should be made for depreciation arising either from the exhaustion of minerals, or from the lapse of the lease, or from both — it is not legally necessary even for a mining conipauv to set aside any portion of its earnings to replace wasting capital. The Auditor can thus do no more than ad\ise the extreme desirability of so prudent a course. Depreciation of Plant should, of course, be provided for; Init that question — and also the proper mode of treating Wagons on the Hire-purchase System — is best dealt with in Chapter VI. The Wages paid at collieries require the same careful atten- tion that must at all times lie accorded to this most important item ; but inasmuch as the great bulk of wages paid is at the rate of so much per ton, the aggregate amount payable can be tested with greater facility than in many cases. The peculiar conditions obtaining to Colliery Accounts generally render it desirable that the audit should descend into somewhat considerable detail ; concerning the actual extent of such detail, however, no general rules can be given, as each case must l)e judged u[)on its own merits. Brick \N'orks. — It is a matter of frequent occurrence for a collierv to own brickfields, and it is by no means uncommon to find that it owns the cottages occupied l>y its workpeople. Both these matters will require the Auditor's attention, but they need not be considered at length here. Chapter II. has already dealt with the question of Rents l<.ecei\al)K'. while the accounts con- nected with brickmaking call for no special comment, beyond the mention that proper Cost Accounts should, of course, be kept. {b) FORi:iC.X MINES.— To a very great extent the fore- going considerations ai)ply to mines of every description; but the circumstances of a mine being abroad naturally modifies the procedure ui certain respects. Among other things it should be ascertained that all mining regulations of the foreign (or Colonial) Government ha\e l)een complied with, and all taxes and licences paid. SPECIAL CONSIDERATIONS IN DIFFERENT CLASSES OF AUDITS. 9 I It is not usual for the Auditor to \isit the works of a foreign mine. The general manager remits periodically a certified ir'turn of his receipts and payments. Avhich is incorporated in the accounts kept at the Head Office. Such accounts are not usually very Aoluminous. and are generally examined by the Auditor in toto. It is, of course, desirable that all expenditure at the works be properly vouched, and for the Auditor to fxamine these vouchers. To make such an examination really effective, some knowledge of the language locally spoken is, of course, highly desirable ; but it is no use for Auditors to conceal (from themselves) the fact that, with regard to foreign expenditure, they are largely in the hands of the Mine ^Manager, who — up to a certain extent — might rob his employers with impunity, if he so chose. For Balance Sheet purposes the Mine Manager should be required to apportion all expenditure between Capital and Revenue, and to certify such apportionment ; also to submit a certified statement of local floating assets and liabilities, or a certificate that no such assets or liabilities exist locally, and at the same time he should report upon the state of efficiency of the plant and machinery, together with any buildings and other more or less permanent assets there may be upon the works. This latter report is most essential for a proper consideration of the question of depreciation. It is always well — and where the produce of the mine is jjrecious, it is \ery essential — for the Auditor to use every avail- able means of ascertaining that credit has been taken in the books for the value of the whole of the output. In conclusion, it may be added that he should expressly state in his report what the precise extent of his examination has been. This is perhaps a convenient place to draw attention to the fact that in the case of undertakings having their principal scene ot operations abroad it is very usual, and most desirable, that a " Iccal '" Auditor should be employed to audit the foreign accounts. In the case of undertakings owned by individuals 92 AUDITING. this circumstance gives rise to no complications. The local audit is a matter of contract between the parties, and the responsibilities of the local Auditor are determined by the con- ditions of such contract, while the Auditor at headquarters is as entitled to accept the report of the local Auditors as the report of any other expert upon matters within his personal knowledge. In the case of companies, however, it is perhaps desirable to point out that, unless the local Auditor is formally appointed by the shareholders as one of the Auditors " of the company " — which in point of fact is never done- — his position is merely that of an employee of the company, and that his duty to the company is determined by the terms of his contract, and not by statute. Under such circumstances the Auditors of the company have as much right to accept the report of the local Auditor as the report of the local manager, and they are entitled to accept it with less hesitation by reason of the fact that it is frimd facie the report of an independent, rather than of an accounting, party. It is desirable, however, that in their report to the shareholders they should draw attention to the facts, in order that their responsibility may be limited accord- ingly. In the very unlikely event of the local Auditor being formally appointed Auditor of the company, the position would appear to be similar to that referred to under the heading of dual appointments in Chapter X. ; which would be most unsatisfactory in that presumably each Auditor would be responsible for the work performed by the other, although for obvious reasons he would ha\e had little or no opportunity of testing its efficiency. It not infrequently happens in such cases that the title-deeds relating to the foreign property are abroad, and therefore cannot be produced for the inspection of the Auditor at headquarters. In such cases it would seem to be part of the duty of the local Auditor to inspect the title-deeds, and to report that they are in order ; but howe\er that may be, the facts of the case should be reported by the headquarters Auditor to the shareholders. {c) MINIiS UNDER THE STANNARIES ACTS.— It is not usual for the services of professional Auditors to be requisi- SPECIAL CONSIDERATIONS IN DIFFERENT CLASSES OF AUDITS. 93 tioned in these cases ; but as the Cost Book System under which the Cornish mines are worked is one peculiarly suitable for Mining Accounts, and as, moreover, the system is not generally known in this country, it has been thought well to state briefly the outlines of its working. Auditors will find it may (so far as legally possible) be advantageously applied to the working of anv metalliferous syndicate. The owners of a mine are practically unlimited partners, with power to transfer their shares without the consent of their co-partners, or to withdraw altogether upon payment of their share of the current liabilities. No partner is liable for the mine's debts, after he has sold or relinquished his share in the mine. The capital is unlimited. At the commencement it is usual to call up wiiat is considered to be sufficient working capital for the next three months, and thereafter a general meeting must be called at least once in every sixteen weeks. At every meet- ing an account of receipts and payments and a detailed Balance Sheet must be submitted. If there be a surplus, the members are to decide whether the w-hole or any (and, if so, what) portion thereof shall be divided. If there be a deficit, a call should be made, sufficient to meet all outstanding liabilities and to provide further working capital for current needs. There are two methods of paying the miners. " Tributers " are placed on a definite pitch, and are paid a certain agreed proportion of the value of the metal raised by them. Contracts with Tributers are renewed every eight weeks, and their earn- ings naturally vary \-ery considerably. As they have to pay for candles, dynamite, fuses, tools, &c., they may even find them- selves indebted to the mine at the end of their eight weeks' contract; on the other hand, their earnings are sometimes very high. The other method of payment is by " Stoping, " under which the miner is paid so much per ton for all stuff (earth and ore) sent to the surface : under this arrangement a miner's earnings are much more regular. 94 AUDITING. In Appendix "A" will be found certain extracts from the Stannaries Acts relative to accounts under the Cost Book System. It may be added that a very similar system of work- ing mines is very prevalent in Australia, Avhere it is known as the " No Liability " System. III. FINANCIAL ACCOUNTS.— (a) BANKS.— In deal ing with the question of Bank Audits it is well to remember that one of the most controversial subjects relative to profes- sional practice is being discussed. So far as possible, a position that few will care to assail will be occupied ; but it were well to admit at once that the author considers the duties of a Bank Auditor to be very much more onerous than some eminent Accountants care to admit, whatever his bare legal responsibilities may be. Further, it is to remembered that the bare legal responsibility is not the highest measure of the duties of a professional man. It is certainly very desirable that the law should not be unduly harsh — or the position of an Auditor would be intolerable — but it is imagined that few would con- sider that they had discharged all moral obligations as soon as they had complied with their statutory duties. These remarks, however, apply equally to all classes of audits. Under the Companies (Consolidation) Act, 1908 (Section 108) — for which see Appendix " A " to this volume — limited banking companies are required to exhibit a statement of their affairs. It were well, therefore, for the Auditor to see that this section is complied with, and that the statement so exhibited is correct. The law as to banking audits is thus now similar to the general law on the subject, save that section 113 (5) of the 1908 Act limits the liability of the Auditor in respect of branches beyond the limits of Europe : by implication, therefore, it emphasises the importance of a thorough examination of the accounts of all less remote branches. The certification of a Bank Balance Sheet involves the thorough examination and exhaustive testing of e\"ery account SPECIAL CONSIDERATIONS IN DIFFERENT CLASSES OF AUDITS. 95 in the General Ledger, the counting of the bahance of cash in hand, the examination of all bills (especial care being taken to note that all overdue bills are properly explained, and that rebate of interest is duly allowed for at a uniform rate), and the inspection of all securities — in which latter task it is usual for the Auditor to recei\e the advice and assistance of the Solicitor. With regard to the counting of the cash balance, the only safe way of dealing with cheques in hand is for the Auditor to himself forward them to the Clearing House and other agents. The disregard of this precaution has left the door open for most serious frauds upon the part of bank managers and others. In connection with these matters, it is. perhaps, well to call attention to the extreme importance of all the cash and securities being produced simultaneously, and of their all remaining in the Auditor's sole keeping until the inspection of all is completed. Extensive frauds ha^■e been known to remain undetected through failure to observe this simple precaution. How far the Auditor should extend his examination of the customer's accounts is a matter concerning which considerable difference of opinion obtains ; but many will endorse the dictum of the late iNIr. Slocombe, that " the overdrawn balances due from customers should be carefully scrutinised — more par- ticularly those which are not secured, or, being secured. ha\e exceeded the limit fixed by the Board of Directors ; and I need not add here that one important part of the Auditor's dutv. after making this examination, is to see that, in his judgment, ample provision has been made for the losses likely to arise upon them." This point suggests the consideration of Secret Reserves, which have been attacked upon the contention that, by their very existence, they proclaim the fact that the Balance Sheet is not " full and fair." Assuming, however, that the Secret Reserve is merely a bond fide provision against unforeseen bad debts, the author fails to appreciate the crying need for the publication of the amount of the provision made. Unless the 96 AUDITING. amount is so separately stated, however, the only proper method of dealing with it is to deduct the amount of the reserve from the assets against loss upon which it has been accumu- lated. Any such reserve as is implied by the omission of such tangible assets as office premises from the Balance Sheet can only be regarded — and this is stated deliberately, and in spite of the prevalence of the custom — as incorrect and misleading. Moreover, it possesses the practical disadvantage that the very existence of such assets may be concealed e\"en from the Auditor, and thus at a later date fail to be examined along with the rest of the securities. Perhaps the chief difficulty in the audit of a large bank consists of the great number of its branches : of the English banks alone, eight have over 100 branches. Tt is expressly pro- vided in the 1879 Act that the Auditor need not examine the accounts of any branch beyond the limits of Europe ; this pro- vision certainly relieves the Auditor, so far as it goes, but it is distinctly suggestive of an intention, on the part of the Legis- lature, that the accounts of all European branches should be examined by the Auditor. The difficulty in the way of such an examination in the case of the largest banks must be at once apparent, for obviously it is of but little use for the Auditor to check the cash balances at the various branches unless the checking is conducted simultaneously. It is believed that only one large bank (the Metropolitan) submits all its branches to the Accountants' audit ; still, the existence of a single instance seems to show that the requirements of the statute are not altogether impracticable. It is clearly desirable, where an examination of all the branches has not been made, that the Auditor's report should be so framed that there may be no misapprehension upon this point. A detailed audit extending to all the transactions of a bank is not practicable, nor — in view of the very highly developed system of internal check employed — is it necessary. The branch managers and branch inspectors must perforce be relied upon to a \ery great extent, and — except in the very rare SPECIAL CONSIDERATIONS IN DIFFERENT CLASSES OF AUDITS. 97 instances of conspiracy between them — it is thought that they may be safely depended upon. Here, as elsewhere, however, a knowledge of men and affairs is most valuable, and the Auditor should not dismiss this question of possible dishonesty from his mind until he has reasonably satisfied himself upon the point. These remarks are in direct contradiction to the view expressed by Lord (then Mr.) Justice Vaughan Williams in the New Oriental Bank case,* but it is believed they are both sound and practical. It is not usual for the Auditor to examine all the customers' Pass Books, but he should see that they are frequently examined by the manager or the inspector, and that every Pass Book has been examined and initialled by one or other of these officers at the close of each half-year. It will be noted that later on (in the case of Building Societies and Trustee Savings Banks) it is laid down as an essential that all Pass Books should be examined by the Auditor : the distinc- tion between the two cases lies solely in the vastly superior system of internal check adopted by banks, and only applies when this distinction exists. A plan that is sometimes adopted, and which has much to recommend it, is fojr the bank to send a statement to every customer, showing the amount to his credit (or debit) at the time of balancing, and requesting him to sign and return the same, if correct. It will be observed that the view adopted here with regard to a Bank audit is that the verification of details may — and indeed must — to a large extent be left to the staff audit. The recent frauds upon the Bank of Liverpool, which paid upwards of £,\-iO,oQo upon cheques forged by one of its Ledger clerks, may perhaps raise a question as to whether this reliance upon the system of internal check is altogether justified in practice. It is thought, however, that the Liverpool frauds have little, if *" It is not for an Auditor to consider the ho7ia fides of directors, but to deal with the books of the company and with commercial details and figures, not to consider the honesty of its officers." H 98 AUDITING. any, bearing upon the point, in that the system of internal check seems to have been chiefly conspicuous by its absence, or at least by its inefficiency. Three of the fundamental rules of any effective system are : (a) That no clerk should have access to books recording entries which go to check the entries kept by that clerk, (b) That the clerks should be shifted about at frequent intervals, so that a fraud — even if committed — may be speedily detected by a fresh clerk going over the same ground. (c) That no unusual entries, as, for example, transfers, should ever be made without special authority. None of these rudimentary precautions appear to have been adopted in the case mentioned, and it seems safe to say that, had any one of them been in force, the frauds could not have been committed, or would at least have been discovered at a very early date. Similarly, the more recent frauds at a rural branch of the Capital and Counties Bank were only possible because the same branch manager and cashier were left together for years. At the same time, as has already been stated elsewhere, it is always desirable that an Auditor, when considering the exact extent of his investigation, should make careful inquiry into the system of internal check employed, and satisfy himself that the system theoretically in force is actually carried out in practice. In dealing with Bank Accounts, and all other accounts of a similar nature, the Auditor must never forget that his responsi- bilities are not confined to safeguarding the interests of the proprietors. His report is virtually — whatever it may be legally — a guarantee to the fiiblic that the accounts submitted are to be relied upon as being, in every respect, correct. It is not, of course, suggested that he guarantees the safety of the customers' deposits ; but he would reasonably be blamed, were it to transpire that a bank which he had certified as solvent was afterwards discovered to be hopelessly insolvent. At first sight it may appear impossible for the Auditor to act up to the position here indicated, but he must remember that, in reality, the test of an Auditor's competency is in his ability to judge of the correctness of items by an exhaustive testing — SPECIAL CONSIDERATIONS IN DIFFERENT CLASSES OF AUDITS. 99 not necessarily of the items themselves, but of their totals. It need hardly be added, however, that a knowledge of banking theory and practice will be found an all but essential aid for this purpose. This may perhaps be thought to imply that a half-yearly audit would be sufficient ; but the author considers that a bank audit — to be really effectual — should be more or less continuous, for it is extremely difficult for the Auditor who is not frequently on the spot to get an extensive insight into the manner in which a business is carried on. A few remarks concerning the Revenue Account will not be out of place. The items of interest constituting the gross profit must be carefully tested, especially as to the rate charged upon current transactions, and also interest taken credit for upon doubtful advances, will require the most careful consideration. With regard to the rebate upon bills in hand, it has already been stated that this should be at a uniform rate ; by this, how- ever, is not meant that the rate must necessarily be a fixed one. Some banks employ a fixed rate (generally 5 per cent.), while some employ the rate actually charged in each case; and some, again, the current market rate. The first and third methods possess the merit of simplicity, but perhaps the second is the most strictly accurate. The great thing for the Auditor to ■observe, however, is that one method is uniformly adopted, ■otherwise the profits of the year might easily be manipulated. In the foregoing remarks the desirable extent of the Auditor's •duties has been stated rather than the bare limits of his legal responsibilities ; the question will, however, be found more fully discussed under the heading of " The Liabilities of A-uditors." In this connection it is of interest to observe that the ques- tion of the extent of the duties of a Bank Auditor has recentlv ■engaged the attention of the Accountancy profession in Victoria. The report of a special Committee appointed bv the Council of the Incorporated Institute of Accountants of Victoria to deal therewith is reproduced below. It should not H 2 lOO AUDITING. be overlooked, however, that it was expressly decided by LiNDLEY, L.J., in the London and General Bank case that '' an Auditor has nothing to do with the prudence or imprudence of making loans, with or without security. . . . His business is to ascertain and state the true financial position of the company at the time of the audit, and his duty is confined to that." This dictum is perhaps not very helpful, in that the " true financial position " can in the nature of things only be ascertained by inquiry into the loans, and the bad debts (if any) that may be expected to result therefrom ; but it is suggested that while, as a matter of professional responsibility, the Bank Auditor will naturally require to satisfy himself that the Reserve provided against Bad and Doubtful debts is adequate to meet any reasonable contingency, his legal responsibility in the matter is far less onerous. However, for what it is worth, the report of the Victorian Committee is reproduced. It is as follows :■ — " In attempting to define the proper scope of a bank audit the Com- mittee has to admit very great difficulty in giving expression to views which, however clear to those members who have had practical experience in bank auditing, may convey to others an imperfect idea of a very technical subject. The Committee has principally devoted its attention to those banking institutions having their head offices in Victoria. "Your Committee conceive it to be unnecessary to enter into any description of the internal system of inspection adopted by all banks, and refers to it and to the automatic check upon all officers as being complete and efficient. " From the very magnitude of the operations it would be a physical impossibility for an auditor — save in exceptional instances under extra- ordinary circumstances — to personally investigate the accuracy, for instance, of branch returns, or the clerical correctness of the mass of statements presented to him. It has further to be pointed out that an Auditor is appointed by the shareholders to ascertain the correctness of the Balance Sheet — i.e., ' that it represents a correct view of the company's affairs ' on a given day. In view of the large area over which the bank's operations are conducted, and the limited time between the closing of the books and the date of the publication of the Balance Sheet, he is of necessity obliged to confine his attention I \ \ SPECIAL CONSIDERATIONS IN DIFFERENT CLASSES OF AUDITS. lOI to those matters which are of major importance, and to endeavour by every means within his power to satisfy himself that the Balance Sheet is a full and fair one, and correctly exhibits the position of the bank on the balancing date. Many matters relating to the head office accounts he can readily ascertain, such as verifying the cash and bullion in hand, bills under discount, and various classes of securities included in the Balance Sheet as the property of the bank, and also the depositors' and current accounts of the bank. Further, it is quite practicable to verify the notes of the bank shown by the books to be on hand at the head office, and to ascertain the correct- ness of the entries made in regard to cancelled notes. In regard to the custody of securities for safe keeping for clients, it is now a frequent custom for banks to receive a small commission for cutting off and collecting coupons and for the safe custody of debentures. I he actual custody of such debentures should be verified by the Auditor. Apart from advances, there are assets impossible of verifica- tion by the Auditor at the balancing date, such as the correctness of the balance due by foreign agents or branches situated, say, in London, also remittances in course of post. In regard to these matters the only course open to the Auditor is to examine the system of internal check, and satisfy himself with such evidence as may be available. ■'The large question with all financial institutions lies in the sound- ness or otherwise of the advances. It is the aim of every bank, in addition to published Reserve Funds of greater or less magnitude, to provide internal reserves not merely sufficient for any probable losses in sight, but constituting, in addition, a substantial provision for unforeseen contingencies. It is, further, the practice not to carry to profits the interest on any account regarding the soundness of which there is any doubt. It not infrequently happens that such accounts are operative, and obviously the client must not be permitted to know the full estimate in which his financial standing is held by the bank authorities. Therefore, his account is charged in the usual manner each half-year with interest, which is carried to a Suspense Account, there to await the final working out of the account. " The Auditor has highly responsible duties thrown upon him in regard to these reserves. It is his duty to scrutinise all entries made in connection therewith, and satisfy himself that everything is bond ■fide in regard to them, and these remarks apply, though in a lesser degree, to all items charged or credited to profits. '' In connection with the soundness of those accounts for which the management consider it is unnecessary to make any provision, or the degree of provision necessary for accounts admitted to be more or .,' . . . lOJ AUDITING. less doubtful, there is room for difference of opinion. The soundness of an account does not necessarily depend upon the value of the securities held by the bankj and if an Auditor took up the view that full security must be held by the bank for every advance made he would entirely misapprehend his duty. In the Committee's view the bounden duty of an Auditor in connection with advances is to critically inquire into every advance of a material amount — have placed before him particulars of the securities held, and the value placed on each, and such other information as he may require, so that he may endeavour, as a reasonable business man, to arrive at a fair judgment as to the adequacy of the security held against the amount advanced. Should this, in his opinion, be full and sufficient, as is generally the case, he passes on to the next account, but if there appears to be insufficient security he is, assuming that material amounts are in question, entitled and bound to inquire as to the reasons for granting such advance. It is not sufficient answer to be informed that such matters lie in the discretion of the directors. Undoubtedly they do, but the same statute which confers such dis- ci etions upon the management places upon the Auditor the obliga- tion of inquiring into the result of their exercise, and he is entitled to have placed before him the facts upon which the management base their belief that the position of the borrower is such as to reasonably jiistify the inclusion of the amount as a sound advance. " The branch advances occupy a somewhat different position from these at the head office. They are subject to a very critical scrutiny by the head office officials, and also by the visiting inspectors, and those situated in country towns are, as a rule, smaller in amount. \\ hilst allowing due weight to this, in your Committee's opinion, the soundness of these advances should be scrutinised in such detail as is reasonably possible, and it is the duty of the auditor to satisfy himself by the examination of a substantial proportion of them." {l>) INSURANCE OFFICES.— All persons or bodies of persons, whether corporate or incorporate (save friendly societies and trade unions) that carry on any kind of insurance business, are now, more or less, subject to the provisions of the Assurance Companies Act, 1909 (vide Appendix " A "), the contents of which should be studied carefully. It will be convenient to deal first with Fire Offices, and to afterwards consider the various modiiications necessary for the audit of other Insurance Accounts. SPECIAL CONSIDERATIONS IN DIFFERENT CLASSES OF AUDITS. I03 Fire Offices. — The first point appears to be for the Auditor to satisfy himself as to the total amount of income receivable. The Policy Book and the Renewal Register — modified by the " Specials " and Endorsement Books — will provide him with this information ; but a large amount of tedious (although most necessary) checking of additions must be done before the result is finally arrived at. Where renewal receipts are written out for all existing policies, the production of all unused receipts should be required as a voucher for policies discon- tinued ; but where blank receipts are used — either in the head office, or at the branches or agencies — the number of receipts issued, used, and returned, must be compared with the number of renewals and discontinuances, allowance being made for such receipts as have been spoiled. It is not necessary for the premium income to be checked in detail ; the gross amount receivable is known, and the insurances discontinued can be verified, the net amount receivable can thus be arrived at. The total cash received on account of premiums, less the outstanding balances at the com- mencement of the period, should agree with the net amount receivable, less the balances outstanding at the close of the books. A list of these latter will be furnished to the Auditor, which he can easily check by satisfying himself that they have either been actually received since the closing of the books, or have been acknowledged by the agents to have been received by them. This is a much smaller affair than checking each item received, but it is — if anything — more exhaustive. Re-insurances will, of course, require due examination, but they call for no special comment. The Cash Book must be carefully added and properly vouched, and it is well to check the vouching of all miscel- laneous receipts in detail. It is not usually a very long job, and cannot well be verified in anv other wav. With regard to losses, it is not usual — unless the amount is large— to go behind the voucher for the receipt of the amount I04 AUDITING. paid ; the directors Avho signed the cheque are supposed to have satisfied themselves (and to have undertaken the responsi- bility) concerning the bona fides of the claims allowed. The postings of the Cash Book should, however, all be checked. It is well, however, to call for the Claims Book, with a view to making sure that due provision has been made among the liabilities for all claims received in respect of losses incurred up to the date of balancing. The valuation of the Balance Sheet assets is more appro- priately considered in a later chapter, while the method of verifying the items is similar to that obtaining under Banks and kindred associations. The percentage of premium income to be carried forward as a provision against unexpired risks must not be lost sight of. From 30 to 33 per cent, is perhaps the usual minimum allow- ance ; if a smaller amount be reserved, the effect is that the company is not setting aside a sum that would be sufficient to enable it to re-insure against the whole of its liabilities under current policies. It should be added that the premiums due at Christmas are not included in the accounts drawn up at the close of the year. It is not usual to make any special reserve for unexpired risks : in general, the provision is included in the Reserve Fund. Such a practice is )iot strictly correct, how- ever, for a Reserve Fund should represent an accumulation of pure profits, while a reserve for unexpired risks is a provision for profits as yet unearned. Still the practice is so general that it can hardly be described as misleading. Another similar item that must not be forgotten is that of premiums paid in advance. Where a reduced premium is accepted for, say, seven years' premiums paid in advance, the question of interest ought really to be considered ; but as these transactions are generally not ^•ery numerous, interest is not usually provided for. The item " Premium Income " should always be stated " less Re-insurances," both for the sake of showing the net revenue I ■i I SPECIAL CONSIDERATIONS IN DIFFERENT CLASSES OF AUDITS. I05 of the company and for calculating the provision for unexpired risks. The accumulated reserves of a sound company should always amount to at least one year's net premium income — in some of the best offices they run as higlr as two years' income or more. Life Offices are governed — so far as the form of their accounts is concerned, and in many other respects of less immediate interest to the Auditor — by the Assurance Companies Act, 1909. The material portions of this Act are included in Appendix " A," and should, of course, be thoroughly mastered by the Auditor before commencing his work. Where the office also carries on other insurance business, it will be noticed that the life accounts are required to be kept separate, and the Auditor will naturally have to see that this is done — not merely on paper, but in fact. Every three, five, or seven years (as may be required by the constitution of the company) a " valuation " Balance Sheet will have to be prepared. The distinguishing feature of these periodical accounts is, of course, the actuarial valuation of the office's liability to the policy-holders. The Auditor is not responsible for the accuracy of this valuation, but it is his duty to see that the accounts are duly prepared in accordance with the actuary's figures. For the benefit of the reader who has had no acquaintance with Life Insurance Accounts, it mav be stated that the usual annual Balance Sheet and Accounts are purely interim accounts, and that it is only when the periodical " valuation " takes place that a real balance is struck, and the profit ascertained. The method of arriving at the profit upon these occasions is in reality by single-entry. That is to say, the present value of the existing assets is put down upon the one hand, and upon the other the present value of the liability on current policies (the total of the actuarial valuation), to which are added the ordinary outside liabilities and the paid-up capital. The difference between Io6 AUDITING. these two sets of figures is the profit for the period, subject to any interim dividends that may have been paid or interim bonuses that may have been declared. A careful perusal of the statutory form of accounts appearing in Appendix "A" will readily enable the reader to follow the procedure indicated. The routine of the audit will differ but little from that of the Fire Office, but the Auditor will be wise to pay particular atten- tion to the surrenders. Claims should also be more carefully looked to than is necessary in Fire Ofifices. The audit of the investments will be a much more voluminous matter than before, and will require considerable care, both to see that the capital is intact and that the prescribed income has been recei^^ed. As, however, the method of keeping Invest- ment Ledgers varies very considerably with different offices, this matter cannot well be gone into in further detail. In some cases the Auditor of a Life Office will have been appointed especially to protect the interests of policy-holders. In every case, however, the Auditor should consider himself responsible to the policy-holders for the correctness of the accounts, which he should on no account unqualifiedly certify, unless he is convinced of the stability of the undertaking. Accident, Guarantee, and other Offices do net raise any new considerations. The great majority of such accounts follow entirely upon the lines of Fire Offices — the company's contract being an annual one, which it can discontinue at any time, should it think well to do so. The business of Sickness Assurance, however, more nearly approaches that of a Life Office, and actuarial assistance will be required for the deter- mination of the value of the unexpired risks. No special legislation has been enacted relative to Sickness Assurance Offices. Generally, readers may be referred to the remarks concern- ing " Branches " under the head of " Banks." The amount of audit bestowed upon the various branches of Insurance Offices SPECIAL CONSIDERATIONS IN DIFFERENT CLASSES OF AUDITS. IO7 is often by no means sufifacient ; but, on the other hand, the internal audit is usually fairly satisfactory, while that in force at the head office is, as often as not, most conspicuous by its absence. It is but right to add that many insurance offices are incorporated either by special Act of Parliament, by Deed of Settlement, or by Royal Charter. This circumstance, how- ever, while naturally affecting the internal arrangements, does not as a rule influence the Auditor's duties in any material wav. {c) TRUST AND INVESTMENT COMPANIES.— The accounts of these companies are, probably, as simple as accounts can well be. The ostensible purpose of such companies is to enable investors to spread their capital over a large field, and so, by the principle of average, obtain a better security for their principal Avithout a corresponding sacrifice of interest. How far the Trust Companies of the day have acted up to this theory of their existence it is beyond the present purpose to inquire. Suffice it that, from the shareholder's point of view, the only satisfactory accounts will be those which indicate a fair rate of interest earned without depreciation of capital. The Auditor will require to see Brokers' Contract Notes for all sales and purchases, and also to ascertain that all dividends and interest have been properly accounted for. Purchases cum div. and sales ex div. will probably be the most likely cases in which an irregularity may occur. Only income earned during the time that an investment is held should be credited to Revenue, while -per contra Revenue is entitled to due credit for all the income earned during that period. The valuation of investments is perhaps the most important function of the audit of Trust Companies. Under the existing unsatisfactory state of the law, the Auditor cannot, of course, prevent the directors issuing accounts stating investments, at cost price (regardless of value), but he at least can — and Io8 AUDITING. certainly should — call attention in his report to anything that he considers to be an undue inflation of assets. It is not always imperative that investments should be written down to market price. In the first place, the principle of a\'erages may consistently be followed here, and it will suffice if the aggregate market price be not less than the aggregate cost price. If, however, there be a deficiency in this respect, it should be met, not by a revision of individual values, but by a setting aside of a lump sum to an Investment Fluctuation Account as a reserve against loss. This reserve may either be deducted from the amount of investments in the Balance Sheet, or separately stated as a liability. A reserve so created should, except in very special cases, not be reduced in subsequent years, except for the purpose of providing for the actual loss realised upon the sale of depreciated investments. When the aggregate market value exceeds the aggregate cost price it is not at all desirable that the capital value of the investments be increased- To credit such an increase to Revenue is clearly as incorrect as it would be to credit it with an assumed increase in the value of Goodwill. There is no particular harm in writing up the assets and crediting the difference to a Reser\e not available for equalising dividends, but it is much better kept in hand — at all events until the permanence of the increase be well assured — as a secret reserve, against which the company may draw in bad times. With regard to the profits or losses arising from sales made during the period under audit, in the first place the dividend should be apportioned (from day to day) so that the actual capital profit or loss may be arrived at. Such profits and losses made during any one year should be treated in the aggregate : if the result be a profit, it is available for dividend ; if a loss be the result, it should come out of revenue, unless an adequate reserve exists from which the loss may be taken. It is, how- ever, highly desirable that profits made by changes of investments be taken to reserve, and not credited to revenue. SPECIAL CONSIDERATIONS IN DIFFERENT CLASSES OF AUDITS. IO9 In bad times the conscientious Auditor of Trust Companies has an unthankful task before him, but he must not shrink from the responsibilities of his situation. It has throughout been the general scheme of this work to lay down the lines upon which an audit may best be conducted, rather than those upon which it may be conducted without personal risk to the Auditor himself ; but for the sake of com- pleteness it is desirable to call attention to the fact that it has been decided by the Court of Appeal in the case of Verner v. Commercial and General Trust that a ' ' pure ' ' Trust Company may, by its articles of association, provide that all sums received as interest or dividends upon investments (less adminis- tration expenses) are profits available for dividend, without taking into consideration any depreciation or loss arising from fluctuation in the value of the capital assets of the company. The judgment of the Court of Appeal will be found duly recorded in Appendix " B " j it may, however, be added at this point that the view taken by the Courts seems to be that it is quite competent for a company so to constitute itself that its members are, for all practical purposes, in the same position as life-tenants would be in the case of an ordinary trust : that is to say, they are to receive whatever income is earned (less current expenses), without any reduction in respect of losses of capital or any accretion in respect of gains. Of course, in the case of an ordinary trust the field of investment is expressly limited to first-class securities unless the instrument creating the trust enlarges it : in the case of a Trust Company the instrument creating the Trust is the memorandum of associa- tion, and if sufficiently wide powers be contained in the memorandum, it seems to be possible for the company to invest in the most speculative concerns without making any provision for possible or ascertained losses, so long as creditors are nut defrauded thereby. The decision is in itself sufficiently dangerous, even when expressly limited to a " pure " Trust Com.pany ; but when the decision comes to be further extended, the expediency of following it becomes even more doubtful. In I no AUDITING. Appendix " B " will be found a report of the late Mr. (afterwards Lord) Justice Stirling's judgment in the case of Wilmer v. MclSIamara 6^ Co., Lim., which is founded upon the decision just stated, but further extends it, for the Court declined to interfere in the distribution of a dividend declared in the case of a trading company, notwithstanding the fact that it was not satisfied that a sufficient sum had been set aside to meet the depreciation that had actually occurred in the wasting assets. Should such a decision as this be upheld upon appeal, it would almost appear as though due provision for depreciation was an entirely voluntary act which could in no case be enforced upon a company against the will of the majority ; but the truth of the position seems to be that in this case — and, for that matter, many other similar cases — the attitude taken up by the Courts has been that they cannot undertake to act " as a providence " to all and sundry. So long as creditors are not defrauded, and so long as persons are not induced to take shares by misrepre- sentation, the Courts leave each separate company to work out its own salvation upon its own lines. FINANCE COMPANIES.— It is important to distinguish between Trust (or Investment) Companies and speculative Finance Companies. The chief profits of the former are income derived from investments, and profits derived from a change of investments only arise incidentally. In connection with the latter the profits derived from a change of investments form the main source of income ; consequently all such invest- ments must be regarded as so much Stock-in-trade — as floating assets — and valued accordingly, whereas the investments of a bond -fiie Trust Company may fairly be treated as fixed assets. j; The importance of this distinction lies in the fact that whereas the investments of a speculative Finance Company ought never to be valued at a price in excess of the current market price, it is frequently difficult (if not impossible) to arrive at any reliable basis of valuation ; for Stock Exchange quotations are by no means necessarily a reliable basis, if there be no free market. Again, it may be pointed out that, following the ;■ I SPECIAL CONSIDERATIONS IN DIFFERENT CLASSES OF AUDITS. Ill ordinary principles of the valuation of unsold stock, no appre- ciation in the value of investments ought to be credited to Revenue until' those investments have actually been sold. It is not, however, necessary to write down each separate investment that has depreciated ; the proper course would appear to be to maintain the investments in the Balance Sheet at cost price, making provision for a Reserve sufficient to cover any deficiency in the aggregate intrinsic value, as contrasted with the aggregate book value. Realised profits may, of course, properly be credited to Revenue ; but care should be taken to see that they have been actually realised in cash, and, so far as possible, the Auditor should be upon his guard against the inflation of profits by means of " accommodation " transactions between different members of a group of companies. Probably the Whitaker Wright frauds will be sufficiently fresh in the minds of readers to make unnecessary any detailed explanation of what is alluded to under this heading. To sum up, it appears that although, so far as the authorities have hitherto gone, it would appear that under some circum- stances dividends may legally be declared out of current revenue without first making good depreciation of investments, it is, on the other hand, certain that the declaration of such dividends is a direct violation of every principle of sound finance, and should at all times be discouraged by the Auditor, who should make sure that the true position of affairs is sufficiently revealed to the shareholders, either upon the face of the accounts or by a special clause included in his report. CHAPTER IV SPECIAL CONSIDERflTIONS IN DIFFERENT CLflSSES OF flUDITS. (Coniinued.) i IV. GAS AND WATER ACCOUNTS.— (a) GAS COM- PANIES. — It is not essential that a Gas Company be incorporated under special Act of Parliament ; but, as it can by no other means obtain power to pull up roads for the pur- pose of laying down or taking up mains, &c., it is very unusual to find a company of any importance not so incorporated. In such cases, however, as do exist, the company is under no special statutory obligation with regard to its accounts ; but in general respects the Auditor's duties will be the same as those of the Auditor of a company incorporated under a special Act. In the case of a Gas Company especially incorporated, it is, of course, necessary that the Auditor should make himself thoroughly acquainted with the particular special Act. In it he will find provisions as to share and loan capital, the rate of dividend or interest to be paid thereon, the standard price of gas, and other particulars which will have to be borne in mind. He will also find certain General Acts incorporated with the Special Act, and with these he must make himself thoroughly acquainted in so far as they affect his duties. Those sections of these Acts that refer immediately to the Auditor's duties or to the form of the accounts, will be found reprinted in Appendix "A." SPECIAL CONSIDERATIONS IN DIFFERENT CLASSES OF AUDITS. II3 The form of accounts given in Schedule B of the Gas Works Clauses Act 187 1 applies to all companies Avhose Special Act incorporates either the 187 1 Act, or the Gas Works Clauses Act 1847. The latter Act and its amendments also make provisions with regard to the formation of Reserve and Insurance Funds, and provide for the issue of new capital under what are known as the Auction Clauses. The appropriation of profits under the sliding scale is also introduced. One of the most important matters, from the Auditor's point of view, is the division of all expenditure into two classes — Capital and Revenue. The wording of the statutory form of accounts will sufficiently indicate the basis of this division ; it remains, however, to add that, perhaps, the Auditor's most important duty is to see that this basis is maintained. At the same time, it is not always possible for the Auditor to judge as to the correctness with which, say, the cost of an improvement, or renewal, has been apportioned as between Capital and Revenue; nor, indeed, is it necessary that he should so con- stitute himself an engineering expert. He will, however, require to see that the company's engineer has certified the apportionment to be correct, and that the expenditure on Capital Account has been passed by the Board. In addition, it is desirable that he should satisfy himself that the principle followed by the engineer in arriving at his apportionment is a sound one. There is, properly speaking, no "' safe side ' ' in these matters — an undue charge to Capital is unfair to the pro- prietors, while an undue charge to Revenue is (through the operation of the sliding scale) an injustice to the consumers. The following examples of apportionment will, however, be found useful, as indicating, in general terms, the correct method of arriving at the amount chargeable against Capital, and against Revenue, in any special case that may arise : — New Works (including extensions) : Capital. New Works in place of Old Works : Charge original cost of old works pulled down, less value of old materials, against Revenue; charge the remainder against Capital. 114 AUDITING. [The above accurately explains the theoretical apportionment of expenditure on renewals as between Capital and Revenue ; but, for practical purposes, it is important to bear in mind that the cost of any kind of constructive work does not remain constant over an extended period. Assuming it did remain constant, no modification of the principle already described would be necessary ; but, inasmuch as ^•ariations in cost are to be expected, it is important to bear in mind that only the bond fide " betterment " can properly be capitalised. Thus, if assets which originally cost ;^io,ooo were, on renewal, to cost j^i 2,000, the whole of the cost of such renewal would be a Re\enue charge. If, howe^■er, the assets which originally cost ;^io,ooo were replaced by assets of a higher revenue-earning capacity at a cost of ;^ 15,000, the correct method of appor- tioning this ;£i5,ooo would be, in the first place, to ascertain what the exact reinstatement of the original assets would have cost, to charge that sum to Revenue, and to capitalise the excess only. There is reason to believe that in the past this rule has not always been applied with sufficient strictness to the expenditure of undertakings framed upon the Double Account System — whether Gas-works, ^Vater-works, Railways, Tramways, or the like ; but there can be no question as to its soundness when the cost of constructive work is upon the increase. In new countries — as, for example, in most Colonies — the cost of constructive work has, owing to facilities for transport, been materially reduced of late, and thus the question arises as to whether the same principles may fairly be applied. If they were to be applied strictly, it is clear that pure renewal work, involving no " betterment "• whatever, would indirectly result in a credit to Re\enue, in that the original amount of Capital expended wouhl be maintained in spite of the fact that the Capital assets actually existing to represent it had cost less. Tlius, an asset which originally cost ;£io,ooo, and which was renewed (without betterment) at a cost of p£^8,ooo, would still be included in the Capital Expenditure at the former figure. This is, of course, the essential weakness of the Double Account System, if strictly SPECIAL CONSIDERATIONS IN DIFFERENT CLASSES OF AUDITS. I15 applied : that, with reducing prices, its effect is to " water " the Capital of the undertaking. It is believed, ho\ve\(:n-, that the usual practice under such circumstances is to depart from .the strict principle of the Double Account Sy.stem, and to write down the value of the Capital Expenditure as and when renewal work is undertaken at a reduced price, and this clearly is the only sound policy to adopt.] Conversions. In a similar case to the last — save that •certain old materials, instead of being sold, are used for other purposes on the works — treat the particular department of Capital Expenditure as the purchaser of the old materials in ■question, debiting it with the value of the materials and the full •cost of conversion (if any). The income of a Gas Company consists of Gas Rates, dieter Rents, Residuals sold, and (generally) profit on Fittings and Rents ; in addition to Transfer Fees and Interest on Invest- ments. The collection of Gas Rates and Meter Rents are best checked in totals (in the manner shown under Fire Insurance Accounts, care being taken to test fully both allowances and arrears); the total receivable being arrived at from the '' State of Meters " Books, which wdll show the total amount of gas consumed and what meters are on hire. The residuals sold cannot well be checked as to quantity (save by comparing the various working statements) ; but, of course, the Auditor may, and should, check the collection of the amounts debited. The same remark applies to Fittings, which will almost invariably be found to form a part of a Gas Company's business, although no mention of the circumstances will be found in the statutory form of accounts. It may be added that it is best merely to state the profit arising from fittings on the credit side of the Revenue Account (rather than to credit Revenue with Income, and to debit it with Expenses), as there is nothing gained by showing the whole world what percentage of profit has been made. The leading items of expenditure arise from Coal, Stores, and Wages; the latter has already l)een considered in Chapter I., and the former in Chnptcr IF, anocal Government 144 AUDITING. Board to allow the expenditure to be defrayed by the issue of a Loan; and the Board's rules do not appear to be based upon any accepted principles of accountancy. Thus, one general rule is that no loans shall be sanctioned to cover the expendi- ture of wages paid to permanent employees, even although those employees may have been continuously engaged for weeks (or months) on end upon ho)id fide capital extension ; while fcr toiitra the Board will occasionally allow an appeal ad misericordiam, and sanction a loan for purely Revenue pur- poses. In one case at least, where a loan had been duly sanc- tioned, and the proceeds of that loan had been improperly applied for purposes other than those sanctioned, a second loan was permitted upon terms : that is to say, Capital Expenditure was allowed to be debited ttvicc, and Revenue benefited accordingly. These, however, are only a few of the difficulties that arise in practice, making any comparison between the accounts of trading departments of Local Autho- rities and the accounts of proprietary undertakings carrying on a similar business extremely difficult. When the necessity arises for making some direct provision for depreciation a special difficulty arises in this direction. With regard to gas-works and water- works, where — as has already been explained — the theoretical principles of the Double Account System prove sufficiently accurate for most practical purposes, there is no tendency towards any very marked differ- ence of treatment, and municipalities are quite content to comply with their statutory requirements, and to provide by w^-ay of a Sinking Fund for the gradual redemption of Loans out of Revenue, while at the same time maintaining their Capital Expenditure intact (or approximately intact) by charging all repairs and renewals against profits. The result is that these undertakings, which were originally purchased by the Local Authorities with borrowed money, are being gradually paid for by the Local Authorities out of profits ; and only the excess profits, after so providing for the gradual payment for the undertaking, are applied towards the relief of rates. Witli SPECIAL CONSIDERATIONS IN DIFFERENT CLASSES OF AUDITS. I45 reasonably competent management no difficulty whatever ought to be experienced in arriving at this result, and yet applying annually a reasonable surplus of trading profits towards the relief of rates. In some cases, however, the management has been defective, and in other cases the success of the under- taking has been handicapped from the outset by an unduly inflated Capital Account, which — combined with the lack of competent technical advice, and a desire to prove by results that the original enterprise was really justified — have produced a singularly unfortunate position of affairs in connection with some of the more speculative enterprises of tramways and electric-lighting. Here, as has been already stated, no true profit can be arrived at — at all events during the earlier years of an undertaking's existence — by the strict application of the Double Account System. In addition to charging actual outlay in respect of repairs and renewals against Revenue, a provision — and a fairly substantial provision — for Deprecia- tion is essential if the true results are to be shown. These facts have been overlooked (it was thought, in the first place, inadvertently) ; and — now that their o^■ersight has been challenged — attempts have been made to justify it that are hardly likely to meet with the acceptance of those who are competent to express an opinion upon the subject. It has been argued that, inasmuch as there is no statutory provision req^uiring Local Authorities to provide for Depreciation, it is unnecessary for them to make any such provision; and it has further been argued that the provision of the statutorv Sinking Fund takes the place of — and is in substitution of — Depreciation. With regard to the first point, it has been aptly pointed out by the late Mr. Edwin Guthrie, F.C.A., that no statute is necessary to supplement the Common Law provision that accounts (of whatever kind) should be true accounts. If, there- fore, provision for Depreciation be necessary to enable the accounts to show the correct position of affairs, it becomes equally necessary from a legal point of view. It may, how- ever, further be pointed out, in the first place, that the statute 146 AUDITING. law does require the Capital assets of these undertakings to be ''maintained" out of Revenue, and, further, that no profits are legally available to be applied towards the relief of rates until after such maintenance and Sinking Fund ha\"e been j)rovided for. With regard to the second point, as to whether provision for Depreciation and provision for Sinking Fund are interchange- able terms, it must, of course, be clear to those who duly appreciate the object of each that the two are by no means identical. It might, of course, be argued that, so long as the assets are really maintained intact out of Revenue, there is no urgent need to provide for the eventual repayment of loans. From the accounting point of view no such need, of course, exists; but from the legal point of view it is necessary, if for no better reason than because it has been decreed that permanent indebtedness is not to be allowed. That, however, is clearly not the way in which the subject was approached by the Legislature. The Legislature (there can be but little doubt) altogether overlooked the question of Depreciation, as such, deeming the statutory requirement that the assets should l)e " maintained " out of Revenue sufficient; but, for all that, it required the loans to be eventually redeemed, and — perhaps ^q)preciating that ' ' maintenance ' ' (taking a narrow view of the term) would not involve any provision for obsolescence — it seems to have attempted, although quite roughly and often iiHiie unsuccessfully, to limit the term of each loan .il)])roximately to the life of the assets about to be acquired. It is well to bear in mind, however, that although this rule h;is invariably been acted upon with regard to the more stable •< nterprises, the essentially speculative element in connection with all electrical work has been quite overlooked, with the result that many loans have been sanctioned for electrical l)urposes, for periods far exceeding any reasonable estimate of ilu' life of the assets. This fact has been admitted by the tiiof' enlightened Local Authorities, for all such duly appre- •SFIXIAL CONSIDERATIONS IN DIFFERENT CLASSES OF AUDITS. 1 47 ciate the necessity for an adequate provision for Depreciation ; but some (as, for example, Bolton) have claimed that, // due provision be made for Depreciation, it is unnecessary for provision to be made for Sinking Fund as well. The policy of the Local Government Board — if, indeed, its somewhat conflicting regulations can be said to be governed by any policy whatsoever — would appear to be limited to an attempt to prevent money being borrowed for renewal purposes luitil the repayment of the original loan has been provideil for ■out of Revenue. In practice, however, this system will l)e found to result in extremely unequal charges to Revenue, unless some serious attempt be made to equalise those charges by the provision of a Reserve for Renewals, or other form of Depreciation Fund. Theoretically, Loans are sanctioned for a term corresponding to the average life of the assets to be acquired therewith. Apart from the fact that the average life •cannot be computed in advance with more than approximate accuracy, it is clear that — being an average figure — it does not correspond with the life of each separate item, with the result that a considerable number of assets will in all cases call for renewal before the repayment of the original Loan has Ijeen provided for by the statutory Sinking Fund instalments. Whatever deficiency there may be under this heading at the date of renewal must then be provided for out of current Revenue, unless some provision has been made in advance against the Revenue of previous years. Thus, in practice, in all cases substantial payments for renewal purposes will have to be charged against Revenue; and, that being so, the charge ought in all fairness to be equalised as far as possible o\er a series of years. The question has been raised as to whether it is competent for a Local Authority to provide a Reserve for Renewals or Depreciation Fund. The point is not altogether free from doubt, but in practically all cases there exists power to create a so-called " Reserve Fund " up to lo i)pr cent, on the capital 148 AUDITING. outlay for the time being. Such a '' Reserve Fund " would probably be sutilicient to equalise expenditure upon renewals necessarily chargeable against Re\'enue ; but, instead of being regarded as an optional allocation of profits, it should be con- sidered as a necessary charge againsi Revenue prior to the ascertainment of true profits. The name '"' Reserve Fund " is thus clearly misleading. In this connection it is of interest to note that the Institute of Municipal Treasurers and Accountants, in consultation with the ^Municipal Electrical Association, has passed the following resolutions : — • " That in the opinion of the Association, electricity supply undertakings ha\e to be maintained in a thorough state of etiticiency out of Revenue, no Depreciation or further writing- off of capital is necessary when the period allowed for the repayment of Loans is not greater than 30 years, as the equated life of the works exceeds this period. " That with regard to the formation of a Reserve Fund, this Association is strongly of opinion that such should be formed up to the limit allowed by the Provisional Order before any contribution is made in relief of the rates." These resolutions confirm the view already expressed, although they do not appear to explain very clearly the circum- stances under which the necessity arises for the early provision of an adequate Reserve for the equalisation of expenditure upon renewals. The view expressed in the last edition of this work as to the true relationship between Depreciation and Sinking Fund pro- \-ision was (so far as the author is aware) entirely novel when first embodied by him in a report submitted to the Electricity Committee of the City and County of Bristol in July 1906. It attracted a considerable amount of discussion at the time, and a certain amount of hostility, but appears since to have been fairly generallv accepted by those who have made a special SPECIAL CONSIDERATIONS IN DIFFERENT CLASSES OF AUDITS. 1^9 Study of municipal linance. In a series of articles contrilmted to the columns of Tlic Accountant in 1908, however, Mr. R. F. Miller, F.C.A. — apparently in his desire to emphasise the point (never in dispute so far as the present author is C(5n- cerned) that it is not the duty of an Auditor to formulate counsels of perfection, but rather to audit and report upon the accounts submitted for his investigation — seems to have depre- cated the discussion of this highly important question bv the accountancy profession. Mr. Miller there refers to a letter from himself, which appeared in The Accountant of the 15th June 1907, in which he put forward a hypothetical case for the opinion of the present writer, and he seeks to draw his own conclusions from the fact that the challenge then laid down was not responded to. It may be questioned whether much good ever results from a mock arbitration upon purely imaginarv data (which in the nature of things are but inadequately described, and therefore probably imply quite different ideas to different readers) ; but, lest the inference should be drawn that the views already expressed as to the desirability of as far as possible equalising revenue charges before attempting to arrive at a figure of so-called profit will not work out in practice, because they cannot be carried to their logical conclusion, it is perhaps desirable to discuss the matter further, and to explain what would be the ultimate result of the procedure advocated in such circumstances as those cited by ]\Ir. Miller. Mr. Miller's '"challenge " — for such it is in effect — is some- what lengthy ; but it would be di-fificult to condense it without some risk of doing injustice to its author, and it is accordingly reproduced here in cxtenso : — " Is it too much to hope that the Professor will, on some not di.-tant occasion, resume his consideration of the question and extend the circle of his observation? There are one or two aspects of the depre- ciation problem which I should greatly like to see handled by him, or seme other authority, and discussed by experts, and with your kind permission I will endeavour briefly to indicate them. I ^O AUDITING. "It seems to me that, in estimating the reserves to be set aside- during the currenc}" of the debt upon a trading undertaking before aid is given to the rates, an essential factor in the calculation is cur view of the position in which the undertaking should stand financially and otherwise at the date when the debt is finall}' discharged. Deter- mine this, and the necessary means can be adopted. Differ as to the end, and agreement as to the means is impracticable. Conflicting ideals have perhaps been responsible for much of the controversy of the past. '■ The question may, therefore, well be asked whether any fiduciary relationship exists between the ratepayers to whom Parliament has granted powers to establish a trading venture and their successors? Are they in any sense accounting parties in respect of that venture tO' the next generation? " By way of illustration, let us suppose the Professor to be called in as umpire between ratepayers holding opposite opinions on this point at a period when an important municipal trading undertaking has just been freed from debt. A newcomer into the town is scandal- ised to find that the gas works (say) are not in all respects up to date in their equipment, and though yielding a fair profit are carried on upon old lines and might with advantage be modernised and made more profitable. There is, however, no Reserve Fund in hand to meet the necessary expenditure, and their current going value is reported by experts to be considerably below their first cost. The retiring Chairman of the Gas Committee, however, intervenes, and claim.-, that the newcomer has no valid ground of complaint. ' We (says the Chairman) set up these works forty years ago under Parliamentary sanction ; we ran all risks, and have fully repaid the cost, applying the surplus in aid of the rates ; we have, in fact, fully discharged every obligation laid upon us by Parliament, and now we hand on to you the works free of debt and in a moderate state of efficiency ; and even if you do require to borrow /.'25,ooo to bring them in all respects up to date, you are relatively much better off than we were when we bor- rowed ^fioojooo to build them in the first instance.' Upon Professor Dicksee's award depends the view to be formed of the scale upon which depreciation ought to be provided for during the currency of the loan in the case of such an undertaking. " May I point out that the question I am submitting is an eminently- practical one, and ultimately resolves itself into this, \Yhat advice are we as Chartered Accountants to give to our nmnicipal clients on the subject? Are we to tell them that their responsibilities for the maintenance and renewal of their trading undertakings are limited to SPECIAL CONSIDERATIONS IN DIFFERENT CLASSES OF AUDITS. 15T the periods granted for the repayment of debt, and that a scheme of outlay and reserves, which is estimated to uphold the undertaking until the debt is discharged and spreads the necessary cost fairly over the period, meets all the circumstances of the case (and here conies in the value of Professor Dicksee's recent lecture), or are we to recom- mend such reserves as will be adequate not only to keep the works in the very front rank and guard against obsolescence, but also to accumu- late a fund at least equal to the difference, between first cost and the value placed upon them by experts at the date when the debt is paid off? "If our clients proceed to argue that their duty is defined by Parlia- ment, and quote Professor Dicksee, that ' the undertaking began life with no capital of its own, but only with borrowed capital, and it is not as a matter of law required to improve upon the position ; for were it required to do so, the necessary effect would be to compel the existing generation of ratepayers to pay for benefits which would be enjoyed by their successors, and this apparent^ is not and never has been the policy of the Legislature as applied to these undertakings ' [The Accountant, p. 484), upon what grounds and to what extent are we to urge them to go beyond their statutory obligations? Do they lay themselves open to legitimate criticism by refusing to do so? And do we violate any canon of professional orthodoxy by passively acquiescing in that refusal? " Of course, it goes without saying that in municipal audits — as in all classes of audit — it is the Auditor who gives the least trouble that is most likely to secure a large volume of business. Or, if that be too hard a saying, then certainly the Auditor who is continually acting as a drag upon the pro- gre.ssive instincts of the practical business man is unhesitatingly voted a nuisance, to be dispensed with with all convenient speed. That being so, there is a good deal to be said, from a purely commercial point of view, in favour of the line of argument that inasmuch as the I-ocal Government Hoard insist.s upon its sanction being obtained as a precedent to the exercise of borrowing powers by Local Authorities, and itself pre- scribes the terms of repayment with a view to safeguarding the interests of lenders, the municipal trader and the municipal Auditor alike are entitled to wash their hands of all responsi- bility so long as the Board's regulations are literally complied with. It is not suggested that this view is legally unsound, but 152 AtDITING. it is suggested that if all audits were to be conducted upon these lines the profession of accountancy would never have risen to its present dignified position ; nor for that matter would this work have the standing that it at present enjoys, had it been based upon the lines of showing would-be Auditors precisely how closely they might sail to the wind without incurring legal responsibility for negligence. There can be little doubt that the Local Government Board has in the past " rushed in " and framed regulations as to municipal loans that men with a wider knowledge and a more practical experience would have hesitated to endorse. There can be little doubt that borrowing municipalities who comply with these regulations are entitled in all honesty to say that they relied upon the Government Department to keep them straight, if they knew no better; but if they do know that these regulations are unsound, and will eventually lead them into a quagmire, they cannot altogether escape from their share of the blame by endeavouring to shift the responsibility upon Government officials. Similarly — but a fortiori — Auditors must expect in the long run to be judged by their own intelligence and straightforwardness, rather than by a slavish adherence to red tape and a scrupulous disinclination to accept responsi- bility. In the early days of municipal enterprise, when ;, everyone was a pioneer and all roads were unsurveyed, it was ; * only fair that generous allowances should be made for mistakes, ■ even if in some cases the consequences of those mistakes proved I disastrous ; but there can, it is thought, be no possible excuse . t for the professional man, who, sheltering himself behind the strict legality of his position, refrains from bringing his own knowledge and experience to bear to point out which are the unsafe paths. So long as audits are conducted in deference to instructions evolved by '' authorities " that are not experts, so long will those audits fail utterly to inspire feelings of con- fidence on the part of the business community. This, indeed, is of course the explanation of the essentially unsatisfactory nature of the official audit. An audit conducted in pursuance SPECIAL CONSIDERATIONS IN DIFFERENT CLASSES OF AUDITS. I 53 of instructions received from a Government Department will necessarily be one inspired by knowledge which, if in any way expert, is at least ten years behind the times ; whereas the most efficient audits will be those that are continuously pro- gressive, bringing new thoughts to bear upon the problems at each successive investigation. A perusal of the above quotation of Mr. Miller's submission of an imaginary case to the supposed umpirage of the present writer will, it is thought, at once impress the reader with the extreme vagueness of the case as put forward, which does not at any point reach within grappling distance of the essential problem of the matter. We have here the case of a large undertaking, which it is supposed will be continued for an indefinite number of years, and the suggestion is put forward that as the management of each year hands on the undertaking to its successors it is entitled to ask them not for criticism of its stewardship, but for thanks that there is anything at all to hand on. There might be something in the implied suggestion if the undertaking consisted entirely of assets; but clearly if the liabilities handed on to successors— to be discharged by them in due course — exceed the amount for which an equally service- able collection of assets could then be acquired, no very strong case for gratitude has been made out. If it were beyond all dispute essential that the undertaking should be carried on, and that it should be carried on by the Local Authority, perhaps matters could not be put stronger than this ; but in many cases those who in due course are called upon to take over the venture from their predecessors, at a price of accepting (and in due course discharging) all outstanding liabilities, are, it is thought, at least entitled to the view that, as the concern is thus thrust upon them, whether they like it or not ; whether it is still capable of earning a profit or not ; and whether or not it inter- feres with some other development which in their opinion is infinitely more important ; they may well say that at the very least they ought to get some bonus in the nature of a per- ceptible surplus of assets over liabilities, as a condition of thus 154 AUDITING. having foisted upon them an undertaking with which they have no sympathy. All this, however, is municipal politics (or municipal morality, according to the point of vieAv), rather than municipal accountancy ; and although it is suggested that the possibility that posterity may not be very grateful for having obsolete concerns foisted upon it at cost price ought not to be entirely overlooked by those who prate abr)ut '" building for posterity," the crux of the whole matter, from the Auditor's, point of \iew, is that accounts whicji purjiort to be framed upon business lines should at least be cunijiarable with the accounts of business undertakings, and that accounts which purport to show a " protit ' " must be unsound, if they are so framed that in the nature of things it can clearly be foreseen that in a few years' time the Revenue charges will have increased to such an extent as to create a deficiency that must then be met by a special charge upon the rates. Whatever legislative or official sanction may be given to such a procedure, it is clearly bad finance and unsound accountancy to live from hand to mouth — to show large profits in some years and heavy losses in others, when earning capacitv remains constant, and the only fluctuating item is the cost of current repairs and renewals. So far as can be gathered, the onlv approach to an argument that has yet been advanced in refutation of the suggestion that there should be an adequate provision for the equalisation of these charges over a term of years is that the Local Govern- ment Board regulations as to the repayment of loans compel a Local Authority gradually to build up sonic capital of its own in respect of those assets that have a longer working life than the equated loan period. This is the sort of argument that would be unanimously condemned in connection with com- mercial accounts. It is practically identical with the argument (much favoured by a certain class of managing director) that due provision for depreciation may be ignored in bad years, because there has been an appreciation in the realisable value of certain other fixed assets — an argument that would be entirely i SPECIAL CONSIDERATIONS IN DIFFERENT CLASSES OF AUDITS. 155 sound if the maintenance of a stated aggregate value had alone to be considered, but quite l)eside the point when it is borne in mind that tlie whole object of providing for depreciation is tO' save up money to meet a known future expenditure that other- wise can only be provided f(jr by further capital issues, involving additional interest charges adversely affecting. Revenue. Before leaving the matter altogether, however, it may be pointed out that the hypothetical case cited by Mr. Miller is entirely illusory, in that it supposes the possibility of a gas- works free of debt and in a moderate state of efficiency. If the tendency of municipal finance were to arrive at a state wheiT the works were free from all debt, at any future time, there would be little to complain of. The trouble is that matters are so arranged that avowedly the intention of the Local Govern- ment Board is that bv the time the loan is reduced to zero the as.sets shall have no greater \alue ; but that, owing to errors of knowledge and to the inequalities of the equated loan period (to use a paradox), the general tendency is for loans in the aggregate to increase, and not to decrease ; while the tendency is for assets to increase, it is true, as a result of further developments, but not to increase at an equally rapid rate. VII. EXECUTORS' AND TRUSTEES' ACCOUNTS, — The accounts of trustees in bankruptcy are audited by the Bankruptcy Department of the Board of Trade. An audit of the accounts of any other kind of trustee by the Court may be secured in an action brought against the trustees for the pro- duction of an account. \Mth the consent of the trustee, of course, any interested party may appoint his own Auditor to audit the accounts of a trust ; but such an audit would be purely informal, and would bind no one. Since the passing of the Public Trustee Act 1906, however, a very workable scheme of audit has been provided by Section 13 of that measure, which is quoted /'// cxtotso in Appendix "A." The Auditor ap]uii:it((l undi-r this section must be either a .solicitor or a 156 AUDITING. public accountant. He is provided with all necessary powers to make his audit effective, and at the conclusion of the audit is required to forward to the person on whose application it was instituted, and to every trustee, a copy of the accounts, ■ together with a report thereon and a certificate signed by him- self to the effect that the accounts exhibit a true view of the state of the affairs of the trust, and that he has had the securities of the trust fund investments produced to and verified by him ; or, as the case may be, that such accounts are deficient in such respects as may be specified in such certificate. The fact that the accounts have to be " certified " as being true accounts in the nature of things limits them to a bare account of receipts and payments, which alone is capable of absolute verification. The Auditor will require to have produced to him the original, or an official copy, of the instrument creating the trust ; the books, accounts, and vouchers of the trustees ; and all securi- ties and documents of title held by them on account of the trust. He must satisfy himself that all property passing to the trustees has been brought into account, and that all payments charged against such account have not merely been made, but are also properly chargeable against the trust fund. Where there is more than one trust fund, it is important to see that each is kept separate, and that all should be verified simul taneously. In particular must he see that the distinction between capital and income has been duly observed. In the space here available it is impossible to deal fully with what is in fact a somewhat complicated subject, but the following very brief resume of the principal points to be con- sidered will, it is thought, be sufficient for all ordinary purposes. The Apportionment Act applies at the commencement of the trust, and on the happening of any event that changes the personality of those entitled to benefit thereunder {e.g., on the death of a life-tenant or the forfeiture of his interest), but there is no apportionment on a mere change of investments SPECIAL CONSIDERATIONS IN DIFFERENT CLASSES OF AUDITS. 157 effected under powers given to the trustees unless the Court SO orders. In calculating apportionments, the date of death (or forfeiture, as the case may be) is to be taken as being the last day of the first of the two periods. The income, or expenditure, to be apportioned is that for the period between the dates in respect of which it is payable. Thus an appor- tionment of dividends (save in the case of banks or railway companies) will be the dividends for the year, interim dividends being treated merely as a payment on account ; but if the apportioned part allocated to the first period be smaller than the amount actually received during that period as interim dividends, there can be no refund in favour of the second period. Apportionments in the case of bank dividends, rail- way dividends, parochial rates, ground rents payable half- yearly, &c., will be in respect of the half-year current on the happening of the event necessitating apportionment, an similarly wdth all classes of items accruing over shorter periods. Where there is a trust in favour of a life-tenant with remainder to some other party, in the absence of evidence to the contrary the Courts will assume that it was the intention of the testator that the trust fund should be of a permanent nature, and it will accordingly direct its conversion into Consols, or other trustee securities, and allow the life-tenant only to receive income as though conversion had taken place as from the com- mencement of the trust. Even where there is express power to retain existing investments, this inference will be drawn in the absence of express provisions to the contrary {Howe v. Earl Dartmouth) ; but where there is sufficient evidence to show that the testator did not intend existing investments — whether wasting or otherwise — to be converted, the whole of the income is payable to the life-tenant, subject, of course, ro apportionment. When trustees, in the due exercise of their powers, retain an investment, all moneys received in respect of such invest- ment by w'ay of interest or dividend (subject to the foregoing) are to be treated as income, and all distributions in the form 158 AUDITING. of capital — e.g., fully paid-up Shares or Debentures, or a right to apply for such at less than their market value — are to be treated as capital. In cases where a testator dies, leaving considerable debts and legacies payable out of capital, it is evident that, if the payment of these claims be postponed, the income received in the meantime will Ije considerably in excess of the income on the residue of the estate. In the absence of express provisions to the contrary, the rule in AnJiitscii ?'. ]yiiiitcll applies, and the life-tenant is only entitled to income on the resiiiue — that is to say, the moneys necessary to pay debts, legacies, &c., must l)e provided not solely out of capital, but out of capital and the income received on the investment of such capital up to d^e date of actual payment. The practical application of this rule would often involve very intricate calculations. It is usual therefore for wills to be drawn so as to exclude its operation, ;ind to give the life-tenant the benefit of the increased income .(luring the first year. Inasmuch as the moneys actually received during the first twelve months after death will, after apportionment in favour of capital, invarialjly be less than a full year's income on the residue, this is a convenient as well as a simple arrangement. When verifying investments the Auditor will require to satisfy him.self not merely that they are actually in existence at the date of the audit, but as far as ])ossible that they have been in existence ever since the date of their alleged acquisition; that MO loss has been sustained to the estate through the unreason- able changing of investments (the rule against apportionment .on changes of investment may easily bring about .such losses); and that the investments are of a kind authorised by the instru- ment creating the trust. In the absence of express authority, the (inly proper trustee investments are those from time to time authorised by the Court for" the investment of trust funds. These include mortgages on freeholds and long leaseholds up to an amount not exceeding two-thirds of the value thereof at the date of the advance, as certifien « N N N fl <^ yi rL lO ^ ft^ CO H OJ X n nl o - c i: n <^'>'»'C U 3 3 i o.oH^CQcqc/3 n o 1 o aJ U u5 •' c c IS m M a = to — a 1-1 o a a. Pi, n I- (U c o cd a s ■ cr •B : ■T3 C . « 3 o a; c "^ i- J- a o^ o u a, 13 a C a 60 c u J3 u 3 o > OS <: X u < 23 ( - -' w — *n "*- I I C OJ O 4; nJ S « « "^-S ° Ji^ c 5 «^ 4) "3 O °-?^ M o , , O A ■5W M 2 164 AUDITING. O 00 . 00 Q "2 < O ^ XI ,5 H P g o -o o o S ,h ^ ^ 2; ^ ^ w " J f— I *" <• o H O H P H o H o o I— H > I— ( D J Q ^ < ID - O j: ^ c H P H in 1—4 < c t— 1 H rn iS t— ( H 1— i u 3 H tn W CD rt , 1 'A u m 1— 1 H u <( ra CO "~^ O kO i_t M 00 0^ ci V? O M 00 H o^ tN.00 o -J- U-) m 1 CO nro en CJ -t f^ 1 CJ CO M 1 O O N N vo o r< o O 10 en M on in in -rh c fe •^ Wo" C > (U a a-S " rr-' or c /\ 'Jl^ o •^ • — ^ (a O o O o . .ft, o BO "i . C " o S a. . in (U ID C_- ■ .~. n O :^ ■— QJ 1-1 ' — ' ^ '^ Q^ — ^ fll I . ^ <1> ti _ Ul O4 c D OiHO QJ ■'1 OJ ») O '^ ?i Jj m - ii M „ ro OJ tu a; >-> ot/)C/}CXW S i 1) « o 1- •ut: o ^-^ ^— •- O c jj-n u Cup OJ C^ CO 2 c IJ " — CO o U ^ § m 05 n ■ "^ 8 'I a a a '-fi tn u G Co " o I S t« '"^ I iS C-G u "~ti M o M O o o w o cr '-rt \o o M 0\ , , mo O M o o O QO " O ri o Oi w tn O M«3 VO ^o VC Oi rj M "-^ m u-i rj '^ -t- ^ 13 . s ■ iZ OJ OJ -— "U cfl 1 s-^ s ^^ D-c i5. ■S.2 OJ ag 0; 3 o 000 ^O »n »n ui C J, c o c o -2 QJ rt 0) ■n rt T5 t/i c '■ ' QJ c ■n 0) -3 > > Q o o h . > c o • -a . OJ u OJ ¥ ' OJ y. ^ 3 o o QJ O .— +-' Qj Ji: o OJ -^ OJto " -50 O "Si"' ro c r^ .£■" 3 ■" OJ *!!; i^ u t; ^ • o OJnSQ OJ ■ ^ rt "1 J5 • c 2 =>- o .5° o o o C OJ •a QJ cr> bi CD nn u OJ U u > ^ m CQ u Q. a c cr jj_ j^ •a ■r-i Tl r> ri rt j= a. oo -C » ■-C Br U u rt > rn a. f ) i-i u in ^ 71 ^ 0) '1 S OJ UJ rt ;V a y. «K a H SPECIAL CONSIDERATIONS IN DIFFERENT CLASSES OF AUDITS. 165 O o ■—1 00 H 00 V! 01 o o O m ^ to O ►-• t^ M O 00 ro cr\ C C -a c o a o o ex c o u I Q s 1) o G a :« n :e a! (/I I- ^ o •^ 3^ 5 o c n! o E; PL, O m O < w Q W H H W w a c/) w u z < < o P3 -^ M M M (X m v^ Si in en 00 in -^3 C\ rr in m c-i ^ -1- !7 ^ -1 t^ 1 c rt *-H c fc c n1 13 ^- ■C ;: rt ■^ a -^ u ^ :3 :d s - ° >^ g mo — ° , ""^^ ''^ OJ ^ CJ ggcS i; o c c 3 o o u < o o 65 , c X > S cfl — i66 AUDITING. CO o H <: w d, o o g Q H ;?; o o • '^ I— I u H CO :zi is H Pi W o Oh o I— ( < O I— I H O Q O « Oh W H O W o U H H < Pi o O Cd O £ > cn O H ;::) H P3 'A < < Si <: 09 o H Z D O O U H K O H 3 z u Q Z < o o o o o o ^ VO o ovo 6 o n m VD VD O O O 0\« O M t^ O O Ci O O u^ W W N "I O O O O o o o o o o o o O w^ O >rt CO N CI HH "O O n 1-^ •-• N N CI . (U -a c 3 (/] 6 -O I ''3 5 3 .tg.^ 0_ t/) •-3 rtrt '^^'^ •r* c ^ 3 t/) m 0) s >•" (n rt 01 4) •a > C c o crt ff; c-o o n « rt T3 3 tl E -*-• nj h - o t« C0&4 OJ p z; '^ [fi C S 3 c 3 '".E > -t; at, 3 u. c«|I| i/?- e-K o^ o c °- S " 2 ,/,"'" rt ;2 ti S ^ t/) c/) t/) c/) c/D o "^ S'o 2 3 « « — u o |W (U U OJ tie 3x: 0(_| 3 o >- 7x1 a> c/)Jh 4) S « u ™ 0)'-^ "" OCT) ^-° &, = SogS E {\ '-H o o o o o o M M t^ 0-) u-> CI o -^ IN worn lO o *o o oo o ooo ovo rt- C^ f o Orn-tONOO'-' o o o O »n« o o c* OVOt-lxNu-iWu-i O ro ro en m M m ** I n O O OiO O Ol fl o 6 .5 •<« 3 • O o o ■ u ■ O 3 I/) ^ nl O <« 0) (U 3 a; ^3 C . 3 . O ID J2 — CO .sS< ■ "1 5 • (K & O ,„^td 3 G."^ Mb, *; en ^ > « CO ii £ o >'.'C o 2 a; c 5b CO Pi u < corQ 1^ « « . > Q'H • ° «^ (U o e 3 lU S 3^-1 3 • 3 S " — -a< . o tu rt ■ "^ J-" ™ U r; CO Br-3 o ^ > CO .3 Ui _^ 2 »., .t: 0) o 3; ~ 5 3 ax. '-.St; rt P lA .- u I. j; ooO J^gS^ a; S^ c2 St/5 a< J2 a SPECIAL CONSIDERATIONS IN DIFFERENT CLASSES OF AUDITS. 167 J * NH ^ P-f 1-* 5; r/i "•-» n JJ 1 HI a r ) eo -5j Q t-H « H HH bl W U ^ z X V3 Pi u M r1 b Z < W < V m o o o »o "-♦J o o o o Vj u :Q o o o ■.S >-. t- 150 -^ c v- in '"' •= ■« a) a; ■A .a c rrt « a :Da C tf n :e rrt a. . ^ -i - aJ ^- o 3 t; — -^ c >, rt ,- o 'b . o l/l u n a cJ 32 _ o .2 — cfl i; 1/1 >~' s w c a) ■-.i ■-^^ r^ c^o M (-1 IN t/1 a 3 is T3 S 3 SftS c o ^ < •^ O C 3 O to J Ci. — 33 3'-n :_ :5a o. " c ^ 3 .2 o •c<: So a 1= U a o .0 •a c n (U J3 o 3 O > a a a 3 O o u < o o « J3 _^ 0) D3E lA »-H g c b u £ T3 c 3 rt X • 1/1 " XI re rtU . lU J3 X ■ •^ ■n ■ (U ^ « . X > . (U . a . J3 • j= ^ : > i68 AUDITING. O O ol en H < w OH <^ OD O ^w . GS^ s, •^ '-' W-' PhW o CIhO Ow Kp H? Sen si CQH <<; o 00 CO CO ^ fi fli hJ o w w T1 ffi (U H c i •z J3 o HH iM H ^ H H !-) O o Z o o z o <: a; V Q TD r^ O vn oo t/) o o o GO rn o u-1 C " K 6 ■- ^ > - - pa ,„ ro in VO QO 00 O ■* -3- O ^ M N O -• O O N M O OO ■"H ^coNO'^fivnl en l^Om o o o O O fn rt . s ■^ ^ o ^ p X 6 i" c\ •a . n " c -^ & 3 rt o W -E ^' o H - .— o o o (/) tfi ^ m a: a: frt E H V r. ^ 1 ci u. t—t t— < HH Uj H s z Z (H c n H H u < w H Ci rn 3 Z H HH M b W c < Ell s z "~t? ^ ^ !i3 U-) Tj- a-i a^ n >-J C\ (N •-" rn - 1 r^O 1 -+ 1 coo 000 00c O 10 IT) O O O O S^ • o o : !r "- • (L — o p. o ^H - Q r^ - ID O ■ - ii o 5> JJD o QJ >. ^. "Co M O O -yi — > = I- •- D h C O 00 Cl OO 1 <> x^ o ° 'C 1-1 « 1 rv ■- ri C^ " fl i s 1 V? T3 ^o « ovo O o o o o o o tn -+ O u-1 t-l ^ VO o o o o o o o o -H S " -*• r^ o o ^ * * ^ o o o vrj ^ »-k! u-> o ^ N CO o u^ o M N m 00 m •^ q^ «?> o l^ M m " C) eji ^ ,^ ^ ^ T) c c/l u5 tn w GJ [A O o O C U g o u o u re U O^ o IT :Q x ; ' a: -^ C o 1 CQ 5 c •oa o u o 'J c o s o o o en CQ "5 (U t/7 :8c S ° 'tn 5 X3 HC1 w 00 E ct re . bo . re c re u ►J 5 • u O '2 re in 5 re c _o .2 C O .2 00 00 1 3 _s r^ OTJ a CI. 5 (A rt 5 t/3 CD X • t/j " *v<- m : o (V u7 Ui ^ o u M u (D 1 C I- .a c O 1/1 . . - -^ C w oo 5 re = Ci'^ o ►y; •^ ? " o c re 33 o -5 c 5 .S o 3 Q o s ^ t* VO t^ -. * -< ;>,C» ^ U (U M >< 3 an, n oK u a s 1 1/; c 3 u o QJ * ° s « 3 re o o ._^ 3 c 0> o ^ U-, C OJ 0> 3 J= a) re T3 3 (/) CU SPECIAL CONSIDERATIONS IN DIFFERENT CLASSES OF AUDITS. I/I An important matter — from the Auditor's point of view — is tliat charities are not liable for income-tax ; it should, there- fore, be seen that none has been paid, and that the tax deducted from rents and dividends received upon investments has been recovered. The following extracts from the " Instructions for the guidance of Secretaries," prepared by the before-mentioned sub-committee, will form an appropriate conclusion to this section : — " I. — Where Form I. is used, the Cash Book should be kept upon a columnar method, so that the analysis appearing in the Treasurer's Cash Statement may be easily followed by the Auditors. " 2. — Where a Banking Account is kept, all cash balances should be paid into the Bank on the last day of the period to be reviewed. " 3. — A List of all books kept by the Institution should be handed to the Auditors, all the books being open to inspection. " 4. — In Forms II. and III. the accounts should be kept in a Ledger, opening in the form in which they will be presented in various financial statements. it 5. — (Immaterial.) " 6. — The books should be balanced and the Statements for audit prepared prior to the visit of the Auditors. " 7. — All Deeds and other Securities should be kept in a Deed Box at the Institution's Bankers, the box having three locks, the keys of which should be held respectively by the Treasurer, Secretary, and another member of the governing body. " 8.— (Immaterial.) " 9. — Before going to press the printer's proof of the Sub- scription Lists and Accounts should be examined by the Auditors. 1-/2 AUDITING. " lo. — (Immaterial.) " II. — All vouchers of payment should be arranged in the order of the dates of payment prior to the audit " 12. — All Bankers' Pass Books, made up to the end of the period under review, should be at hand at the time of audit.'" Many of these points do not relate solely to Charities' Accounts, but will be found useful at all times ; they are, how- ever, mentioned in this connection because they appear to indicate the lines upon which the audit of a charity's accounts should run. Hospitals participating in King Edward's Hospital Fund are required to keep their accounts upon the uniform system prescribed by that Authority. P'ull particulars, including an elaborate classification index, are published by Geo. Barber, 23 Furnival Street, London, E.C. {b) CHURCHES. — In many respects the audit of Church Accounts is a peculiarly thankless task. Apart from the fact that they are hardly ever submitted to the Auditor in anything approaching proper form, it is almost invariably the case that no effective internal supervision is exercised, and frequently large sums will pass through, say, a verger's hands without any proper check being kept upon his dealings. The Auditor must check everything he can, and try to teach his clients the elements of commercial caution ; but it is probable that he will never feel quite happy with a church audit. The writer well remembers, upon one occasion, being refused permission to count a balance of over ;,£^ioo (practically a running balance) that was in the hands of the verger : not long afterwards — but, nevertheless, after repeated warnings — the suspicions of the vicar were at length aroused, and the verger was instructed to pay his balance into the bank. It seems unnecessary to add that he was unable to do so. {c) COLLEGES AND SCHOOLS.— These accounts call for but little comment. The usual method of audit may be said to SPECIAL CONSIDERATIONS IN DIFFERENT CLASSES OF AUDITS. I 73 consist of a " cross " between that employed in " Charities " and " Hotels " {q.v.), but it may be added that only a detailed audit is likely to be found entirely satisfactory. Many University Colleges are subject to the Statutes made by. the Commissioners appointed under the Universities Act, 1877, under which duly audited accounts have to be sub- mitted to the University. In most cases a tax is payable upon the amount of income recei\'ed. Endowed Schools are nominally under the control of the Charity Commissioners, to whom copies of the Annual Accounts should be forwarded. The principal point to be remembered is that the Governors have no power to apply the corpus of the endowment to current purposes. IX. BUILDING AND FRIENDLY SOCIETIES, ETC. —{a) BUILDING SOCIETIES.— The enormous number of frauds — some of them of disastrous proportions — that ha\"e occurred in the accounts of Building Societies should suffice to make the Auditor of these accounts more than usually cautious. The Building Societies Act 1874 left the appointment of Auditors to be dealt with by each society in its rules, but it was generally considered that at least two Auditors must be appointed, the usual custom being for the directors to appoint one Auditor and the shareholders the other. In many cases, however. Chartered Accountants were not appointed, and it is probable that most of the disasters are attributable to this circumstance. This condition of affairs has been partially remedied by the Building Societies Act 1894, which requires that at least one of the Auditors shall publicly carry on busi- ness as an accountant. Unfortunately, however, this Act only applies to societies registered after 1856. In the majority of cases the Auditors so appointed have been Chartered Account- ants, but it will be seen that this is not required by the statute ; moreover, the wording of the section is so vague that cases still exist of accounts not being audited by bond fi.de public account- ants at all. It is well, however, not to lay too much stress upon the evils attending the appointment of a wholly unqualified 1 74 AUDITING. mail as Auditor, for the danger does not by any means stop here. It will usually be found that the whole management of a building society virtually devolves upon one man, who — besides having both books and cash under his entire control — turns the whole of the board round his little tinger. Add to this the fact that many building societies are virtually banks (and tliis fact has not been materially altered by the 1894 Act), and that the system of bookkeeping employed is generally of tlie most primitive kind, and some idea of the responsibility of the Auditor's position may be gained. The complexion of affairs is hardly improved where there is more than one real workur upon the staff : any efficient system of internal check is ;ill but tuiknown (except in a few — a very few — of the best and largest societies), while the class of man employed is usually \ery different from, and very inferior to. the class of man employed in banks for work of a very similar nature. The great majority of frauds that have been committed have remained undetected by reason of the very superficial examina- tion bestowed upon the accounts by the Auditors ; but cases have occurred in which the most detailed audit (conducted by imskilled men truly, but none the less detailed on that account) has failed to detect anything wrong. The author's experience of Building Society Accounts — and these remarks apply equally to every class of accounts included vmder this heading — has convinced him of the extreme import- ance of checking every addition, posting, and \oucher ; of carefully \'erifying every amount received in redemption of mortgages or paid out to investing shareholders ; of comparing every Pass Book with the Ledgers, and both with the lists of balances ; and of testing the latter at considerable length in respect of the calculation of interest. The income received from properties on hand must be verified in every possible way ; and, where such income does not seem to be a fair return upon the book-value of the various properties, the latter should either be revised or supported by a Surveyor's valuation. SPECIAL CONSIDERATIONS IN DIFFERENT CLASSES OF AUDITS. I 75 The deeds relating to all mortgages, and the securities relating to whatever other investments there may be, must also be examined by the Auditor ; who will do well, in addition, to require the solicitor to certify that such deeds are all in order. In the case of a building society of any pretensions the number of deeds that call for inspection will be very consider- able, and accordingly a method of saving unnecessary labour will be found acceptable. In all well-managed concerns it will be found that the deeds relating to each mortgage are enclosed in a separate envelope, upon the outside of which is endorsed a resume of its contents. If this endorsement has once been verified and the envelope has been sealed, it is thought that under normal circumstances no similarly detailed verifica- tion of the contents is necessary at .subsequent audits. At each subsequent audit all fresh sets of deeds must, of course, be verified in detail, as must also the contents of those envelopes which for one reason or another have been opened during the current period, and upon which therefore the Auditor's seal is not intact ; but it is thought that where the seal remains intact, and where a sufficiently distinctive seal has been employed, any further detailed investigation is unnecessary. It should be sufficient for practical purposes to verify the contents of a few envelopes, taken at random, and also, of course, the contents of all envelopes which in the opinion of the Auditor may by any possibility have been tampered with. It is more than probable that the fees attaching to his office will afford the Auditor no adequate remuneration for an examination conducted on such lines as those laid down ; but, be this as it may, the Auditor who — under ordinary circum- stances — omits any of the precautions named would be worse than foolish. It must also be remembered that there is a statutory limit to the borrowing powers of a society, which must not be exceeded. Another point to be borne in mind is that the 176 AUDITING. Balance Sheet and accounts are now required to be kept in such form as the Registrar of P'riendly Societies may prescribe. The statutory requirements concerning, and the prescribed form for, the Accounts of Building Societies will be found duly set forth in Appendix " A. ) ) (b) FRIENDLY SOCIETIES.— The Friendly Societies Acts 1875 to 1908 contain certain provisions (for which see Appendix "A" hereto) which will guide the Auditor in his work. Beyond these statutory requirements the general con- siderations di.scussed under the head of Building Societies will apply equally to the Accounts of Friendly Societies, except that the different nature of the business carried on will somewhat alter the scheme of audit and assimilate it more closely to that followed in the case of Insurance Companies. Unless the Auditor be a " public " Auditor holding an appointment under the Treasury, the accounts must be certified bv two Auditors ; but two partners in the same firm will satisfy the requirements of the Act. It is, perhaps, worth while to rememl)er that the actuary employed at the quinquennial A'aluation need not be a " public " valuer. Friendly Societies are required to keep hung up in a con- spicuous place a copy of their last Balance Sheet, and to present a copy of their accounts free of charge to any member who may demand it ; while every member has a right to inspect the books of the society at all reasonable times. (c) TRUSTEE SAVINGS BANKS.— In connection with the audit of these accounts the Savings Banks Acts 1863, 1891, and 1893 will require to be studied, and in Appendix " A " will be found such portions of these Acts as affect the Auditor in the discharge of his duties. The 1863 Act prescribes the form in which the annual return is to be made. The remarks in connection with the Accounts of Building Societies will apply, so far as they are relevant, with equal force to the Accounts of Savings Banks. The examination of SPECIAL CONSIDERATIONS IN DIFFERENT CLASSES OF AUDITS. 1/7 all the Pass Books is a most important feature, and it must not be forgotten that there is a statutory limit both to the amount standing to the credit of anj- one depositor, and to the amount that may be paid in by a depositor in any one year. A general super\'ision of Savings Banks is vested in an Inspection Committee appointed under the Act of 1893. In its annual report for the year 1893-94 it was stated — after citing the duties laid down in Section 6 (6) of the 1863 Act :- — " Under Xo. i of the above headings the books of the bank may l)e taken to comprise — " (a) In all cases. Deposit Ledgers with one or more daily Cash Books, or other record of the individual cash trans- actions with depositors. These books, at least, must there- fore necessarily be examined not less than once each half- year to comply with a minimum requirement of the Act of Parliament. " (b) In certain cases, a General Ledger and General Cash Book, or cash summaries, in which the totals of the daily transactions are periodically worked up to show the aggregate sums deposited and repaid. " From the reports received the examination of the detailed cash records (which 182 banks keep in duplicate) does not appear so thorough as might be desired, though doubtless there may be a considerable amount of examination not mentioned by the Auditors in their reports, nor referred to in the reports of the inspectors. " This is especially noticeable in the checking of the daily additions of these books, or schedules, in the regular checking of the cash remittances to the treasurer by a reference to the Bank Pass Book, and of the cash balance by actual enumera- tion. Although there may be some details of examination which have not been defined in the Auditors' reports, the statistics obtained do not convey any very great assurance that the scrutiny brought to bear upon the Cash Books by the N 178 AUDITING. Auditors in the majority of cases is a searching one. and it would thus appear that in many instances the audit in this respect ought to be supplemented. " The examination of the Deposit Ledgers, on the other hand, appears to be much more complete, notably the detailed postings from the Cash Book. The additions and .subtractions in the Ledgers, it is true, come in for but a small share of attention ; but the verification of Pass Kooks. so far as it extends, is a test of the accuracy of these operations, as well as, to some extent, of the postings. The calculatitjn and addition of interest is decidedly a weak point in the manage ment of banks where there is only one paid ofiicer. Though ■checking these items can hardly, in ordinary circumstances, be held to be the function of an Auditor, still, the Auditor seems at times to be the only person availal.'le to test their accuracy. Unless the Auditor does it, no independent check is brought to bear upon the items of interest at banks where only one paid officer is employed, and errors in calculation are apt to remain undetected. Any such defect should be seen to, even if some additional expense is incurred thereby ; the cost to be met, where necessary, bv corresponding economies in other items of Management Expenses. " The most marked feature of a Savings Bank Audit appears to be the examination of the lists of balances extracted from the Depo.sit Ledgers. Two hundred and twenty-five Auditors certify that they ha\'e checked this independently, and eleven that they have done so with the aid of some member of the staff of the liank, a test that is not usually suflficiently inde- pendent to be safely relied upon. The importance of this operation will be ajijjreciated when it is remembered that in most banks the total of the list is the only independent evidence of the aggregate liability of the trustees to the depositors, and it is necessary, therefore, to enable the Auditor to give a true certificate as to the amount of liabilities and assets. It also furnishes a check upon the accuracy of the postings in the SPECIAL CONSIDERATIONS IN DIFFERENT CLASSES OF AUDITS. I 79 Deposit Ledgers in the aggregate. As a check upon fraud the list is of little worth, unless made accessible to depositors, and even then, before it can be put to much use, it is necessary to give every publicity to the existence and purpose of this volume by means of proper notices. Little reliance ought, therefore, to be placed on this statutory check upon fraud. " As a rule, ' the books of the bank ' include a General Ledger and General Gash Book in the larger and better managed and audited Ijanks only, but we suggest that such books should be adopted by all Savings 15anks, large and small. These books, or corresponding summarised statements, should be made up not less frequently than once a month, and ought to be checked bv the Auditor throughout in all respects as to additions, transfers, and postings, either continuously month by month (where a visit of such frequency is possible), or at other longer intervals. " Other I)Ooks of account relate to Stock business, in which there is liut little scope for error of any serious moment. " Auditors' Report. — Our experience during the past three years shows that a clear report in writing, not less frequently than once every half-year, has not always been given, a minority of l)anks I)eing still content with an annual report only. " List of Balances. — As already stated, the examination of this list is usually well attended to. " Gertificate of Liabilities and Assets. — This require- ment can now in all cases ije conveniently complied with by the Auditor certifying the Annual General Statement of Account (which, as last amended, contains a form of Balance Sheet) as having been examined and found correct. '■' Book of Balances. — As mentioned already, this book should bear a clear certificate as to its accuracy. At nearly all Banks it is so, but some cases still occur where the accuracy N 2 l8o AUDITING. of this book is either not certified by the Auditor, or is certified by implication only. A form of certificate suggested by Mr. Booker (one of the late temporary inspectors) was given on page 74 of our P'irst Annual Report. " Examination of Pass Books.— -It appears from the reports rendered that 178 Auditors attended at the Savings Banks from time to time to examine the Pass Books. Twenty-eight (apart from Savings Banks in Ireland, where this is compulsory) attended at periods of audit only. These figures would seem to indicate that the Auditors dispense with this test in certain cases where the trustees and managers themselves compare the Pass Books with the corresponding accounts in the Ledgers. " One hundred and sixty-eight Auditors of Savings Banks, other than those in Ireland, gave the number of Pass Books examined, and from these it would appear that the percentage thus verified varies from 13 per cent, to 39 per cent, in the case of Banks with deposits over ^100,000, the average being 18 per cent. ; from 18 per cent, to 32 per cent, where the deposits do not exceed ^100,000. but are over ;^4o,ooo, average 29 per cent. ; and from 20 per cent, to 31 per cent., average 28 per cent., where the deposits are under ^,{^40,000. At Irish Banks the average percentage is 57, and at Banks in the whole Kingdom in respect of which figures are obtainable the average percentage is 20. " These figures give, without doubt, more favourable ratios than would be the case if the data were supplied in every instance. It may be safe to assunie that figures are mostly given in the cases where the examination was made to an extent above the average. In several cases, too, the numbers stated to be examined include books left at the Savings Bank for audit, and in some (where the audit is not conducted at the Bank office) the Auditor states that he has examined such Pass l^ooks as were sent to him by the actuary, practically a useless proceeding, unless coupled with extraordinary precautions. It may, therefore, be advisable to recall to mind the remarks on SPECIAL CONSIDERATIONS IN DIFFERENT CLASSES OF AUDITS. i8t page lo of our Second Annual Report to the effect that Pass Books should be compared as brought in by the customers, and not left for inspection for days and weeks at the Banks. " Other Details of Audit. — Receipts are taken from depositors at 120 Banks out of 236 from whose Auditors reports were received, and have been checked at 28, and tested at 27. There is a general feeling amongst the Auditors that it is too much to expect them to verify signatures to any extent. " Expenses of management have been sufficiently vouched in 193 cases. " The double check upon cash transactions with depositors appears to be complete and to be completely recorded at 204 Banks out of the 236. Of these 204, 182 record the use of the double check in two independent Cash Books, while 22, having only one Cash Book, post the Ledgers at the time from the entries in the Pass Book, thus recording each transaction in two ways before the Pass Book leaves the Bank. This method, although it might serve to trace any discrepancy in balancing the cash, does not afford a check on the total of the cash trans- actions for the day. It is only in use as a rule, however, in the smallest Banks ; but, to make it more complete, the accounts operated upon might be marked by inserting tags or other markers in the Ledgers, and the postings should be checked with the Cash Book, and the Cash Book summed a second time before the business of the day is concluded. The removal of all tags, or other markers, from the Ledgers would show when all the postings had been checked. " The double check is wanting, or is insufficiently recorded, in 32 cases out of the 236. " Valuable assistance in the work of audit is occasionally rendered by the trustees and managers, either acting indi- vidually or by forming themselves into small audit committees. In the former manner a trustee or manager, willing to per- sonally undertake some detail of audit, could most usefully 1 82 AUDITING. direct his attention to the examination of Pass Books with the Ledgers of the Bank. The work of an audit committee would more especially be valuable in connection with the examination of the Cash Book, and of monthly or other statements of busi- ness done. This would be particularly the case at Banks where it is not usual for the Auditor to undertake more than a half-yearly or rjuarterly audit, apart from any continuous examination of Pass Books that he may be called upon to make. " We deem it of essential importance that the rules of all Savings Banks should make provision for the following matters : — " (a) For the examination of Pass Books during the year as presented by depositors and their comparison with the Ledgers to the extent of lo per cent, of those extant, either bv the Auditor or by some other independent person or persons. " {^>) For the examination by the Auditor of the annual general statement and its certification by him, if found correct. If he is not satisfied, the Auditor should report accordingly to the trustees and managers. " (c) For thf Auditor to render occasionally, when desired, a list of work done by him in the course of his audit." The above extracts are of value, as showing the usual practice in addition to that which experience has shown to be desirable. (d) CO-OPERATIVE SOCIETIES, &c.— The considera- tion of the audit of these accounts need not be entered into fully. Certain statutory provisions (which will be found in Appendix "A") must be complied with ; but, in other respects, the audit will follow much upon the same lines as that of ordinary trading concerns. SPECIAL COiXSIDERATIONS IN DIFFERENT CLASSES OF AUDITS. 1 83 Like all classes of audit enumerated in this section, the audit oH Co-operati\e Societies' Accounts — to be effective — must be detailed and should be continuous. It may be added that — at all events, so far as the smaller Societies are concerned — the small numijer of employees militates against an effective system of hiternal check, which, combined with the small salaries usually paid, makes it important to take every precaution against fraud. It is greatly to be regretted that the statutory provisions as to the audit of these accounts, and also those of Friendly Societies, tend to discourage the employment of qualified accountants as Auditors. The provision that one " Public Auditor,"' or two other Auditors, must certify the accounts would have l)een valuable, had proper precautions been taken to ensure that only properly qualified persons were appointed " Public " Auditors by the Treasury. Doubtless many Public Auditors are well qualified to discharge their duties, but as much certainly cannot be said for all ; while the evil is further aggra\-ated by the fact that further appointments are only made as vacancies occur, so that a sort of monopoly exists, backed up l»v a statutory authority, which certainly cannot be supported upon its merits. The accounts of Co-operative Societies are made up to the 31st of December in each year, and a return in the prescribed form must be forwarded to the Chief Registrar of Friendly Societies before the 31st of March following. X. PROFESSIONAL ACCOUNTS.— (cz) SOLICITORS. — It is not easy to audit the accounts of solicitors effectively without devoting considerably more time to the task than clients, would be willing to pay for, and nothing short of a continuous audit appears to meet the necessities of the case. When a system such as Kain's System of Bookkeeping for Solicitors is employed, it would appear to be of especial importance that the Auditor should satisfy himself that every entry in the Cash Journal is duly recorded in the proper 184 AUDITING. column, for its insertion in the wrong column may easily produce an entirely false result. For this reason it is thought that most Auditors will deprecate the employment of the system where the Cash Journal is kept by the cashier. These comments are made not with the express purpose of drawing attention to the shortcomings of a system in very general use, but merely because the system is, on account of its convenience, so frequently employed that the present work would not be complete without this passing reference to the difficulty of audit- ing accounts so framed. In the author's opinion the system is unrivalled where the principal (or one of the partners) himself keeps the Cash Journal ; but in the case of those medium- sized firms where the principals cannot give individual attention to the books, and where the connection is not sufficiently large to make it practicable for the account-keeping to be organised upon a regular system of internal check, there would appear to be grave difficulties of verification that outweigh any immediate convenience in record. The amount included in the Balance Sheet for outstanding charges should, in general, be verified by comparison with the draft Bills of Costs. Agents' Accounts should at all times be carefully considered, and it is not a bad plan to compare every item of costs charged up with the press copy of the bill rendered, the object being to make sure that the full amount •chargeable has been debited, for the amount asked for may not (by reason of an amount having been received on — or in — - account) be always the amount that has to be debited. Of recent years the increasing number of fraudulent failures on the part of solicitors has drawn attention to the importance of proper accounts being kept by those who wish to a\oid any possible reflection upon their manner of dealing with the moneys entrusted to them by their clients. At more than one meeting of the Law Society attention has been drawn to the importance of clients' moneys being kept quite distinct from the moneys of the practitioner himself. It is impossible to overstate the importance of this distinction, while it may be SPECIAL CONSIDERATIONS IN DIFFERENT CLASSES OF AUDITS. 1 85 added that in many respects it materially simplifies the keeping of the accounts. Each large estate should have its own separate Bank Account and separate books, entirely inde- pendent of the books of the firm, while all other moneys received in trust for clients should be paid into a " Clients' Account," and a separate column provided in the Cash Book for keeping this account distinct from the " general " Bank Account. Not the least important ad\'antage of keeping the accounts of large estates quite separate from the general accounts is that the cost of keeping them, and of having them audited, may then frequently be charged against the estate, in addition to other rosts. Moreover, these accounts can be sub- mitted to the clients (or their agents) for audit without disclosing any other transactions ; and if they be so audited at regular intervals it is frequently unnecessary for them to be also audited by the solicitors' Auditors, and by this means a further sa\ing of expenses may be effected. (b) STOCKBROKERS. — A con.siderable amount of mystery appears to envelop Stock Exchange Accounts, and the remark has frequentlv been made that the audit of Brokers' and Jobbers' Accounts is altogether too technical a matter to be conducted safely by the general practitioner. The advantage of special practical knowledge on the part of the Auditor has already been admitted, but it is contended that the desirable knowledge may readily be obtained, even by the general prac- titioner ; and, with Stock Exchange Accounts in particular, it is suggested that the necessity of " specialism " has been greatly exaggerated. For the audit of these accounts to be of any value, however, it is necessary that it should be of the most detailed descrip- tion : the danger of error or fraud — either of which might assume alarming proportions — is extremely great, and the utmost care and circumspection are, therefore, imperati\e. Particular attention should be directed to the Name Ledger, and Continuations must also be carefully traced. The question 1 86 AUDITING. of '• splits " should also he kept in mind, as — although not a large item — it is a likely source of petty fraud. Perhaps the chief danger in this class of audits lies in the fact that in the great majority of offices there exists no regular system affording a reliable internal check, and no efficient supervision. To remedy this obvious weakness the visits of the Audit(K should be frequent, say, at least once during each account ; indeed — although a periodical audit is doubtless useful, as affording a reliable periodical statement of accounts — the only really efficient audit of Stock Exchange Accounts would appear to be one that is both detailed and continuous. (r) ARCHITECTS. — The accounts of architects are, per- haps, less frequently the subject of professional audit than either of the two classes of accounts just discussed, but this is a state of affairs which is always undesirable, and particularly so in cases where two or more architects are practising in partnership. The accounts do not, as a rule, involve a particularly voluminous record, and it is therefore desirable that in all cases the audit should be a detailed one. The fact that architects are frequently not business men makes it imi)ortant that the Auditor should take every precaution to guard his client from loss, both through actual fraud and bad bookkeeping; it is therefore important for him to see that every item in the Cash Book is properly vouched, and, so far as possible, that all fees and commissions are duly accounted for. It may be mentioned here that, with regard to fees payable to an architect for .super- vising the erection of buildings, these fees are payable by W'ay of a commission — generally at the uniform rate of 5 per cent. — upon the value of the work done, as certified by the architect for the purpose of assessing the payments to be made on account to the builder. There will always, at Ijalancing time, be a considerable amount of accruing fees, which, although not actually due for payment at the time, constitutes an asset ; a schedule of these items should be prepared and certified by the SPECIAL CONSIDERATIONS IN DIFFERENT CLASSES OF AUDITS. 187 principals for inclusion in the accounts. !Many practitioners, however, work their accounts exclusively upon a cash basis, and the plan always has much to recommend it when professions are concerned. Another point that must not be lost sight of is that, in all important undertakings, a " Clerk of the Works " is appointed to be on the spot, for the purpose of checking the material and workmanship employed by the builder. The Clerk of the ^\'orks is not infrequently appointed l)y the architect, but he is in\ariably paid by — and is the servant of — the architect's client ; if, therefore, for reasons of convenience, his salary has been paid by the architect, it is important to see that it is sul)sequently recovered by him. District Surveyors. — Under the Metropolitan Building Acts "'District Surveyors " are appointed to supervise the con- struction and alteration of all buildings within the Metropolitan area. These District Surveyors are invariably architects, although in the case of all recent appointments the London County Council has stipulated that those occupying the position should give up their general practice. A few of the appoint- ments, however, still remain in the hands of practising architects. It is both desirable and convenient that, in these cases, the accounts of the District Surveyor .should be kept quite separate from the general accounts ; and, as certain returns have to be made to the London County Council from time to time, it is convenient that the books should lend them- selves to the preparation of these returns with a minimum amount of trouble. As, moreover, the collection of fees will then almost invariably devolve upon an employee, it is desirable that every reasonable safeguard should be adopted with a view to prevent the possibility of fraud. The best system to adopt is to employ a tabular Ledger, in the same form as that in which returns have to be made to the County Council, with additional money columns on the right- hand side for the purpose of recording the receipt of fees 1 88 AUDITING. during the current and the following year. Should any fees be still outstanding at the end of the following year these may be transferred to another folio, but the probability is that they will be so few in number as to prevent the additional labour thus invoh'ed being any serious objection. The fees actually received should be entered in the Collection Book, which is a Cash Book with no credit .--ide to it ; and it will probably be convenient to ha\e a separate Cash Book, recording the manner in which these fees have to be accounted for to the cashier at the office — or, if thought better, a credit side could be added to the Collection Book for this purpose. In practice, however, the former method is more con\enient, as the Cash Book can then be kept at the general office, and the Collection Book at the district office, where, of course, it will be continually in use. {d) MEDICAL jNIEN. — -There are so many different systems of bookkeeping employed by medical men that it is difficult to afford any useful hints as to the method of audit in the space here available. It may be pointed out, however, that it is not, as a rule, either necessary or expedient for the Auditor to go behind the debits in the Patients' Ledger, which, as often as not, are fixed at round sums by the practitioner without any strict reference to the number of visits. It is desirable, how- ever, that the Auditor should see that some efficient system of recording visits is in force, so that his client has all the facts before him when assessing the amount of his charges. The Auditor should carefully check the credit side of the Patients' Ledger, noting in particular any allowances that have been made, and he should see that all cash credited to patients has been properly accounted for. Where payments ha\e been made on account of patients, w^hether for medicines, or for consultation fees, &c., it is very important that the Auditor should see that they are properly charged up and collected in due course. Many practitioners employ one or more assistants, or dispensers, w'ho are authorised to receive money, and where this is the case it is especially important that the system in use should, as far as SPECIAL CONSIDERATIONS IN DIFFERENT CLASSES OF AUDITS. 189 possible, follow the ordinary business precautions against fraud. With those practitioners who supply their patients with medicines it is also necessary that the accounts of druggists, (S:c., should be carefully checked, and an allowance will base to be made at balancing time for the value of drugs in stock. It need hardly be added that where horses and traps or motors are the property of the practitioner, an adequate allow- ance must be made for depreciation, probably at the rate of 15 per cent, or 20 per cent, per annum for horses and traps, and say 33J per cent, for motors. Where, however, these are '■ jobbed," it is equally important to see that the cost of hire to the date of balancing is included ; or, if this has been paid in advance, that a proportionate part is held over as an asset. In concluding this portion of the work, the author cannot but feel that in spite of the very considerable space that has been devoted to the consideration of the special features attaching to the audit of different classes of accounts, the subject has been only \ery imperfectly dealt with. W'hen, how- ever, it is remembered that an exhaustive treatise upon the audit of any one class of accouiits might easily approach the dimensions of the whole of the present work, it is hoped that it will be conceded that — however desirable it might have been to have considered the various questions involved in further detail — more could not reasonably ha\e been expected within the limits of this volume. CHAPTER VI. FROM TRIAL BALANCE TO BALANCE SHEET. That which forms the most important part of every audit — the questions of principle involved in the preparation of the Balance Sheet and Trading and Profit and Loss Accounts from the Trial Balance — will now be considered. It is especially desirable that in every audit the principal should give these subjects his personal consideration, not merely because of their intrinsic importance, but also for reasons of policv that have already been dwelt upon. Throughout the course of this chapter the endeavour Avili be to view the various questions of principle from the broadest possible standpoint. It is true that, by this means, the inherent ditftculty of the considerations involved will not be escaped ; but it is hoped that at least the treatment will be found free fnjm catch-words, and all other .sources of superfluous mystification. PRINCIPLE IN VALUATION OF ASSETS.— It bein^ the primary object of most ordinary undertakings to continue to carry on operations, it is but fair that the assets enumerated in a Balance Sheet be valued with that end in view ; before this subject is pursued any further, however, it is well to acknowledge the two I'ssi/z/iall v different fcalurcs ol)taining in different classes of accounts. Certain Parliamentarv companies, constituted for ihe ])urpose of imdertaking public works, are, on account of the peculiar circumstances under which they were called into existence, required to render their accounts in a special form, under what is called the Double Account 1-ROM TRIAL BALANCE TO BALANCE SHEET. iqi System. It being required that all capital raised by these companies shall be expended in the construction of the public- works for which purpose they were called into existence, care is taken by the Legislature to see that this provision is tkilv complied witli : hence a special form of account, in which all moneys received and expended in the construction of the works are separated from the General Balance Sheet. Now, in order that this account (the Capital Account) may perpetually show- that — and how — the capital authorised to be raised (except a small margin for working capital or contingencies) has actually been spent only upon the authorised purposes, it is necessary that the actual amount expended on the works be debited to the account, regardless of any alterations in value that mav afterwards occur. It would, of course, have Ijeen easy for the Legislature to have provided that any fluctuation that might occur should be duly allowed for in the General Balance Sheet ; but having regard to the fact that no such fluctuation could affect the company in any practical way, so long as it carried on business, and !)earing in mind also the fact that it is con- templated that the company will pcnuaiiciitlv carrv on business, it would appear that all consideration of these fluctuations is considered superfluous. With an eye to the future, however — and doubtless also wdth a view to, so far as possible, ensuring the business being permanently carried on — it was provided that the company's works (which are required to be stated per- petually at the amount of their initial cost, regardless of their after value) must be kept in a state of continual efficiency, and that the cost thereof shall be borne out of Revenue. It w'ill thus I)e seen that the forni of the Double Accoiuit System arose from the statutory re(]uirement that all capital raised should be used for the carrying out of the works for the execution of which the company was created ; and that the principle that, so long as the works were maintained in a state of efficiency, their actual value need not i)e reconsidered periodically, arose from the circumstances that it was con- ig2 AUDITING templated that the work authorised would be carried on permanently. How far these considerations need affect one's judgment concerning the valuation of the assets of undertakings not specifically covered by the statute it will now be necessary to inquire. Taking first the case of private traders, whether sole or firms, it is not difficult to see that, inasmuch as no man can reason- ably hope to live for ever, the business of such an one is ephemeral as compared with that of a Parliamentary company. It is true that the business may, and frequently does, live longer than its founder ; but to do so involves a change of pro- prietorship, and with it a re -val nation of assets. It will thus be seen that, although there is no necessity to consider the con- tingency of liquidation (at what are expressively known as " break-up " prices), not merely the contingency but also the eventual certainty of a re-valuation must be faced. The basis of such a valuation will be that known as "a going concern," and it will, perhaps, be worth while to consider the meaning of this phrase. So far as it possesses any definite meaning — for, of necessity, the term is an elastic one — the qualification implies " at such a price as a willing purchaser would be pre- pared to give." That is to say, the assets should be written down from time to time to provide effectively for depreciation. A fluctuation in value caused by external circumstances will, however, also require to be taken into consideration when pro- perty changes hands. It is important to remember that it is not really practicable so to maintain the efiiciency of assets that no Depreciation shall ever take place, and also that private firms are under no statutory requirement to retain the whole of the undertaking intact. The Double-Account principle does not, therefore, apply to the accounts of private traders : it is, indeed, only suitable in cases where, owing to the jnuJtiflicity of assets, the expenditure on repairs and renewals in each year naturally and automatically approaches very closely to the actual loss by way of Depreciation. FROM TRIAL BALANCE TO BALANCE SHEET. 195 The accounts of what may be termed '•'registered" com- panies next claim attention. These companies, having a perpetual succession, are, perhaps, entitled to be considered as theoretically permanent (although, in practice, they are generally much shorter-lived than private enterprises), and consequentl}' the Double- Account principle of stating values- might be employed (but for the fact that a registered company is under no obligation to retain possession of any of its fixed assets) if it were found practicable to say definitely what were, and what were not, fixed assets. This is a point upon which even Accountants might not always be agreed, while the statement of Lord (then Mr.) Justice Farwell, in the case of Bond V. The Barrow Hamatite Steel Co., Lim., that blast furnaces owned by a smelting company must be regarded as part of its floating assets, emphasises the importance of a system of accounts which may be as independent as possible of any necessity of definitely distinguishing between fixed assets and floating assets. Incidentally it may be mentioned that the terms most commonly used by lawyers, "fixed capital," and '■floating (or circulating) capital " are clearly incorrect. The capital of a company is that which has been contributed for the purpose of enabling it to carry out the " objects " for which' it was formed : it may be possible to say what assets have been acquired with that capital, but even then the assets and the capital are clearly separate entities. In the great majority of cases there can be no doubt that the position of affairs can be more readily and clearly disclosed by a single Balance Sheet than by accounts kept upon the Double Account System. In the case of companies, however, there is a further point to be considered, namely, that there are increases which are not divisible profits, and losses which (as a matter of law) need not be made good before dividing profits in the form of dividend. The Profit and Loss Account must obviously be framed so as to show the divisible profits, and the question thus remains to be considered how profits and losses that do not affect Revenue — or, to put it another way, 194 ' AUDITING. capitalised fluctuations — are to be treated. As a matter of bookkeeping, it is clear that two courses are open. Either the capitalised items must be disregarded in the Balance Sheet by misstating the value of an asset or a liability, or some account must be raised to record the profit or loss that is not taken to Revenue. If the latter course be adopted, the accounts should be sufficiently clear to explain what has been done : in the former case, if the assets are over-stated it is also necessary that mention should be made of the fact, as the assets appearing in a single-account Balance Sheet are frima facie assumed to be stated at a reasonable valuation. If, however, a profit has been made which is not available for distribution, it is often con- sidered unnecessary to modify the accounts so as to disclose the circumstance. This point, however, is discussed more fully under the heading of " Secret Reserves." As a general rule, the amount at which all assets are stated in the Balance Sheet — except where a special statutory provision to the con- trary obtains — should be regulated by the realisable value of such assets on the basis of a going concern. It may, however, be added that there are certain classes of undertakings, in addition to those provided for by statute, to which the applica- tion of the Double Account System is not inappropriate — 6'.^., mines, collieries, speculative syndicates, and other concerns of an essentially non-permanent character. Upon several occasions during recent years the writer of leading articles in the "Commercial Supplement" of The Times has very definitely expressed the view that the values attached to items appearing upon the assets' side of a Balance Sheet ought to represent a bond fide estimate of the amount that these items would realise in the event of a forced sale. With all respect to a venerable newspaper, it is submitted that this assertion shows an entire misapprehension as to the real functions of a Balance Sheet. A Balance Sheet is intended to show the position of affairs of a continuing business at a given moment of time ; and its function is, it is submitted, chiefly to prove the reasonableness of tlie apportionment of FROM TRIAL BALANCE TO BALANCE SHEET. 1 95 income and expenditure aK between one 5'ear and another, and also to show the financial position of the business — i.e., the resources it has available to meet its current liabilities. It is not, it is submitted, a statement of affairs prepared to show ■debenture-holders, or mortgagees, what might be regarded as the minimum value of their security in the event of a forced realisation ; i ait rather what may fairly be regarded as the position upon the assumption that the business is not about to be wound up, Init intended to be continued. It is obvious that there must necessarily be a very vast distinction between the valuation of fixed assets under these different circumstances, and that so far as these assets are concerned, so long as it is reasonable to assume the continuity of the business, the correct thing is not to attempt to show the realisable value (which may be considerably more, or very considerably less, than the oiiginal cost), but rather to show such expenditure as expendi- ture, subject to the fact that in so far as it will not last for ever its cost must be apportioned as fairly as possible, and charged against the profits earned in successive years, in order to arrive at the true working expenses and the true net profit of tiach year. If the system advocated by The Times were to be insisted upon in all cases, there are very few large undertakings that would be able to show a profit, even under the most favourable circumstances, until they had been at work for a considerable period. At the same time, it is, of course, not denied that it is very desirable that dividends should be kept within quite reasonable limits until ample Reserves have been set aside with a view to meeting any contingency that is reason- ably likely to occur during the lifetime of the business. The whole question, however, interesting as it undoubtedly is, is not one with which the Auditor fer se is concerned. In practice, assets may generally be divided into two classes : (i) Those that represent Capital more or less permanently locked up, and (2) those that do not ; the former may be named Fixed .Assets, the latter Floating Assets. o 2 196 AUDITING. VALUATION OF FIXED ASSETS.— The points to be borne in mind here are that Depreciation may reduce their value, and that Fluctuation may increase or reduce their value. So far as Depreciation is concerned, inasmuch as use has directly contributed to the profit earned, it is clearly an expense with which profit may fairly be charged. The only question is '■ How ? " which will be considered in full under the head of Depreciation. On the other hand, Fluctuation is something altogether apart from trading profit and loss, being merely an accidental v.iriation (owing to external causes) in the value of certain property owned, but not traded in : to carry the amount of such variation to Profit and Loss Account would be to disturb and obscure the results of actual trading, and so render comparison difficult, if not impossible. Moreover, as has already been stated, the Profit and Loss Account should be so framed as to show a balance which actually exists and is properly available for dividend. On no account, therefore, should the results of Fluctuations affect the Profit and Loss Account. Whether or not it is desirable that such Fluctuations should be revealed by the accounts at all will be fully considered under the head of Secret Reserves. The actual cost of acquiring Fixed Assets {e.g., stamps, con- veyances, registration fees, &c.) is usually capitalised. This is not unreasonable, as such expenses are clearly an integral part of the cost price of such assets. Under the Companies (Consolidation) Act 1908, Section 26 (3) {vide Appendix "A'"j, it is provided that every company registered under the Companies Acts, and having its capital divided into shares (why companies limited by guarantee are exempted is not clear), shall include in the Annual Summary that it forwards to the Registrar a statement " in the form of " a Balance Sheet audited by the company's Auditors, and con- taining a summary of its Capital, Liabilities, and Assets, giving such particulars as will disclose the general nature of such Liabilities and Assets, and showing how the values of the FROM TRIAL BALANCE TO BALANCE SHEET. 197 fixed assets h;i\e been arrived at. It is submitted that anv reasonable mode of summarisation of items, such as that suggested in Chapter YII., will disclose the general nature of the assets and lialnlities sufticiently to meet the requirements of this section. With regard to values, it will be observed that no basis of valuation is laid down; but that the basis, whatever it may be, has to be stated. The requirements in this respect are thus sufticiently lax. The assets might be valued at cost price ; at cost price, less depreciation ; at a valuatio made upon any stated date ; or presumably even at book value»y and vet the requirements of the section would apparently be complied with. Upon the whole it is by no means certain that a valuation "' at cost price " would not for this purpose give more real information than any other. "At cost price, less depreciation ' " means less than nothing unless the provision for depreciation be adequate ; while a valuation may be (and some- times may properly be) at a ligure considerably in excess of the original cost. As has already been stated, a properly drawn up Jialance Sheet will in all cases Ije sufficient to meet the require- ments of this section ; and it is suggested, therefore, that if the statement filed be in different terms, the circumstance might well be regarded as one calling for further inquiry. VALUATION OF FLOATING ASSETS.— It being the essential feature of these assets that the whole aim of the undertaking is to con\ert — or to be able to convert — them into cash at the earliest possible opportunity, the element of immediate realisation is an important factor in their value. The only point to remember is that, while a manufacturing prolit is earned only when the manufacture is completed, a trading profit is only made when the sale is completed. Neither profit must be anticipated, but it does not appear to be essential that manu- facturing profit should invariably be held over until a sale has been effected. It may be added that, where a manufacture consists of se\eral distinct processes, and separate accounts are kept of the manufacturing profit earned under each process, there seems to be no great objection to each process being ipS AUDITING. ronsiderc'l as a separate manufacture, so long, of course, as the goods are readily saleable at the usual trade price. ^\'ith regard to what is a trading jirofu. a luost ingenious argument was once advanced hy Sir Richard ^\'EBSTER (now Lord Chief Justice) before the late Lord (then Mr. Justice) Field (in Harden v. Faulkner and others), in which it was con- tended that the inost scientifically correct method of valuing a stock-in-trade was to take it at selling prices, less the average tradt profit ; it being suggested that any profit realised in excess of the average was in reality a profit on buying, not on selling; and any profit realised less than the average a corresponding loss on buying. The argument passed muster at the time, appears to be plausible, and iiulicates a system that would doubtless ju'ove very convenient in practice ; but, unless the profit on different articles was very uniform, it would hardly be a safe one to adopt. RESPONSIBILITY FOR VALUES.— A much-debated point is the extent of responsibility incurred by the Auditor in relation to the values set upon the assets of a company in the published accounts of the directors. The opinion arrived at in the Court of Appeal in Tlic Loudon and General Bank case upon this most important point appears to be that the Auditor incurs no respons^tiify whatever so long as, after exercising reasonable care and diligence, he has honestly arrived at the opinion that the accounts are correct. It will be seen, how- ever, that this decision in no way commits itself to the expression of any particular gpinion as to the mode of valua- tion to be adopted. Li this latter respect it is interesting to note that the draft Bill recommended by the Departmental Com- mittee appointed to consider the 'luestion of Company Law Amendment by the Board of Trade in November 1894, required that the Balance Sheet of every company shall show {inter alia) " whether the assets are taken at cost price, or by valuation, or on what other basis they are stated, and whether anv, and if .so what, amount or percentage has been written oft. and what other provision, if any, has ijeen made for i FROM TRIAL BALANCE TO BALANCE SHEET. 199 depreciation." This recommendation, in a somewhat modified form, is embodied in Section 26 (3) of the Companies (Con- solidation) Act 1908, already referred to {vide p. 196). The question of auditorial responsibility is fully considered in Chapter X. VERIFYING EXISTENCE OF ASSETS.— Having settled a basis of valuation, the next thing would appear to be to obtain evidence of the existence of the assets enumerated in the Balance Sheet. The evidence necessary in each class of assets would be as follows : — LAND AND BUILDINGS : The title deeds of the property. Should the property be mortgaged the title deeds will, of course, be in the possession of the mortgagee, and an acknowledgment of this fact should be obtained from him or his solicitor, together with a statement of the amount due. Conversely, the verification of an asset represented by a mortgage is the production of the title deeds and the mortgage deed. In the case of a second mortgage the title deeds will, however, be in the custody of the first mortgagee, and here the Auditor will require to satisfy himself that such first mortgagee has received proper notice of the existence of a second charge. In the case of Copyholds there will, of course, be no title deeds to inspect. In place thereof a certified copy of the roll of the Lord of the Manor should be produced. The difference ■ between Freeholds and Copyholds is much the same as the difference between Registered and Inscribed Stocks. Title deeds are sometimes in the hands of solicitors or bankers. This fcr se is no reason why they should not be produced to the Auditor ; but, when they are abroad, and there is no local audit, the certificate of the solicitor or banker must perforce be accepted. In that case, however, the facts should be stated in the Auditor's report. 2 00 AUDITING. STOCK-IN-TRADE : The original Stock Sheets, signed by the stock-taker, calculator, checker, and manager. Most accountants would, in addition, consider it essential that the more important extensions and additions be re-checked by one of their own staff, and, further, would require to be satisfied as to the soundness of the principle of valuation adopted. The Auditor's liability in connection with the valuation placed in the accounts upon the amount of stock-in-trade was considered in The Kingston Cotton Mills case and The Irish Woollen Co. case, which are more fully dealt with in Chapter X. It may be pointed out at this stage, however, that the general effect of these decisions seems to be that, where the circumstances of the cases are not such as to arouse the suspicions of an ordinarily capable and diligent Auditor, he is justified in relying upon the valuation of stock-in-trade which has been submitted to him and certified to him by the Managing Director. In the lirst-named case, however, the Auditors had taken the precaution to state in their report that they accepted no responsibility for the valuation of the stock "which had been certified to them by the Managing Director," and as a matter of prudence it would no doubt be well for Auditors to always add this qualification. It may be aidded, however, that such a qualification as this would certainly not appear to save the Auditor, where he had reasonable grounds for doubting the valuation itself ; whenever his suspicions have been aroused, it is absolutely necessary that the Auditor should thresh the matter out to the bottom. The recent decision of Alverstone, C.J., in Henry Squire {Cash Chanists), Lim. v. Ball, Baker ty' Co. — Mead v. same {vide Appendix " B "), seems to carry the matter a good deal further in the direction of relieving the Auditor from liability. Here it was not disputed that the Stock Sheets had been falsified for years, probably by the managing director and sec- retarv acting in collusion. There was evidence to the effect that the alterations in the Stock Sheets should have caused the Auditors to become suspicious, that their " cumulative TROM TRIAL BALANCE TO BALANCE SHEET. 20I effect" was irresistible: for the defence it was urged that while the arithmetical calculations were checked, the Auditors relied on the certificate of the managing director and secretary as to the existence and valuation of the stock, and that in their reports they had regularly drawn attention to the steady increase in the book-value of the stock. In giving judgment for the defendants, his Lordship said, with regard to the alleged " cumulative effect," " it is quite clear that you are not to assume that the work must always be done by the same clerk." This seems perfectly just, and is most reassuring to the honest Auditor. The whole judgment is, indeed, worthy of careful attention, showing as it does that " infinite capacity for taking pains " that is akin to real genius. Still, one cannot help thinking that such matters ought to be decided by a tribunal of experts. INVESTMENTS IN STOCKS AND SHARES : The Auditor will require to have produced to him the scrip, certificate, bond, or other document, proving that the owner- ship of the investment in question is vested in his clients ; and he should also require production of the broker's note, with a view to verifying the cost price thereof. In the case of Consols and other inscribed stocks no such certificate of ownership is provided, and in these cases it becomes necessary to obtain a certificate that, upon the date of the accounts, such stock stood registered (or inscribed) in the names of the Auditor's clients. It is important to notice the date of such certificate, as it is not in itself a proof of ownership, but merely a record dealing with that particular date alone, and it differs from an ordinary certificate, or scrip, in that, in the event of a subse- quent sale, it does not have to be given up. Investments on behalf of a company sometimes stand in the names of indi- viduals, who hold them in trust for the company. A proper declaration of trust, duly executed, should in all cases be produced to the Auditor. 202 - -AUDITING. The following is a list of the principal Inscribed Stocks, under the headings of the Banks at which they are respectively transferable. Forms of application for certificates can be obtained on application at the various Banks ; they must, how- ever, be signed hj' at least one of the persons in whose name the Stock stands. A .small fee is payable, the cost of which shpuld be borne by the client. The Auditor should see that the request is made that the required certificate be forwarded direct to himself : — The followixg Ixscribed Stocks are transferable in .\ny amounts AT the Bank ok England : — 2^ per cent. Consolidated Stock (Goschen's Consols). v 35 per cent. Annuities, 1S94. jft 2g per cent. Annuities, 1005. S 25 per cent. National War Loan. 1 • 2| per cent. Irish Land Stock. ' Local Loans 3 per cent. Stock, 1012. India 3^ per cent. Stock, 1931. " India 3 per cent. Stock, 1948. - Metropolitan 3^ per cent. Stock, 1929. Metropolitan 3 per cent. Stock, 1941. ^letropolitan 2^ per cent. Stock, 1949. Liverpool 35 per cent. Stock. Birmingham 3^ per cent. Stock, 1946. Birmingham 3 per cent. Stock, 1947. Swansea 35 per cent. Stock. Hull 2h Psr cent. Stock. Wolverhampton 22 P^^ cent. Stock. Nottingham 3 per cent. Stock. Manchester 1891 Redeemable Stock (3 per cent.), 1941. New Zealand 4 per cent. Consolidated Stock, 1929. New Zealand 35 per cent. Consolidated Stock, 1940. New South Wales 4 per cent. Stock, 1933. New South Wales 35 per cent. Stock 1924. New South Wales 3-^- per cent. Stock, 1918. Queensland 4 per cent. Stock, 191 5. Queensland 4 per cent. Stock, 1924. Queensland 3g per cent. Stock, 1924. Queensland 3^ per cent. Stock, 1930. Transvaal new 3 per cent. Stock, 1923-53. FROM TRIAL BALANCE TO BALANCE SHEET. 205 The foli.owixg Inscribed Stocks are transferable in multiples 01' /^i AT THE Bank ok England : — Eastern Bengal Railway " A " Annuity, expiring 30th July 1957. Eastern Bengal Railway " B " Annuity, expiring 30th July 1957. Eastern Bengal Irredeemable 4 per cent. Debenture Stock. Scinde, Punjaub and Delhi Railway "A" Annuity, expiring 31st December 1958. Scinde, Punjaub and Delhi Railway " B " Annuity, expiring 31st December 1958. East Indian Railway 4^ per cent. Irredeemable Debenture Stock. Oude and Rohilkund 4 per cent. Debenture Stock, 1898. The following Inscribe)! Stocks are transferable in any amounts AT THE London & Westminster Bank, Lothbury, E.G., the procedure being the same as at the Bank of England : — Cape of Good Hope 4 per cent. Inscribed Stock of 1883. Cape of Good Hope 4 per cent. Consolidated Stock, 1916-1936. Cape of Good Hope 3-^ per cent. Consolidated Stock, 1926-1949. 4 per cent. Victoria Inscribed Stock, 1881-2-3-4-5. . 3^ per cent, ^'ictoria Inscribed Stock, 1888-9. 3g per cent. Victoria Inscribed Stock, 1921-6. 32 per cent. Tasmanian Inscribed Stock, 1920-40. Newfoundland Inscribed Stock, 1913-38. 32 per cent. Brighton Corporation Stock, 1946. Cardiff Corporation Stock, 1935. 3^ per cent. Reading Corporation Stock. 3 per cent. Reading Corporation .Stock. 4 per cent. Western Australian Inscribed Stock, 1911-31. The following Inscribed Stocks are similarly transferable IN any amounts at the Office of the Crown Agents for the Colonies, i Tokenhouse Buildings, E.C. : — Western Australian (January and Jul}' 1034) 4 per cent. Natal 4 per cent. Inscribed Stock (April and October 1937). Natal 4 per cent. Inscribed Stcck (May and November 1927). Natal 35 per cent. Inscribed Stock. Ceylon 4 per cent. Inscribed Stcck. Ceylon 3 per cent. Inscribed Stock. Jamaica 4 per cent. Inscribed Stock. Mauritius 4 per cent. Inscribed .Stock. Mauritius 3 per cent. Inscribed Stock (guaranteed). Grenada 4 per cent. Inscribed Stock. Trinidad 4 per cent. Inscribed Stock. Hong Kong 3^ per cent. Inscribed Stock. British (luiana 4 per cent. Inscribed Stock. 204 AUDITING. Funds deposited as security might be taken on the certificate of responsible persons, provided the deposit is itself clearly regular. It may be added that if, when examined, the securities are securely sealed up in packages, it is not necessary at subse- quent audits to re-examine them in detail, if the seals remain unbroken. BOOK DEBTS. — The extent to which it is practicable to verify the existence of Book Debts depends largely upon circumstances. Unless they are very numerous the Auditor should satisfy himself that the total appearing in the Balance Sheet agrees with the Ledger balances, and that proper pro- vision has been made for cash (as well as trade) discounts and also for bad and doubtful debts. With regard to the discounts, it is customary to deduct the full cash discount upon all Ledger balances. It is questionable whether this is really necessary, although it is clearly a prudent course to adopt ; but where cash discounts are deducted from the trade creditors they must, of course, be also deducted from the trade debtors. With regard to bad debts, the Auditor should obtain a certificate from at least one responsible person acquainted with the facts, to the effect that in his judgment due provision has been made for any loss that is reasonably likely to occur. It is naturally impossible for the Auditor to verify this provision in detail, but he can at least take note of overdue and " dead " accounts, and see whether such pro\"ision as appears to li'nn lo l)e adequate has been maile in respect of these. As the number of Book Debts increases it becomes impracticable for the Auditor to verify the Ledger balances in detail ; it has already l)een explained, however, that, where an adequate system of internal check exists, the verification of details can to a large extent be super- seded by tests. For all practical purposes it is probably as efficacious to check the balances of, say, one or two Ledgers out i>f twentv as it would be to check the whole. The serious fraiiils \vhi<'h occurred some years since in connection with Tlie MUhvaU Dock Company serve, however, to emphasise the FROM TRIAL BALANCE TO BALANCE SHEET. 205 importance of sotnc tests of the accuracy of the Book Debts, even in the case of large undertakings where the number of Ledgers in use is enormous. PLANT, MACHINERY, FIXTURES, &c. : There is, perhaps, too much tendency to assume the correctness of the " book " figures with regard to these assets, provided reasonable provision has been made for depreciation : it is important, however, to make careful inquiries into all additions, with a view to seeing that they represent bond fide capital expenditure that may properly be added to the value of the asset, and, further, to make particular inquiry as to the sale of worn-out or discarded assets. It not infrequently happens that such sales are erroneously credited to Sales Account, with the result that the latter is over-stated and that due inquirv into the loss in respect of such sales is overlooked. The amount realised on the sale of fixed assets should, of course, be credited to the real account standing in the books in respect of such assets ; but the realisation affords an opportunity of inquiring into the value at which these assets stood in the books, and should they have been sold at a loss, that loss must in all cases be written off, as otherwise an item will be brought into the Balance Sheet as an asset which represents something no longer in existence. It should not be forgotten that such Ledger Accounts as these are really Total Accounts, and that they require as much verifying as any other Total Account — e.g., Book Debts. Occasionally, as has already been stated, a re-valuation will be made for the purpose of assessing, or of checking, the pro- vision for depreciation ; but in any case a certificate should be forthcoming, to the effect that the various items included in the last inventory are still the property of the undertaking. BANK BALANCE : Banker's Pass Book, verified either by personal visit to Bank or by Banker's certificate of balance. In practice it will rarely happen that the balance recorded in the Pass Book exactly agrees with the balance in the Cash 206 AUDITING. Book, and a Reconciliation Account has therefore to be prepared upon the following lines : — Balance as per Pass Book ... _^'i,267 i 9 Less Cheques unpaid, viz. : — Dec. 16, Jones ... ,, 21, Smith ... ,, 29, Brown £29 2 16 5 9 71 14 2 117 1,149 19 10 Ad if Pa\'ments in not credited, viz. : — Dec. 30, Bill No. 69 ... ;^i2o o o ,, 31, Sundries ... 69 2 7 Balance as per Cash Book ... 1 89 2 7 /•'i'339 2 5 ^Vhere practicable it is important that the Auditor should see that the various adjustments which constitute the difference between the Pass Book Balance and the Cash Book Balance .are rectilied in due course by subsequent entries in the Pass Book. In this connection the case of 77/e Briglitoii Eden and Empire Syndicate, lAni. v. London and County Bank, Li»i. (decided in 1904). will be found of interest. This was an action brought iigainst the defendant Bank for damages for loss sustained through the negligence of their manager in allowing the manager of the plauitifts to himself make entries in the Bank Pass Book, which entries were, it was stated, inaccurate in point of date although accurate as to amount. By this means the plaintiff's manager was able for a number of months to avoid detection at the monthly audit of his accounts, and at the end of the year, when the defendant Bank were called upon to certify the balance shown in their Pass Book, the deficiency was made good, doubtless, by the plaintiff's manager tempo- rarily borrowing the amount of his defalcations. The decision in this case, that the defendant Bank were liable in damages, is satisfactory to Auditors, in that it makes a Pass Book duly ■obtained from a Hank a reliable basis for the Auditor's verification, whether formallv certified as correct or not. FROM TRIAL BALANCE TO BALANCE SHEET. 207 CASH IN HAND : Verified by production of actual cash balance, or, if the date of the accounts has gone by, bv exhaustively verifying the Bank Account up to the date of audit and then counting the balance of cash in hand. In cases where there is more than one Cash till, all must be produced to the Auditor and \-erified by him simultaneously ; but, wherever practicable, it is preferable that all cash in hand should be paid into the Bank on the afternoon of the date of the Balance Sheet, in which case, of course, no occasion arises for the Auditor to verify the balance of cash in hand, for the all-sufficient reason that there is none. In the case of cash at distant branches a satisfactory certificate that the balance exists may generally be accepted in lieu of actual counting. In con- tinuous audits all cash balances should be frequently verified — say, at least once a month. In the case of London Oil Storage Co., Lini. v. Seear, Hasluck &= Co. {vide Appendix " B ") an unsuccessful attempt was made to plead that it was no part of an Auditor's duty to verify the balance of petty cash in hand. This might fairly be con- ceded if the balance of petty cash did not exceed the usual limit of about _;,^5, but in the case in question the Petty Cash Book showed a balance which had gradually increased from ;^2i in 1897 to ^796 in 1902. And whatever may be said in general terms, therefore, as to the desirability of an Auditor verifying balances of cash in hand, it is clear that it would be only prudent to regard the existence of a large floating balance as ■priiiid facie a matter for suspicion, and therefore a matter calling for careful inquiry ; and this was tht- view taken by the jury in this case, although they only awarded the plaintiffs nominal damages. BILLS RECEIVABLE : Verified by production of the actual bills themselves. Care should be taken to see that no overdue bills are included in a Balance Sheet under the head- ing of " Bills Receivable " ; that due provision is made for discount where necessary ; and that all anticipated loss by way 2C8 AUDITING. of bad debts in respect of Bills Receivable — both in hand and under discount — is included in the accounts. WORK IN PROGRESS : This should be certified by the \\'orks Manager, the Chief of Cost Office, and the Managing Director. In the case of readily saleable goods manufactured in quantities the usual rule is to value work in progress at cost— the term '' cost " being defined as the cost shown by the Cost Accounts, which as a rule includes, of course, a certain amount of " loading " for factory and other standing expenses. As has already been stated, when the work of any one manu- facturing department has been completed, there seems no reason why that department should not be entitled to take full credit for the work performed ; but in such cases care must, of course, be taken to see that the stock of unfinished goods represents items that will be finished and sold at the normal rate in due course. When work in progress consists of single articles — as, for example, in the case of contract work — its valuation becomes both a more difficult and a more serious matter, partly because past experience is no longer available as a guide, and partly on account of the magnitude of the figures involved. In the case of contracts extending over a number of years it is clear that annual accounts can only approximately estimate the true net profit earned in each year. In the case of manufacturing firms it is for the partners mutually to agree a basis for the valuation of work in progress, but the safest course would appear to be not to take credit for any profit on uncompleted work. In the case of companies, however, which require to produce annual accounts, and to pay annual dividends, this course is hardly practicable. A company is not obliged to wait until profits have been actually realised in cash before crediting anything to Revenue ; there is, therefore, no illegality in taking credit for estimated profit on work in progress ; but, in view of the extreme difficulty of arriving at an accurate estimate, and the extreme uncertainty that often prevails as to what the ultimate result will he, it is clear that only v'ery conservative estimates I FROM TRIAL BALANCE TO BALANCE SHEET. 209 can be indulged in witli safety. Cost Accounts sliould, of course, in all cases be available to show the actual cost of each contract up to the date of the accounts. If the work has so far proceeded that it is possible for the Works Manager to certify an outside figure for the cost of completing the work, it would not be unreasonable to apportion the profit between the two periods according to the expenditure incurred in each, providing, of course, ample reserves in all doubtful cases. In connection with work less far advanced, it seems more ques- tionable whether anything in excess of manufacturing cost can safely be treated as an asset. In this connection, however, it may be borne in mind that all large contracts are readily capable of division into sections, the cost of each of which has already been estimated in advance. A comparison of the Cost Accounts in respect of the work performed with the original estimates will thus enable a very fairly reliable view to be obtained of the general position of the contract, more especially, of course, in those cases where the speculative part of the work is in the earlier stages. In the majority of cases, where contracts extend over a lengthy period, it is usual for payments to be made on account, upon the certificate of the architect, or superintending engineer, as the case may be. The amount of such payments would be from 75 per cent, to 90 per cent, of the value of the work actually performed, and it is clear, therefore, that the excess of money received over expenditure incurred may safely be regarded as the minimum profit earned up to date. An interesting discussion of this question took place at a meeting of the Chartered Accountants Students' Society of London on the 15 th October 1902. SALES FOR FUTURE DELIVERY.— The question has arisen more than once as to whether a company is entitled to take credit for profit expected to be earned in respect of orders booked for future delivery. The point is naturally one of con- siderable importance in some industries, as, for example, with 2IO AUDITING. wine merchants, who frequently book orders for future delivery, and also with regard to coal merchants, cotton merchants, and the like, who enter into contracts to supply their goods for some time in advance. The general rule which has been laid down in this work is, it is thought, unquestionably the safe one to adhere to in all cases, namely, that the profit on the sale of goods should be taken credit for at the time when the sale actually occurs ; and where it is an essential portion of the contract of sale that the goods shall not be delivered until some future date, then the actual sale would certainly appear to be at the date of delivery, and not at the date of booking the order. Like many other matters, however, this is, perhaps, as much a matter of degree as a question of principle, and where orders have been actually booked, so that a valid contract exists upon which the consumer could be sued for payment, the mere fact that the goods have not been delivered might well be overlooked and the profit taken credit for in the period when the order was booked ; this rule, however, could certainly only be applied where the goods were actually in stock, and not when they were still unmade. Even where it is decided that credit may rea.sonably be taken for such future sales, it is important to remember that when payment is delayed a reason- able rebate should be made for loss of interest, and under no circumstances could any harm be done by postponing the whole of the profit until the period when the goods were actually delivered. OUTSTANDING ASSETS.— The point that now claims attention is the question as to how far it is the Auditor's duty to consider the propriety of including certain items among the assets that relate to transactions which, at the date of the Balance Sheet, are uncompleted. It has been said that no profits should be taken into account that have not been actually received in cash, unless there is every reasonable likelihood that they will eventually be so received. This, of course, means that a sufficient provision must al\v;ivs b.' made for b.id and doiililful debts ; but it means ■ 1 FROM TRIAL BALANCE TO BALANCE SHEET. 211 something else besides. \\"itli some classes of transactions it is quite possible, even though the transactions themselves are not actually completed — to say with reasonable certaintv what profit will eventually result; and. in these cases, the most correct course would appear to be to apportion the profit so that each period took credit from the profit arising from its portion of the transaction. Thus, in the absence of evidence that would lead one to a contrary supposition, the profit arising from sales may safely he credited to the period in which the sales occur, and the profit arising from manufacture similarly belongs to the period in which the articles are manufactured. The income arising from first-class investments {e.g., interest on Government Stocks, or Railway Debentures, or rents receivable) may likewise be said to accrue from day to day. With regard to the latter, however, the question of convenience intervenes; and, unless the amount involved is of sufficient magnitude to render absolute accuracy desirable, it would probably be considered sufficient if only those sums actually due were considered as assets — the amount accruing being taken as a set-off against liabilities of a similar nature, and a Suspense Account opened for the difference in a lump sum. Turning now to another class of transactions, the final result of which can only be determined approximately, no accruing profit can, with safety, be taken credit for upon the uncompleted voyages of ships, or uncompleted contracts (except in so far as pre- viously indicated), not for accruing dividends upon ordinary shares in companies, nor (under normal circumstances) upon unsold consignments; the eventual result of all these transac- tions being generally of so speculative a nature that it is not safe to do more than carry forward whatever expenses may have been incurred. Sometimes, for the purpose of providing a Secret Reserve, assets are intentionally under-stated : except when so done advisedly, however, there is but little fear of the Auditor find- ing the assets under-stated. Occasionally defalcations have, by this means, been made to fall upon revenue (generally by 212 AUDITING. writing off good debts as bad), but the attention thereby attracted to the existence of a leakage prevents such a course from being at all common. 'e> OUTSTANDING LIABILITIES.— For a similar reason, there is but little fear of liabilities being over-stated : how far it is necessary for the Auditor to take special steps to guard against their under-statement is the matter that now claims attention. While the practice of " dating forward " invoices is so common, there will always be some danger of goods being included in stock without having been passed to the credit of the Bought Ledger. " Stock-taking " statements might help to discover the omission, but they also might not. It will be a great help, therefore, if the services of the Stock-keeper are requisitioned, and he be made responsible for the production of invoices for all goods that have passed through his hands. The purchases for the next few weeks after the date of the balancing mav also be scrutinised with advantage. Upon this point the decisions of the Irish Court of Appeal in Tlie Irish Woollen Co. case, and of Alverstone, C.J., in Henry Squire {Cash CJuniist), Liiii. v. Ball, Baker &" Co. — Mead v. same, are of interest — the latter, perhaps, particularly so. All Expense Accounts {e.g., wages, salaries, &c.) should be examined carefully, to make sure — as far as possible — that nc outstanding liabilities have been omitted. It is a common practice to set off accruing rent, interest, &c., against insurance rates, and other items paid in advance, and to keep a fixed sum suspended to meet whatever difference there may be. The plan certainly possesses the advantage of convenience combined with practical accuracy ; but the sufficiency of the fixed sum should be verified at every audit, as the circumstances may easily vary from time to time. The Auditor's own fee is a matter in which he will naturally be interested. There is no uniform practice, however, some k FROM TRIAL BALANCE TO BALANCE SHEET. 213 preferring to debit the accounts of the period under audit with the fee, and some the period in which the audit is conducted. The latter course is naturally the most convenient where the amount chargeable depends upon the time occupied. The Minute Book may disclose the existence of liabilities — both certain and contingent — that are not recorded in the books of account. CONTINGENT LIABILITIES must not be forgotten. Bills discounted are perhaps the most usual source of con- tingent liability. Disputed claims must not be lost sight of, however ; and claims for dilapidations on premises, the lease of which has almost expired, should be anticipated, so that the whole loss may not fall upon one year. Arrears of Cumulative Preference Dividends also come under this heading, although some dispute this statement on the ground that preference shareholders have no absolute right to any dividend until it has been formally declared. HIRE-PURCHASE AGREEMENTS.— This subject is of sufficient importance to merit a separate heading. In former editions of this work its proper treatment was considered very exhaustively, because (so far as the author was aware) the principles underlying these transactions, and the best methods of applying them, had not then been discussed in any other book. The detailed treatment of the subject has, howe\er, now been transferred to the author's Advanced Accoiuiting, which deals fully with those advanced problems that are questions of account, as such, rather than questions of auditing. From the Auditor's point of view the main point of import- ance is to see that a correct system of dealing with the trans- actions is adopted which charges a sufficient proportion of the instalments against the revenue of each year, so as to a\oid the proportion capitalised appearing at too high a figure. This is a pure question of interest calculations, and the following 21-1 AUDITING. Table will suffice to show the present \'alue of the unpaid instal- ments upon any hire-purchase agreement for the acquiring of ranwav wagons. T\];i.K sHdWixc Tkkskxt ^'AI.CK OK Pavmexts cxdek H I KE- I'L'KCHASf: Agrp:emexts. Instalments : £ioo per annum At 5 per cent. Year y Rests At 5 per cent. Half-Vearly Rests At 6 per cent. Yearly Rests At 6 per cent. Half-Yearly Rests £ £ ' £ £ AgrtHiin Jill u :t!i I vc-ai to run 95-238 96-371 94-340 95 673 ti 2 „ „ 185-941 i8S-og8 183-339 185-855 „ w 3 „ „ 272-3=5 275-406 267-301 270-859 „ " 4 „ II 354-595 358-507 346-511 350-984 „ n 5 „ „ 432 -H'^ 437-603 1 421-236 426-510 ft „ 6 „ tt 507-569 512-888 491-732 497-700 „ " 7 It It 57S637 584-545 558-238 564-803 11 „ H „ It 646-321 652-750 620-979 628-055 ti " Q „ „ 710-782 717-66S 680-169 687-675 It „ 10 " II 772-173 779-458 736-009 743-S74 'J'he aniounl charged against l\e\-enue must be equal to the inttrest on the present \ahie of the instalments due at the commencement of that period, and tht- apportionment must be so arranged that when the agreement expires the proportion tliat has been capitalised does not exceed the present value of th'_' instalments at the date of the commencement of the agree- ment. All repairs must, of course, have been charged to l\e\enue, and som-c further pro\ision mu^l be made for Depreciation. This, howexer. may b,_- more conveniently discussed under that hcailing. The abo\-f remarks apply in their entirety to hire-purchase agreements ior the actiuiring of railway wagons and any other articles which are ordinarily purchased upon such terms that the rate of interest is either 5 jier cent, or 6 per cent. At the present time, howe\-er, cases frequently occur in which Fi RXiTURE. -Musical Instruments, -Bicycles. <.\:c.. are .sold under hire-])urchase agi-eemeiits, and in these cases the rate of interest charged is almost iinariaiily far higher, usually \arying from 10 i)er ci-nt. to 30 per cent, per annum on the unpaid instalments. The proper treatment of these tran.sactions is fully * In cases where a reference to Tables is impracticHble the Auditor will be upon the safe side if he reckons the Cash Value as being the aggregate amount of the instalments minus simple intertst thereon, at the prescribed rate, for half the prescribed period. FROM TRIAL BALANCE TO BALANCE SHEET. 215 considered in the author's Advanced Accounting: for present purposes it will be sufficient to point out that firms transacting business of this description in the nature of things deal Avith a very large number of items, each of comparatively small amount. It consequently follows (i) that it is impracticable to keep such intricate accounts as would be necessary accurately to apportion e\ery instalment recei\ed between interest and capital ; (2) that such scrupulous exactness is unnecessary in practice, as the \olume of the transactions is sufficient to enable an average to produce fairly reliable results. The best prin- ciple, therefore, is to regard the difference between the cash price and the credit price of the articles sold as interest charged, and having ascertained the average rate of interest to apportion it between the thi'ee years o\er which the currency of these agreements almost invariably runs. By this means practically accurate results can be obtained with a \ery small expenditure of labour. The apportionment should, however, be in favour of the later years, so as to err upon the side of caution, and it may be added that clue provision for Bad Debts and Lapses will here require special consideration. DEPRECIATION. — The importance of this question is considerable, and it is therefore desirable that the matter .should be considered in detail. Before doing so. however, it may be well to remind the reader of the distinction between Depreciation and Fluctuation. Depreciation is a shrinkage in \"alue which, in the ordinary course of events, may be expected to take place, as being a necessary con.sequence of the posses- sion and enjoyment of the asset : it consequently is a charge against Revenue. Fluctuation, on the other hand, arises from causes entirely outside the scope of the business, and may affect the value of its assets either adver.sely or fa\ourably. The operations of Fluctuation cannot, however, affect true trading profits either one way or the other, and as a rule, there- fore, it is best to disregard them in the accounts. A favourable Fluctuation in the \'alue of fixed assets seems the proper subject for a .Secret Rest-rve. A favouralile Fluctuation in floating assets 2l6 AUDITING. is temporarily a Secret Reserve, which will be included in the trading profits when those assets are realised. An unfavourable Fluctuation in floating assets may be disregarded so long as there is every reason to believe that it is of a temporary character. But if it seems likely that conditions will remain unfavourable until the time comes for realising those assets, then the loss should be anticipated ; or, to speak more accurately, it should be charged against the period in which it actually occurred, rather than against the period in which it was realised. An unfavourable Fluctuation in fixed assets need not, under normal circumstances, be charged against Revenue before declaring dividends out of current profits ; it may there- fore be disregarded in the accounts. But, in order that the true position of affairs may be placed before the shareholders, it is desirable that a note should be appended to the Balance Sheet, drawing attention to the shrinkage in value, or that a paragraph to that effect be inserted in the Auditor's Report. In connection with this distinction between Depreciation and Fluctuation, it should be added that in some quarters the practice has been advocated of occasionally haxing fixed assets re-valued as a check upon the annual provision for Depreciation. There is much to be said in favour of this \ie\v, in that it is always desirable to take every reasonable opportunity of test- ing the sufficiency of estimated provisions ; but, on the other hand, it must be borne in mind that a re-valuation can hardly fail to take into consideration Fluctuation as well as Deprecia- tion, and consequently may introduce into the accounts a disturbing element, obscuring the real result of the trading. It ought not to be impossible, howe\er, to check the provision made for Depreciation by means of re-valuation without introducing these complications. In order to make it quite clear what is intended, it may be pointed out that a machine costing (say) ;^ioo, and a further ;^2o to fix, may answer its purpose for (say) six years, and then have to be sold as second-hand for ;£iS- This leaves a cost of ;£io5 to be written off over the six years' life. Under the FROM TRIAL BALANCE TO BALANCE SHEET. 217 circumstances it might be reasonable to charge this at the rate of ;£i- los. od. per annum (equals 14^ per cent.); or the efficiency of the machine may be so high when new that a reasonable procedure would be to charge 27 J per cent, on the reducing balance, which would reduce the ^"120 to (approxi- mately) ;£^i5 at the end of the sixth year. But, whichever method be adopted, it is more than probable that the balance shown on the Machinery Account at the end of the first, second, third, fourth, and fifth years would not agree with the valuation made by an expert at those times. The reason for this is that the expert would take into consideration the value of the machine in the market, whereas the manufacturer is only con- cerned with its value to him. Moreo^•er, the market value may be influenced by uther considerations besides the actual con- dition of the article in question. The existence of new and better types is, of course, a risk that ought to be provided for by Depreciation, but fluctuations in the value caused by an increase or reduction in the cosi of producing similar machines in no way affect the cost of the original machine that has to be written oft" over a term of years. COMPARATIVE TABLE. Reduced by Reduced by 14* % i 27* % on Cost ! per annum Revalued tsay) Cost (including Erection) Depreciation i £ I20'00 i7'50 £ 12000 33 'oo £ I20'00 40' 00 2 10250 i7'50 8700 2392 80 '00 i5'oo 3 4 5 6 Estimated Break-up \'alue 85 -oo 17-50 63 08 i7'35 65 00 15 00 6750 i7'50 4573 12'57 5010 1000 50-00 i7'50 3316 g-i2 40-10 1000 32-50 i7'5o 24-04 6-61 30-00 1500 £15-00 £17-43* £'15-00 ' The estimate is (it will be seen) too large. It is, however, no very serious matter to charge the whole of the deficit— £2-43— against the sixth year's profits, increasing that charge to £904. 2l8 ■ AUDITIiNG. "With these prL-liminary remarks we may proceed to the special features in connection with the depreciation of various classes of assets to l)e considered. FREEHOLD LANDS may quickly Ije dismissed— they ordinarily suffer no depreciation. Fencing, and other similar works, would, of course, depreciate, liut the item would not usually be of sutificient importance to require consideration. If, however, it hecame a large item, it should be treated separately as Plant (c/.v.). Liability to loss from earthquake or coast erosion will, of course, have to be taken into account in all suitable cases. FREEHOLD BUILDTXGS depreciate to an extent varying greatly according to the quality of the workmanship and materials employed in their erection. The amount of the Ledger Account Avill frequently include freehold land, which, as we have seen, does not depreciate ; the depreciation will therefore be confined to the Imilding itself. If the Instalment plan be adopted, from i| to 3 (or even 5) per cent, of the original amount may be deducted annually ; if the Annuity method be used a fixed sum debited to Revenue, which, after crediting interest, will write the asset down to zero in from, say, 50 to 150 years ; or, if the Sinking Fund system be preferred, such a sum may be set aside as will accumulate to the cost of the building in that time. In each case all current repairs will have to be borne by Revenue, in addition to the depreciation. With regard to the relative merits of the Instalment, Annuity, and Sinking Fund methods, the two latter are distinctly preferal)le; although — on account of its greater simplicity — the Instalment method is frequently used for short leases. The Annuitv system differs from the Sinking Fund in that the instal- ments are not invested ; the (net) amount of each successive instalment therefore requires to be increased to compensate for loss of interest on the previous uninvested in.stalments. Tables showing how the amount of such instalments may be arrived at will lie found at the end of this work (7'idc Appendix "D "). Sinking Fund svslem, is, of tHJurse, far cheajjer than any 11^ ■■•f. FROM TRIAL B.\LA^XE TO BALANCE SMEET. 219 Other in cases where the working life is sutiticiently long to make the accumulations of compound interest appreciable. GOODWILL does not "depreciate." On the other hand, it will generally be conceded that it is liable to fluctuations, both continual and extreme ; as, however, no one would think of calling its omission from a Balance Sheet a Secret Reserve, it will probably be most convenient to deal with the question of Goodwill under the present heading. As a matter of fact, Goodwill is not written down /ncai/sc- its value is supposed to have t)ecome reduced — such a course is all but unknown. The amount at which Goodwill is stated in a Balance Sheet is never supposed to represent i^ither its maximum or its minimum value ; no one who thought rif ])urchasing a business would be in the least influenced iiy the amount at which the Goodwill was stated in the accounts; in short, the amount is absolutely meaningless, except as an indication of what the Goodwill may have cosf in the first instance. Liasmuch, therefore, as nobodv can be deceived bv its retention, there is no i/cccssity for the amount of Goodwill Account to lie written down. On the other hand, tlie practice is not unusual, wliere suiiicient profits are being made. The question is not, however, one upon which the Auditor is retjuired to express an opinion; and, so long as the item is separately stated on the Balance Sheet, it is not desirable that he sliould interfere with the discretion of the management, although there is, of course, no oiijtction to his offering an opinion when he is invited to do so. HORSES invariably depreciate, and — if heavily worked — very rapidly. The rate of depreciation will probably vary between 15 and 25 per cent, on the starting balance of the account. Until experience has shown the actual rate of depre- ciation it will be safer to arrive at the result by a re-valuation (which, with horses, can be more accurately done than with most things), and where only a small number of horses are employed (sav 20 or less) the re-valuation should often be re.'r^orted to, if only as a check upon the rate of depreciation employed. 2 2C AUDITING. INVESTMENTS need not he depreciated unless of a wasting nature — such as shares in Mines or Single-Ship Com- panies. As to how far it is desirable that fluctuations in their value should be considered, the reader is referred to the para- graph on Secret Reserves (paste a). It is not very unusual to find that a company invests in the shares of another company with a view to securing a voice in the management thereof, either with the object of removing undesirable competition or of securing an outlet for its supplies, while occasionally its object is to enable it to secure a supply of those raw materials of which it stands in need. In such cases it is submitted that the expenditure is primarily in the nature of expenditure for the purpose of increasing the value of Goodwill, and that there- fore the intrinsic value of the shares incidentally acquired is a matter of somewhat secondary importance. An mcrease in the value of such shares could not become a realised profit unless the shares were sold (and therefore the benefit of the connection lost), and thus under no circumstances should it be shown upon the face of the accounts. Prr coitra a decrease in the value of such shares is ordinarily of but little importance, so long as the full benefit of the connection can be retained ; indeed in an extreme case such a decrease may be the best possible evidence that the fullest benefit is being obtained from the connection. It is therefore easy to justify the retention of such shares in the Balance Sheet at cost price, unless both the shares and the connection are found to be of comparatively little value. Even then, howc\er, the loss is a loss of Capital rather than of Revenue, and thus need not of necessity be charged against current profits. In the case of investments of Sinking Fund instalments designed to provide a specified sum at some definite future date, fluctuations in market value are obviously of no importance; but the realisable \alue of the investments at the date when their realisation is contemplated is, equally clearly, a most important question. Any depreciation in value that can be rea.sonably foreseen should therefore be provided against, and i FROM TRIAL BALANCE TO BALANCE SHEET. 22 1 the Sinking Fund instalment modified accordingly ; but casual fluctuations in the meanwhile may well be disregarded, and (subject to the provision already mentioned) such shares may properly be stated in successive Balance Sheets at cost. On the other hand, temporary investments, which may at any time require to be reconverted into cash, should in all cases be treated as Floating Assets — i.e., valued at their original cost or realisable market price, whichever for the time being may be lower, and any loss arising from such re-valuation should be charged against current profits. LEASEHOLD LAND and PREMISES.— The premium paid for leases may be regarded as the purchase-money paid for a terminable annuity of the difference between the annual value of the property and the annual charges. In short-term leases the readiest method will be to charge a proportionate part of the term against each year's Revenue; but the method is too rough to be employed if the term exceeds, say, eight or ten years. In the case of longer leases the Annuity, or Sink- ing Fund, plans (which were discussed under the heading ''Freeholds'') should be adopted. Almost invariably the termination of a lease finds the late lessee liable to a heavy claim for dilapidations ; this claim will frequently amount to one year's rent, or even more, and it is therefore a con^"enient and prudent course to adopt to deduct about one year from the unexpired term of the lease before making the depreciation calculations. All fixtures that are technically " landlord's fixtures " must be lost to the lessee when the lease expires, and therefore must be depreciated accordingly. All repairs are, of course, chargeable to Revenue ; but they may be averaged by the temporary or permanent employment of a Reserve for Repairs Account through which Revenue is charged with a fixed amount annually, the difference between the actual expenditure and Ih.e annual charge being brought forward as a liability, or (more rarely) as an asset. Before leaving this point it is well to bear in mind that, in the case of exceptionally long leases, or exceptionally badly 222 AUDITING. l)uilt premises, it may he necessary to im-rease the annual charges for depreciation Ijeyond the usual rate, so as to provide for the rehuihiing of the structure (hiring the lease. LICEXSJiD HOUSES i)resent some rather special features. The goodwill attaching to the licence gives the lease or freehold of licensed premises a market \alue greatlv in excess of the real value of the huildings. A licence on free- hold premises does not depreciate, but a licence on leasehold premises i^asses away with the premises, and must therefore be depreciated like a lease. A licence may at any time be withdrawn — either for misc^onduct or for no reason — but this is a contingency outside the scope of depreciation. Questions arising in connection with the treatment of licences, and con- tributions towards the Compensation Fund, have alreadv l)een dealt with in Chapter III. {vide p. 78). MACHINERY depreciates Ijy wear and tear and by becoming obsolete. In addition to charging all repairs and (partial) renewals to Revenue, from 7^ to \2\ per cent, .should be written off annually from reducing balances. Boilers, which depreciate more rapidly, should be reduced from 10 to T5 per cent, per annum. Loose tools are most con- veniently dealt with by means of a re-valuation. It is desirable that a sound practical opinion be obtained as to the preci.se rate to be adopted in any particular case, and a thorough re-valuation from lime to time is very helpful. MINES undoubtedly depreciate in direct proportion to the amount of mineral extracted. Legally, however, deprecia- tion need not be provided for by a mining company l)efore declaring a dividend. Where depreciation is provided the correct method appears to be to write oft' annually such pro- portion of the total cost (less residual value of plant) as the year's output bears to the estimated contents of the mine, or — in the case of a lease — such proportion of the total cost as the year's output bears to the estimated total outi)Ut during the lease. FROM TRIAL BALANCE TO BALANCE SHEET. 223 On the other hand, it must not he forgotten tliat there is so much uncertainty ahout mining \-entures that it would be prac- tically impossible, merely by the adoption of any system of accounts, lo ensure that the whole of the Capital of the under- taking was always maintained intact ; while the persons W'hcj invest in this class of concern would doubtless object to large funds accumulating in the hands (jf directors, and earning a low rate of interest, that might legally be distributed as dividend, even though in point of fact they constitute a return of Capital. Perhaps, therefore, it is best that mines should be regarded as coming under a distinct category as '■ non- permanent " undertakings, the excess of current income over current expenditure being distributed, irrespective of the value •of the remaining assets as contrasted with the paid-up capital. ^MOTORS. — At the present time it is impossible to give anything but the most general idea as to what represents a reasonable provision for the Depreciation of motors, as so much ■depends upon the pattern in use, the speed at which it is run, the skill with which it is driven, and the facilities which its employment provides for efficient (as opposed to merely temporary) repairs, to say nothing of the paramount risk of loss arising from obsolescence. It is thought, however, as has already been stated in Chapter IV., that ^^^^ per cent, off the annual reducing balance is by no means an excessive provision in the case of locomotive motors. In the case of stationary motors, perhaps half this rate might be regarded as a minimum. PLANT, other than machinery, generally runs compara- tively little risk of becoming obsolete, and a deduction of from 5 to 7^ per cent, will therefore usually sutifice. Furniture and Fittings should, however, be subjected to a somewhat higher rate. In both cases an occasional re-valuation will be desirable. Plant (or Machinery) acquired upon the Hire- Purchase System must, of course, be depreciated. Under normal circumstances the depreciation will be in accordance with the 2-4 AUDITING. nature of the asset, whatever it may be. It should be borne in mind, however, that if full Depreciation be charged during the currency of the agreement, in addition to the proper interest instalments, the consequence will not infrequently be to charge against the profits of the earlier years a sum in excess of the cost of hiring similar articles. The cost of simple hire may fairly be regarded as the maximum amount that need ever be charged against profits for the use of any asset, consequently the full provision for Depreciation may require to be modified during the currency of the hire-purchase agreement. PATENTS are virtually leases of a monopoly, and although it is possible that some value — in the nature of goodwill — may remain after a patent has run out, it seems desirable that the cost thereof should be written off within the period of its life. Renewal fees seem to correspond to ground rents. Where a patent has not been purchased, but remains the property of the original patentee, it is very undesirable that the item should be treated as an asset at all, except to the extent of its actual f cost in fees, &c. Such a course would seem to be everv bit as "i artificial as a similar treatment of goodwill, which sa/is dire is a latent asset in every paying concern. The late Mr. A. A. James, F.C.A., has, however, expressed the opinion that patents should not be written down, but that a general Reserve should be built up per contra. When the patents represent the bulk of the assets — and the undertaking is thus essentially "non-permanent " — this would, upon the whole, appear to be the best course to adopt. A similar mode of treatment will apply to Copyrights, except that their commercial value has usually expired long before the copyright has run out. (See further under " Piihlishers' Accounts.^') SHIPS undeniably depreciate, although the rate at which they do so is so variable that no general rules can be given that would prove of any practical utility. The amount of depreciation is usually certified by a competent engineer, and FROM TRIAL BALANCE TO BALANCE SHEET. 225 therefore — so long as his report looks plausible — the Auditor is relieved from undue responsibility. As already stated, it is almost unknown for a Single-Ship Company to provide for depreciation, it being inadvisable to allow a large deprecia- tion fund to accumulate in the manager's hands. So long as the Auditor's report makes it perfectly clear that no deprecia- tion is being laid aside, and so long as the Courts see no illegality in such a course, there does not appear to be any valid objection, from an Auditor's point of view, that is not outweighed by the resultant advantages. A Single-Ship is obviously a " non-permanent ' ' undertaking. REPAIRS will, in all cases, require to be charged against Profit and Loss ; but, with a view to equalising profits, it is a very good plan to charge a fixed sum to Profit and Loss, and to credit that sum to a " Reserve for Repairs Account," against which account the cost of actual repairs will be debited. Except in very special cases, however, a debit balance on the Reserve Account should not be passed as an asset. If the amount expended upon repairs is below the average of previous years it may be desirable to reconsider the value of the property itself. THE LATE MR. ADAM MURRAY'S VIEWS.— The general question of Depreciation is one of such great import- ance that the views of so experienced an authority as the late Mr. Adam Murray, F.C.A., can hardly fail to prove of very considerable interest. Mr. Murray delivered a lecture upon " Wear and Tear and Depreciation," at Liverpool in 1887, which is (by special permission) reproduced below. " In submitting a short paper on the above subject it is intended only to offer some general remarks ; to give a few cases in illustration, and to refer to others upon which a difference of opinion exists. " At the outset it will be convenient to make a distinction between Wear and Tear and Depreciation. Depreciation is a comprehensive term, including wear and tear ; but the two are distinct elements, and may be considered separately. " Wear and Tear may be defined as ' diminished value arising from use,' as in the Income Tax Act 1878, 41 Vict., cap. 15, section 12, under which a deduction was for the first time allowed in the assessment of Q 2 26 AUDITING. profits under Schedule D, such allowance being in respect of ' diminished value by reason of wear and tear.' Although described in the Act to be for ' wear and tear,' yet in the form of Income Tax Return No. iia, under Schedule D, the word 'depreciation' has been adopted ; still, the Income Tax Commissioners and Survej'ors limit the allowance to wear and tear. "The word 'depreciation' is almost universally used in the deduc- tion from Property, Plant, and Machinery Accounts, and the corresponding charge made to Profit and Loss Account, but in the case of most ordinary trading concerns ' wear and tear ' might properly be substituted for ' depreciation.' " Under the head of ' wear and tear ' it is proposed to deal with the ordinary charge made in Trading Accounts for the use of buildings, machinery, and plant. " It is equally an item in calculating the cost of production, as is the paj^ment for labour and for materials consumed. " In ascertaining the cost of materials and stores used, the stock is taken at the end of the period against the stock at the beginning, and purchases during the period, the difference being the consumption. " In the case of buildings and machinery a deduction is made, but the effect is the same as taking the propert}' and plant into stock at a reduced amount, or at an increased amount if the additions during the period have been in excess of the deduction for wear and tear. " Although the process differs, yet the result attained is the same, the cost of materials used being ascertained, the charge for the use of buildings and machinery being estimated without reference to change in value from other causes than use. It would not be a safe basis to take the value, as there is a fluctuation in the value of buildings and machinery irrespective of use. " In order that the cost of production should be approximately correct for the purpose of fixing the selling price, or for comparison with the market price, it is important that wear and tear should neither be over nor under-estimated. For instance, the cost of building a cotton mill and furnishing it with machinery may some years ago have been equal to 30s. per spindle. Such a mill may now be built fully equipped with machinery having all the latest improvements at about 20s. per spindle. " In the case of an old mill it would be misleading to charge more for wear and tear than would be sufficient in the case of a new mill, consequently an old mill, unless it had been written down in the books at a high rate for wear and tear, might stand at a sum relatively higtier than that of a mill built in more recent years. " On the other hand, in the times of large profits (now passed away) it was not unusual to write off altogether the cost of the mill and machinery, or to reduce it to an amount much below the value. In I FROM TRIAL BALANCE TO BALANCE SHEET. 227 such case the element of wear and tear might be lost sight of, or under- estimated, and thus the spinner would be deceiving himself as to the •cost of production. " In the present daj's of bare profits it is of the utmost importance that the cost should be fairly estimated, and the mill proprietor should look at the question of wear and tear between himself as a landlord on the one hand and as a tenant on the other. " It is not unusual in the cotton manufacturing districts for a manu- facturer to rent a weaving shed with looms and power at an annual rent of so much per loom, and an owner occupying his mill should in like manner charge his business with a rent equal to interest on the value of the buildings and machinerj-, together with a charge for wear and tear beyond the cost of repairs, renewals, and maintenance, the outlay in respect of which should be debited to the Trade Account as part of the ordinary' expen-.s. " !Much confusion and uncertainty exists in the Property and Machinery Accounts of many manufacturing businesses, by reason of the way in which wear and tear and renewals are treated. It is nut unusual to make a deduction from the Property Accounts for wear and tear, and then to add to those accounts the outlay not only in the nature of additions and extensions, but also for renewals ; the result not unfrequently being that the Property Account is upheld at a sum far beyond its real working value, and as a consequence the profits are iipparently more than the actual profits. A safer course, in my opinion, is to make a deduction from the property for wear and tear, charging such deduction to the Profit and Loss Account, as well as the entire ■cost of maintenance, thus increasing Property, Machiner}'^, and Plant Accounts onl}' b}' the actual additions thereto. " The accounts of railway companies and gas companies are kept en this principle, with this difference, that there is not any charge for wear and tear beyond maintenance, it not being required in the statutory form of accounts for those companies that there should be any such charge, and consequenth" in the Revenue Account actual maintenance is included only. " In the case of railway companies owning steamships, there is a charge which is called ' depreciation,' but it would be more correctly ■described as ' provision for renewal of steamships.' " Some municipal corporations owning gas works have exceeded theii powers in charging the Profit and Loss Account with wear and tear where there is not any such requirement in the special Acts conferring borrowing power for gas works purposes, and the ratepayers are thus placed in a less advantageous position than that of shareholders of a gas company, in addition to which a Sinking Fund has also to be provided out of the gas profits of a municipal corporation. Q 2 2 28 AUDITING. " In making a deduction for wear and tear it is the practice with the majority of companies to follow the course usual with private trading concerns. i' " Some, however, do not take wear and tear into account beyond the actual outlay. " If it is objected that the cost of maintenance and renewals over a number of years may be unequal, this difficulty is met by estimating what amount annually is likely to be required for such purposes, and by charging the Profit and Loss Account with such amount, carrying ', the same to the credit of a ' Renewals and Repairs Account,' debiting ' the outlay from time to time to such account. | " It is not proposed to suggest what the rates for wear and tear should be in various businesses. These must be estimated by those conversant with and able to judge from practical knowledge of each particular j business. It is sufficient to lay down what is believed to be a sound i general principle, i.e., to maintain existing works and plant out of 1 revenue, and in addition to charge Profit and Loss with a deduction ' from property, machinery, and plant in respect of wear and tear. "It is customary to make the deduction by a percentage rate from the cost as reduced from time lo time, and not from the original cost. There is thus a larger amount for wear and tear charged in the early years, but the practice is preferred, seeing that in the later years, when the charge for wear and tear is less, there will be an increased expendi- ture for repairs and renewals as the unexpired term becomes shorter. " If the life of an article, subject to wear and tear, was a known quantity, then the question of charge would be simplified. In such case interest would have to be added to the cost and balance cost, from year to year, writing off an annual sum to the Trading Account, by which cost and interest would be either extinguished altogether, or reduced to the value of old material at the end of the term. " Let us now look at depreciation as distinguished from wear and tear ; as the converse of appreciation, and as a separate element. " Numerous and varied cases will suggest themselves. " In addition to ordinary wear and tear, manufactories and works are subject to depreciation arising from " [a) Improvements by which machinery may become of little more value than that of old material. " {b) The less profitable state of trade. ^ " (f) The reduced cost of labour and materials. "Where a manufacturer occupies his own property (as is almost invariably the case) as a prudent man he ought to have a reserve taken out of profits for these contingencies. FROM TRIAL BALANCE TO BALANCE SHEET. 229 " It is an excellent plan to have an inventory of principal machines, tools, iSrc, kept in such a way as to show wear and tear deducted, as well as the reduced cost, in detail. By this means, if part of the machinery becomes superseded and has to be realised, the loss is readily ascertained and can be charged to Contingent Fund. This is not a merely theoretical system, but is in actual practice ; of course, in such a case the loss or difference having been written off, any sub- stitution would be chargeable to Plant Account, as in the case of an addition. Such an inventory would be of great use, as affording the means of making a comparison between the reduced cost of machiner}' as in the books, and the then working value. " The proprietor of a mill or works built twentj^ years ago would find that as between himself as landlord and as a tenant he would now have to charge himself with rent onl\- on the reduced value, and the difference between the present value and the cost would be a loss of capital and not a loss as a trader. " It ma}' be considered refining too much to make this distinction, still it is a convenient rule to apply, and assists in arriving at the correct principle in cases which frequentl}' arise. " Another case which properly comes under the description of depre- ciation is that of a leasehold property. If land is held under lease for twent3'-one years, to be surrendered at the end of the term with the propert}- upon it, the amount paid to the lessor and the cost of build- ings erected by a lessee with interest thereon can be dealt with without any doubt as to the correct principle in such case, the term being fixed and not uncertain as in the case of machinerj'. ■■ Let us suppose that the land for the term of lease cost ... ;if 1,000 " and the buildings erected by the lessee ... ... ... 2,500 " If the lessee occupies the property for the purpose of his business he has to charge his trading with an annual rent, which he will ascer- tain in the following manner, the value of money being taken at 5 per cent. We find from one of Inwood's tables that the amount of ;i^i with interest at 5 per cent, for t\vent3'-one years would be ;/'2.786, therefore the amount for /^3,5oo would be /.'9,75i. Then we see from another of the tables that ^i per annum at 5 per cent, would in twenty-one years amount to ^35-7i93 5 then as /.'35-7193 = ;^9'75i • ■ £^ ■ £^12,^ thus giving the annual rent or instalment as £2-2,. "If the land had been leased at £^0 per annum then the charge to the business would be the rent and the annual instalment to write off the ;^2,5oo (the cost of the buildings) and interest. In either case the annual charge is equal to the rent between the proprietor as a landlord and as a tenant. A Ledger Account of the cost, interest, and instal- ments, with annual rests, would, of course, be closed by the last instalment. 230 AUDITING. "Another case -which comes within the experience of many of us is that of a colliery. " A field of coal is leased, sa}^, for thirty years subject to royalty on coal as it is won. The lessee expends on ' Sunk Capital Account ' /.'loojooo, in opening up and sinking pits. The charge to the Profit and Loss Account, in addition to the roj'^alty on the coal, will be the annual instalment to be written off in the same way as in the previous case. " Taking money at 5 per cent, the ;^ioo,ooo would in thirt}' years amount to ^432,100, £1 per annum at the same rate would amount to 66.4388; then as 66.438S : 7^432,190 : : /,'i : 7.6, 505. 08, this being the annual charge to be made by the lessee in his Profit and Loss Account as the annual rent which would be charged to him had the outlay been made by the lessor, he being content to have his expenditure back in thirty annual instalments, including principal and interest. " The effect of wear and tear or depreciation taken out of the profits of a business is, of course, to increase the balance of floating assets over liabilities, or to reduce the excess of liabilities over floating assets, and it ma}' not be unsuitable to refer to the proper application of money arising therefrom. " In the case of works mortgaged, or advances by bankers, or others, it would, of course, be wise to reduce any such liability. If there were not any such claims to meet, then it would be well to take the money out of the business rather than expend it in additions or extensions. "A common error has been to use available funds of this kind for the purpose of building additional works or factories instead of invest- ing the money to meet the cost of substitutions. When such time arrived there had been 3'ears of bad trade, and thus the means were not forthcoming, the consequence being embarrassment, if not ruin. " And now a few observations as to Accounts and Balance Sheets in relation to the subject under consideration. "As a means of affordiiig information to those interested, it is desirable that wear and tear and depreciation should be shown as a deduction from time to time in the Balance Sheets of all trading con- cerns in the same way that additions to property and plant are usually set forth. In exceptional cases the error is made of having a Deprecia- tion Account as a fmid on the debit side of a Balance Sheet; the usual practice, however, being to charge wear and tear and depreciation against profits and to reduce the Property or ^lachinery Accounts corre- spondingly. It is misleading and erroneous to look upon such an entry in the Balance Sheet as a fu/id represented by assets. The property and machinery being of less value ought to be written down. The amount of wear and tear or depreciation is, no doubt, represented by money if taken out of profits ; but it is only a change between fixed and floating assets, the latter being corresponding!}' increased. FROM TRIAL BALANCE TO BALANCE SHEET. 231 " It is not usual to charge Profit and Loss Account in anticipation of wear and tear or depreciation, and so create an actual fund ; but if such be the case it would be more intelligible if any transfer of the kind was made to the credit of such an account as ' Renewals and Repairs Account.' '■ It has from time to time been suggested that there should not be any deduction made from profits for depreciation, but that it should be left to partners and proprietors to decide for themselves how much of the profits or dividends is in respect of interest, and how much principal. "There appear to be several objections to such a mode of dealing with the accounts of trading concerns, although in some cases it is the practice. '■ In the case of property, machinery, or plant subject to depreciation, such as : — Manufacturing concerns, Leasehold colliery, Steamship company, &c., the Balance Sheet would be misleading, inasmuch as the capital of the company would apparently be represented by property and assets, when, in fact, they had greatly depreciated, and in some cases would cease to be of anv value whatever. " In a company, the shares of which had not any Stock Exchange quotation, and where sellers and buyers had to arrange prices between themselves, intending purchasers would not have the means of satisfying themselves as to the value of the shares. " It is not sufficient to say that existing shareholders are aware that part of the share capital is being repaid while outsiders would be in ignorance thereof. Dividends in such cases (consisting of both prin- cipal and interest in uncertain amounts) would not be an}' criterion of value. " Directors generally would not approve of such an anomalous and objectionable mode of making up the accounts of their compan3^ " Accountants would hesitate, or indeed refuse, to sign such a Balance Sheet, inasmuch as it did not ' represent the true position of the compan}'.' " Having had experience of wear and tear and depreciation in various forms their influence should be used to secure adequate deductions in order that Balance Sheets may be accurate, so that objection could not be taken to them. " It would be most unsatisfactory and dangerous if property and assets were not written down, money arising from depreciation being applied in discharge of liabilities, or in reduction of share capital. " It is greatly to be feared that in many cases where machinery (from the speed at which it is run) is subject to a high rate of wear and tcar^ 232 AUDITING. sufficient allowance is not being made, and that, consequently, divi- dends include some portion of the capital where the shareholders are under the belief that they consist of profits only. " Such a theory as has been suggested would, if recognised, lead to much inconvenience in the case of trust estates where there were life interests. Trustees could not be expected to take the responsibility of making a division of dividends between life-tenants and those entitled in remainder, and it would be most unsuitable to leave them in a position of having to decide how much should be considered income, and what portion a repayment of principal. " We now come to the conclusion of a paper in which the intention has been to deal with a few leading features of the subject under consideration, including the following : — " The distinction between Wear and Tear and Depreciation. " The deduction from Buildings, Machinery, and Plant for W^ear and Tear to be in addition to the cost of maintenance, chargeable to the Trading Account. " A Renewals and Repairs Account, to equalise the charge to Trading Account. " Inventory of Plant and Machinery. " Accuracy of Balance Sheets. " The illustrations given are few in number, but the principle suggested, if approved, may be applied in any variety of circumstances. The subject is an important one, and sufficient may have been said to create a desire to follow it out in more complete detail." In a letter to the author, written some little time since, Mr. Murray said : " I do not know that there is anything in it (the above paper) which T would now alter, although I might add to it. I am more and more impressed with the importance of provision for renewals being placed upon a sound and systematic basis, having regard to the life of machinery, &c. , and charging outlay against provision." In exemplification of his views Mr. Murray referred to the accounts of the Lancashire and Yorkshire Railway, in which — in addition to the actual cost of repairs — a fixed sum is charged to revenue for replacements, the actual expenditure upon replacements being charged against various "Renewals Funds," while the balance from time to time appears in the General Balance Sheet as a liability. It is believed that other railways adopt a similar system, but it is most unusual for the published accounts FROM TRIAL BALANCE TO BALANCE SHEET. 233 to show what has actually been done in the way of providing for future renewals. DEPRECIATION TABLES.— It will have been noticed that, where a rate of depreciation upon machinery, &c., has been stated in the preceding paragraphs, it has usually been stated as being "' upon the reducing balance." The advantage of this method is that the larger instalments are written off at first, when the machinery is new and its earning power greatest, but it is important to remember that the ultimate results attained by the two methods are widely different. Thus, if 5 per cent, per annum be written off ^loo for twelve years the residual value will be ^^40, but if the same result is to be arrived at by calculating depreciation upon the reducing balances the rate to be employed must be 7^ per cent. For the purpose of displaying similar comparative results under varying circumstances, the author has compiled a little work entitled Comparative Depreciation Tables, which, it is thought, will be found of value. A table on the " annuity " system for use in connection with freehold and leasehold properties is included in Appendix "D." PRACTICAL TREATMENT IN ACCOUNTS.— Before leaving this subject of Depreciation, it is perhaps desirable to point out that the very common practice of grouping quite a number of different assets together in the same Real Account in the Ledger is one that greatly increases the difficulty of making proper provision for Depreciation, or of testing the adequacy of such provision as may have been made. Where the Ledger balance represents one asset only, it is not usually a difficult matter to test the sufficiency of the provision roughly by comparing the amount of such balance with the apparent then value of the asset itself, and thus when the need arises the rate of Depreciation may be increased — or perhaps even reduced. Where, however, com- posite accounts are employed — as, for instance, when one " Plant and Machinery Account "■ has to do duty for prac- tically the whole equipment of a large factory — it is impossible 234 AUDITING. to test the reasonableness of the Ledger balance bv any mental ira[)ression of the " fair value ' of the items then existing to represent it; and indeed it is difticult, if not impossible, to determine that any one asset has been written down to its residual value by the time that it is scrapped. To get over this difficulty, the late Mr. Adam Murray suggested the employment of a Plant and Machinery Ledger, which would show under separate headings the history of each important item in the whole of the equipment — thus for this purpose reducing the Plant and Machinery Account in the General Ledger to the level of an Adjustment Account, although (as a matter of pure bookkeeping) the Machinery Ledger would doubtless be regarded merely as a statistical book, and not as a book of account. The suggestion has everything to recommend it to those who are honestly desirous of keeping themselves acquainted with the true position of affairs; but however that mav be. it is not at the present time in \'erv general use. It is, of course, no part of the Auditor's duty to insist upon any particular method of Depreciation being employed. So far as Fixed Assets are concerned, it is indeed \ery question- able whether there is any legal necessity for a company to pro\idc for Depreciation at all. If there is, it is certainly competent for the Directors so to pro\ide in whate\er manner they may, in the exercise of a bond fide discretion, think best. At the same time, it seems desirable to point out — particularly in the case of assets ha\ ing a working life of, say, more than ten year.s — that it is far cheaper to proxide for Depreciation by wav of a Sinking Fund than upon any other system ; and similarly that the Annuity System of providing for Deprecia- tion, while enabling a theoretically adequate provision to be made without inconvenience during the earlier years, neces- sarily throws a \ery heavy charge upon the later years, when in all probability the profit-earning capacity of the asset is at its lowest. It is suggested, therefore, that the Annuity System should never be employed in practice ; that the Sinking Fund System (or its equivalent, a Sinking Fund policy) should be FROM TRIAL BALANCE TO BALANCE SHEET. 235 employed wherr th' working life exceeds, say. tt-n years ; and that in the case of shortdived assets pro\dsion should he either by way of an equal fraction of the original cost, or a fixed percentage on the reducing balance, being charged against the profits of each year. Probably the last-named is to be pre- ferred, as it involves the heaviest charge in the earlier years, and thus provides a useful check against undue extravagance in the way of capital expenditure. On the other hand, it is well to bear in mind that while the employment of the Annuity System is open to the practical objections already enumerated, this mode of calculation involves the readiest means of judging the comparative cheapness of different types of assets, and represents practically the only means of judging whether the shortdived and comparatively inexpensive asset is, or is not, in the long run more expensive than the more costly and more permanently built asset, assuming the working capacity of each lo be equal. PROVISION FOR BAD AND DOUBTFUL DEBTS. — Unless the outstanding Book Debts are extremely numerous, it is desirable that the Auditor should go over the list in com- pany with his client, or the Managing Director, or some equally responsible authority, and settle the amount of loss to be pro- ^■ided for. Where the number of accounts renders this course impracticable, a certified list of amounts to be treated as bad, and a statement that the provision made is sufficient, signed by the aforesaid responsible authority, should be supplied to the .\uditor. In a lecture delivered to the Chartered Accountants Students' Society of London in 1898. Mr. Daniel Hill, F.C.A., dis.sented from this view, holding that " although a client ought to know more about his customers than the Auditor does, an experienced Accountant will give a far more reliable valuation than the owner or Managing Director of a business can do." No doubt the training and experience of an Accountant htd]:)s him in many ways to gauge the probable realisable value of Book Debts; but unless his experience be confined to one 1 'articular industry (or at most to a few industries), his knowledge 236 AUDITING. of the financial standing of the customers can of necessity only be fragmentary at the best. It is, moreover, thought to be undesirable for an Auditor to differ from the deliberate opinion of (say) a Managing Director, unless he is prepared to give solid reasons in support of his views. On the other hand, it is not intended to suggest that, merely because the Auditor has been supplied with a certified list of the provisions which it is thought necessary to make for Bad and Doubtful Debts, all he has to do is to accept it without further comment or inquiry. It, of course, remains for the Auditor to satisfy himself that the provision is one which appears to be both bond fide and reason- able. In this connection the following extract from an article which appeared in The Accountant of the 12th January 190: will be found useful : — " With trading concerns debtors who always take a cash discount may, in the absence of information to the contrar}', always be assumed to be good for any outstanding balance not greatly in excess of their ordinary anrount. Debtors who alwa3's accept bills for their accounts may, under similar circumstances, be regarded as good, provided the bills are always met at maturity without renewal. Where there are renewals, the accounts should be examined more carefully; and, as the number of cases would not be large, this detailed inquiry would not be impracticable. Accounts showing an increasing debit balance require more careful scrutiny than those where the balance is reduced, more particularly if the number of transactions during the period be small. In the case of interest-bearing debts, the punctual payment of the interest may be taken as presumptive evidence that the principal is good, provided it be not in arrear ; but where the interest is in arrear, the presumption is that the debt is at least doubtful, unless sufficient security is held to cover the amount. ' Dead ' accounts are more likely to be doubtful or bad than 'live' accounts; and in this connection a debtor who, during the current year, has not paid enough cash to extinguish the balance against him at the commencement of the year, may generall}' be regarded as a ' dead ' account, and treated accordingly. Apart from the open balances standing against the various debtors in the Customers' Ledgers, it is important not to lose sight of unmatured acceptances, whether these be in hand or have been discounted ; but, as has already been stated, a customer who invariably meets his bills at maturity may usually be regarded as safe to continue to do so." It may be added that, in many cases, there should be a fairly constant ratio between the amount of outstanding book ( FROM TRIAL BALANCE TO BALANCE SHEET. 237 (l(;bts atid the total of the sales on credit during (say) the last three months. Although it is very undesirable that an insufficient provision lie made for bad debts, it should — on the other hand — be rt-membered that when once a debt is written off its chances of being eventually collected are greatly discounted ; and, further, that there is at least the possibility of its not being accounted tor, even if collected : hence the advisability of adopting the system already described {vide pp. 59 and 6q). In connection with this subject, the judgments in the Irish Woollen Co. and the National Bank of Wales cases {vide Appendix " B ") will be found of interest. OUTSTANDING DISCOUNTS.— It is customary to l)rovide for the usual cash discounts, upon both Book Debts and Trade Creditors, by means of a Suspense Account. Where, however, the amount is uncertain (by reason of the variable nature of the payments) and the difference between the two sides is but slight, the provision might be omitted without any great harm being done — indeed, it is a very open question whether the profit or loss — as the case may be — ought to be anticipated. Trade discounts are, however, a very different matter, and should always be provided for by deduction from the purchases and sales respectively. It has been stated that every transaction on credit involves the consideration of interest or discount — a statement which is, doubtless, theoretically unassailable, but practically incon- venient. As a matter of fact, a result almost ideally correct may be obtained with a tithe of the trouble. If the terms upon which goods are sold are, say, zh per cent, discount at one month, or a three months' acceptance net, it might, at first sight, appear that the trader gives credit at 15 per cent, per annum interest, but in all probability he would only allow 3 per cent, (or at most 3A- per cent.) for cash, which is altogether a different rate. The real terms would thus be : 2;^S AUDITING. 35 days" average credit (2olh of month to 20th of month, pay- al)le loth of following month), 3 per cent, or 3^^ per cent, •di.scount ; 65 days' average credit, 2-J- per cent, oft'; 126 days" average credit, net. It will be seen that these terms do not actually represent any deiinite rate of interest, and further- — the choice of terms being with the debtor — that no absolutely accurate apportionment can be made. In such a case as that named a better plan cannot be adopted than to suspend 2^ per cent, on all open accounts, and carry over the Bills Receivable net. A similar method would apply to outstanding liabilities and Bills Payable. Where, however, a Bill has been discounted or renewed at interest, or granted for an exceiDtionally long term of interest, the question of interest should be no longer ignored, unless the amount involved be trifling. The decision in /// re Tlic Irish Woollen Co. may be consulted wuth advantage here. In the case cjf Banks and other Financial Houses interest (which is no longer obscured by trade profits, but is itself the chief source of profit) must, of course, be alzvays taken intc) account. DIRECTORS' FEES.— In the absence of any special arrangement contained either in the articles of association or in the minutes of general meeting. Directors are entitled to no remuneration in respect of their services. The Auditor will require to see therefore, before passing any such remunera- tion, that provision is contained therefor in the articles of association; or else that the remuneration has been voted by the shareholders in general meeting. He would also require to see that the amount which the Directors have received is in accordance with such proxisions. Proper vouchers should i>e given by Directors for fees received by them, and (unless specially so prescribed) the Income Tax payable upon such fees should — if paid by the company — be deducted from the sums payable to the individual Directors. FROM TRIAL DALANCE TO BALANCE SHEET. ' 239 The case .somitinies arises, in ronnection willi companies which are not doing -very \^ell, of Directors foregoing the whole or a portion ot their fees. In such a case as this it is desirable that the Auditor should incjnire as to whether they have actually foregone the right to claim such fees, or merely foregone their immediate payment. In tlie latter case the amount still due should, of course, be included among the liabilities in the Balance Sheet. It is. perhaps, superfluous to add that no one who is not a Director can be entitled to receive Directors' Fees. As the Companies (Consolidation) Act requires every company to keep a Register of its Directors and Managers, it seems desirable that this Register should be consulted when vouching the ])ayments made, or due, to Directors in respect of fees. The question as to whether a Director is entitled to anv fees if his appointment is terminated within the year, is one that can only be determined as a result of carefully construing the terms of his appointment. It mav be mentioned here, how- ever, that in ijuite a nimiber of cases the conditions are such that there is no apportionment in the event of the Director failing to complete his year of ofifice. This point should certainly not i>e overlooked in ^•ouching Directors' Fees ; but in considering outstanding liabilities to be brought into a Balance Sheet, it is, of course, only reasonable to assume that the year will be completed, and that therefore the fee will be earned. PRELIMINARY EXPENSES.— In the Balance Sheet of almost every young company this item will be found among the Assets. It will probably surprise few to learn that, as the law is at present interpreted, registered companies are under no obligation to write off this item out of profits. It is, how- ever, not onlv \ery desirable but also very usual to write off the amount of the Preliminary F.xpcnses within the first three or five years; and the Auditor will do well to recommend the adoption of such a course. A\"ith Parliamentary Companies, on the other hand. Preliminary Expenses are an item of Capital 240 AUDITING. Expenditure, and — as such — are retained upon the accounts for ever. It must not be forgotten that, in every case, the Auditor must thoroughly verify the amount of this item by reference to \ouchers and contracts. In particular, he should make sure that the company has made no payments that the promoters undertook to pay, or which — for other reasons — may appear improper. It is not an unknown occurrence for Directors' qualifications to be paid for out of Preliminary Expenses. RESERVE FUND.— It is contended by some that a Reser\e Fund must in all cases be invested in securities outside the business, but the view generally held by those competent to judge is that it is not — under ordinary circumstances — desirable that a Reserve Fund be specially invested if the moneys can be utilised to better advantage in the business itself, or in reducing its liabilities. Where, however, the fund is specially raised for a specific purpose (^.^., the redemption of debentures) its investment would appear to be desirable, for the purpose of ensuring its being available at the appointed time. In certain other cases, as named in Appendix " A," Reserve Funds are required by statute to be specially invested ; and in these cases it is, of course, the Auditor's duty to see that this has been done. Where the Reserve Fund exists for the purpose of strengthening the credit of the company — as in the case of Banks — it is doubt- less desirable that it should be invested in first-class securities ; but it is no part of the Auditor's functions to interfere with the Management in this respect. The whole subject is, however, dealt with very fully in the following chapter. In the absence of special provision in the articles of associa- tion, there is nothing to prevent directors from transferring the whole or any portion of the amount standing to the credit of Reserve Fund to the credit of Appropriation Account, for the l)urpose of increasing the amount of profits available for divi- dends. Where such a course is being pursued, the Auditor should, however, take steps to acquaint the shareholders with FROM TRIAL BALANCE TO BALANCE SHEET. 24I the facts, unless they are sufficiently obvious on the face of the accounts. Prior to the passing of the Companies Act 1900 it was very generally thought that Premiums received upon the issue of shares ought in all cases to be credited to Reserve Fund ; but it was not considered that this course was absolutely compulsory ; while apparently there was nothing to prevent such Premiums being distributed as dividends by being transferred from Reserve Fund to the credit of Appropriation Account. The Act of 1900, however, and the decision of the Court of Appeal in the case of Burrows v. Matahdc Gold Reefs and Estates Co., Livi., raised a doubt as to whether Premiums must not be treated as a receipt on account of Capital rather than on account of Revenue. The House of Lords has, however, in Hilder v. Dexter {vide Appendix " B "), overruled the Court of Appeal in the case already referred to, and the position would thus appear to be the same as it was before the 1900 Act. That is to say, although it is obviously desirable that Premiums received on the issue of shares and debentures should be placed to the credit of a permanent Reserve Fund, and not applied to the equalisation of dividends, there is apparently nothing in the Companies Acts to prevent their being divided, either at once or at any subsequent date. The Court of Appeal has decided, In re Hoare &' Co., Litn. {vide Appendix " B "), that a Reserve Fund originally constituted out of premiums received on the issue of shares need not be exhausted before a scheme for the reduction of capital can be entertained. INSPECTION OF MINUTE BOOK.— The question frequently arises, and is the source of no little contention, as to whether an Auditor has the right to inspect the Minute Book recording the proceedings at board meetings. It is thought, however, that this right cannot be. disputed, inasmuch as it is clearly the duty of the company Auditor to report on the accounts after having examined ' ' the books of the company ' ' ; and certainly the Minute Book is a " book of the company," inasmuch as it is one of the few books which every company is 242 AUDITING. required by statute to keep. Theoreticallyj at least, it is neces- sary that the Auditor should carefully examine the whole contents of the Minute Book, but in practice it is thought that this rule may frequently be relaxed, and reference only made in respect of items upon which the Auditor is in doubt, or with regard to which he requires further elucidation. It need hardly be added, however, that in this respect — as with regard to all other matters where the Auditor prefers to take a short cut in his work — he does so at his own risk, and the risk in this particular connection is that he may fail to become acquainted with some contingent liability or contract that would materially alter his views with reference to the accounts which he is called upon to audit. It is thought that the Companies (Consolidation) Act, 1908, Section 113 (i) supports the views expressed in the previous paragraph (which appeared in all the earlier editions of this work), and it may be noted that the opinion of Counsel — which is referred to in a later chapter — expressly endorses this view. If an Auditor is refused facilities for performing his duties, whether such refusal takes the form of declining to allow him access to any of the '" books, accounts, or vouchers of the company," or to the failure of the directors or officers of the company to give such information or explanation as may be necessary, the Auditor must state in his report that he has not obtained all the information and explanations he has required. REDEEMABLE DEBENTURES.— Where Debentures, redeemable at par or at a premium, have been issued at a lower price, it is essential that a proper reserve be made to meet the deficit; and it will be the Auditor's duty to see that a sufficient provision is made. FORFEITED SHARES, not reissued, should be stated separately on the Balance Sheet, as a dividend declared would not be payable in respect thereof. Such shares may at any subsequent date be reissued at any discount not exceeding the amount per share already received, and when so reissued the FROM TRIAL BALANCE TO BALANCE SHEET. 243 amount already paid (or so much thereof as represents profit) should be treated as a premium upon issue, or credited to Reserve Fund. The Auditor should alwa)"S make a point of seeing that the minutes as to forfeiture and as to the calls due are frimd facie in order. SECRET RESERVES.— rhis most debatable subject is approached with considerable diffidence. Very much can be (and has been) said upon both sides of the question, making it a most difficult thing to say what is really the correct course to adopt in any particular case ; and, if the question be com- plicated, even when a particular instance is judged upon its own merits, how much more difficult is it to lay down any general rules of universal application. The object of all secret reserves is to equalise dividends, or to equalise apparent profits ; and, in the case of banks and similar institutions, it must be admitted that, were accounts published showing considerable fluctuations in the amount of profits earned, the result might readily be to produce a feeling of disquietude which was altogether unwarranted by the actual facts. More particularly in the case of banks largely affected by fluctuations in exchange does it seem desirable that the temporary effect of such fluctuations should be excluded from published accounts. The understating of assets in profitable years (which is the usual means of providing a secret reserve) clearly contemplates, however, the possibility of their being written up in less profitable years, when it may be desired not to disclose the fact that the profit earned has been less than usual, or perhaps even insufficient to cover the proposed dividend. Opinions differ greatly as to the extent to which the forma- tion of secret reserves is permissible ; but it is thought that, within reasonable limits, the matter is one resting with the Directors rather than with the Auditor, so long as there is no suspicion of bad faith. It is when it is sought to have recourse to a secret reserve, l)y writing up those assets which have R 2 2 44 AUDITING. hitherto been undervalued, that the position requires the most serious consideration of the Auditor, and upon this point a few- precedents may prove of interest. .Some time since the accounts of the London General Omnibus Company, Lim.. were criticised, because the Balance Sheet contained upon the assets' side an item of considerable magnitude described as "Times," representing, apparently, the assumed value of the Goodwill attaching to the times of the company's omnibuses. In order to meet this criticism the item '' Times " was eliminated, and the value of the company's lease- hold premises written up to a corresponding extent, it being stated that — e\en at this enhanced valuation — the leaseholds appeared at a figure lower than their intrinsic value. The matter was not made the subject of legal proceedings ; but, in view of the attention which it attracted, it may, it is thought, safely be assumed that it was found impossible to attack this policy upon legal grounds. A more important precedent is the case of Bolton v. The Natal Land and Colonisation Company, Lim. {vide Appendix ■■' B '), in which it was held that a company might properly declare a dividend out of current profits under the following circumstances : — A large bad debt had Ijeen made in previous vears, and the loss so shown upon the accounts was cancelled by writing up the value of the company's lands to a correspond- ing extent. It may be mentioned, however, that in the case of a land company, its lands — which are held for purposes of re-sale — are floating assets, and it was expressly stated by Lord (then Mr.) Justice Romer, in the course of his judgment, that it was " not correct, in estimating the profits of a year, to take into account the increase or decrease in the value of the capital as.sets of the company." With regard to the position of the Auditor generally, it would appear that, in the absence of mala fides, he incurs but little responsibility here. He should, however, be very careful about the good faith with which the valuations or re-valuations are FROM TRIAL BALANCE TO BALANCE SHEET. 245 made ; and although he has no power to influence the manage- ment in the exercise of their ho)ia fide discretion, yet it would appear to he his duty, in cases of doubt, to acquaint the share- holders with the facts of the case sutiliciently to enable them to exercise their own discretion as to whether they will pass the accounts in the form in which they are presented to them or not. Thus, where the assets are stated below their certainly- knowm value (forming a secret reserve), or above their certainly-known value (forming a secret delicit), at least the bare fact should be mentioned in the Auditor's report. Again, there are limits to the extent with which a secret reserve should be played with, for the sake of equalising dividends ; and it is very undesirable that \aluable assets should be omitted from the Balance Sheet /'// toiOy because in such a case the Auditor is very liable to omit to verify their existence. In some Balance Sheets a note is appended to the effect that certain (specified) assets have not been included. Such a course a]5pears to remove the most w^eighty objections that can be raised against the reduction of valuable assets to zero. It has not been thought (lesiral)le to alter the foregoing paragraphs, which appeared in the sixth edition of this work; the decision of Lord (then Mr.) Justice Buckley in Ncu-to7i 7>. Birmingham Small Arms Company, JJm. {vide Appendix " B ''), has, however, since I)een given, and throws much addi- tional light upon the subject. In the first place, it shows that secret reserves are sometimes represented by outside investments that are not disclosed at all upon the face of the Balance Sheet (reserves that can only be created by, in effect, debiting Revenue with a payment that in no sense represents an expense); secondly, it shows that a company may, by its articles of association, deprive its members of their natural right to a " full and fair '' i5alance Sheet ; thirdly, that an Auditor is not hound to disclose the fact that the financial po.sition of the company is better than the position shown bv the Balance Sheet issued by the company ; fourthly, that neither memoranduin nor articles of association can take from the .\uditor his statutory right (jf reporting to the shareholders 246 AUDITING. on the (whole) accounts of the company, and that provisions purporting to do so are void ipso facto. Those desirous of entirely withholding the secret reserve from the cognisance of the Auditor might attain their end in- authorising the directors for tlie time being to make payments in their absolute discretion to thirtl parties, who might agree to act as informal trustees of the moneys so handed over, provided the necessary powers were contained in the memorandum of association ; but no articles cnuhl authorise such a disposition of a company's revenue earnings. I'liilciibtcdlv the usual object of a secret reserve is to impart a liciitious ap])taran(e of stability to the profits of a prosperous but fluctuating business : this, in itself, seems to be entirely legit iinaie. Sometimes, however, the ol)ject — or one object — is to secure the command of moneys that may be expended without being accounted for. Thus a secret reserve might con- ceivably be employed (i) in securing control of allied under- takings upon the American Trust principle, in which case the value of the "investment" may be quite speculative; (2) in investments in, or loans to, undertakings in which the directors are personally interested, in which case the application may not Ix- at all in the interests of the company ; (3) in commis- sions or bribes to the agents of customers and others, i.e., in ways declared illegal by the Prevention of Corruption Act 1906 ; (4) in voting " additional remuneration " to the directors or their friends. It is clear from the decision in the BiniiiiigJiain Small Arms case that the duty is cast upon the Auditor of reporting to the shareholders in all cases where he considers that the assets representing the secret reserve have been misapplied : his position in this respect is thus one of the gravest respon>iliilit}-. FOREIGN EXCHANGES.— The treatment of foreign exchanges in books of account appertains to bookkeeping rather than auditing, and the subject will accordingly be found to be fullv dealt with in the a.nth.ox^% Advanced Accounti7ig. From the jjoint of view of the Auditor, all that is necessary is that the I FROM TRIAL BALANCE TO BALANCE SHEET. ;24^ accounts should properly disclose the true position of affairs. For this purpose it is only necessary to bear in mind that the Trial Balance (from which the accounts are compiled) is a summary of traiisactio7ts that have actually taken place, tempo- rarily recorded, for the sake of convenience, in the medium of a foreign currency. To determine their proper valuation in sterling it is necessary that the nature of these various records should be inquired into; that the Revenue Account (whatever its precise form) should correctly show, under suitable headings, the totals of the various kinds of transactions on account of Revenue, and that the Balance Sheet should fairly state the Assets and Liabilities — those of a floating nature at their realisable cash \-alue, while the fixed or permanent items may be maintained at the original amount, subject only to such provision for Depreciation as may be necessary in view of their wasting character. If this position of affairs be comprehended, there is no more difficulty in auditing accounts figured in a foreign currency than in auditing accounts the narration to which is expressed in a foreign language. The medium of expression in neither case aft'ects the nature of the facts. A ULTRA VIRES. — It is a question of some nicety as to how far an Auditor is expected to concern himself with the validity of the transactions that come under his notice. It may be taken that, in general, the Auditor is not constituted a judge of the conduct of the directors in their administrative capacity ; and that, so long as the accounts are in order, and in accord- ance with such statutory provisions as may affect the particular undertaking, and its memorandum or articles of association (or their equivalent), the Auditor need not concern himself with questions which his professional training has not especially qualified him to solve. It is clear, however, that when the Auditor is aware that irregularities have been committed, it becomes his duty to report the whole circumstances to the shareholders {c.f. decision in the Birmingham Small Arms case referred to on p. :r46). 248 AUDITING. Inasmuch as a payment made ultra vires generally involves misfeasance on the part of those responsible therefor, it is clear that, in so far as this condition of affairs obtains, it is incorrect to include such payments in accounts without including fcr contra as an asset the claim for misfeasance that could be made against the parties responsible. Hence a perfect audit w^ill necessarily require to take into account this question of ultra vires. Practically, however, the Auditor, not being a lawyer, will not be responsible for failure to detect irregularities of this description which have not come to his notice, and which he has not failed to detect by reason of his negligence or absence of proper care or skill (legal skill not being expected). It will thus be seen that the statement that an Auditor is not concerned witii questions of ultra vires is true only so far as the lowest ground is taken of the bare limits of the legal responsibility of the Auditor, and that he who desires to make his audit as efficient as possible will, so far as his knowledge permits, give due consideration to this as to ail other questions. In this connection it is of interest to note that the District Auditors appointed by the Local (Government Board (who are almost without exception lawyers, rather than accountants, by training) appear — in the circumstances, by no means unnaturally — to regard an audit as a testing of the legality of the acts recorded in the accounts even more than an inquiry as to whether the record is itself correct as a statement of that which has transpired. It would appear, as has already been stated, that the perfect audit in\olves an inquiry from both points of \iew, and thus requires a certain amount of legal knowledge as well as a thorough knowledge of accounts. In practice, however, there can be little doubt that this result is better arrived at by employing a skilled accountant, and giving him the right to call for the opinion of other experts where necessary, than by employing a lawyer ; and this, even in the case of such audits as those of the accounts of local authorities or of trust estates, where questions of law are of far more frequent occurrence than in ordinary commercial accounts. CHAPTER VII. FORM OF ACCOUNTS AND BALANCE SHEETS. It has already been very clearly stated that, in general, the Auditor is not responsible for the form of the accounts which he certifies. The consideration of the form that such accounts should take is, therefore, not strictly a matter within the scope of the ])resent work. Still, it is none the less true that, as a matter of fact, Auditors are frequently asked to settle questions of f orm j and although in the case of limited companies' accounts they will often be only prudent if they decline to accept a responsibility that properly devolves upon the directors, there can, it is thought, be no possible objection in the case of the accounts of private firms. Moreover, it cannot be denied that the subject is at all tim.es one upon which the Auditor should have definite and well -matured opinions. It may be stated at the outset that the accounts which it is now proposed to deal v/ith are those which are ordinarily published as "the audited accounts " — viz., the Revenue Account (or its equivalents) and the Balance Sheet. OBJECT OF REVENUE ACCOUNTS.— Taking first the account which in different undertakings is variously called the Trading Accoinit, the Manufacturing Account, the Working Account, the Profit and Loss Account, and the Revenue Account, the first jioint to be considered is the real object of 250 AUDITING. preparing such an account. This may be stated to be for the purpose of showing — f'irst, the amount of business done in each of the various 1 tranches in which business is carried on; Secondly, the amount of expenditure in each of the 1 tranches, or departments, necessary for the carrying on of that business ; and Thirdly, the amount of surplus, or profit — or loss, as the case may be — which arises from the carrying on of the business. The object of the information is doubtless primarily to ascertain the amount of ultimate profit or loss, but beyond this there is also the further object — which, perhaps, is only fully appreciated by those skilled in accounts — of comparing the corresponding items of different periods, with a view to ascertain how income may be increased and expenditure reduced, or, on the other hand (so far as possible), why income has become reduced, and why expenditure has increased. It will thus be seen that the etlficiency of this account depends very materially upon the skill with which the income and expenditure have been distributed over the various headings employed, and consequently it becomes necessary to discuss the nature of the various headings under which the items of this account should be divided. It goes without saying that, inasmuch as this account details the summarised result of the transactions recorded in the books, its exact nature will very materially depend upon the precise business which is being carried on. It therefore becomes necessary to further consider the subject under the headings of vaiious classes of business. COMMERCIAL ACCOUNTS.— Taking first commercial concerns (which undoubtedly represent the great majority of the undertakings which are now being considered), it will be found that the transactions consist in the buying of goods and sell- FORM OF ACCOUNTS AND BALANCE SHEETS. 25 1 ing thereof, either in the precise form in which they were pur- chased (as in the case of traders), or in an altered form (as in the case of manufacturers) ; in both cases there being the further expenditure incidental to the carrying on of the undertaking. ACCOUNTS OF TRADERS.-Dealing first with the Accounts of Traders, which are naturally of a simpler nature than those which require to be kept by manufacturers, the first circumstance to note is the method usually in vogue by which a trader computes the amount of advance upon purchase price which it is necessary for him to charge for his goods in order to obtain a remunerative return for his labour, and this excess is very generally known by the term of " Gross Profit.'' It would be very difficult to find an exact definition of the term '" Gross Profit," inasmuch as the items from which it is calculated will be found to vary in different undertakings ; but seeing that the whole business of a trader is based upon the calculation of a fixed percentage of gross profit upon each different class of goods dealt with, it necessarily follows that any form of accounts that does not recognise the existence of such a thing as " Gross Profit " fails to afford the trader that assistance which he is entitled to look for from his accounts, and consequently to a very great extent fails to justify its existence. It has been argued by many experienced accountants that Gross Profit cannot be considered to arise until such things as rent of warehouse, salaries of warehousemen, &c., have been debited to the Trading Account : but as it is the almost universal custom of traders to reckon their percentage of gross profit entirely from the cost price of their goods (although, as a matter of convenience, they actually make the calculation backwards from their selling price) it would seem that, how- ever correct it may be ni theory, it is in practice nothing more than pedantic to include in this first section of the account anything more than " Sales "' and the closing " Stock "'" upon the credit side, and " Purchases," and the opening ^- Stock " upon the debit. It is, of course, quite possible to argue that the -5- AUDITING. resultant credit balance means absolutelv nothing at all ; but, even if this were so, the fact remains that unless the account be so prepared it is impossible to see whether the aggregate trans- actions of a period actually result in the percentage of gross profit which the tracJer had been calculating upon throughout that period ; and, therefore, whether it is thought best to call the balance of this first section '' (iross Profit," or to employ the indefinite term " Balance," the overwhelming weight of advantage lies in bringing the account — in this respect at least — into accord with the custom of every trader, and so enabling him to ascertain whether during any stated period he has actually achieved the results which he anticipated. In the second section of the Revenue Account may be included all items of income and expenditure relating to the business. These expenses should l)e grouped in convenient subsections, so that the effect of each group upon the whole may readily be perceived. This is useful l)oth for the purpose of seeing how far the net profits of a concern have been affected by purely financial reasons, and how far by com- mercial reasons ; and also on account of the convenience it affords if it should at any future time be decided to convert the venture into a limited liability company. The following pro forma accounts are drawn up upon these lines, and represent a good form for a firm of traders : — FORM OF ACCOUNTS AND BALANCE SHEETS. 253 T30 000000 ■B 00 0, 000000 ul 00 2 g g V m m f V m h (^ q^ q q_ o_ o_ •* « »oo cf QcToo -^ 'f N >o C4 en -^ w t-t rt QO Cj CX) •ao 000000 C M ( . ino 000000 j 00 ■^ 9, . . oQ <^8 888888 ° °. 1 ° ° °. ° o\ * 1 ^ 00 ^^ w »nso in en fovo" E^ M m « M H 1 IS u •T30 000000 03 60 • • wO 000000 000000 S ' ' ■3 ■ *• B 3 u (d ii m 000000 f (^ q o_ o_ o_ o_ q_ q "^ m 10 m 0" Q u C* M Tf .-. CI W ctf a ^ Ca H in 01 Q M & . . J* ro • • en M 00 c^ : c : : : : i'S :S ' ' ' ' Q U Q Z '55 Q Q Z P4 5; M £ S 'C iJ >,.ti 2 b i^° ^ " c <: w ■^ 01 3 (U ■" 3 0. 3 C a C Di moo *<5 w m G 2 K H •BO 000000 ^ 0. (^ tn 000000 01 "(3 000000 000000 q q_ q q o_^ 8 Q C ^ h h ^N in\o (D DO CO i-T -a 00 "z" N tn Tf " M Tf 00 M cfl 00 m in (U J3 tS ■BO 000000 Z *Hi m 04 t^ 1 in 2 W s mO 000000 M cP cf 10" 3 .a cn p- »/^ U^ >0 in si tn en L,, OONNI^O ^0 inovovOQOin P a 'a 0000 0) C 0000 m 00 -"^ is ■00 000000 t^, in ^^0 vo in 01 w in *-« CO lO w "-^ ' H w 000000 >o »o in m c-r yiT i~r M . . . 3 < 00 T30 000000 tn 3 ca P q in uT S kO 000000 m >H . . . ■Sg 000000 Q U tn Z * ""^^ 8_S;K8_S;8_ o_ 2 N •5 S P w1^ (/I cT 6" t^ -^ »o rn N in < -K- n tH in > u . . . QHSfcfc Q -J" t- ::! (St?. S. .2 ►^ CUDO lU rt (U 11 & oh S 3 a8 3 rt.C.- n qj OJ (U n> 3 C C g c r r r HOO C^ oa H = a 5 a £ 5 i ^54 AUDITING. be B cd 0) o X *-> a o c o *^-i n O v> o -*-> o r •) rt a -< (111 -»-* v> rn en O ■S (1) X J 0) -4-* 0) Q XI r. . o c <-M rt 0} Q. Jl H H o o u ;^ O Q o o o o ^ M CD O > A u D ■ u A ■ 3 -H : 3 a. ^ 2 [/I — o (/) a> o O ex t/3 O S .2 rt O U o „ H»< o o o o o O tn 00 ;^ 1- o o o o o >o o 8^ w o o o in in o •-< M 00 o N « -• t u-1 1-. « TJ o O o o IT o o o o o *-», u~. r> o o M o^ o o o m o " P. Q o — J) (U ■- X [1. ,"" ' t. (/I 3 n o - o o v^ o . - - H - ' - • o * u u. > 2 o I* — O " < J3 u rt i> -03 ••3 3 N C d •r c C > rt rt GO u. Ui O cu ^ 0>p.Cu -* fl) o I u _ ll ^ (U 0) Sao. 2=0 o ~ " CO (/) c £ c aj w u o H •a — '5 > a! 0) u c rt i 3 rt oa m o t c u - o. . (U a. w. QO »n ; fi a 0) uT 3 S : 2 •2^ « ^ o c -^ C 3.^ m 3 3 „ i- c'^ -" 0) 3 Qj aj >» rt > o ^ >- fe s >< 4, « rt (U FORM OF ACCOUNTS AND BALANCE SHEETS. 2-,^ MANUFACTURERS' ACCOUNTS.— Passing on to the accounts of manufacturers, it is first necessary to subdivide this heading in accordance with the various classes of business that fall hereunder. There is first of all the class of manufacturers but slightly removed from the trader — that is to say, the manu- facturer who does not require to sink a large proportion of his capital in expensive plant and machinery, the most typical examples of which are, perhaps, that of the small manu- facturing jeweller and the small manufacturing tailor — both of whom, by the way, are fast dying out. In this class, as with traders pure and simple, the selling price is based upon a per- centage of so-called "Gross Profit," the outlay in this case being the cost of materials together with the wages spent upon manufacturing ; and, therefore, although the method is clearly indefensible from a theoretical point of view, the division between the first and second sections may conveniently be •drawn exactly where it is drawn by the manufacturer himself in his mental calculations. Those who wish to have their accounts as complete as possible may prefer in addition to make a further subdivision of this account in the second section, separating the expenses of manufacturing (such as rent of factory, wages paid for supervision of workers, depreciation of plant, &c.) from those expenses which relate more par- ticularly to the storing of goods and the selling thereof ; but inasmuch as the balance shown by this break would correspond with nothing in the mind of the manufacturer it appears to be superfluous, and it will probably be thought sufiicient to merely show separate totals for these classes of expenditure in the same section, as shown below : — AUDITINC. fa goo O m wi Vi M •-■ CJO w 1i -^o r;':: '^■^ (S^ o CO o H oa S w o u Q H I/] Q M Q Z Pd K <: u >^ m X H o tl< "z" o H o a tn Q Z o o w H O u u < w tfi o Q <: fa o ■w o o u> o o o o o o cm c a ^ . tn • • a (/I cd • en tu • a >> j= u J2 . 3 - .&, O g g c « £gs 0< on o 5 ^ I, o o <-tJ o o o o f^ o m o -■t r^ w "O o o o o in o o o o o o o o , , o »n m o o o o o o o o o o o o o o o o o o o o o o o O O *o m O O M O OVO 01 m ►1 .2 m" > -i*J" t- u OJ >- c H U K H Bi o z o H o a H p o o u < o I— I H U < 2:; ■^ o a. o o c 10 01 ,<^ £ s d 1,500 2,750 By Amount Transferred to Trading Account (being the trade price of goods manu- factured during the year) „ Stock on hand, 31st December 1908 : — Materials* Goods Unfinished £ s d 1,250 8,000 700 u-l qi T3 00 I/. 00 l-l §0 1 CO ■ • ) . Ol >% u . cd . C • a c'C " 02 - I/) tr. • "c : H tC • ■ & : ca 2 3 c/l " o< o Q -s t/. , u-> en 00 o Of cs s u a Q H O a n z << a H O z o I H I H O U u <; o n o 0) o -3000 U-, o o o , 000 V!"^p c t^ t^ o o •■a ■ c O U) •-. 2, o o o^cuo o t- --on! rt p Otc •S't! ui 2- o c o s o o n 1- pii p . ^ . h ^ eo •- c ;i « § 5 = CO p — V. O ,1^ c ^ .C S^ ° « *^ * ^ ^ S u ~ — « ^ ^^ s § !^ ^ -s y. — E Z c .9 o a> 0! 13 B O O P in .» I * FORM OF ACCOUNTS AND BALANCE SHEETS. 259 CONTRACTORS' ACCOUNTS.— The next class of manu- facturers to be dealt with consists of those that may con- veniently be summarised under the head of " Contractors," i.e., those manufacturers who only make articles which have already been sold for an agreed price. To this class belong builders and many engineers. It is, perhaps, more in this class than anywhere else that the absolute necessity of proper Cost Accounts is so evident. Iiideed, all contractors' accounts may be regarded as incomplete which do not provide, in addition to an ordinary Profit and Loss Account, a " Summary of Cost Account," showing the same result. This being done, the chief interest centres round the Cost Account rather than the Profit and Loss Account itself. and there is thus no necessity for the latter to be unduly elaborate. It is therefore usually best to state this latter account in one section only, as shown below. s 2 26o AUDITING. •o o o c ii O 5.2 '-•^ o o o o n o o in o -3 O O O O O ^ o o o o o o o o o o O Q O O O t-.^ O O O m in O O O C) w »n Tt r^ o o o o o o o o o o o o o o o o o o o o o o 'o o o in o o m « in 01 f^ m fO o o o o o o o o o 1 in o in 1 *^ '~* 00 in o \r> ro O 1 o-i M m 1 rr -I- r* 1 00 O lO 1 DO " lO . c o ,U : c 1 o ■a Ss.s.s S •«« . ^£-^1 lull's I :^ i"" ^11^ O ^ ^ m % £ « ± S FORM OF ACCOUNTS AND BALANCE SHEETS. 261 C -^^ S ^ •r' *-■ U .— ' iX ^~' S 4-1 . -i~* CD H 5 +-> on a; a M -t— • -C f>1 c fi-S na S M s: -ri Q (L *— H X H x: a (fl 4— ' -C '^ M , C/5 rn H cx 3 Q ^-^ >■ _ r^ W (I •^ -l-> Q M-^ ^ "^ -^ Z w -^' c/; - — ^ C/l C3 a, < ^ ■ ^' >^ c C3 -4— » a H c« Tl .S Ph Oh 0; f— 1-1. £/; r; , r^ H c U% -1^ rt M-i U2 ^ -^ Ph c u u < s en -•-• "^ ■1) c (i^ u 3 4-i w OJ C) -*-* .ti ^ 1/ d < 1-1 % S 3 >-> ^6 g U3 s ■^ := '^^ ^ Oj f— H C S a; ?J M-< ^ tC r- Q « .;: ;-i w •*« 1 1 CX) 0\ N 1 M "" 1 "^m'S^J? *i ^ 1 M 1 ^ 1 (pajaiduioouu ji) - pjBAVJOJ paUJBO JOEJJUOO '-*'::: N JO ]S03 IBJOX sajo}S >H C) '•->? 888 lunoiuy ■hJ 'I- o_ ". ca 0" M « Sj :? ♦31U?X 000 M »n c3 JO sjnoH 08 c^ junoooy 5SB[ mOJJ pJBMJOJ »o "0 8 0" w JO DBJJUOQ CO 00 CO « N W M M M 000 000 U-J to «-»■*« N N ^ 'hJ 00 o 1- li. c c 000 000 000 Si O 1/3 -i-> O 3 ^ S §.2 +-> ti '^ Ph o 5i CI. C O) en ^ Q c OJ a; > a 0) OS a; ;^ +-» bX) 3 c3 Xl 0) ■ -^ -4— > 3 TS f— < 0) -l-> V3 CJ J2 c3 Oh ^ m cj (L> ^ X 0) -t^ rt >> 3 l-H T-l &. l-< a, rt 1 x: • i-H C/3 0) rt -i-' OJ JH G t-H +-» 3 n OJ T3 JD Td rt < t^ n >. c; bH C3 rt ^ >^ ;-> 1— ( 3 (U 262 AUDITING. STATISTICAL INFORMATION.— In connection with all the preceding accounts it will usually be found of the very greatest assistance to add statistical columns, for the purpose of showing the relation which each item bears to the amount of trade done. This relation will usually be expressed in the form of a percentage on the amount of the sales, but where the business deals with articles of a uniform or similar character- as, for instance, in the case of collieries, brickyards, and the like — the percentage will probably be based upon some quantity, or unit, of the goods dealt in, as " per ton of coal " or "per thousand bricks," and in these cases it is usually thought more convenient for the unit to be the production rather than the sale. This view is confirmed by an interesting lecture on " The Form of Revenue Accounts and Balance Sheets, and the use of percentages in connection therewith,'' ]i by Mr. Richard Brown, C.A., reproduced in The Accountants' Magazine, March 1904. In published accounts it is also somewhat usual, and very •convenient, to publish the figures for the last preceding period side by side with those for the current period, for the purposes of comparison. For the sake of clearness the earlier figures are best placed on the left-hand side of the description of the various items, and in italics, or some other type which may be distinguished readily from that in which the accounts for the current year are printed. MINING ACCOUNTS — Another very important class of i accounts, which can hardly be said to come under any of the previous headings, are those relating to Mines. These accounts are best dealt with in two sections : one to include all the items relating to the actual working of the under- taking ; and the other, those appertaining more particularly to finance. Cost Accounts would be made weekly, fortnightly, or monthly, but they would usually form no part of the annual accounts. i FORM OF ACCOUNTS AND BALANCE SHEETS. 263 " NET PROFIT." — This is, perhaps, the proper place to offer a protest against the method adopted by many companies of stating in their published accounts a so-called " Net Profit," out of which it is proposed to set aside a certain sum for Depreciation and Directors' Fees. A true net profit can only be arrived at after charging up all expenses — including, of course, Depreciation, Directors' Fees, Interest on Debentures, &c. &c. STATUTORY FORMS OF ACCOUNT.— The fore- going remarks as to forms of account do not, of course, relate to those undertakings whose accounts are specially provided for by Act of Parliament. These are : — The accounts of such Railways and Tramways as come under the provisions of the Regulation of Railways Act 1868. (A revision of this form is now under consideration.) The Accounts of such Gas Companies as come under the provisions of the Gas Works Clauses Act 187 1. The Accounts of Assurance Companies, which come under the provisions of the Life Assurance Companies Act 1870, and the Assurance Companies Act 1909. The Accounts of Electric Lighting undertakings, which come under the provisions of the Electric Lighting Clauses Act 1899. And a few other undertakings (such as Building and Friendly Societies), to which many of the points now being raised do not apply, or apply only in modified form. BALANCE SHEETS. — Turning now to the question of Balance Sheets, perhaps the first point to be disposed of is the rival advantages of the Single and Double Account Systems. SINGLE AND DOUBLE ACCOUNT SYSTEMS.— In undertakings whose accounts are based upon the latter system it is assumed that the capital of the undertaking has been sunk in the purchase and construction of definite permanent works, 264 AUDITING. and the Balance Sheet is divided into two portions, one show- ing, on the one hand, the expenditure on such works, and upon the other the capital raised wherewith to meet such expendi- ture, while the second section, or " General Balance Sheet," contains what may be conveniently called the " floating " assets and liabilities arising incidentally in the course of carrying on the undertaking. It has been thought by some that this method of stating the accounts absolved the company from making any provision to meet depreciation of its permanent assets, and to a certain extent (e.g., with regard to preliminary expenses) this would appear to have been the intention of the Legislature ; but what was really intended seems to have been that Fluctua- tion, rather than Depreciation, was to be disregarded ; and it is. perhaps, well to call attention to the fact that it is not only possible but also perfectly easy for provision for Depreciation ,, to be made and stated in accounts kept upon the Double Account System. In point of fact provision /i/i/sf be made for the depreciation of wasting assets that call for renewal — the only open question is zt'//en the provision shall be made. WHAT ARE ASSETS?— Going back to lirst principles, it must be admitted that an asset may fairly be detined as " an expenditure upon a remunerative object," and, indeed, it may be taken as the test of whether any particular expenditure is an asset or a loss to inquire whether as a matter of fact such expenditure is — looking back at it — worth the amount expended upon it. This applies whether the expenditure is in the nature of capital spent in the purchase or construction of any par- ticular property, or in the purchase of property or labour which was subsequently sold to another. In the former case, if — looking back upon it — it is considered that if the opportunity of making the investment a second time should again arise it might reasonably be made upon the same terms, it may fairly be said that there is value for the original outlay ; and in the latter case, if — looking back upon it in the light of present experience — one would again sell upon credit to any particular individual property upon which time or money had been FORM OF ACCOUNTS AND BALANCE SHEETS. 265 expended, it may fairly be said that ^•alue is still remaining for the amount with which it at present stands charged. If, on the other hand, it appears that the value remaining for such expenditure is less than the original amount of such expenditure, it is obvious that, as a matter of fact, Depreciation (or loss) has occurred. NECESSITY FOR DEPRECIATION.— With regard to those few classes of undertakings whose accounts the law requires to be kept upon the Double Account System, it would appear that (in view of the permanence of the undertaking and the consequent remoteness of realisation and an ascertained loss) the Legislature does not require any provision to be made to meet such Depreciation, except in the case of leaseholds ; but it requires all expenditure ui)on maintenance and renewals to be borne by Re\-enue, and it indirectly sanctions (where it does not expressly enforce) the provision of a prudent Reserve to meet any outlay that may in future be required to keep the property in a state of working efficiency equal to that in which it at first stood. On the other hand, it is a very generally accepted principle with regard to those undertakings that are not specially pro\"ided for by the Legislature, that before reckoning profits an adequate sum should be set aside to meet any loss arising from the Depreciation of property ; curiously enough, however, it would appear doubtful as to whether the law compels aiiv company to make provision for Depreciation before declaring di\-idends out of its earnings. In both cases, therefore, the que.stion of Depreciation is rather one of prudence, or of internal administration, than of legal compulsion ; and, moreo\er, it will be seen that there is no essential ' difference in this respect between accounts kept upon the Single Account System and those kept upon the Double Account System. In both cases Depreciation must, of course, regularly take place, and it is usual to provide for it in advance {i.e.. without necessarily waiting until the time for renewal arrives), although the method employed under the two systems of showing the provision naturally varies. 266 AUDITING. METHOD OF PROVIDING FOR DEPRECIATION.— With the Double Account System, it being undesirable to obscure the record of the original cost shown in the Capital Expenditure Account, the method adopted is to accumulate the amount set aside from time to time upon a Depreciation (Fund) Account, or a Reserve for Repairs and Renewals Account, which is included as a liability in the General Balance Sheet (although not necessarily stated separately). On the other hand, the more usual course to adopt with accounts kept upon the Single Account System is to deduct the amount written off for Depreciation from the amount at which the value of the asset is stated, and this whether the Assets Account and Depreciation Account are kept separate in the Ledger or not. It may be mentioned, however, that although theoretically the distinction between the Double Account System and the I Single Account System is that described above, it is not invariably adhered to in practice. Under the Single Account System, Reserves to cover Depreciation, &c., are not infrequently shown upon the liabilities' side of the Balance Sheet, instead of being deducted from their respective assets ; while the Chelsea Electricity Supply Company, Lim., has issued accounts (prepared upon the Double Account System) showing a considerable sum written off Capital Expenditure under each of the various headings — a plan which has also been recommended by the ^Municipal Tramways Association. It may be pointed out, however, that a Reserve for Deprecia- tion is not a Reserve Fund, and should not be so styled. CHOICE BETWEEN DOUBLE AND SINGLE ACCOUNT SYSTEMS.— It will be seen therefore that the question as to whether a certain set of accounts shall be kept upon the Double or the Single Account System, however interesting it may be in other respects, does not really in the least affect the question of the desirability or necessity of making an adequate provision for the Depreciation of wasting assets. There is this, howe\-er, to be said — that while, with FORM OF ACCOUNTS AND BALANCE SHEETS. 267 accounts stated upon the Double Account System, it will naturally be assumed (in the absence of evidence to the con- trary) that no such provision has been made in excess of the actual expenditure upon renewals to date (if any), it will in the case of accounts kept upon the Single Account System be as naturally supposed that the values assigned to the various assets are actual, and not fictitious amounts. Consequently in those undertakings where it is difficult, if not impossible, to assign an accurate value to a company's assets (and where those assets are of a permanent nature and represent the bulk of the work- ing capital), the Double Account System may advantageously be adopted, as being the less likely to create a misapprehension upon the part of the shareholders. For example, in the case of a single-ship company it is usual to make no allowance for Depreciation of the value of the vessel, which naturally repre- sents practically the whole of the company's capital. Such a case is particularly suitable for the Double Account System, and that for the simple reason that this system best records the actual facts of the case. On the other hand, with companies who venture the bulk of their capital in any ordinary trade, the question is widely different ; for in such cases the permanent assets naturally form a much smaller proportion of the total capital, and consequently the Double Account System (which pre-supposes the investment of practically the whole capital of the undertaking in permanent assets with which the business of the company is carried on) does not apply. In these cases, therefore, it is essential that all assets which are not taken into account at what may fairly be assumed to be iheir value at the date of the accounts should be definitely stated to be " at cost." The various items which are ordinarily found upon a Balance Sheet will now be dealt with in order, and the best form of wording under various circumstances considered. For this purpose the best course will be to take as a model the form of Balance Sheet provided in Table " A " of the Companies Act 2 68 AUDITING. 1862. which sets t\v liabilities upon the left-hand side and the assets ujion the right-hand side, commencing upon both sides with thf most permanent items and leaving those which are most constantly varying to the last. It should be borne in mind, however, that this form is compulsory onlv in the case of companies registered before ist October 1906. which have not excluded it by the adoption of special articles of as.sociarion. FORM OF BALANCE SHEET.— Some years ago it was not unusual to lind Balance Sheets stated with the assets upon the left-hand and the liabilities upon the right-hand side. The circumstance is. doubtless, at first sight curious, but, like many other tilings, there was good rea.son underlying this apparent anomaly. Under the Italian sy.stem of bookkeeping, which is still i>ractist'd in some old-fashioned merchants' houses, it is the custoni at e\ery period of balancing, after the Nominal Accounts ha\e been closed, to transfer the balances of the Real and Pt-isonal Accounts into one account, usually called in England the " Balance Account," and in France the " Balance dc Siniir.'' or '" Closing Balance." Under such circumstances, the I.t'dgt-r would be actually closed (which, in fact, is never the case undi^r the ordinary English system), and the Balance Account so raised would practically be a detailed Balance Sheet, but with the assets upon the Dr. and the liabilities upon the Cr. side, as shown in the old-fashioned Balance Sheets already referred to. The re-opening of the Ledger for the next period's transactions would necessitate the writing back of the balanris of the Kenl and Personal Accounts to their respective headings : which would involve (for the sake of completing the Double ]-".ntry) a second Balance Sheet (" Balance d'Ouvert"), but with the sides transposed, \\z., the liabilities upon the Dr. and the assets ui)on the Cr. side, ^^'hy this latter, rather than the. former, should be the form which is now generally adopted it is not \ery easy to see ; but, perhaps, the best reason that can be given is that, inasmuch as a set of books must be formally opened before it can be closed, the first Balance Sheet w-ill FORM OF ACCOUNTS AND BALANCE SHEETS. 269 naturally he in the form of an Opening Balance Sheet in the modern form, and that, consequently, where the ahl)re\iated methods of modern bookkeeping dispensed with the actual closing of the hooks at each balancing, it would be natural to adhere to the form of Balance Sheet which was used in the first instance. As, however, tlie modern Balance Sheet is not a Ledger Account, but merely a summarised extract from the Ledger, many accountants consider that the headings " /?/-." and " C/-.," " To " and " By," are out of date, and do not, therefore, employ them ia Balance Sheets. It has been argued in some quarters that the Balance Sheet is a Ledger Account, and that therefore these signs ought not to be omitted. The matter is, of course, of no real importance either one wav or the other ; but when the statement that the Balance Sheet must of necessity be a Ledger Account has to be supported bv such explanations as the following, it may well l)e questioned whether the artificiality of the argument does not help to disprove the original proposition. Li a lecture delivered at a meeting of the Chartered Accountants Students' Society of London, in 1894, Mr. Ernest Cooper, F.C.A., said, " In the Ledger the account is the account of the customer or others with the owner of the business ; in the Balance Sheet the account is the opposite — that is to say, the account of the owner of the business with the customer and others. Those to whom I am debtor are my creditors ; in my Ledger they appear as creditors, for the Ledger shows their relation to me. In my Balance Sheet I state my relation to them, which is that of debtor, so I i)ut them upon the left-hand, or Dr., side. Therefore, when vou have made out the Trial Balance from the Ledger vou must, of course, transpose the sides to make the Balance Sheet." It is, of course, not impossible to prepare an account, in the forrrt of a Ledger Account, showing the position of affairs l)etween the sole i)roprietor of a business and that business ; liut it is an entire fallacy to suppose (as appears to ha\e been supposed above) that the proprietor, or proprietors, of a business, and the business itself, are interchangeable terms. The accounts 270 AUDITING. of a business are the accounts of that business, and not the accounts of its proprietor or proprietors, and a clear apprecia- tion of this fact will often save confusion. In the lecture already referred to Mr. Cooper went on to advise his audience never to put the words " Liabilities ''" and "Assets " at the head of Balance Sheets, adding that, " many years ago Sir George Jessel severely censured this practice," and that " various items are found on both sides of Balance Sheets which are not strictly Liabilities or Assets." As no reference is given to the occasion upon which the late Sir George Jessel " censured " this prac- tice, comment is naturally impossible. It may be mentioned, however, that the headings deprecated by Mr. Cooper are employed in the statutory form of Balance Sheet appended to Table " A " of the Companies Act 1862. With regard to the statement that \arious items are found on both sides of Balance Sheets which are not strictly Liabilities and Assets, it is greatly to be feared that this is the case, but also greatly to be deplored. It is only possible to justify the inclusion of any item in a Balance Sheet, provided — at that time at least — it is reason- able to treat it as a Liability, or as an Asset, as the case may be. It is thought, therefore, that if these headings were in all cases attached to Balance Sheets, the incongruity of non- permissible items might be emphasised — a result which would certainly not have drawn the " censure " of the authority referred to. CAPITAL. — Upon the liabilities' side of a Balance Sheet the most prominent item — in the case of a limited company at least — is the shareholders' capital, which, of course, can only 1)0 increased beyond its original limit — or reduced — after due compliance with important legal technicalities. In stating the Capital Account it is desirable to show, first, the nominal capital, i.e., the limit sanctioned by the memorandum of asso- ciation ; secondly, the number and value of each class of shares issued and the amount called up thereon, from which should be deducted the amount of calls in arrear, stating the number of shares upon which such calls are due. In France, and also- FORM OF ACCOUNTS AND BALANCE SHEETS. 27 1 ill South America, it is usual to state the full amount of the capital issued as a liability, and -the amount uncalled as an asset ; but this is not at all a desirable form to adopt, as it can hardly be said that uncalled capital is more than a contingent asset. It is, moreover, often one of very doubtful realisable value. FORFEITED SHARES.— The next item to be stated is the amount paid up upon shares forfeited, when such shares have not been reissued by the company. When they are reissued this item may appropriately be absorbed in the Reserve Fund. DEBENTURES. — Next comes the amount due upon deben- tures, the amount extended being the nominal amount : the rate of interest should be mentioned. The amount of the Discount (if any) should be shown as an " asset," until written off out of profits. The appropriate place for premiums received upon issues of either shares or debentures is in a special Reser\-e Fund. "\Mien debentures ha^•e been issued as security for a debt, the amount of such debt should be stated as the liability, with a full note of the security held. MORTGAGES. — The next item upon the Balance Sheet will be the amount due upon mortgage, which, ordinarily speaking, is practically permanent. The rate of interest should be stated here also. OTHER LIABILITIES.— Next come the ordinary liabilities of the company, which, according to Table " A," are separated under the following sub-headings : — ■ (a) Debts for which acceptances have been gi\en. (b) Debts to tradesmen for supplies of stock-in-trade and other articles. (c) Debts for law expenses. (d) Debts for interest upon debentures and other loans. {e) Unclaimed dividends. (/) Debts not enumerated above. 272 AUDITING. It has become a very general practice for the item " {d) Debts for interest upon debentures and other loans " to be shown as an addition to the loans themselves. There is, of course, no possible objection to this proceeding from an accountant's point of view ; and, indeed, this seems to be the proper place for it. RESERYJ^ FUNDS.— The next item upon the liability side is for " Reserve Fund, showing the amount set aside from profits to meet contingencies." This, perhaps, is as good a definition of a Reserve Fund as has been offered, and although special Reserve Funds may be created for the purpose of pro- viding for special contingencies, it may be taken as an axiom that no sum which is not set aside out of profits can properly be called a Reserve Fund. Nevertheless, under the heading of " Reserve " all sorts of items are frequently included which under no possible circumstances can be considered to have been set aside out of the profits. This, perhaps, raises the some- what large question as to what arc actual profits, but it must at least be admitted that the term " Reserve Fund " is by no means applicaljle to the following : — (rt) A sum set aside to meet Depreciation of property, and to provide for its future renewal. This is a charge against profits, rather than a sum set aside out of profits. {b) A sum set aside for the purpose of equalising the charge against Profit and Loss for Repairs and Replacement of Machinery, &c. This, also, would appear to be a charge against profits. {c) A Reserve to provide for loss upon Bad Debts or Depreciation of investments would likewise appear to be a charge against profits ; unless, indeed, the amount so set aside was more ample than the circumstances of the case necessitated, in which case it would probably be a better course to charge against profits what might be considered a fair Reserve for loss, and to accumulate any further Reserve that might be thought prudent in the form of a Reserve Fund pure and simple. I FORM OF ACCOUNTS AND BALANCE SHEETS. 273 {d) Investment Fluctuation Account. This is an item which, unless further explained, should never appear upon the face of a Balance Sheet, and that for the simple reason that its meaning is by no means clear. It may mean that investments have been re-valued at a higher figure than cost price, and the proceeds carried to this account rather than to the credit of Profit and Loss or Reserve Fund ; or, on the other hand, it may mean that the investments are stated in the Balance Sheet at a higher figure than their actual value, and that the amount of the Investment Fluctuation Account is an amount set aside in anticipation of future loss. The former is a perfectly legitimate form of Special Reserve Fund ; the proper place for the latter (which is, in fact, merely a Depreciation Account) appears to be in reduction ■of the stated value of the assets. (6') Sinking Fund, or an amount set aside (and specifically invested) for the purpose of meeting a future loss upon redemption of debentures issued at a discount, renewal of leases, &c. (/) The so-called "Reserve Fund" of a life assurance •company, which really amounts to a fund set aside out of the surplus premiums paid by the assured in the earlier years of their insurance to meet the deficiency of such premiums to cover the increased risk of later years, when the expectation of life is shorter. To a ^ery large extent the Reserve Funds of life assurance companies are '*' premiums paid in advance," rather than " accumulated profits." There can, it is submitted, be no doubt that it is improper to state as a Reserve Fund any sum which has not been actually set aside, out of profits, solely for the purpose of providing against unforeseen contingencies. THE INVESTMENT OF RESERVE FUNDS.— So much has been written upon the " fictitious " nature of all Reserve Funds that are not actually invested in securities out- side the business itself that it seems desirable, in a work of T J 74 AUDITING. this character, to examine the arguments that have been raised in support of this contention. So far back as 1890, Mr. T. A. Welton, F.C.A., expressed his views upon this subject in the following terms : "'' The expediency, or otherwise, of making special investments of reserved profits can only be determined after a careful review of the circumstances in each particular case. I lay the more stress upon this matter because it has become the fashion in some quarters to urge that all reserves, including those of banking companies, should be specially invested, without any regard to the nature of the prospective requirements to meet which they are provided." It is believed that at that time the soundness of such views was not seriously disputed by any very considerable section of either the Press or the public ; but the numerous failures that occurred during the vears 1892 and 1893 showed that the mere existence of a large Reserve Fund did not in itself suffice to ward off disaster, hence (being in somewhat of an unreasoning mood) many unfortunate shareholders hastened into print with the view ihat these "paper reserves " were "fictitious." Most of the lay Press took up the cry, and their arguments — which, it must be admitted, were somewhat plausible — have now sunk so deeply into the public mind that it is not unlikely that the misconception will prove ineradicable. At the same time, it cannot be too strongly advanced that the question as to whether or not any given Reserve Fund is repre- sented by assets consisting of marketable securities outside the business, or by less readily marketable assets employed in the business as fixed (or working) Capital, is comparatively speak- ing of little importance. The most casual perusal of any Balance Sheet will show at a glance, even to the least informed,: by which class of assets the Reserve Fund is represented. Con- sequently the occasion does not arise to deal specifically with this point. What is of infinitely more importance, and what cannot be gathered even by the most expert accountant by a perusal of the published accounts, is whether the so-called Reserve Fund is (i) a ^w//d fide accumulation of divisible net FORM OF ACCOUNTS AND BALANCE SHEETS. 275 profits set aside (or reserved) merely to provide for unforeseen contingencies, or in general terms because it is thought inexpedient to divide profits up to the hilt ; (2) a Reserve set aside out of profits with a view to retaining in the possession of the company assets that may hereafter be applied to a fore- seen and specific purpose — as, for example, the repayment of redeemable debentures ; or (3) a provision, falsely called Reserve Fund, set aside by charging from year to year some- thing against profits for the purpose of building up a provision to meet a known or expected deterioration of assets in the future. No mere inspection of any published accounts would enable anyone to determine to which of these three classes an item described as " Reserve Fund " belongs : hence the extreme importance, from the Auditor's point of view, of the adoption of a correct nomenclature. The term " Reserve Fund " without qualification, ought, it is submitted, in all cases to refer solely to class (i) mentioned above. If the Reserve Fund be an accumulation of divisible profits " earmarked " in advance for a specific purpose, and therefore not properly avail- able for any other purpose (as in the case of class (2)), the limitations of that Reserve Fund ought to be clearly stated upon the face of the Balance Sheet (e.g., "Reserve Fund accumulated to provide for Redemption of debentures in 19 — , '^ or " Reserve Fund specifically earmarked." Tf a credit balance that properly comes under the definition of class (3) is called " Reserve Fund," it is submitted that the accounts are to that extent false and misleading, and that the Auditor should report that (and why) they do not properly disclose the true position of affairs. UNDIVIDED PROFITS.— The last item upon this side of the Balance Sheet is the balance of undivided profit. It is thought preferable to show this balance without elaboration upon the Balance .Sheet and in a " Profit and Loss Apportion- ment Account " (or the last section of the Profit and Loss Account) to show the connection between the balance shown upon the Balance Sheet and the balance of the Profit and Loss T 2 2^6 AUDITING. Account for the current period. There is, however, no objec- tion to showing the details upon the Balance Sheet, except that it does not appear to present the facts of the case quite so clearly. CONTINGENT LIABILITIES.— With the question of Contingent Liabilities it is not necessary to deal at length, beyond stating that all such liabilities as are known should be noted upon the Balance Sheet, even if it is anticipated that they will not ultimately result in a claim against the company. THE ASSETS SIDE. — Turning now to the assets, it is convenient to deal with these — as with the liabilities — under their various heads. FIXED ASSETS.— Table "A" deals first with "Freehold Land," " Leasehold Land," and" Leasehold Buildings," which it requires to be stated separately, and apparently without deduction for depreciation. The word " apparently " is used advisedly, for depreciation is not here mentioned, although it is specifically provided for in the case of " Stock-in-Trade " and "Plant." This seems to show that, even in accounts stated upon the Single Account System, the Legislature did not intend to make it compulsory for the permanent assets of a company to be re-valued periodically ; and this, it will be remembered, is a question with two sides to it — viz., the possibility of a rise in value, and the possibility of a fall. Had leaseholds been excepted, it might reasonably be assumed that it was intended that companies should not allow either a rise or fall in their permanent assets to modify their trading profits ; but it is impossible to suppose that the depreciation of leaseholds was intended to be ignored, and therefore the point remains uncertain so far as the legal obligations of a company are con- cerned, although there need be no uncertainty as to what is the proper course to adopt. FORM OF ACCOUNTS AND BALANCE SHEETS. 277 FLOATING ASSETS.— Next in order Table "A" states Stock-in-trade and Plant, " the cost to be stated, with deduc- tions for deterioration in value as charged to Reserve Fund or Profit and Loss." It would have seemed more natural to have placed Plant before Stock-in-trade, as being obviously a " fixed asset," and it seems strange to talk of a " deduction for deterioration in value, as charged to the Reserve Fund." Inasmuch as the Reserve Fund has already been defined as " an amount set aside from profits to meet contingencies " the deductions that may properly be charged against Reserve Fund would appear to be limited to unforeseen deterioration, rather than for regular depreciation. Next come "Debts owing to the company," which for some inexplicable reason appear to be stated under separate headings, instead of being under sub-headings, as in the case of the debts owing by the company. The headings are as follow : — - Debts considered good, for which the company holds bills or other securities. Debts considered good, for which the company holds no security. Debts considered doubtful and bad. It is also provided that " any debt due from a director or any other officer of the company is to be separately stated." It is not usually considered desirable to state separately the amount of the doubtful and bad debts, but the provision for the separate statement of any debt due from a director or other officer is one that should not be lost sight of ; doubtless, it is not intended to apply in the case of debts for small amounts in the regular course of business, but cases will readily occur to the reader in connection with some recent failures where the compliance with this provision might have materially aftected the course of events. 278 AUDITING. The next item on the Balance Sheet is Investments, which should be stated in some detail, and if the investments are on account of Reserve Fund or Sinking Fund the circumstance should be clearly stated. The Life Assurance Companies Act 1870 provides the following subdivision of the item Investments upon the Balance Sheets of Life Assurance Companies, and the example is worth following under all ordinary circumstances : — British Government Securities. Indian and Colonial Securities. Foreign Government Securities. Railway and other Debentures and Debenture Stocks. Railway Shares (Preference and Ordinary). House Property. Other Investments (to be specified). It would, however, seem desirable in many cases to state the actual investments separately, for when it is remembered that such an item as " Foreign Govenmient Securities " may include investments so various as French Rentes, Turkish Bonds, and South American Republic Bonds, it is obvious, in this case at least, the particular heading adopted is no indication whatever to the general desirability of the investment. Again, " Railway Shares " may mean anything between Great Western Stock and Grand Trunk Stock, to say nothing of Mexican and other similar railways. Last upon the Assets' side is the item of Cash, which is best separated into — Amount at Bankers on Deposit, including accrued interest. Amount upon Current Account, and Amount in hand. GENERALLY. — It is hardly necessary to enter in detail into the forms of Balance Sheets required for different classes FORM OF ACCOUNTS AND BALANCE SHEETS. 279 of undertakings ; the same rules will apply in almost all cases, and although modifications of detail will appear desirable in almost each particular case, these naturally must be considered and dealt \\ith according to the particular circumstances that obtain, the general jDrinciple in all cases being that the accounts must not only be correct, but also so clear as to render misappre- hension impossible, e\'en among those who do not profess to be skilled accountants. In this respect it is, perhaps, well to bear in mind the particular classes of persons who are likely to be interested in the accounts. Thus, in the case of a friendly society, lucidity Viill be the great thing to be aimed at, while in the case of such an institution as a bank the main object of the Balance Sheet is, perhaps, less to inform shareholders as to the amount of their profits than to allow the public to form a reliable estimate upon the bank's stability. It may be added that an '' account " is not primarily a collection of figures : it is a narration of events and facts ; while a person appointed to hear and approve such narration is called an " Auditor." The importance of these points lies in the circumstance that, although accounts are now written (or printed) instead of being- delivered orally, the narration (or wording) is at least as material as the figures themselves. The following three general forms of Balance Sheets are designed for use under different circumstances : — 28o AUDITING. < o U H < 00 o Q o 'i^ Pi rfl ^~- i^ < H u u u Q r'^ 1— C/J < CO P z n O l^, c; n U H < '/<, D H (xj O K O H D O Q < H W I— t U :^ U <5 ^j < m ^ Sa ■^ ft^ Q) tt, O Ri •^ Total Receipts to 31st Dec. 1908 — CO cy; 00 t , 00 ^-- C u-l T -r -- - c •n Received during year '^ U-. <^ : S : 8 in Certified Receipts 31st Dec. 1907 -so 00 IT. a c 00 ■-^ 8 .9.3> t^ « -T n " o" GO By "A'' Shares of £10 each „ "B" Shares of £10 each, including Premiums received on issue of same „ Debenture Stock at 5 per cent. Total to 31st Dec. 1908 r2 c 000 cr. 000 w CJ " c , in CI ro ci ^^ -r CI tx tJ-i i-T in ^t 4 n M 8 6 »n 216 17,523 oTo 21,645 3,806 -1- 2 8 CO m 1 a.:i So " T3 000 ^ c 000 in m c> •- t_, Ci C 'O r-, C ^ CO CO i-< U-) 8 c 00 00 --o CT en 1^ CO co" 00 rn 8 i< r2 000 tr. C 000 c: r^ >- C \0 -1- cf 8. 216 12,886 19,706 2,067 in 00 U-, C* 1 GAS fo Expenditure to 31st December 1908 — ^ands acquired (including Law Charges) New Buildings, Manufacturing Plant, Machines, Storage Works, and other Structures connected with manufacture New Mains and Pipes, including laying of same, paving, and other works connected with distribution New Meters, including hxiut: Cost of promoting special Act ■J. [-1 WATER To Expenditure to 31st December 190S — Lands acquired (including Law Charges) New Buildings, Storage, and Filtra- tion Works, and other Works con- nected with collection of water . . New Mains, including laying of same, paving, and other works connected with distribution Cost of i>romoting special Act OJ > C < U a; c « 03 FORM OF ACCOUNTS AND BALANCE SHEETS. ;8i 00 O c\ m 03 s w u a Q H 2 O H W W X C/3 u o n w w o -30 000 MO 000 Cs 00 •- in r^ ^ #,ro c» \c rj-1-0 CO M u-i w m m Cj ■C C 000 I/l 000 000 00 »nQO u-» w T^^O m ' «>j " -1- 00 -i- m N m M * 0» ■»*- ■* woo '-<' ^ _ . . _ ^ „ o« 00 u :8,: : < 2^ ^ fX u u •- OJ . . 1< — ^ c 00 '.-^ '. '. Z S"^"^ "^"^ S s 8 Si u c :q : : S:^ a ■ > ■ « ca m d < do -c 01 c • • - c ~ ^ " "3 •t: • - z 3^ 0.--C < ^-^ G Z z w 71 ^as^ ai-Cwa 55 H > < u < -to ^CtJ (juoo ou >> < Z . — _ . '-0000000 yioooocoo C\ 10 m M 00 , ^ cn « ix ^ o^ N^ CO 1- n r^. >■■-, cTi CI 0^ TT ■<»■ cT (N . *- . 00 • . w . • n 0^ f^ hH u . - . <1> . • • • • j«. • t U — 1 1J ■ - • ^ •'^ ■ G • 1 n K •S K iJ 2 «c^ ""^^'^ ^^'-'"^t. Hy" qHo 0>0Z •sJctJ • :S8-£ •S'S-Sz ?^^. Hcjt/:- o w cn Q < H 2 in M fe D ro o H H w w ffi o 5S (I] w cy^ U w < 1 1 u < iz; CQ < J < M o <-f! V; "-4J <-.? o o o o lO C 1 c* o o o o O X c -t O CI o o o o o O o o o § CM 01 o o O in o o o o o o o o o o o o o o c m o u o cc o a o rt — [/> .— ^ D CQ u *J > FORM OF ACCOUNTS AND BALANCE SHEETS. ■83 Pi (—1 O Z I— I O < Pi H O H W W u o o 00 o o Ui CO :4 o Q H C/) H W u o •J < cq <-*j 'hJ V; ^ o o o o c o IT) O >-r o" o o o o 2 ° in "2 ''■ ■00 o o o o Sj ;2 ■ ■ o C to '-H ^ (J en.— S- H- u 0000 0000 o o O in o XI o -• O CI m ^ ^ rn t-N U-: »-> o o o o to o o O o t^ o oo o n o o u S. 00 o o o CO o in >n 30 tx •J3 O 1- "-■ •■t-m U3 o -- _ O 5 ■" — O o „ " e «; " M unts as correct, any third party U-g., a bank advancing, money) relying u[)on his cervilicate would probably have exactly the same right to ex]ject the accounts to be accurate as though the audit had !_>een performed in pursuit of their own instruc- tions. This is a point that should not be lost sight of, as one is very apt to rely upon the unsu])ported word of ones own client. At the same time, there is m) reason wiiy partial AUDITS (the results of which are /.'ot certified) should not be 314 AUDITING. made in the case of individuals or firms, provided there is a clear understanding between the client and the Auditor as to the extent of the latter 's examination. An Auditor may resign his 'jfHce at any time, but it is doubt- ful whether he could then claim to be paid for the time occupied upon an uncompleted audit. On the other hand, the client may at any time discharge his Auditor, but he would probablv beheld liable for the whole fee of the current period, if the audit liad actually been commenced. THE AUDITOR TO A FIRM is usually appointed by the mutual agreement of the partners; but, occasionally, by the articles of partnership themselves, or by one particular partner. If appointed Auditor to ihc firm, he must, however, in every case, consider cacli partner as his client, and protect the interests of eat-h arcordingly. The same conditions as to terms of agreement, responsibility, fees, and resignation obtain to the auditorship of firms as were mentioned in the preceding para- graph ; l)ut it would seem that any one partner would have power to bind tlie fu-m as to the amfuuit of the fees — except, perhaps, where the appointment lay in the hands of one partner, when the consent of such partner would apparently be required. Probably no one partner could discharge an Auditor without the consent of all his co-partners. 'J'his seems the proper place to point out that in practice it not infrequently happens that the letter, if not the spirit, of partnership agreements is broken from time to time; and, so far as these infractions of the agreement relate to accounts, it is clearly the duty of the firm's Auditor to draw attention to the position of affairs in his report. The most usual irregu- larity of this description is for one or more of the partners to exceed the amount which they are entitled to draw on account of profits; and, although this overdrawing need not necessarily imply bad faith upon the part of the partner concerned, it is important for the Auditor to draw attention to it, if only for the sake of equitably adjusting the respective interests of the I THE ATTITUDE OF THE AUDITOR. 315 partners. Even where the partnershi]:) articles do not provide for interest upon either capital or dra\vini:;s. it would be well to point out that, as a matter of equity, it is desirable that interest should be charged upon any t-xc-ess of drawings over the authorised amount, inasmuch as these are clearly in the nature of a loan from the firm to the individual partner, and should, therefore — as a matter of right — carry interest in exactly the same way, as the law provides that loans from the partners to the firm shall carry interest at the rate of 5 per cent, in the absence of express stipulation to the contrary. Any irregulari- ties of this description should therefore be reported to all the partners ; and, as a matter of convenience, it would appear to be desirable that such report should precede the actual closing of the accounts, so that the instructions of the firm may be taken upon the point and given effect to liefore the audit is completed. It is verv desirable for the Auditor to see that the accounts, after being finally agreed to, are signed by all the partners. The question of partial audits has already been referred to under the preceding heading. It should be added here, how- ever, that, for the protection of the Auditor, it is desirable not only that he should start with a clear understanding as to the scope and limitations of his partial audit, but. further, that he should draw the attention of any incoming partner to the terms of the audit contract. This question was raised in the case of McCaid v. McLean, which came before Mr. Justice Phillimore and a special jury in July 1907. Here the plaintiff's sought damages against the defendant Auditor, alleging that it was through his neglect they had lost money by the defalcations of an employee. The defence was that, by arrangement with the then senior partner, the audit imdertaken was agreed to be a limited (or partial) audit only ; but that partner had long since retired from the firm, and it was admitted that the defendant had taken no steps to bring this arrangement to the knowledge of subsequent partners. The action was settled, and thus no express decision on the point at issue was arrived at. There can 3l6 AUDITING. be little doubt from every point of view, however, that the Auditor owes it not merely to himself, but also to his clients, to make it quite clear what he does and what he does not do. In tiie case referred to, the imyjortance of this point was emphasised by tlie fact that the annual Balance Sheets were signed by the Auditor as "certified," and his accounts were rendered for fees for " auditing " ; but even if the accounts had not lieen signed at all, and the charges had been made in respect of a '"'partial audit," or for "professional 'services," it would still seem desirable — particularly in view of the decision in SiiiitJi v. SJieard {vide Appendix " B ") — that there should be a clear understanding in writing as to what the Auditor is justified in not checking. THE AUDITOR TO A LIMITED PARTNERSHIP.— The Limited Partnership Act 1907 contains no provisions as to |j audit, and thus the arrangement between the Auditor and his client in this case is one determined .solely by contract. Inasmucli as (he limited partner has a full right to inspect books of account, &:c., the responsibility of the Auditor would appear to be precisely the same as in the case of an ordinary partnership. The proper course would be to hold the balancr fairlv between the partners, and to report any infringement of the partnership agreement that it is not certain has come to the knowledge of all parties. In the event, however, of the Auditor being appointed by the limited partner under Section 6 (which gives the limitetl partner the power of personally, or by his agent, inspecting the books and accounts), the duties of th.- Audi'j.r would appear to be similar to those of one appointed on behalf of creditors either under a formal or informal deed of inspectorship, which are dealt with in the next paragraph. THE AUDITOR ON BEHALF OF CREDITORS.— It not intreijuently occurs that a retiring partner, who leaves a portion, of his ca[iital in the firm, or a creditor who makes an advance to a lirm. stipulates that " Mr. So-and-so shall audit the accounts." Unless the contrary intention be very clearly expressed, the Auditor .so appointed would act on behalf ot IHE ATTITUDE CF THE AUDITOR. 317 both the firm and the creditor. In such a case it is very desirable tliat the amount of tlie fee be arranged beforehand, and it would not be wise to leave it an open question as to who was to pay it. Under the circumstances the firm could not, of course, remove the Auditor without the consent of the creditor ; nor, in the absence of a special provision to that effect, could the creditor do so, and in any case he would probably be obliged to indemnify the firm against any ^-xtra expense occasioned by his so doing. The position of the Auditor, in such a case as this, closely resembles that of the Company Auditor, except that the creditor would be entitled to the fullest possible information, whereas shareholders have not an equally extensive right. The decision in Smith v. Slicard {vide Appendix •' B '") is of interest in this connection. AUDITORS UNDER THE COMPANIES ACTS.— When the first edition of this work was published there was no statutory provision that the accounts of companies (other than those companies registered under the Companies Act 1879) should be audited, and therefore, although it was very usual for a company by its Articles of Association to provide for an audit, the relationship between a company and its Auditor was one of contract in each particular case, modified possibly to some extent by common law. It is true that Table "A" applied to all companies whose Articles of Association did not expressly exclude its operation ; but Table "A" had not the force of a statute, it merely embodied in a convenient form the terms of the contract entered into by those who were bound by its pro- visions. Accordingly the position of the Auditor under tlie Companies Acts was in those days a matter of some uncertainty, dependent very largely upon the facts of each individual case. It was, however, very usual for Articles of Association to follow somewhat closely the provisions of Table '"A," which provided (Clause 94) that " the Auditors shall make a report to the members upon the Balance Sheet and accounts and in every such report they shall state whether, in their opinion, the Balance Sheet is a full and fair Balance Sheet, containing the J 18 AUDITING. f particulars required by these regulations, and properly drawn up so as to exhiljit a true and correct view of the state of the company's affairs : and in case they have called for explanations or information from the directors, whether such explanations or information ha\e been given by the directors, and whether they have been satisfactory : and such report shall be read, together with the report of the directors, at the ordinary meet- ing/' A comparison of these provisions with Section 113 of the Companies (Consolidation) Act 1908 will show that, even after forty-five years' experience, it has not been found possible to effect any very substantial improvement. Further and more precise legislation upon the matter has, it is thought, been rendered necessary, not so much by any inherent defect in the provisions of 1862 as on account of their optional character; and even more by reason of the fact that the general practice of Accountants has, most unfortunately, been upon lines that tended to belittle the efficacy of these provisions. r It will be observed that Article 94 of Table "A " provided that Auditors should " make a report to the members," and that such report should be " read ' ' at the Ordinary Meeting. Special Articles of Association very frequently went further, and required that the Auditor's report should be printed at the foot of the Balance Sheet, and thus more or less made public property. Hence arose the custom of reporting in a concise, not to say a colourless, form. In an interesting lecture delivered by the late Mr. G. B. Monkhouse, F.C.A., on '■ Certificates," at the third provincial meeting of the Institute of Chartered Accountants, held in 1890, it was pointed out that in place of the report evidently contemplated by Article 94 it had become the almost invariable practice for the Auditor, after satisfying himself that the Balance Sheet was a full and fair Balance Sheet, containing the particulars required by the com- pany's regulations, and properly drawn up so as to exhibit a true and correct view of the state of the company's affairs, to signify the fact by signing the Balance Sheet, and prefixing his signature with the words "Audited and found correct," or THE ATTITUDE OF THE AUDITOR. 319 Others to the same effect; indeed the Auditor's report of those days was so little a report in the popular sense of the term that, by common consent, it was almost invariably described as a " certificate." This, it is submitted, was an unfortunate expres- sion that ga\e rise to much misconception, in that a certificate is something that " makes certain," and is thus necessarily limited to facts capable of absolute verification ; whereas a report is something "' brought back " in answer to an inquiry, and is thus an " account " — but not. of course, an account rendered by the accounting party. It will thus be seen that the altogether gratuitous substitution of the term " certificate " for " report " conveyed with it a fictitious idea that the Balance Sheet was a statement of fact capable of absolute verification, instead of being merely a narrati\"e of accounting parties " brought back " from them by an independent messenger selected for that purpose by reason of his impartiality and trustworthiness. The evil did not, howe\-er, by any means stop with the false impression given to the general public by the adoption of the misleading term " certificate." By reason of the fact that it had become customary to print all that the Auditor had to say as the result of his audit at the foot of the Balance Sheet, it became usual (as jMr. ^Ionkhouse stated in the paper alreadv referred to) to reduce those comments to the barest possible minimum ; in fact, there ha\e been cases in which the so-called " certificate " has consisted exclusively of the Auditor's signa- ture, without one word of comment, and the employment of the single word " Audited " or " Certified " was by no means unusual — indeed the latter expression was employed by the defendant in the case of McCatil v. McLean, already referred to (vide p. 315). notwithstanding the fact that it was alleged that only a " partial " audit had been conducted in that instance. It is difficult to see why a quite reasonable desire for con- ciseness should ever have been carried to so absurd an extreme ; but it is quite easy to see that the practice of publishing the Auditor's report (by whatever name it might be known) was j-O AUDITING. ■ nie that in the nature of things, however convenient it might be when everything was entirely satisfactory, might — and indeed naturallv wouhJ — prove extremely embarrassing in cases where the Auditor did not feel entirely justified in expressing the \-iew that e\erything was as it should be. A reference to the London and General Bank case will show that while the Auditor had as the result of his investigation satisfiied himself that the •capital of the companv was locked up in assets difficult of realisation, and that no dividend could prudently be paid, he was induced to refrain from expressing this view to the share- holders on the ground that the publication of such a report would inevitably ruin the bank, and thus cause incalculable harm to the shareholders, whom it was the primary duty of the Auditor to defend. To meet this difficulty, the Companies Act 1900 w-as passed, which, in addition to making an audit compulsory in the case of every company (Section 21) provided a somewhat com- plicated means of enabling the Auditor to acquaint the share- | holders with the results of his investigation. The means then adopted were, however, of a half-hearted description, and, it is submitted, largely failed in their operation because those con- nected with prosperous companies — including the Auditors — abstained from giving them a fair trial. Under Section 23 of I die Act of 1900 it was provided that the Auditors should " sign | a certificate at the foot of the Balance Sheet stating whether | ■ or not all their requirements as Auditors had been complied \ with," and should " make a report to the shareholders on the \ accounts examined by them, and on every Balance Sheet laid X i)efore the company in general meeting during their tenure | of office; and in every such report should state whether, in ;|' I heir opinion, the Balance Sheet referred to in the report was | properly draw-n up, so as to exhibit a true and correct view of | the state of the company's affairs as shown by the books of the 1 company." It was further provided that '' such report should be laid before the companv in gi-nir.d nui'iiug. " It is sub- '.» •IHE ATTITUDE OF THE AUDITOR. 32 1 mitted, as a pure question of interpretation, that there is only •one view to be taken of the meaning of this section, namely, that upon the face of the Balance Sheet there should appear a formal " certificate " on the part of the Auditor, to the effect {substantially) that he had been afforded proper facilities to make the audit — a statement which, being a matter of fact, would be capable of certification — and that, in addition, he should report to the shareholders on the accounts to such extent as he might think necessary, which report need not be printed at the foot of the Balance Sheet, but must be read to the share- holders in general meeting assembled. There is, of course, nothing in the section to forbid the printing of the report at the foot of the Balance Sheet ; but there would be no sense in flistinguishing between the certificate and the report, if it were intended that the two should form one document; and, as has already been stated, the essential requirement of the situation — as shown by somewhat painful experience — was that the Auditor should have some means, definitely authorised by the Legislature, of communicating with the shareholders in a manner that would not necessarily damage the credit of the •company, should the report be unfavourable. The general practice under the 1900 Act suggests, however, that company directors, taken as a class, were not sufficiently far-seeing to appreciate that they might at some future time be glad of an opportunity of refraining from printing the Auditor's report. The vast majority of company Balance Sheets issued in 1 90 1 and thereafter had appended to them what to all out- ward appearance was something combining in one document the statutory certificate and the statutory report — a practice which would have made any subsequent departure therefrom extremely inconvenient, as very prominently drawing attention to the fact that the report was unfavourable — a circumstance that might easily damage the company far more than the publi- oation broadcast of the report itself. This is a point to whicli attention was directed in the 5th Edition of this work ; but .apparently those respoiisililc seem to have considered tliat the 3-^ AUDITING. time could never come when the accounts of tlieir company would form the subject of a report that they would not care to print. Sooner or later, however, such a position may arise in the life of any company, and thus arose what can only be described as a most mischievous practice — absolutely in conflict with the spirit of the Act of 1900, and one which it is sub- mitted might involve all concerned in a very serious liability — namely, the practice of continuing to append to the foot of the Balance Sheet a document which frimd facie appeared to be a combination of the statutory certificate and the statutory report, and of at the same time issuing a fuller report to shareholders which was not printed, but only read at the general meeting — probably immediately after the notice convening the meeting and before the handful of shareholders present could properly settle down into their places. In Appendix "A" will be found extracts from the 1908 Act Avhich call for the special attention of the Auditor. Upon reference to Section 65 it will be noted that every company limited by shares and registered after the commencement of the Act is required to hold a statutory meeting not less than one month, nor more than three months, after the date on which it is entitled to commence business, and that at lea.st seven days before the day on which that meeting is held (save in the case of private companies) the directors are required to forward to every member of the company a report containing certain par- ticulars in connection with the issue of Capital and other matters. It is further provided by Subsection 4 that, in so far as this report relates to the shares allotted by the company, and to the cash received in respect of such shares, and to the receipts and payments of the company on Capital Account, ir shall be certified as correct by the Auditors of the company (if any). A new duty was thus thrown upon Company Auditors. Formerly their responsibility was confined to the verification of the periodical Balance Sheets, but since the passing of the 1900 Act it is provided that, if Auditors have been appointed before the statutory meeting, they shall certify as correct the various THE ATTITUDE OF THE AUDITOR. 325 figures which the directors are required to place before the shareholders in advance of that meeting. The forms of the various certificates and returns now required — in so far as they refer to Auditors — are included in Appendix " A." Passing on to the Auditor's duty in connection with the annual or other periodical accounts ; this, so far as it is modified by the 1908 Act, is contained in Section 113* {vide Appendix " A"). Some doubt having arisen as to the exact meaning of these provisions, the Council of the Institute of Chartered Accountants submitted a case for the joint opinion of Sir Robert Finlay, K.C, Mr. Felix Cassel, K.C, Mr. A. R. KiRBY, and Sir F. B. Palmer. The opinion given by these gentlemen is as follows : — (i) In our opinion the Auditor's report to be made pursuant to Para- graph (2) of Section 19 of the Companies Act 1907 should, in cases where the Auditors have no special comments to make, run as follows :— Report of the Auditors to the Shareholders of , Limited. We have audited the Balance Sheet of the , Limited^ dated the day of and [here identify it as : " above set forth " or " within contained " or " a copy of which is annexed hereto and initialled by us" or "a copy of which has been initialled by us."] We have obtained all the information and explanations we have required. In our opinion such Balance Sheet is properl}'^ drawn up so as to exhibit a true and correct view of the state of the company's affairs according to the best of our information and the explanations given us and as shown by the books of the company. * We consider that the Report should identify very clearly the par- ticular Balance Sheet to which it refers, so that there may be no room for after dispute or confusion and no danger that by mistake or other- wise the Balance Sheet submitted to the shareholders, though bearing the proper date, should not be the one actually referred to in the report. Perhaps the surest mode of identification is to write the report at the foot or endorse it on the Balance Sheet to be submitted, for by these means the two documents are made inseparable : in other words, the report runs with the Balance Sheet. But, as above appears, there are alternatives open. In any case, the Auditors should keep a copy of * Section 19 of the Companies Act 1907. Y 2 3^4 AUDITING. the Balance Sheet they audit and place a memorandum of identity thereon, so that if the question arises they may be able to testify certainly as to the matter. (2) Under the section the Auditor's report is to be attached to the Balance Sheet or referred to at the foot thereof. In the former case we consider that the attachment should be effected either by printing the two documents continuously on the same sheet of paper or by fastening the report to the Balance Sheet. We consider that the best mode of attachment is that the report should be written or printed at the foot of the Balance Sheet or endorsed thereon. (3) If the report is not attached to the Balance Sheet there should at the foot of the Balance Sheet be words referring to the report, e.g.j " The report to the shareholders of Messrs. the company's Auditors on the above Balance Sheet is dated the da}' of and is open to inspection." In our opinion it is for the directors to make the reference and settle the form thereof and not for the Auditors. (4) In our opinion the Act does not impose on the Auditors the duty of seeing that the report is attached to the Balance Sheet or referred to at the foot thereof. This duty, we consider, is imposed on the company and its directors. (5) It appears to us that it is not the duty of the Auditors to see that the Balance Sheet is signed by the required number of directors. Sub- section (3) of Section 19 clearly contemplates that the Balance Sheet is to be issued after the report has been made, for a copy is to be attached or referred to. As to cases in which there are no officers called directors, the Balance Sheets should be signed by the manager or other person occupying the position of director, for Section 30 of the Act of 190Q with which the Act of 1907 is to be read (see Section 52) provides that the term " director" includes any person occupying the position of director by whatever name called. (6) In our opinion it is not the duty of the Auditors to supply to share- holders when requested copies of the Balance Sheet and their report, or to furnish information to individual shareholders. (7) In our opinion the Statement ia the form of a Balance Sheet referred to in Section 21 of the Act of 1907 is a document to be sub- mitted by the directors to the Auditors for audit. The document must contain as the section requires a summary of the company's capital, liabilities, and assets, giving such particulars as would disclose the general nature of such liabilities and assets and how the value of the fixed assets has been arrived at, but it is not necessary to include in it a statement of profit or loss. We consider that in many cases the last THE ATTITUDE OF THE AUDITOR. 325 audited Balance Sheet will be a sufficient statement in the form of a Balance Sheet, but where the Balance Sheet does not state how the value of the fixed assets has been arrived at it would, in order to comply with the section, have to be supplemented by a note or memo- randum stating how the value of such assets was arrived at. Where the Balance Sheet, whether supplemented as aforesaid or otherwise, is adopted for the purposes of the section as a statement in the form of a Balance Sheet, it should in our opinion be accom- panied by a copy of the report of the Auditors on such Balance Sheet, and if it is so supplemented the Auditors should certify that according to the best of their information the method specified in the supple- mentary note or memorandum has been adopted. We consider, however, that it is open to the directors to frame the " statement in the form of a Balance Sheet " referred to in Section 21 in more general terms than the Balance Sheet provided that it is complies with the requirements of the section, but in such case the statement must be audited by the company's Auditors and the result of the audit should be certified at the foot of the statement. (S) As to the general duties of the Auditors under Section 19 of the Act of 1907 we consider that they should perform these duties with due regard to the provisions of the company's Articles of Association in so far as those articles are consistent with the Acts, and that they should call for all such information and explanations as they consider requisite to enable them to make the report to the shareholders con- templated b}' the section. They should not have the least hesitation in reporting fully as to any unsatisfactory features in the position. Lastly, we do not consider that the Auditor's duties are limited to a comparison of the figures in the Balance Sheet and those in the books. No doubt he has to examine the books, but, as Lord Justice Lindley said in Re The London and General Bank (1895, 2 Ch. 683), " he does not discharge his duty by doing this without inquiry and without taking any trouble to see that the books themselves show the company's true position. He must take reasonable care to ascertain that they do so." R. B. FiNLAY, Felix Cassel. A. R. KiRBY. Francis B. Palmer. Temple, 13th March 1908. . , 326 AUDITING. The above opinion is reproduced for what it is worth, and for the sake of completeness, but in the nature of things the opinion of Counsel is never particularly instructive in the absence of the case upon which the opinion is based. More- over, it seems doubtful whether under any circumstances lawyers, however eminent, can be reasonably expected to make any notable contribution to an inquiry as to how a professional accountant is to conduct his duties with due regard not merely to the bare limits of his legal responsibility, but also to the reasonable requirements of the general public, of the profes- sion, and of his own honour. It is suggested, however, that there can be little doubt that the distinct leaning apparently evidenced towards the publication of the Auditor's report, in the face of the fairly clear indication in the Act, was in all probability inspired by the case submitted. In the nature of things members of the leading firms of accountants (from whom the Council of the Institute is very properly drawn) have only a limited experience with the audits of those companies making the greatest demands on the vigilance of the Auditor. A standard of practice that may answer all reasonable require- ments in the case of first-class concerns, ably and honestly con- ducted, is by no means necessarily equally applicable to other undertakings, and this is a pcint that certainly should not be overlooked by the average practitioner. The superficial inquirer may perhaps be tempted to suggest that companies unable to pass this lest should not be audited by reputable practitioners ; but the arguments have yet to be put forward in favour of the proposition that the investing public is to be deprived of the benefits of a skilled and impartial audit just in connection with those concerns where it is most indispensable. A little consideration will, it is thought, suffice to show that, where the Auditor has nothing of interest to report, the audit fee represents expenditure wasted, except in so far as it may have had a deterrent effect. It is precisely those concerns that give rise to uneasiness, and which therefore call for careful con- THE ATTITUDE OF THE AUDITOR. 327 sideration and special report, that make the greatest demands upon the impartiality and the ability of the professional Auditor. APPOIXTMEXT OF AUDITORS.— Section 112 of the 1908 Act provides for the appointment of Auditors. Suli- section 3 declares that a director or officer of the company shall not be capable of being appointed Auditor ; but strangely enough there is nothing to prevent a relation, a partner, an employee, or other dependent of a director or officer, from being so appointed. The question has been raised as to whether, under this subsection, a firm employed l)y the aw Lords have here expressed themselves in terms that appear to be widely different from those which have from time to time been used by other Judges, they were not speaking ex cathedra; and further that, although the distinct suggestion is that, should a case be brought before it, the House of Lords might see fit to overrule some of the decisions already given by the Court of Appeal, THE LIABILITIES OF AUDITORS. 34I it does not necessarily follow that their Lordships would adhere to those views (as expressed below) when the time came : — " Passing to clause 29, which deals with the appointment of Auditors, he suggested the addition of words to the effect that, unless it was otherwise provided by the articles of association, one of the Auditors or the Auditor, if there was only one, should be a professional accountant, and should not necessarily be a shareholder. In support of that proposition, he pointed out that joint-stock enterprise had grown very largely of late years, and he maintained that very few Balance Sheets could be audited properly except by a professional accountant. He went on to suggest the insertion in the Bill of a provision that no Auditor, other than the retiring Auditor, should be appointed at a general meeting, unless notice had been sent out to the shareholders with the notice of the meeting. That, he said, was brought forward with the object of preventing the question of the Auditor being ' rushed,' as was sometimes the case at present. The Bill provided that there should be a Balance Sheet containing all details — technically, what was known as the Trial Balance. It was scarcely necessary to provide for that by legislation, because a Balance Sheet could not be niade out unless the details were given. As to the duties of Auditors, the Bill proposed that they should use reasonable diligence with the view of ascertaining that the books of the company had been properly kept, and recorded correctly the financial and trading transactions of the compan}'. The latter part of the section he did not object to, but he thought the words ' properly kept ' should be omitted. ' Properly kept ' was a vague term, and the section would be quite sufficient to meet the difficulty without its insertion. It would be the duty of the Auditors to say that the books had not been properly kept if that was the case. " The Bill cast upon Auditors the duty of checking the Balance Sheet, including the amount of debts due to the company after making a proper deduction for debts considered to be bad or doubtful. It would be impossible for the Auditors to do that in the case of large companies, where the debtors numbered, say, 1,000. In the case of banks, for instance, where the number of debtors was very large, it was found necessary to keep an aggregate account of debtors, showing the total amount due to the company by its debtors. The Auditors would have to take that account, and schedules would be prepared, and, if neces- sary, would be tested afterwards. The duty should not be thrown upon Auditors of checking every balance. In one case he might mention the debtors numbered 750,000. (Laughter.) It should be sufficient if they 342 AUDITING. gave a certificate to the effect that they had used all reasonable care and diligence in ascertaining that the Balance Sheet was true." Lord Davey : " I should like to ask whether you conceive it to be the proper duty of an Auditor to say not only whether the books are properly kept, but to go into questions behind the books, and say whether the assets are properly valued?" — " I do not know that I can give a better definition of the duties of the Auditor than that laid down by Lord Justice Lindley. He said that it was the duty of an Auditor to be honest, to exercise all reasonable care and skill to ascertain that that which he certifies is true, and to exercise all reasonable care and skill in ascertaining the truth." Lord Farrer :" That is all very well ; but what is the truth which he is to ascertain?" Lord Davey : " Yes; that is it. Can he, for instance, when the properties are valued at a certain sum in the books, and on the face of the books are properly valued, can it be his duty, not being a valuer, to go into the question of value and say that the directors have put too high a value on the real estate?" — " No; I do not think so. It would be giving the Auditor a different position from that which ! j it was contemplated he should have — namely, that he should examine the accounts of the directors and see whether they are correct. Any- thing calculated to arouse his suspicion he ought, of course, to look into." Lord Farrer : " After all, the responsibility lies with the directors?" — " Not altogether with the directors. There are the managers of the company." Lord Farrer : " Do j^ou wish to place the Auditor in the position of •an administrator, who is to check the directors in their management of the company?" — "Certainly not." Lord Davey : " Is not the sounder principle this — that the Auditor is bound to know everything the books tell him, to have all the suspicions that the books suggest, and to make all the inferences to what he finds in the books would lead him?" — " I think that would cover the whole of his duty. I think it is his duty not to certify a Balance Sheet until he believes it to be true, and he has taken all reasonable care that it is so. He is bound to see that the Balance Sheet is brought before the shareholders in such a form that they themselves can exercise their judgment upon it." " The next suggestion he had to make was that the pains and penalties of Auditors should be modified. At present the Auditor was supposed to be responsible if dividends were paid out of capital." — Lord Davey : " Is he? I never knew it." — The Lord Chancellor : " Putting aside iraudulent connivance, what do you suppose to be the responsibility of I THE LIABILITIES OF AUDITORS. 343 an Auditor?" — The witness: "That if diAidends have been paid out of capital, assuming, of course, that the compan}- is wound up, the directors and Auditors are responsible for the amount of the dividends so paid, subject to the Statute of Limitations in favour of the Auditors." — Lord Davey : "Where do j'ou find that?" — The Lord Chancellor : "I am not aware of any such law. I am not aware of any case in which the innocent mistake of a director has been held to be the subject of an action." — The witness : " There was a case before Mr. Justice Stirling."" — Lord Davey : " There, there was fraudulent connivance." — The witness : "I think there was not con- nivance, but that the Auditor himself was ignorant." — The Lord Chancellor : " To me it is a startling suggestion that for an innocent mistake an Auditor should be liable."' The ^-iew expressed by the late Lord Davey above was, it will be seen, that the Auditor is bound to know everything the books tell him, to have all the suspicions the books suggest, and to make all the inferences to which ail that he finds in the books would lead him. This, taken by itself, is a somewhat narrower view than has been previously suggested in the course of this chapter — namely, that the l:)Ooks must not be considered as the sole source of evidence — l>ut it is thought there is very much less difference between these views than is at first apparent, and that the late Lord Davey's view that the Auditor should ■' have all the suspicions which a careful examination of the books would give him " amounts to very much the same thing as the opinion, already expressed in these pages, that the books themselves are frimd fade evidence only, and must, in all cases of doubt, be verified by independent inquiry. AUDITORS LL^BILITY FOR DEFALCATIONS OF EMPLOYEES. — The question as to whether — and, if so, to what extent — an Auditor is liable to his clients for defalcations committed by their employees is one of very considerable importance, but unfortunately the precedents upon the subject are not sufficient to establish any general rule. The reports xxiRoss V. Wright (> Co. (an Irish case decided in July 1896), and in Wilde v. Cape 6^ DalgleisJi, and Martin v. Isitt may advantageously be consulted in this connection ; but it cannot be pretended that there is any degree of finality about them. Pending further decisions, however, it may perhaps not I »l I 344 AUDITING. unreasonably be assumed that, in this (as in other) respects, the Auditor will be liable to be proceeded against by way of action for negligence in the discharge of his duties ; and, if it can be shown that the defalcations have resulted from the negligence or incapacity of the Auditor, the probability is that he will be held liable in damages accordingly. The more interesting of the two cases in question is undoubtedly that of Martin v. Isitt, in which the plaintiffs claimed damages by reason of the fact that the monthly audit, which the defendants had contracted to perform, had been allowed to fall into arrear, and that the defalcations had remained undetected for a longer period than, in the plaintiff's view, was reasonable. The case was eventually settled without any definite expression of opinion upon the part of the Judge as to its merits ; but doubtless, in so far as the delay in the monthly audit was unreasonable, the Auditor would be responsible for any loss incurred by his clients in consequence. The question is obviously, therefore, one of the very greatest importance, as showing the extreme desira- bility of monthly and other periodical audits being punctually proceeded with. On the other hand, a reasonable margin would, no doubt, in all cases be allowed. It would be mani- festly impossible for an Auditor to commence his investigations in all cases bnmcdiately after the period had elapsed, and con- sequently it is only reasonable to suppose that some elasticity would De used in applying the general rule ; otherwise the position of professional Auditors, say, in the month of January, would be a serious one. With regard to the later decision upon the liability of Auditors in the event of defalcations on the part of employees, given by the Irish Court of Appeal in the case of the Irish Woollen Co., Lim. (a full report of which appears in Appendix "B "), it is important to bear in mind that the decisions of this Court are not legal precedents in England ; but, be that as it may, it is thought that the proposition previously advanced can now be entertained with even less doubt than before — namely, that where loss is incurred through the defalcations of THE LIABILITIES OF AUDITORS. 345 employees, which defalcations might have been discovered or prevented by the exercise of due diligence, the Auditor will be liable. It may also be mentioned that in this case stress was laid in the agreement between the Auditor and the company that there should be a " monthly '' audit, although there appears to have been some conflict as to what was actually intended by this arrangement. The circumstances were as follow : — Dividends had been paid out of capital on the faith of accounts which were afterwards discovered to have been falsified, and the charge against the Auditor may (in effect) be divided under three headings : — (i) That he failed to discover that the stock had been over-valued. (-') That he failed to discover that the book debts had been over-valued. (3) That he failed to discover that the trade liabilities had been under-stated. With regard to (i), the case would appear to be upon all-fours with the decision in the Kingston Cotton Mills case, and for much the same reasons the decision of the Court was in favour of the Auditor. (2) Here, again, the Court decided in the Auditor's favour, on the ground apparently that he could not be held responsible for the insufficiency of the reserve provided against Bad Debts, nor for the omission to provide for Cash Discounts. With regard to Bad Debts, it is quite clear that all an Auditor can do is to make reasonable inquiries as to the sufficiency of the provision made, and the final responsibility must in all fair- ness rest with the directors and managers ; but it would appear to be the duty of an Auditor to form a reasonable opinion as to the sufficiency of the reserve, and to qualify his report if in his opinion such reserve is inadequate. Upon the subject of Cash Discounts it would not have been surprising if the Court had held that a proper provision otcgJit to have been made for the amount which it was expected would eventually be 346 AUDITING. deducted on payment of the various accounts, although, of course, -per contra Cash Discounts might properly be deducted from the trade liabilities. In this respect the decision of the Court of Appeal is perhaps more favourable to the Auditor than might have been expected. (3) It was in respect of his failure to discover that the trade liabilities were under-stated that the Auditor was held liable for negligence. There would seem to have been a systematic falsification of the books in this respect, and had this falsifica- tion been discovered at an earlier stage it would have been clear that the dividends paid away had not been earned. Incidentally, the discovery of falsification in the books under this heading would naturally have aroused suspicion as to the accuracy of the records under headings (i) and (2). Without having the actual books before one it is difficult — if not impossible — to express any opinion as to whether or not a reasonably careful and skilful Auditor could have discovered the frauds ; but the report of the case distinctly suggests that there were points which would call for careful inquiry, and upon which in point of fact inquiry was actually made by the Auditor. He would appear to have noticed that certain invoices were not entered in the books until after the period to which frjmd facie they related, and to have inquired as to why this course was pursued. The explanation given, apparently, was that the goods relating to these invoices had not been included in stock. The explanation is by no means unreasonable, as such a practice is certainly not contrary to the custom of many perfectly honest undertakings. In the Kingston Cotton Mills case it was stated that " Auditors must not be made liable for not tracking out ingenious and carefully- laid schemes of fraud when there is nothing to arouse their suspicion, and when these frauds are perpetrated by tried ser- vants of the company, and are undetected for years by the Directors." It may well be thought that these remarks would apply equally well to the IrisJi Woollen Com-pany case; but it may be pointed out that the practice of " holding back " THE LIABILITIES OF AUDITORS. 347 invoices because goods have not been taken into stock, although perhaps in itself permissible, is one which — considerations of fraud apart — might easily lead to mistakes. So that, if any means arc available for checking the records of the transac- tions, such means ought not to be neglected by a reasonably careful Auditor. It appears that the suppression of invoices would have been discovered at once, had the Auditor taken the precaution of comparing the Creditors' Ledger Balances with the statements of account forwarded by the various creditors ; and, that being so, it seems reasonable to have held that he was guilty of negligence in omitting to take this precau- tion. It is true that the " stock-taking " statements would only have disclosed "suppressed"' invoices, and would not have thrown any light upon the invoices '"'carried over "; but the discovery of a large number of invoices altogether sup- pressed would at once arouse suspicion in the mind of any careful Auditor, and throw upon him the onus of further and more exhaustive inquiry. In the " soft goods " trade it is customary for creditors to be asked to send in "stock-taking "' statements to be compared with the creditors' Ledger Balances, so that, particularly in the case of a concern carrying on such a business as that of the Irish Woollen Company, Lim., does it seem reasonable that the Auditor should have been expected to take this precaution. A recent decision in connection with the liability of an Auditor for failure to detect defalcations is that in the case of the London Oil Storage Company, Lim. v. Secar, Hasluck 6^ Co. {vide Appendix " B "), which came before the Lord Chief Justice and a special jury in June 1904. To the casual onlooker this case would appear to be quite straightforward, but Lord Alverstone devoted so much care to his summing- up that it seems clear the matter struck him as being one of more importance and more difficulty than to the ordinary observer appears to be the case. The principles governing the matter were, he said, clear, but the practical application of those principles to any individual case a matter of the very 348 AUDITING. greatest difficulty. This admission is to be welcomed, as affording a most acceptable contrast to the manner in which the Courts regarded the views of Auditors a dozen years before ; but if the situation in the case referred to is so difficult as to seriously tax the intelligence of a special jury, it is clear that the present author was by no means overstating the case when — in the fourth edition of this work — he expressed the view that such important and such highly technical matters ought not, in fairness to Auditors, ever to be decided by a single Judge. Shortly stated, the points at issue here were as follows : During a number of years the defendants had never taken any steps to \erify the amount of cash in hand appear- ing on the Balance Sheet. During those years the amount of this balance had very^ materially increased, and during the latter part of the period had not been shown separately from the balance at bank. Eventually, owing to the illness of the responsible cashier, it was discovered that the bulk of this balance was non-fxistent. with the result that the company sustained a loss of some hundreds of pounds. On behalf of the defence it was argued (i) that in the absence of suspicious circumstances an Auditor was entitled to rely upon the state- ments of trusted employees {vide Kingston Cotton Mills case) ; (2) that there were no suspicious circumstances here ; (3) that the Directors had not had their suspicions aroused, and, there- fore, if the case w\as one for suspicion, they were at least equally negligent ; (4) that there was no evidence to show that the whole of the deficiency in tlie cash balance did not occur since the date of the last audit, in which case clearly the Auditor could not be responsible. The jury found that during the last four years the Auditor had committed a breach of his duty, and they assessed the damage sustained owing to this breach of duty at live guineas, adding as a rider that they considered the Directors had been guilty of gross negligence. Upon the whole this \erdict seems to be a very fair one, and certainly it cannot be said to err upon the side of severity. It is thought, however, that the defendants made their case worse THE LIABILITIES OF AUDITORS. 349 by adopting too low a view of auditorial responsibility. There are, of course, many things that an Auditor must from time to time take upon trust ; but under normal circumstances the balance of cash in hand seems to be the one asset in a Balance Sheet that is really capable of absolute and unconditional verification. In the absence, therefore, of ^■ery exceptional circumstances — as, for example, in the case of an undertaking having numerous branches — the cash in hand should invariably be verified by the Auditor. The actual enumeration of the balance of cash in hand at each of several branches may not be practicable, but so far as can be gathered no such difficulty arose here ; while again the very considerable increase of cash in hand (an increase in no way connected with the actual requirements of the business), ought, it is thought, in all cases to be regarded by the careful Auditor as a matter calling for careful inquiry, if not actually a matter for suspicion. That the Directors showed gross negligence in allowing such a large balance to accumulate in the hands of one of the employees of the company goes, of course, without saying ; but it would be straining the decision of the Court of Appeal in the Kingston Cotton Mills case too far to suggest that, however negligent the Directors of a company may be, so long as they are satisfied the Auditor need inquire no further. Did that really represent the true limit of an Auditor's duties, those duties might be regarded as adequately discharged if the Auditor did nothing more than require the Directors to sign the draft Balance Sheet before he did so himself ! It is obviously in the interests of professional Auditors that their duties should not be made unduly onerous, and that they should not be held responsible for the absolute accuracy of statements contained in the accounts which in the nature of things it is impossible for them to ^'erify completely j but it is thought that it is equally in the interests of the profession that, within such limits as may be practicable, the full responsibility of Auditors for the performance of their duties with reasonable care and reasonable skill should be rigidly enforced. On the subject of "partial'' audits, see later (p. 356). ^^Q AUDITING. The decision of Alverstone, C.J., in II cur y Squire {Cash Clicjiiist), Lim. v. Ball, Baker c5^ Co. {vide Appendix " B "), is difficult to summarise ; nevertheless, it contains some points of considerable importance. The plaintiffs' allegation here was that the defendants had been guiltv of negligence (i) in failing to detect a long-continued falsification of Stock Sheets ; (2) in failing to detect the fraudulent suppression of liabilities. It was held inter alia {a) that the same standard (of care and skill) is due from the auditor's clerk as from the auditor himself ; {b) that the auditor is not obliged always to send the same clerk always to do the same work, and is not responsible if, in consequence of such changes, the "cumulative effect" of falsifications is unnoticed ; {c) where the only effect of an inflated Balance Sheet is to allow a company to borrow money on debentures, the company has suffered no damage that can be made the subject of an action ; {d) articles of association purporting to relieve auditors from all responsibility, save for their own dishonesty, are probably ultra vires ; {e) on the broad issues the action failed ui all respects. The very full report reproduced in Appendix " B " is well worthy of careful study. LIABILITY OF AUDITORS FOR LIBEL.— The question of the liability of an Auditor for libel or slander is one which has not often been raised, but it would seem that the ordinary rules of law would apply hereto. That is to say, that, when the alleged libel or slander is true in point of fact, and is published by the Auditor in good faith and without malice, and in the bond fide discharge of his duty, it would, no doubt, be held to be privileged {Laid ess v. Anglo-Egyptian Cotton 6^ Oil Co., Lim., 4 Q.B., 262). So far, the proposition is eminently satisfactory ; but there still remains for consideration the position of the Auditor, assuming that he were mistaken in his facts, or assuming that he had — in all good faith — gone some- what outside the actual scope of his duty in the particular matter. In these cases it is thought that the question would be primarily one for a jury to decide, but that every reasonable indulgence would be allowed to the Auditor who had acted in good faith and without malice. THE LIABILITIES OF AUDITORS. 35 1 It may be added in this connection tliat it is settled law that when it is part of the duty of a person to attend a meeting and to address it, any statements made by him there in good faith are privileged. Whatever an Auditor may state in his statutory report to the shareholders is therefore clearly privileged. As to how far this would apply to verbal statements made by an Auditor at the general meeting of a company may, however, reasonably be doubted, inasmuch as it is by no means clear that an Auditor has any statutory dutv to attend general meetings. Indeed, it has been held by a County Court Judge that he has no right to do so; and, although this is a view from which probably some may differ, the point is by no means altogether free from doubt. It has certainly never been settled in the affirmative. THE RESPONSIBILITY OF THE AUDITOR FOR ERRORS. — Having now discussed the practical extent of the Auditor's investigation, it is time to pass on to a consideration of his liabilities, in the event of his inquiries having failed to detect and expose errors or frauds. CRIMINAL LIABILITY OF AUDITORS.— This is a question on which the reported cases are few and far between. In the Portsca Island Building Society case criminal proceed- ing were instituted against the Directors and the Secretary of the Society, but not against the Auditors. The Directors were, however, acquitted, and the case is only of interest in this connection, inasmuch as the late Lord Brampton (then Mr. Justice Hawkins) very clearly stated, in the course of his summing-up, that the evidence before him had established a civil liability upon the part of the Auditor. In the case of the Lancaster Building Society, the Auditor, among others, was charged with various criminal offences, but was acquitted j and the Judge in his summing-up stated to the jury that, no matter how scandalous the negligence of an Auditor might be, they would not be justified in returning a 352 AUDITING. verdict of guilty unless they Avere satisfied that there Avas evidence of " not only criminal negligence, but also of fraudulent intent."* The Auditors of the- two Newfoundland Banks which failed in 1894 were also tried, in conjunction with the Directors of their respective companies, and likewise acquitted. The case of Regijia v. Dexter and of hers (decided in 1899) may be mentioned in this connection, but it throws no light upon the liability of Auditors, as the charges related to the promotion of a company that never even went to allotment. It has, however, an important bearing upon the liabilities of accountants who certify as to profits for the i)urposcs of a prospectus. At the trial of the Auditors and certain other oflficials of DutnbelVs Banking Co., Lim., which took place at Douglas. Isle of Man, in November 1900 — the prosecution was under Section 221 of the Manx Criminal Code of 1872, but the wording of this section is identical with that of the English Act of 1862 (24 & 25 Vict., c. 96, Section 84), so that the precise locality of the prosecution introduced no distinctive element — the defendants were convicted of having joined in the issue of false Balance Sheets, knowing them to be false, and with the intention to deceive, and were accordingly sentenced to varying terms of imprisonment. If it were necessary to deal at length with the merits of this particular case, much space might be devoted to a discussion of the evidence, with a view to seeing whether the charges put forward were actually proved up to the hilt in all cases; but for the purposes of a general work of reference this is not required. It may be pointed out, howe\er, that under Section 281 of the Companies (Consolidation) Act 1908 any person who " wilfully makes a statement false in any material particular " in " any return, report, certificate. Balance Sheet, or other ♦ This, of course, was before the Companies Act igoo was passed. THE LIABILITIES OF AUDITORS. 355 document, required by or for the purposes of " that Act, "knowing it to be false,." is guilty of a misdemeanor, and liable on conviction to fine or imprisonment. This section goes somewhat further than the Act of 1862, inasmuch as it is no longer necessary to prove intent to deceive or defraud ; but it is thought that the distinction is more apparent than real, seeing that anyone who walfully makes a false statement, " knowing it to be false," would invariably be assumed by an average jury to have made it for some purpose, and it is unlikely in the extreme that the purpose would be an innocent one. Practically, therefore, the law probably stands exactly w^here it did before the passing of the 1900 Act, save that possibly the trial of any person charged thereunder might now be somew'hat shortened. Another criminal case which is of interest in this connection, although the Auditors were in no way involved, is the trial of the Managing Director and Breweries Manager of SJwwelVs Brewery, Lim., in March 1904, on various charges of fraud. The defendants, Avho were convicted and sentenced respectively to fifteen months' and nine months' imprisonment, had for many years systematically overvalued the stock-in-trade and had induced subordinate employees of the company to certify to these valuations on the representation that they were more than covered by existing Secret Reserves. The case is, it is thought, chiefly of interest to Auditors in that it drawls atten- tion to a possible very serious abuse of Secret Reserves, and emphasises the importance of an Auditor very carefully inquiring into the circumstances under which recourse is had to such Reserves during " lean "' years to conceal the com- paratively poor results then achieved. It has been stated in some quarters that if the False Statements (Companies) Bill 1904 had been passed it would have been impossible for Directors ever to maintain a Secret Reserve without committing a criminal offence. This, it is thought, is an exaggeration. It is, however, important that both Directors and Auditors should bear in mind that the mere fact that Secret Reserves {q.v.) A A 354 AUDITING. exist proves that, to some extent at least, the Directors are not entirely candid with their shareholders; and the absence of absolute candour naturally necessitates at the very least the most scrupulous care in connection with all matters relating to the accounts. CIVIL LIABILITY OF AUDITORS.— There are two methods by which civil proceedings may be taken against Auditors for damages occasioned by negligent or unskilful dis- charge of the duties imposed upon them — namely, by way of action, and by way of misfeasance summons. The latter, however, only applies to Auditors of Companies in the course of being wound up. PROCEDURE BY WAY OF ACTION.— One of the lead- ing cases under this procedure is the Leeds Estate Building and Investment Society, Liin. v. Shephard, which was decided by Stirling, J., in 1887. The head-note of the official report reads as follows : — " Held, that it was the duty of the Auditor in verifying the accounts of the company, not to confine himself to verifying the arithmetical accuracy of the Balance Sheet, hut to inquire into jts special accuracy, and to ascertain if it contained the par- ft iiculars specified in the articles of association, and was properly drawn up to contain a true and accurate representation of the company's affairs." That portion of the judgment which more particularly affects Auditors enforces the same doctrine in even more definite terms : — " In each of (these) years, L. (the Auditor) certified that the accounts were a true copy of those shown in the books of the company. That certificate would naturally be understood to mean that the books of the company showed (taking, for example, the certificate for the year 1879) that, on the 30th April 1879, the company was entitled to ' moneys lent ' to the amount of ;^29,5i5 15s. od. This was not in accordance with THE LIABILITIES OF AUDITORS. 355 The fact ; the accounts, in this respect, did not truly represent The state of the company's affairs, and it was a breach of duty upon L.'s part to certify as he did with reference to them. The l)ayment of the dividends, directors' fees, and bonuses to the manager actually paid on those years appears to be the natural and immediate consequence ' of such breach of duty ; and I hold L. liable for damages to the amount of the moneys so paid." The futility of an Auditor attempting to escape his just responsibilities by a limitation of the scope of his certificate is here most forcibly demonstrated ; there are, however, two other points, which must not pass unnoticed. First, there was no question, in this case, as to the accounts being false. The matter in dispute was no moot question of depreciation, or of apportionment between Capital and Revenue ; the accounts were indisputably false, and it was not even suggested that the Auditor had done his best to verify Their accuracy. Secondly, the immediate result of his neglect was a pay- ment of dividends, directors' fees, and bonus. Had no such result taken place, it is by no means so certain that any liability would have accrued. Before dismissing this case altogether, it may be well to remark that the defendant was allowed the benefit of the Statute of Limitations ; but — inasmuch as this point was not disputed by plaintift"'s counsel, and was consequently not before The Court — it does not follow that a like plea would necessarily avail upon another occasion. Astrachan Sicamship Company Case. — This was an action l>rought in the Palatine Court at Liverpool to recover damages from the Auditors on account of loss sustained by the company through the dishonesty of its manager. A settlement was arrived at by the parties, so that no new point was decided as to the liability of Auditors, but it may be mentioned in passing that the Vice-Chancellor expressed some hesitation as to his A A 2 T,^6 AUDITING. jurisdiction to try the matter, and only proceeded upon being satisfied that he did so with the consent of all parties. In this case a group of steamship companies were administered by the same manager, who was eventually adjudicated bankrupt with a large deficiency, and .subsequently convicted of embezzle- ment. It appeared that he was able to satisfy the Auditors as to the existence of the balance of cash in hand in the case of each separate company by producing to them a suthcient sum of cash, although it would have been impossible for him to produce simultaneously a large enough balance to cover the amount that ought to have been in hand in respect of all the companies that he managed. Apart from this, however, it appeared that he had made entries in the books of the Astrachan Company showing that he had borrowed certain sums from that company at interest, and the suggestion was that a transaction of this kind was sufficiently unu.sual to make it the duty of the Auditors to call the attention of the shareholders to the fact, more especially as — there being no board of directors — the .shareholders were entirely dependent upon the Auditor for protection. Smitli V. Shear d. — The report of this case (decided by Bray, J., and a special jury on nth ]\Iay 1906) is reproduced in Appendix " B," although it is feared that it will prove more confusing than instructive, inasmuch as the verdict of the jury | would appear to be hopelessly wrong. The point here was as to whether an Accountant who had (as he said, inadvertently) charged for "auditing"'" accounts could be held liable for failure to detect fraud on the part of an employee, when his services as Auditor had been requisitioned for another pur- pose, and the audit was evidently agreed for as a " partial audit. The moral of the case appears to be that "partial audits should be charged for as such, and that the precautions omitted in the process of compression should be clearly agreed to in writing, as between auditor and client. It is, however, aways easy to be wise after the event. THE LIABILITIES OF AUDITORS. 357 PROCEDURE BY MISFEASAXCE SUMMONS.— The passing of the Companies (Winding-up) Act 1890 had a very important l>earing upon the liabilities of the Auditors of companies. It is therefore desirable before proceeding to discuss further the liabilities of Auditors, to consider the precise nature of the provisions of the 1890 Act, and the circumstances under which they apply. These are comprised in Section 10 (re-enacted as Section 215 of the Companies (Consolidation) Act 1908), which is as follows: — 215. — (i) Where in the course of the winding-up of a company it appears that an\- person who has taken part in the formation or pmmotion of the company, or any past or present director, manager, liquidator, or any officer of the compan}^, has misapplied or retained or become liable or accountable for anj^ moneys or property of the company, or been guilt}- of any misfeasance or breach of trust in relation to the company, the Court may, on the application of the Official Receiver, or of the liquidator, or of any creditor or contributory, examine into the conduct 01 the promoter, director, manager, liquidator, or officer, and compel him to repay or restore the money or property or any part thereof respectively with interest at such rate as the Court thinks just, or to contribute such sum to the assets of the company by way of compensation in respect of the misapplication, retainer, misfeasance, or breach of trust, as the Court thinks just. It is thought that it may now Ije regarded as settled law that the duly appointed Auditor of a company is one of its "' officers " within the meaning of the foregoing section. The essential distinction between procedure by way of summons under the foregoing "misfeasance " section and pro- cedure bv wav of action is that the former is technically a proceeding in the liquidation, and consequently, as a matter of law, all evidence available in the liquidation is evidence which can be produced in support of the summons. That is to say, that tlie evidence given by the respondents, either at a public examination under Section 8 of the 1890 Act, or under a private examination under Section 115 of the 1862 Act, is evidence in the misfeasance proceedings against those par- ticular respondents, although not against any other respondents there mav be to the same sunimons. 358 AUDITING. This is a form of legal procedure which is new to English jurisprudence, and also, it is believed, to that of any other civilised country. An analogy (although in a far smaller degree) exists, however, in connection with the French Criminal Law, under which a person who has been once arrested on a criminal charge is cross-examined by an examining magistrate (who is virtually a police-inspector), with a view to forwarding the case for the prosecution, and the answers given by the prisoner to such cross-examination are put in as evidence at the trial. There is, however, an auto- matic safeguard to the French system that does not obtain with misfeasance procedure — namely, that the verdict has to be delivered by a French jury, who certainly under no circum- stances would allow itself to be bound by what — in this country — we are accustomed to look upon as the law of exi- dence; and, that being so, it might well be argued that it is absolutely necessary, if crime is to be prevented at all, that exceptional facilities should be afforded to the prosecution. \n this country, however, no such circumstances apply. £nglish juries would, ordinarily speaking, be seriously prejudiced against any defendant who was charged with con- tributing either directly or indirectly to a failure by which shareholders' and creditors' money had been lost ; and although no jury could be called upon to try a misfeasance summons, it is to be remembered that some of the earlier recorded decisions appear to indicate a similar prejudice upon the part of the Judges. Lest this statement should be thought too strong, it may be pointed out here that of the three earliest cases when charges of misfeasance came before the Court in connection with Auditors, the Judge in the Court of First Instance invariably decided against the respondents, while in two cases his decision was absolutely reversed in the Court of Appeal, and in the remaining case it was reversed in respect of one of the two years in which it was given, and the reasons for upholding it in the other year were materially modified. In the more recent case of Dovty v. Cory {in re the National BanJ; of Wales, Livi.) the Court of First Instance (Wright, THE LIABILITIES OF AUDITORS. 359 J.) was again against the respondent, and his decision was upset by the Court of Appeal, whose judgment was affirmed by the House of Lords. As a matter of fact, it seems obvious that, in the nature of things, it is often impossible for any one Judge (who is a lawyer, and therefore not an accountant) to express an opinion that is really entitled to the respect of the community upon the question as to whether or not, under a given set of circum- stances, an Auditor has done all that could reasonably have been required of him ; and in this connection it may be added that probably no satisfactory solution of this extremely difficult problem will be arrived at until some procedure is formulated by which accountants themselves may be called in with a view to acting as assessors, if not as actual judges, upon such ques- tions ; there is ample precedent for this innovation in the Com- mercial Courts and the Admiralty Courts at the present time ; and it must be conceded that no commercial or marine case could possibly raise more abstruse or more technical matters than the question as to whether or not, under a given set of circumstances, an Auditor had done his duty. For the present purpose, however, it will suffice to mention that, after some considerable experience in the Companies Winding-up Court, Vaughan Williams, J., must evidently have come round to the view just expressed, or he would not, in the misfeasance proceedings brought against the Directors of the London dr' Colonial Finance Corporation, Lim., have expressed the opinion that it was far preferable for a jury — rather than any single Judge — to express an opinion upon the points that he was called upon to decide. It may be added in this connection that, as all the parties were not desirous of submitting their case to a jury, his Lordship was compelled to hear it unaided, and eventually decided in favour of the respondents. It is impossible, in the space here available, to enter into detail upon all the arguments which have been raised against the present procedure under misfeasance summonses ; but, in addition to the cross-examination of the defendants without 36o AUDITING. any corresponding right of examination-in-chief, and the inherent inadequacy of the tribunal before which they are arraigned,, the two following may be mentioned : — In the first place, before the misfeasance summons can be issued at all, the leave of the Court has to be obtained. This is granted on ex parte statements made by the applicant, which are not statements on oath, or even statements of fact, but an advocate's summary of the case for the prosecution. The presiding Judge is therefore called upon to express — and does express — a frima facie opinion on the merits of the case before the evidence has been heard ; and, in the nature of things, it is not humanly possible to expect him to altogether disabuse his mind of the impression which these ex parte statements have created. Indeed, one may go further and say that he has already committed himself to an expression of opinion that the applicant has a good case for proceeding. To allow that same Judge to preside at the subsequent hearing of the mis- feasance procedure is as inequitable as it would be to allow a m.agistrate to preside at a trial over prisoners whom he had previously committed. The second objection to the present procedure is that it does not compel the applicant to define his case before coming into Court. In view of the altogether exceptional facilities possessed by the applicant for obtaining information, this appears to be wholly uncalled for in the interests of even the strictest justice. Moreover, it not only greatly increases the costs upon both sides (which under no circumstances are payable by the applicant personally) ; but, further, it makes the cost of these proceedings so enormous as greatly to encourage applicants in launching upon highly specu- lative proceedings in the hope that the respondent will pay something in settlement, rather than face the necessary and inevitable expense. In a well-known case it has been stated that, prior to the hearing of the appeal, the respondent (who eventually succeeded) at one time offered ;^25,ooo in settle- ment, and that the costs from first to last exceeded ;^2o,ooo. THE LIABILITIES OF AUDITORS. 361 Having now shortly reviewed the nature of misfeasance pro- cedure, it is time to pass on to a consideration — necessarily short and imperfect — of the effect of the various decisions which have hitherto been given. All these decisions will be found fully reported in Appendix " B." and should be very carefully studied. The probability is that most careful exami- nation of the text of the various judgments will fail to deduce any satisfactory summary of the precise duty of an Auditor imder general circumstances ; but, such as they are, they afford almost the only guide that is at present available as to the legal responsibilities of an Auditor, and — unpractical as they are in many details — the Auditor who desires to be upon the safe side would do well to see that his investigation conforms as far as possible with the views there laid down. London and General Bank Case. — Here it will be seen, l>y a careful perusal of the judgments reprinted in Appendix -•B," that, in their Lordships' view, the defendant failed in his duty, not in neglecting any necessary portion of his investigation, but rather in failing to acquaint the shareholders with the results at which he had arrived. It appears that, in the tirst instance, the Auditor drew up a very unfavourable report, of which he sent a copy to each of the Directors ; but that he was subse- quently induced to modify this report, and to issue to the shareholders one that contained no reference to its existence. This, it appears, he was per.suaded to do on the understand- ing that some reference would be made to the matter by the chairman at the general meeting, and because he was assured that the publication of his report would ruin the bank. At the meeting no real reference was, however, made to the Auditor's report, and the Auditor (who was present) allowed the omission to pass and the dividend to be voted without any protest upon his part. The Court of Appeal held that the Auditor had failed in his duty because, knowing what his report to the Directors proved that he knew, he failed to place the true position before the shareholders. It was held that his certificate (to 62 . AUDITING. the effect that the assets were " subject to realisation ") was no true warning as to the actual position of affairs, and that the Auditor had no right to depute to the chairman of the Directors the giving of this warning to the shareholders. In paying the dividend in question the Directors had committed a breach of trust, " facilitated, and, indeed, only rendered possible by the Auditor, who failed in discharging his own duty to the shareholders." It was therefore held (follow- ing the decision in the Leeds Building Society case) that the Auditor was jointly and severally liable with the Directors to repay the amount wrongfully distributed as dividend. It may be noted in passing that Vaughan Williams' decision with regard lo the dividend paid in 1891 was reversed; because, although the Lords Justices were satisfied that the account.s- were incorrect, they were not satisfied that the Auditor knew^ — or by the exercise of due diligence ought to have known — that they were incorrect, and that no profit had been earned. The Kiiigsioii Cotton Mills Case. — This was a summons taken out by the Official Receiver, as liquidator of the company, applying for a declaration that the Directors and Auditors of the company had committed misfeasance in sanctioning the pay- ment of dividends, on the grounds (i) that the value of the mills owned by the company, as stated in the published accounts, was greatly in excess of their actual realisable value; (2) that the value placed upon the stock-in-trade in the published accounts was greatly in excess of the actual realisable value of such stock as existed at the time. The case in the first instance came before Vaughan Williams, J., who decided he was bound by the previous decisions in the Neiichdtcl Asfhalte case, the Commercial and General Trust case, and in Wilmer v. McNamara 6^ Co., Lini.. and, therefore, could not hold that it was necessary for a company to write down the value of its fixed assets to a figure that they might reasonably be expected to realise. With regard to the stock-in-trade, however, he held that, in point of fact, the stock sheets had been falsified by the Managing Director, whose certificates as to the quantities and value of such stocks had been accepted by both the Directors THE LIABILITIES OF AUDITORS. ^6;^ and the Auditors — the latter drawing attention to this fact in their certificate. He held that it was reasonable for the Directors to accept the statements of the Managing Director ; but that, in the circumstances of the case, it was not reason- able for the Auditors to do so. He therefore held the Auditors liable, but not the Directors. In giving his decision, his Lord- ship was doubtless greatly influenced by the evidence given by an examiner attached to the Official Receiver's department of the Board of Trade, which was to the eff'ect that a careful examination of the accounts would have shown that the per- centage of gross profit disclosed by the Trading Accounts was so absolutely abnormal as reasonably to call for further inquiry ; and a great deal might doubtless be said in favour of this view, assuming the accuracy of the facts already stated. It is, no doubt, the duty of an Auditor to scrutinise accounts thoroughly before certifying them, and if they show upon the face of them what is apparently an extraordinary state of affairs, it seems not unreasonable to suppose that the duty is cast upon the Auditor of inquiring further into the matter ; for, although it may not be the duty of an Auditor to be suspicious, it will probably be generally accepted as a statement of principle (following the words of the late Lord DAVEY)that " the Auditor is bound to know e\'erything that the books tell him, to ha^■e all the suspicions that the books suggest, and to make all the inferences to which what he finds in the books would lead him." In this case it might be held that a careful scrutiny of the accounts would have suggested suspicions, which, if once aroused, should have been thoroughly inquired into; but, against that, it must l)e borne in mind that Mr. Justice Vaughan \\'illi.'\.ms had before him the evidence of an examiner who had had upwards of two years in which to make his investigation of the accounts, and that (combined with the fact that the investigation was made after the failure of the company) may well account for facts having then come to light which it could hardly be expected an Auditor would have ascertained in the ordinary course of business. 364 AUDITING. Be this as it may, however, the decision was afterwards reversed on appeal. The case for the appellants was argued before the Court of Appeal (consisting of Lindley, Lopes, jiid Kav. LJ.J.) on the grounds (i) that the Auditors had nut failed to discharge their duty to the company, and were under no liability to make good the money misapplied ; (2) that, e\vn if they had, the proper remedy was by way of action, and not by the summary process to which the liquidator had recourse. The Court decided to dispose of the second objection first, \\ith regard to this, Lord Justice Lindley said that it had already been decided that the Auditors of this particular company were officers within the meaning of Section 10 of the i8qo Act. The object of that section was to facilitate the reco\ery by the liquidator of assets of a company improperly dealt with l)v its promoters, Directors, or other officers. The section applied to breaches of trust and misfeasances by such persons. His Lordship agreed that the section did not apply to all cases in which actions by the company might lie for the recovery of damages against the persons named ; it was easy, he said, to imagine cases of breach of contract, trespasses, negligences, or other wrongs to which the .section was inappli- cable, and some such had been the subject of judicial decision. But he was not aware of anv authority to the effect that the section did not apply to the case of an officer who had committed a breach of his duty to the company, the direct consequence of which was a misapplication of its assets, for which he could be made responsible by an action at law or in equity. Such a breach of duty, if established, was a '' misfeasance'"' within the meaning of Section 10. and, there- fore, tlie ]^)rocedure adopted by the Official Receiver in this case was not improper. This part of the Court of Appeal's decision is of some importance, as tending to show that, where it can 1)6 established that the Auditor of a company is an " officer of the company " within the meaning of Section 10. then any charge of negligence which can be brought against him in respect of the audit may, apparently, nlwavs be dealt with by THE LIABILITIES OF x\UDITORS. ^6^ way of misfeasance summons. Since the passing of the Com- panies Act 1900, which makes an audit compulsory, there can be little doubt that all duly appointed Auditors of companies are " officers." Passing on, however, to the merits of the case, Lindlev, L.J., took quite a different view to that adopted by the Court below. He pointed out that " an Auditor was not an insurer." and that in the discharge of his duty "he was only bound to exercise a reasonable amount of care and skill.'' What was a reasonable amount of care and skill in any particular case " depended upon the circumstances of that case ; and, if there was nothing which ought to excite suspicion, less care might properly be considered reasonable than would be so considered if suspicion was, or ought to have been, aroused." In par- ticular, his Lordship " protested against the notion that an Auditor was bound to be suspicious, as distinguished from being reasonably careful." Lopes, L.J., said it was the duty of an Auditor to bring to bear on the work he had to perform that skill and caution which a reasonably competent, careful, and cautious Auditor would use. What was " reasonable care, skill, and caution " in any particular case " must depend upon the particular circumstances of that case." An Auditor, his Lordship said, '■' was not bound to be a detective; or, as was said, to approach his work with suspicion, or with a foregone conclusion that there was something wrong. He was a watch-dog, but not a bloodhound, and was justified in believing tried servants of the company in whom confidence was placed by the company." If there was anything calculated to excite suspicion, it would be his duty to probe it to the bottom, but in the absence of anything of that kind, he was only bound to be reasonably cautious and careful. T//e Western Counties Steam Bakeries Case. — In this case the Official Receiver (as liquidator of the Western Counties Steam Bakeries, Lim.) took out a summons against Messrs. Parsons 366 AUDITING. & ROBJENT. The preliminary objection was raised by the respondents that they were not " officers of the company " within the meaning of Section 10, inasmuch as they had never been formally appointed Auditors in accordance with the requirements of the company's articles of association ; and although Vaughan Williams, J., declined to adopt this view it was the one eventually taken by the Court of Appeal, so the ■case was not further proceeded with. The fact that the Official Receiver did not think it worth while to proceed against the Auditors by way of action, after failing to secure a hearing to a misfeasance summons, shows clearly how much more unfavourable to the Auditor is the latter procedure than the former. The National Bank of Wales Case. — This was a misfeasance summons brought against a Director for having permitted the payment of certain dividends without due provision being made for bad and doubtful debts. Wright, J., held the Director liable, the Court of Appeal reversed the decision, and the House of Lords confirmed the latter view. The reasons advanced by the Court of Appeal in support of its judgment attracted much comment at the time, and were stated in the fourth edition of this work to be " somewhat extraordinary " ; as, however, the case did not directly affect Auditors, it was not then thought worth while to discuss the matter at great length. The decision of the House of Lords is, however, of more considerable importance. It upholds the judgment delivered by the Court of Appeal on 2nd August 1899, but expressly dissents from some of the conclusions then arrived at. The Supreme Court has held that it is no part of the duties of a Director to go into details, and that he is not responsible for the knavery or dishonesty of trusted officials of the company of which he had no knowledge at the time. The Law Lords, however, thought it desirable to express their dissent from those portions of the judgment of the Court of Appeal which declared the respondent Director not liable, ■because they (the Court of Appeal) considered that the divi- ' THE LIABILITIES OF AUDITORS. 367 •clends that had been challenged had not in effect been improperly declared ; and, while approving the decision of the Court of Appeal in the case of Yerner v. The General and Co?nmercial Trust, Litn., the House of Lords laid it down that the question as to what profits could properly be distributed by way of dividend in any individual case could only be certainly determined when that case arose for decision. It was added that, although the provisions of the Companies Act 1877 (with regard to the reduction of a company's capital) must not be ignored, it did not necessarily follow that a company was obliged to make good the losses incurred in previous years out of subsequent profits before distributing anything by way of dividend. I'his decision is of the greatest importance, as it removes the disturbing element occasioned by the judgment of the Court of Appeal, and for practical purposes replaces the whole question as to what are divisible profits upon a sound commercial basis. In the course of the judgment it was, indeed, intimated that, in deciding any particular case involving this question, the Courts would have to take into consideration the views of men of busi- ness specially versed in such transactions as those engaged in by the particular company under review. Re Joseph Hargreaves, Tim. — In this case misfeasance pro- ceedings were taken against the Auditor for having improperly sanctioned the payment of dividends out of capital. The circumstances are somewhat unusual, in that, although it is not disputed that dividends were improperly declared, it appeared that the Auditor had never certified the accounts, arid had systematically protested to the Directors against the declaration of any dividend. No general meeting of the company had been convened, so that it was impossible for the Auditor to place his views directly before the shareholders. Cozens-Hardy, J., held that the Auditor had performed the whole of the duties of his position. The case is therefore of especial interest, as showing that it is no part of an Auditor's duty to communicate with shareholders otherwise than through the medium of the 368 AUDITING. general meeting ; an(J, further, that, even where there are such serious irreguLirities as the failure to convene a general meeting for several years in succession, it is not incumbent upon an Auditor to resign his position and to refuse to have anything further to do with the concern. This decision would appear to still hold good, notwithstanding the more recent legislation. POSSIBLE LIMITS TO LIABILITY.— It has already been stated that, in the cases quoted above, the measure of damages incurred by the negligent Auditor has been the full amount wrongfully paid away in dividends. This raises the very important questions as to how far these cases can be relied upon as precedents in the event of the Auditor's negligence being proved, but (i) No dividend having been paid; (2) A dividend having been paid, and the company having since gone into liquidation, but there being sufficient assets to pay all costs and all creditors in full. It is hardly to be supposed that in either of these cases the Auditor would incur no liability, but a very little consideration will suffice to show that a different mode of assessing damages would have to be adopted. It may be added here, however, that although the practice of the Courts has hitherto been to give judgment jointly and severally against all respondents held liable for the full amount of dividends improperly paid, with costs (without any corresponding right of contribution inter se), it by no means follows that this course will always be pursued. The language of Section 215 is " to repay or restore the money or property . . . or to contribute such sums to the assets of the companv by way of compensation ... as the Court thinks just." In this connection the decision in Re Moxhani v. Grant will be found of interest. Here the Directors had been found liable to refund to the liquidator of the company certain divi- dends improperly paid out of capital, under circumstances THE LIABILITIES OF AUDITORS. 369' which conveyed to the shareholders a knowledge of the nature of the source from which dividends were declared. It was held that the directors had a right to recover from the various shareholders the amount of their respective dividends. It may be added that in one case, where judgment was given in favour of the Ofhcial Receiver on a misfeasance summons, he was directed only to enforce that judgment so far as might be necessary to secure the repayment of twenty shillings in the jP^ to contributories. The decisions in Boaler v. Watchmakers^ Alliance, &'c., Lim., Towers v. African Tug Company, Lim., and in ?e The Liverpool and Wigan Supply Association, Lim., also impose limits on the right of recovery against Directors, which (presumably) would apply equally to Auditors. To sum up, it does not appear that (assuming the liquidator is acting bona -fide, and not actuated by malice) the con- scientious and capable Auditor, who has endeavoured to conduct his audit upon the lines laid down in this work, need feel much apprehension as to the legal consequences arising either from a bond -fide error of judgment, or from his inability to discover an exceptionally clever fraud. On the other hand, it is, doubtless, greatly to the advantage of all properly qualified Auditors if a reasonable measure of responsibility be expected from them, for there is then some chance of scaring out of the field a too numerous class of so-called Auditors, whose extreme ignorance of the veriest elements of their pro- fession is only equalled by their utter inability to appreciate the moral responsibility of their position. It is, no doubt, open to question whether the initiation of proceedings should not be vested in some higher and more responsible authority than at present, and there is serious room for complaint against the harshness and inequity of misfeasance procedure generally ; but it is believed that abuses rarely occur, and that, conse- quently, all competent and reputable Accountants may regard the matter as something that does not in any sense intimately concern them. BB 370 AUDITING. DUAL APPOINTMENTS.— When two Auditors have been appointed, each is jointly and severally responsible for the proper conduct of the audit, unless the contrary is clear from the terms of the appointment. When the appointment by statute provides for two Auditors, the appointment of a firm of two or more partners is not a due compliance with the statutory terms ; but the appointment of two individual members of the same firm will serve. In the case of an undertaking having operations abroad, the employment of a local Auditor to verify the local accounts imposes no liability upon the Auditor of the company, provided the latter is careful to indicate in his report exactly how far his personal verification has extended, and provided he has exercised due diligence and honestly believes the truth of the information he has accepted at the hands of the local Auditor. This point has been already discussed {vide pp. 91-2). f CHAPTER XI. INVESTIGATIONS. It has been thought desirable to devote a chapter to that ■special class of audit that is usually known as an " Investiga- tion." The subject is one intimately connected with auditing, but possesses many peculiar features which cannot afford to be •overlooked. OBJECTS OF INVESTIGATIONS.— An investigation — so far as present purposes are concerned — may be described as "A special audit, undertaken for a particular purpose." The particular purposes for which an investigation is usually made .are as follow : — I. Upon the sale of an undertaking : (a) To a public company. (b) To a private purchaser or purchasers. (c) To a continuing partner, or partners, by a retiring partner, or partners. II. For the purpose of obtaining special information as to the position of an undertaking : (d) On behalf of a committee of investigation appointed by shareholders. {e) On behalf of a present or prospective creditor. (/) With a view to the discovery of suspected fraud. The former group alone claims attention in this work. B B 2 37- AUDITING. EXTENT OF INVESTIGATIONS.— When making an investigation of any kind it must not be forgotten that those reiving upon tlie Accountant's report will naturally, and indeed reasonably, take it for granted that, so long as they adequately explain their object in seeking his assistance, it is for him, as an expert, to decide both as to the nature and the extent of the examination itself. And, in the event of it being subse- quently discovered that an investigation had failed to achieve its intended object, it would be for the Accountant to show that such failure did not arise from any cause which could have been prevented by a more complete, or a more exhaustive examination. Cases are not unknown in which a faulty investi- gation has been attempted to be shielded under the plea that special instructions had been given by the client, and that such instructions had been duly carried out ; it being argued that where the client has given special instructions as to the course to be pursued, the Accountant must be exonerated from any mishap arising from the defectiveness of those instructions. This doctrine appears to be a most dangerous one. There can be no doubt that whatever instructions the Accountant may have recei\-ed were intended rather as a description of the object to be effected than as a definite requirement as to the means by which that object was to be attained. It goes without saying that the best authority as to the means to be employed must be the Accountant himself (who receives his instructions by virtue of his being an expert in the matters requiring investigation), and it would thus .seem that — however desiral)le it m.ay be that he should receive, and even welcome, suggestions as to the modus operandi of his work — an Accountant cannot submit his professional discretion to the dictation of his clients without sacrifice of self-respect and grave danger to his clients' interests. An Accountant who undertakes the responsibility of an investi- gation ought not to seek to .shield himself from the implied responsibility of proceeding upon that investigation on the lines which his professional experience convinces him are the proper ones. INVESTIGATIONS. 373 The position of the investigating Accountant, when only incomplete sets of books are available, is a question of very considerable importance. So long as the books are sufficiently complete to enable the Accountant reasonably to arrive at the conclusion that (so far as they go) they are accurate, there can, it is thought, be no objection to his issuing a report con- Jlned to such matters as the books may show. But there is a danger of the whole system of investigation falling into dis- credit, if Accountants go too far, and substitute for certiticates of actually accomplished facts statements so qualified as to amount, in effect, to but little more than a carefully safeguarded expression of speculative opinion. It should be borne in mind that the object of any form of Accountant's certificate or report, included in a company i)rospectus, is to satisfy intending investors ; and such persons do not, as a matter of fact, by any means always carefully study the wording of the report, or certificate, referred to. Unless, therefore, an Accountant has really something to certify he should studiously refrain from issuing any statement of opinion, or estimate, in the form of a certificate. DETECTIOX OF ERRORS IX THE BOOKS.— Before proceeding to consider the subject in further detail, it would appear desirable to clear up a point which is of the greatest importance, and upon which a considerable difference of opinion appears to exist- — \iz.. the position of the Accountant who has certifie(i as to profits which, in consequence of the falsification of the accounts investigated, have subsequently proved to ha\e been over-stated. There appears to be no decision directly bearing upon this point ; but a case which came before Eord Kyllachy at the Court of Session in Edin- burgh, in 1892. is of considerable interest. The case was that of The EdiiihiirgJi United Breweries, Lijii.. e^Y., v. J aims A. Mollesoii {XicJiol son's Tnisice). &€., and the question then at issue was as to whether the circumstance that the profits dis- closed bv the books of the Palace Brewery, Edinbui-gh. were in excess of the amount actually made was (in the absence of fraud on the part of the vendors) a sufficient ground for the 374 AUDITING. cancellation of the purchase, or for damages. It will be seen that this case has only an indirect bearing upon the point now being considered ; indeed, the interest which it possesses is dependent rather upon the nature of the evidence than upon the point actually at issue. Especially must it be borne in mind that, although Lord Kyllachy's decision was upheld upon appeal, it was merely upheld because it was considered that the plaintiff had no right of action against the defendant, no opinion being expressed by the Court of Appeal upon Lord Kyllachy's views. At the original hearing of the case it was- contended on the one side that books submitted to Accountants for examination were to be taken as warranted free from falsi- fication ; while, on the other hand, it was argued that it was not the custom for any such warranty to be implied, and that a proper investigation of the accounts should have disclosed the fact that the profits had been, more or less, over-stated. In giving his judgment, his Lordship stated that it appeared to him that the question was as to whether it was a condition of the contract of sale, expressed or implied, that the books of the brewery were to contain no errors, or, at least, no errors that were not easily to be discovered, and he confessed his inability to discover any reason for so holding. He could find no standard according to which the purchaser's examination of the books was to be conducted, and he was, therefore, unable to hold that the plaintiffs were entitled to reopen the contract, and now raise the question as to whether a condition as to the amount of profits had been fulfilled. The chief point in this decision that is of interest in the present inquiry is the finding that there does not exist in a contract for sale based upon a statement of profits which the purchaser has an opportunity of verifying an implied condition that such state- ment is correct. Exception must, of course, be taken in the case of a fraudulent misstatement, for naturally such contracts would be voidable upon proof of fraud. The question remains, however, that if the vendors have acted bond fide there is nO' redress for the purchasers if they have gi\"en too large a price for an undertaking in consequence of an incorrect statement of it INVESTIGATIONS. 375 profits by the vendors (provided the purchasers ha\e had an opportunity of verifying such statement), or in consequence of a statement of profits that has been falsified — it may be by some employee of the vendors, unknown to them. It would there- fore appear that, in such a case, an investigation that failed to reveal the actual condition of affairs would have failed to achieve its most important object. In the case of Short 6^ Comfton v. Brackett it was expressly decided by Judge Tindal Atkinson (in 1904) that an investi- gating Accountant is entitled to " assume " the accuracy of the figures appearing in the books. Opinions of Accountants thereon. — It is not proposed to discuss fully the legal position and responsibilities of an investi- gating Accountant under such circumstances, nor to criticise the investigation that was made in The Edinburgh United Breweries^ case; but as there is much that is deserving of attention is the various opinions that were expressed by the expert witnesses who appeared in that case, the opinions of these witnesses are shortly stated here. Mr. Wm. H. King, F.C.A., considered that there is a differ- ence between checking books and investigating profits ; and that an investigation of profits, even if properly conducted, would not always reveal an actual misstatement thereof. Mr. T. P. Laird, C.A., said that in making such investiga- tions he did not consider it any part of his duty to go through all the books and vouchers as in the case of a regular audit. Mr. James Alex. Robertson, C.A., stated that, in investi- gating the profits of a business with reference to a sale, his experience was that an Accountant was not expected to check the books and entries for the purpose of tracking falsifications. There was a marked difference between an audit and an "investi- gation with a view to profits. The falsifications in this case could not have been discovered without a comparison of the postings from one set of books into another, and he held that that was no part of the duty of an accountant turned on to 376 AUDITING. investigate profits. Personally, he always inserted the words " assuming the accuracy of the books " in his certificates. Mr. Frederick William Carter, C.A., expressed himself as being of the same opinion as Mr. Robertson. Mr. Wm. Graham (of the firm of Nicholson, Graham S: Graham, solicitors) expressed his opinion that Accountants, when instructed to investigate into the profits of a company, were not expected to go into such details as would have been necessary to discover the falsifications in this particular case. The late Mr. Alexander Young, F.C.A. (Messrs. Turquand, Youngs, Bishop &: Clarke), said that it was not the custom in such cases to examine the books in detail. Accountants considered that they were entitled to assume the genuineness of the books. On the other hand, i\Ir. James A. Molleson, C.A., thought that a proper examination would have discovered the falsifications; he con- sidered that an Accountant pursuing an investigation that would be useful would wish to analyse the accounts, and if this had been done the frauds would have been discovered. Mr. Richard Brown, C.A., also considered that the falsifi- cations should have been discovered ; he considered that an examination of the individual (trade) accounts was necessary to form a correct idea of the nature of a business, and that, had this been done, the frauds would have been discovered. Mr. David Simpson Carson, C.A., expressed himself as being of the same opinion as Mr. Brown. In speaking of the object of these examinations the writer of an article that appeared in TJie Accountant at the time said : " What the public seem to want is, not the nearest approach to facts that can be obtained in so many days or weeks, but the nearest approach to facts that is humanly possible." This will be found to accurately express the views of the average layman. INVESTIGATIONS. 377 INVESTIGATION ON BEHALF OF PROJECTED COMPANY. — For the purpose of pursuing this inquiry in further detail it is proposed to narrow the field down to the question of investigations made on l^ehalf of a projected com- pany ; and the most convenient method of dealing with the subject will be to contrast the methods to Ije adopted in such an investigation with those ordinarily employed in a regular audit. From a theoretical point of view there need, of course, be no difference of method ; for both audits and investigations aim at a complete disclosure of the facts. In practice, however, it is usual to restrict the inquiry, so far as is possible without imperilling the efficiency of the examination ; and it is because the objects of an audit are not altogether the same as those of an investigation that the method adopted in each case — i.e., the abbreviated, practical method — varies somewhat. LIMITS OF AN INVESTIGATION.— A regular audit professes to discover the true position of affairs. An investiga- tion as to profits, made on behalf of a proposed company, professes to discover the position of affairs so far as it affects the particular object in view. In some respects the narrower field of an investigation will permit the Accountant to reduce the scope of his examination ; but, on the other hand, there would appear to be many points upon which a greater strict- ness of inquiry is necessary. Thus, supposing the Accountant to be acting upon behalf of the purchasers of an undertaking, he may take it for granted that the accounts submitted to him by the vendors do not under-estimate the profitable nature of the business, or the strength of its financial position. Conse- quently, it does not seem necessary that he should inquire with the same exhaustiveness that he would use in the case of an audit into the completeness with which every source of income has been duly accounted for; neither does it appear necessary for him to consider the validity of the various items of expenditure charged in the accounts, nor to check such expenditure minutely with the vouchers. On the other hand, 3/8 . AUDITING. if he is acting on behalf of the vendors, it is clearly desirable that both these points should receive careful attention, but in that case the investigation would not differ greatly from the complete audit ; for it is obvious that he could not authorise the submission of accounts to the proposed purchasers until he was satisfied that such accounts were true in all respects. FRAUD IN ACCOUNTS.— Yet another difference between investigations and audits will not fail to strike the observer. An ordinary audit must always aim at the discovery of fraud ; but an investigation as to profits would not appear to involve any such inquiry, except in so far as the assets or profits might ha^"e been fraudulently over-stated for the purpose of conceal- ing defalcations, or of deliberately making the accounts appear unduly favourable. "Broadly speaking, there are two ways in which books may be falsified for the purpose of concealing fraud. The first method is by falsifying the Balance Sheet, either over-stating- assets or under-stating liabilities to cover the amount stolen ; the second method is by falsifying the Revenue Account, by under-stating income or over-stating expenses, so that the profit shown by the books may be reduced to the profit which was actually netted by the proprietors, after deducting the amount misappropriated by the defaulting official. If the first method has been adopted, the purchasers will not necessarily be prejudiced, for the profits shown by the books will have been the profits actually made; while the assets which appear in the books at an unduly inflated price Avill usually be guaranteed as to value by the vendors, or else vouched for by the certificate of an independent valuer. Some- times, however, the investigating Accouncant assumes responsi- bility for the accuracy of the scheduled book debts taken over by the proposed company, and in such cases it will, of course, be necessary for him to inquire carefully into their correctness. On the other hand, defalcations, if considerable, are likely to be concealed by a falsification of Balance Sheet items rather INVESTIGATIONS. 379 than of Revenue items, for any material understatement of profits, such as would be involved by the last-named form of falsification, would be extremely dangerous, as drawing prominent attention to the existence of a leakage. A falsifica- tion of Balance Sheet items, with a view to concealing defalca- tions, ought not to escape the attention of the investigating Accountant ; not, of course, because he is necessarily respon- sible for the values attached to the various assets and liabilities in th'.^ Balance Sheets of the undertaking about to be purchased, but because he cannot safely include, in his certificate of past profits, profits actually earned by the undertaking which, owing to the dishonesty of its employees, never went into the pockets of its proprietors. Under the second method it would appear that the purchasers would actually gain by the defalcations of an official of the vendors, for the profits earned would be in excess of those shown by the books, while the latter would form the basis upon which the purchase-price for Goodwill was calculated ; and, as the Balance Sheet would correctly record the financial position, there would obviously be no injustice done to the purchasers if these figures were taken as a basis for valuation. It is thought, therefore, that the investigating Accountant acting on behalf of the proposed company need not trouble to go exhaustively into the question of the bona fides of the various expenses debited, his great object being to make sure that the expenses are completely recorded in the books sub- mitted to him. On the other hand, he will require to look care- fully into the bona -fides of many transactions, which the Auditor would naturally pass either unquestioned, or, at all events, after due representation of the circumstances to his clients. The difficulty of the investigating Accountant "s position arises from the fact that his real clients {i.e., those in whose interests he is acting) are an unknown, and, at that time, non-existent body. It is, therefore, obviously impossible for him to consult them in any way during the course of his investigation, and his only means of acquainting them with the result of his inquiry will be by means of his certificate. 380 AUDITING. SCOPE OF CERTIFICATE.— In making an investigation as to profits, tiierefoie, the Accountant must be careful never to lose sight iif the object for which his investigation is being made. That object may be said to be to ascertain (a) \\l-iether the business of the vendors is worth purchasing. {/') ^^'hether such business is worth the price asked for it by the \endors. The Accountant is not actually asked to express a definite opinion tipon either of these points, for it is obviously the business of each intending shareholder to answer these questions to his own satisfaction before applying for shares ; but it is pointed out that the Accountants certificate forms almost the sole basis upon which the intending shareholder can judge of the prospects of the proposed company, and it is therefore argued that it should be the Accountant's aim so to conduct his investigation, and frame his certificate, that the materials necessary for a correct judgment may be placed before the public. At the same time, it cannot be too strongly insisted that an Accountant's certificate as to profits, relating as it does to past events, deals with a subject-matter that ought to be capable of absolute verification. The certificate, therefore, should be a clear and unconditional certificate of accomplished facts, and not a mere 1 stimate of possible — or even probable — future results, misnamed a ''certificate." To the limited extent already mentioned it mav be permissible, and even desirable, to modify the past results so that they may more usefully serve the puri)Ose for which thev are primarily intended- — namely, provide a relial.ile index of future profits. But at the same time a certificate should relate not to the future, but to the past : and intending investors would do well to bear in mind that, unless a dellnite statement as to the past is provided in a companv prospectus, the reasonable assumption is that the past profjts have been unsatisfactory. There is vet another point which llie Accountant must not fail to bear in mind. Inasmuch as he may be required at any • INVESTIGATIONS. 38 1 future date to substantiate the statements that he has certified, he should not fail to make the most copious notes of all that transpires during the course of his investigation. These notes should not be confined to actual figures and calculations : what- ever explanations he may have recei\-ed in reply to his inquiries should be committed to writing, so that they may be available if required. If this be not attended to., and legal pro- ceedings are subsequently instituted requiring the Accountant to substantiate his report,, his position will not be an envialile one, for he will probably ha\e to go over at least a portion of the ground a second time, and perhaps some of the evidence he formerlv utilised may no longer be available. LENGTH OF PEIUOD TO BE INVESTIGATED.— It is generally held that it is no part of the Accountant's duty to prescribe the term of years over which his inquiry should extend. It is, however, desirable to bear in mind the import- ance of expressly stating in the certificate the period that has been cohered by the investigation ; and, further, it is absolutely essential that the inquiry should be brought reasonably up to date. It may be found convenient to report only upon the results of completed years, but the odd months elapsing between the date of the la.st Balance Sheet and the date of the investi- gation should not escape notice, and if they show any material falling-off, the fact ought not to escape attention. It may he added here that it is very desirable that the Accountajit' s certifi- cate should separately state the frofits of each year covered by the investigation. METHOD OF PROCEDURE.— Standing of Vendors. — Before actually commencing an investigation it is very desirable to make inquiries as to the position and character both of the promoters and the proprietors of the undertaking. A man is always apt to be known by the company he keeps, and no one can afford to be mixed up with persons of more or less doubtful reputation. Moreover, if a man bears a really bad character, it may safely be taken as being at least probable that the company in which he is concerned is not likely to prove 382 AUDITING. a very good investment to the public ; and an Accountant is not likely to do himself much good by mixing himself up with unprofitable companies. System of Accounts.- — The next point that claims attention is the general system upon which the books have been kept. And, in this connection, it may be mentioned that — inasmuch as it is very desirable that the Accountant should secure the co-operation of the employees of the establishment — it is a mistake for him to abuse the system of accounts which he finds in use, in the presence of the bookkeeper. Any such want of tact upon his part is almost certain to put the bookkeeper's back up j and then, instead of information flowing in smoothly, it has to be dragged out by a course of cross-examination that involves a heavy expenditure of both time and temper. Audited Accounts. — If the books have been regularly audited by a professional accountant it is a good plan to seek an interview with him, and endeavour to gather the precise extent of his examination, and also his general opinion upon the matter. This course is, perhaps, somewhat unusual ; but clearly it cannot be regarded as objectionable, while cases may easily arise in which it might be a most useful plan to adopt. For instance, if a thorough audit has been made at regular intervals by a competent and trustworthy Accountant, the investigating Accountant might feel fairly safe upon most matters of mere arithmetical accuracy, and confine his attention more exclusively to questions of principle and to values. Unaudited Accounts. — On the other hand, if there has been no regular audit — and a fortiori if the books have not even been regularly balanced — it seems as though he could not, with safety, neglect an absolutely exhaustive inquiry into all the facts. Of course, objections may be raised to this position, the most important being the objection that such a complete examination would occupy a much longer time than is ordinarily available for the purpose. It is, however, submitted that it is the Accountant's dutv to make an effective investi- INVESTIGATIONS. 383 gation — not the most effective investigation practicable in a limited period of time — and, further, that he should so conduct affairs that he need not shrink from accepting the fullest responsibility as to the extent of his investigations. NECESSITY FOR INSPECTING BALANCE SHEETS. — Another general point to which it is desirable to draw atten- tion is the danger of looking only to the Revenue Account for information as to profits. Cases are not unknown in which — - the assets being taken o\'er at an agreed valuation — the investi- gating Accountant has confined his attention entirely to the Revenue Account, without concerning himself with the sufficiency or otherwise of the amounts written off for depre- ciation and bad debts ; the result being that the certified profits " as shown by the books " were greatly in excess of the profits actually earned. The Accountant who aims at something more than pocketing his fees and keeping his skin whole will not rest satisfied with that sort of investigation. GENERAL COURSE OF PROCEDURE.— Assuming that the Accountant is about to commence an investigation into the profits of a manufacturing or trading concern during the past three (or more) years, with a view to it being pur- chased by a joint-stock company ; the land, buildings, plant, and stock-in-trade being specially valued for that purpose by an independent valuer : assuming further that the accounts have been audited continuously by a firm of Chartered Accountants, who are satisfied as to their correctness ; the question arises, What special points will the investigating Accountant require to examine which do not arise in the ordinary course of a regular audit ? Taking first the several Revenue Accounts, he will compare these with each other, and see whether or no they indicate a steady or consistent condition of affairs ; whether the turnover fluctuates materially ; and whether increasing, at a standstill, or diminishing ; whether the percentage of gross profit is fairly constant, and such as is usually earned in such undertakings ; and W'hether the percentages of expenses and net profit to gross 384 AUDITING. turnover are reasonably steady. A marked reduction of expenses during the last year must be \ie\ved with the greatest suspicion, for such reduction, if excessive and not bond -fide, may have a very serious effect upon the future prospects of the undertaking. So far as is reasonably practicable, the Accountant must examine the bona fides of all sales, especially those recorded during the last few months. The prices of at least a portion should be comj^ared with current rates, and any remarkable increase in the amount of sales, or in the number of new accounts opened, should be regarded with suspicion. All entries '' on approval " must be disallowed, and where sales are post-dated it seems essential to make sure that they have actually gone out of stock. The entries for the next few weeks after the closing of the books should be carefully scanned, and if they show an exceptionally large number of returns, or an exceptionally small amount of sales, the Accountant must draw his own conclusions as to the bona fides of such entries. In dealing with the question of consignments, he must remember that the goods have probably been invoiced out at selling prices, while the unsold balance can only be allowed for in the accounts at cost price {-plus expenses) at most. Another point which must not be lost sight of is the question of travellers' commission : care must be taken to charge up commission upon all sales that are included in the accounts. Due allow- ance must also be made for all outstanding discounts ; and empties which are returnable, but not yet returned, cannot safely be taken credit for at the full price charged. With regard to the purchases, the problem is similar to the sales, but somewhat simpler, because the Accountant can usually get hold of the creditor's statements. It is, however, very necessary to be on one's guard against the omission of post-dated in\oices when the goods have actually gone into stock. Where reliable Stock Accounts and Cost Accounts have been kept, there exists a very valuable corroboration of the contents of the Trading Account ; but where these cannot be obtained, INVESTIGATIONS. 385 the Accountant must do his best with the material avaihible. It is especially important that the various stocktakings should be conducted upon similar lines — i.e., they should be based upon the same scale of prices, due allowance being made for the depreciation of articles no longer in fashion, or in small quantities, and for " out " sizes. If the various stock-lists ha\e been prepared upon different scales of prices, they must be recast upon a uniform method, as any such difference may \exy materially alter the profits shown l)y the accounts. The ^■alua- tion of the stock-in-trade made by the valuer should be com- pared with the vendor's stock-list, and if there is any material difference between the two, the Accountant must not fail to •examine the effect of such difference upon the accounts. Thus, supposing he arrives at the conclusion that, throughout (say) the past three years the stock has been consistently over-\alued, say, 15 per cent., and supposing the stock is ;^io,ooo heavier at the present time than it was three years ago, then during those three years the net profits will have been over-stated ^1,500, or (say) ;^5oo a year — a material difference when one comes to pay eight or ten years' purchase for a goodwill. When the stock consists of such articles as cotton, iron, grain, lead, &:c., which have a definite but unstable market value, the question of the legitimacy of profits arising from such alterations in value as may ha\"e occurred is a considera- tion of no slight importance. This is a point ujoon which the author would rather not express too decided a view at the present time, but it is his opinion that (i) no profit should be taken credit for upon the rise in value of unsold stock, although Revenue must be debited with the contingent loss arising from any fall ; (2) no profit should be included as part of the trading or manufacturing profits that has arisen out of a "gamble" pure and simple, but that gambling losses cannot safely be ignored ; (3) where any material portion of the profits has arisen from favourable fluctuations of \'alue — as opposed to true commercial profits — it is very desirable that the two sources of profit should be distinguished in the Accountant's report. c c 386 AUDITING. If there are any further items to the credit of the Profit and Loss Account, he will require to see that the profit has actually been netted, and that it is fairly incidental to the business of the undertaking. Even then, however, a purely exceptional source of profit (e.g., the fact that an important exhibition had been held in that particular industry, or an altogether excep- tional contract executed) should always be specially noted in the report. Another point of no slight imjjortance may be mentioned here, although it does not immediately arise from the preceding considerations. Where the undertaking is of such a nature that it cannot be carrie 1/3 Do. Do. 1903 Do 1904, I id. Do. Do. 1904 Do. 1907, i/- Do. Do. 1907 Do. 1909, 1/- 9d. Do. Do. (on earned incomes not exceeding ;^2jOoo) Do. 1909 Do. 1910, 1/2 Do. 9d. Do. (on earned incomes not exceeding ^^2,000) 1/- Do. (on earned incomes not exceeding ^3,000) 6d. Do. super-tax on incomes exceeding _;!f5,ooo, or excess over _^'3,ooo. Income-tax is accordingly deductible at the rate of One Shilling and Twopence in the Pound on all payments made subsequent to the 5th April 1909 in respect of — (a) Dividends and interest from the Public Funds payable on or after the 6th April 1909. (b) Dividends and Interest of Foreign or ('olonial Govern- ment Securities, or of Foreign or Colonial Companies entrusted to an Agent in this Country for payment here on or after the 6th April 1909; also of like Dividends or Interest which, although iwt entrusted to an Agent in this Country for payment, are realised in the United Kingdom on or after that date through Bankers, Coupon Dealers, or other persons. (c) Interest and Annuities paid by Municipal Corporations or other Local Authorities to Creditors on Kates. (d) Interest and Annuities not paid or not wholly paid out of profits and gains brought into charge to Income Tax. INCOME TAX. 405 But in respect of — (a) Ground Rents, &c., secured on Property charged with Income Tax ; (b) Interest on Annuities wholly payable out of Property, Profits, or Gains charged with Income Tax ; (c) Dividends paid out of the Profits or Gains of Public Companies in the United Kingdom ; the tax is deductible at the rate or rates in force during the period in which the same has or have been accruing — i.e., in respect of any portion which accrued in the year ended 5th April 1909 at the rate of One Shilling in the Pound, and in respect of any portion accruing subsequent to that date at the rate of One Shilling and Twopence in the Pound. These same principles, of course, hold good in respect of changes in the income-tax rates effected in other vears. 't>^ MODIFICATION OF ORIGINAL ASSESSMENT.— The somewhat complicated provisions of Section 133 of the Income Tax Act 1842 were repealed by Section 24 of the Finance Act 1907. and accordingly need no longer be referred to. Section 23 extends the time in which the Income Tax Authorities may make additional assessments to three years after the expiration of the fiscal year in respect of which it is thought such additional assessment should be made. Section 24 (2) of the same Act provides that in the case of a business established within three years, should the profits of the year of assessment fall short of the assessment made, the tax on the actual profits only shall be charged ; or, if the tax on the amount of the assessment has been paid in the meantime, it must be refunded. Subsection 3 provides that when a profession, trade, or vocation is discontinued in any year, income-tax in respect of that year shall be charged on the actual amount of the profits 406 AUDITING. made, and that if it be proved to the satisfaction of the Com- missioners that the total amount of tax paid during the three previous years exceeds the total amount that would have been paid had the assessment been on the actual amount of profits in each of such years, the excess shall be refunded. MEMORANDA. 4°7 4oS ME^:ORANDA MEMORANDA. 4O9 * 4IO MEMORANDA. MEMORANDA. 4" * 412, MEMORANDA. . MEMORANDA. 4 1 3 414 MEMORANDA. MEMORANDA. 415 4j6 n:EMORANDA. I I APPENDIX A. EXTRACTS FROM STATUTES REFERRED TO IN THE COURSE OF THIS WORK. GENERAL. LARCENY ACT, 1861. 24. and 25 \ict. c. g6. Directors, &^c.. Fraudulently Affro-priating Pro-perty. 81. — Whosoever being a director, member, or public ofl&cer of any- body corporate or public company, shall fraudulently take or apply for his own use or benefit, or for any use or purposes other than the use or purposes of such body corporate or public company, any of the property of such body corporate or public company, shall be guilty of a mis- demeanour, and being convicted thereof shall be liable, at the discretion of the Court, to any of the punishments which the Court may award as hereinbefore last mentioned. Keeping Fraudulent Accounts. 82. — Whosover, being a director, public officer, or manager of any body corporate or public company, shall as such receive or possess himself of any of the propert}^ of such body corporate or public company otherwise than in payment of a just debt or demand, and shall, with intent to defraud, omit to make, or to cause or direct to be made, a full and true entry thereof in the books and accounts of such body corporate or public company, shall be guilty of a misdemeanour, and being con- victed thereof shall be liable, at the discretion of the Court, to any of the punishments which the Court may award as hereinbefore last mentioned. Wilfully Destroying Books, &^c. S3. — Whosoever, being a director, manager, public officer, or member of any body corporate or public company, shall, with intent to defraud, destroy, alter, mutilate, or falsify any book, paper, writing, or valuable E E 4t8 auditing. security belonging to the body corporate or public compan}^ or make or concur in the making of any false entry or omit or concur in omitting any material particular, in any book of accovmt or other document, shall be guilty of a misdemeanour, and being convicted thereof shall be liable, at the discretion of the Court, to any of the punishments which the Court may award as hereinbefore last mentioned. Publishing False Statements. 84. — Whosover, being a director, manager, or public officer of any body corporate or public company, shall make, circulate, or publish, or concur in making, circulating, or publishing, any written statement or account which he shall know to be false in any material particular, with intent to deceive or defraud any member, shareholder, or. creditor of such body corporate or public company, or with intent to induce any person to become a shareholder or partner therein, or to entrust or advance any property to such body corporate or public company, or to enter into any security for the benefit thereof, shall be guilty of a mis- demeanour, and being convicted thereof shall be liable, at the discretion of the Court, to any of the punishments which the Court may award as hereinbefore last mentioned. FALSIFICATION OF ACCOUNTS ACT, 1875. \ jS and jp Vict. c. 24. ■; \ I. — That if any clerk, officer, or servant, or any person employed or t^ acting in the capacity of a clerk, officer, or servant, shall wilfully and with intent to defraud, destioy, alter, mutilate, or falsify any book, paper, writing, valuable security, or account which belongs to or is in the possession of his employer, or has been received by him for or on behalf of his employer, or shall wilfully, and with intent to defraud, make, or concur in making, any false entry in, or omit or alter, or concur in omitting or altering, any material particular form, or in any such book, or any document or account, then in every such case the person so offending shall be guilty of a misdemeanour, and be liable to be kept in penal servitude for a term not exceding seven years, or to be imprisoned with or without hard labour for any term not exceeding two years. 2. — It shall be sufficient in any indictment under this Act to allege a general intent to defraud, without naming an}^ particular person to be defrauded. PREVENTION OF CORRUPTION ACT 1906. 419 It is further declared (Section 3) that " this Act shall be read as one -with the Act of the twenty-fourth and twenty-fifth of her Majesty, chapter ninety-six," Section 82 of which makes it a misdemeanour on the part of any director, public officer, or manager of any body corporate or public company, who shall " as such receive or possess himself of any of the property of such body corporate or public company, other- wise than in payment of a just debt or demand, and shall, with intent to defraud, omit to make, or to cause or direct to be made, a full and true entry thereof in the books or accounts of such body corporate or public company." The following section (83) makes it a misdemeanour on the part of any such person, who shall "with intent to defraud, destroy, alter, mutilate, or falsify any book, paper, writing, or valuable security belonging to the body corporate or public company, or make, or concur in the making, of any false entry, or omit, or concur in omitting, any material particular in any book of account or other docu- ment." And Section 84 makes it a similar offence on the part of any such person who " shall make, circulate, or publish, or concur in making, circulating, or publishing, any written statement or account Avhich he shall know to be false in any material particular, with intent to deceive or defraud any member, shareholder, or creditor, of such body corporate or public company, or with intent to induce any person to become a shareholder, or partner therein, or to entrust or advance any property to such body corporate or public compan}^, or to enter into any security for the benefit thereof." PREVENTION OF CORRUPTION ACT, 1906. 6 Edw. 7 CJi. 34. Be it enacted by the King's most Excellent Majest}', by and with the advice and consent of the Lords Spiritual and Temporal, and Commons, in this present Parliament assembled, and by the authority of the same as follows : — I. — (i) If any agent corruptly accepts or obtains, or agrees to accept or attempt to obtain, from any person, for himself or for any other person, any gift or consideration as an inducement or reward for doing or forbearing to do, or for having after the passing of this Act done or forborne to do, any Act in relation to his principal's affairs or business, or for showing or forbearing to show favour or disfavour to any person in relation to his principal's affairs or business ; or E E 2 420 AUDITING. If any person corruptly gives or agrees to giye or offers any gift or consideration to any agent as an inducement or reward for doing or forbearing to do, or for having after the passing of this Act done or forborne to do, any act in relation to his prin- cipal's affairs or business, or for showing or forbearing to show favour or disfavour to any person in relation to his principal's affairs or business ; or If any person knowingly gives to any agent, or if any agent knowingly uses with intent to deceive his principal, any receipt, account, or other document in respect of which the principal is interested, and which contains any statement which is false or erroneous or defective in any material particular, and which to his knowledge is intended to mislead the principal ; he shall be guilty of a misdemeanour, and shall be liable on conviction on indictment to imprisonment, with or without hard labour, for a term not exceeding two years, or to a fine not exceeding five hundred u pounds, or to both such imprisonment and such fine, or on summary conviction to imprisonment, with or without hard labour, for a term not exceeding four months, or to a fine not exceeding fifty pounds, or to both such imprisonment and such fine. (2) For the purposes of this Act the expression "consideration"' includes valuable consideration of any kind; the expression "agent" includes any person employed by or acting for another ; and the expression " principal " includes an employer. (3) A person serving under the Crown or under any corporation or any municipal, borough, county, or district council, or any board of guardians, is an agent within the meaning of this Act. 2.- — (i) A prosecution for an offence under this Act shall not be insti- tuted without the consent, in England of the Attorney-General or Solicitor-General, and in Ireland of the Attorney-General or Solicitor- General for Ireland. (2) The Vexatious Indictments Act 1859, as amended by any subse- quent enactment, shall apply to offences under this Act as if they were included among the offences mentioned in Section i of that Act. (3) Every information for any offence under this Act shall be upon oath. (4) The expenses of any prosecution on indictment under this Act shall be defrayed as in cases of indictment for felony. THE PARTNERSHIP ACT 189O. 42 1 (5) A Court of Quarter Sessions shall not have jurisdiction to inquire of, hear, and determine prosecutions on indictments for offences under this Act. (6) Any person aggrieved by a summary conviction under this Act may appeal to a Court of Quarter Sessions. 3. — This Act shall extend to Scotland, subject to the following modifications : — (i) Section 2 shall not extend to Scotland : (2) In Scotland all offences which are punishable under this Act on summary conviction shall be prosecuted before the sheriff in manner provided by the Summary Jurisdiction (Scotland) Acts. 4. — (i) This Act may be cited as the Prevention of Corruption Act 1906. (2) This Act shall come into operation on the first day of January nineteen hundred and seven. PARTNERSHIPS. THE PARTNERSHIP ACT, 1890. 5j and, §4. Vict. c. jg. 21. — Unless the contrary intention appears, property bought with money belonging to the firm is deemed to have been bought on account of the firm. 24. — The interests of partners in the partnership property, and their rights and duties in relation to the partnership, shall be determined subject to any agreement, express or implied, between the partners by the following rules : — (i) All the partners are entitled to share equally in the capital and profits of the business, and must contribute equally towards the losses, whether of capital or otherwise, sustained by the firm. (2) The firm must indemnify every partner in respect of payments made and personal liabilities incurred by him (a) In the ordinary and proper conduct of the business of the firm ; or^ {i>) In or about anything necessarily done for the preservation of the business or property of the firm. 42 2 AUDITING. (3) A partner making, for the purpose of the partnership, any actual payment or advance beyond the amount of capital which he has agreed to subscribe, is entitled to interest at the rate of five per cent, per annum from the date of the payment or advance. (4) A partner is not entitled, before the ascertainment of profrts, to interest on the capital subscribed by him. (5) Every partner may take part in the management of the partner- ship business. (6) No partner shall be entitled to remuneration for acting in the partnership business. (7) No person may be introduced as a partner without the consent of all existing partners. (8) Any difference arising as to ordinary matters connected with the partnership business ma}^ be decided by a majority of the partners, but no change may be made in the nature of the partner- ship business without the consent of all existing partners. (9) The partnership books are to be kept at the place of business of the partnership (or the principal place, if there is more than one), and every partner ma}-, when he thinks fit, have access to and inspect and copy any of them. 28. — Partners are bound to render true accounts and full informa- tion of all things affecting the partnership to any partner or his legal representatives. 29. — (i) Every partner must account to the firm for any benefit derived by him without the consent of the other partners from any transaction concerning the partnership, or from any use by him of the partnership property, name, or business connection. (2) This section applies also to transactions undertaken after a part- nership has been dissolved by the death of a partner, and before the affairs thereof have been completely wound up, either by any surviving partner or b}' the representatives of the deceased partner. 39. — On the dissolution of a partnership, every partner is entitled, as against the other partners in the firm, and all persons claiming through them in respect of their interests as partners, to have the property of the partnership applied in payment of the debts and liabilities of the firm, and to have the surplus assets, after such pay- ment, applied in pa3'ment of what may be due to the partners respec- tivel}', after deducting what ma_y be due from them as partners to the THE PARTNERSHIP ACT 189O. 423 firm ; and for that purpose any partner or his representatives may, on the termination of the partnership, apply to the Court to wind up the business and affairs of the firm. 40. — Where one partner has paid a premium to another on entering into a partnership for a fixed term, and the partnership is dissolved before the expiration of that term otherwise than by the death of a partner, the Court may order the repa3'ment of the premium, or of such part thereof as it thinks just, having regard to the terms of the partnership contract, and to the length of time during which the partnership has continued : unless — (a) the dissolution is, in the judgment of the Court, wholly or chiefly due to the misconduct of the partner who paid the premium ; or, (b) the partnership has been dissolved by an agreement containing no provision for a return of any part of the premium. 42. — (i) Where any member of a firm has died, or otherwise ceased to be a partner, and the surviving or continuing partners carry on the business of the firm, with its capital or assets, without any final settle- ment of accounts as between the firm and the outgoing partner or his estate, then, in the absence of any agreement to the contrary, the out- going partner or his estate is entitled at the option of himself or his representatives to such share of the profits made since the dissolution as the Court may find to be attributable to the use of his share of the partnership assets, or to interest at the rate of five per centum per annum on the amount of his share of the partnership assets. (2) Provided that where by the partnership contract an option is given to surviving or continuing partners to purchase the interest of the deceased or outgoing partner, and that option is duly exercised, the estate of the deceased partner, or the outgoing partner, or his estate, as the case may be, is not entitled to any further or other share of profits : but if any partner, assuming to act in exercise of the option, does not in all material respects comply with the terms thereof, he is liable to account under the foregoing provisions of this section. 43. — Subject to any agreement between the partners, the amount due from surviving or continuing partners to an outgoing partner, or the representative of a deceased partner, in respect of the- outgoing or deceased partner's share, is a debt accruing at the date of the dissolution or death. 44. — In settling accounts between the partners after dissolution of partnership, the following rules shall, subject to any agreement, be observed : — 424 AUDITING. (a) Losses, including losses and deficiencies of capital, shall be paid first out of profits, next out of capital, and lastly, if necessary, by the partners individually in the proportion in which they were entitled to share profits : (d) The assets of the firm, including the sums, if any, contributed by the partners to make up losses or deficiencies of capital, shall be applied m the following manner and order : — (i) In paying the debts and liabilities of the firm to persons who are not partners therein : (2) In paying to each partner rateably what is due from the firm to him for advances as distinguished from capital : (3) In paying to each partner rateably what is due from the firm to him in respect of capital : (4) The ultimate residue, if any, shall be divided among the partners in the proportion in which profits are divisible. THE LIMITED PARTNERSHIPS ACT, 1907. 7 Edw. 7 c. 24. Commencement of Act. 2. — This Act shall come into operation on the first day of January "one thousand nine hundred and eight. Interpretation of Terms. 3. — In the construction of this Act the following words and expres- sions shall have the meanings respectively assigned to them in this section, unless there be something in the subject or context repugnant to such construction : — "Firm," "firm-name," and "business" have the same meanings as in the Partnership Act 1890 (53 & 54 Vict. c. 39) : " General partner " shall mean any partner who is not a limited partner as defined by this Act. Definition and Constitution of Limited Partnership. 4. — (i) From and after the commencement of this Act limited partner- ships may be formed in the manner and subject to the conditions by this Act provided. (2) A limited partnership shall not consist, in the case of a partner- ship carrying on the business of banking, of more than ten persons, ii THE LIMITED PARTNERSHIPS ACT I907. 425 and, in the case of any other partnership, of more than twenty persons, and must consist of one or more persons called general partners, who shall be liable for all debts and obligations of the firm, and one or more persons to be called limited partners, who shall at the time of entering into such partnership contribute thereto a sum or sums as capital or property valued at a stated amount, and who shall not be liable for the debts or obligations of the firm beyond the amount so contributed. (3) A limited partner shall not during the continuance of the partner- ship, either directly or indirectly, draw out or receive back any part of his contribution, and if he does so draw out or receive back any such part shall be liable for the debts and obligations of the firm up to the amount so drawn out or received back. (4) A body corporate may be a limited partner. Registration of Limited Partnership Required. 5. — Every limited partnership must be registered as such in accord- ance with the provisions of this Act, or in default thereof it shall be deemed to be a general partnership, and every limited partner shall be deemed to be a general partner. Modifications of General Law in case of Limited Partner shifs. 6. — (i) A limited partner shall not take part in the management of the partnership business, and shall not have power to bind the firm : Provided that a limited partner may by himself or his agent at any time inspect the books of the firm and examine into the state and prospects of the partnership business, and may advise with the partners thereon. If a limited partner takes part in the management of the partnership business he shall be liable for all debts and obligations of the firm incurred while he so takes part in the management as though he were a general partner. (2) A limited partnership shall not be dissolved by the death or bank- ruptcy of a limited partner, and the lunacy of a limited partner shall not be a ground for dissolution of the partnership by the Court unless the lunatic's share cannot be otherwise ascertained and realised. (3) In the event of the dissolution of a limited partnership its affairs shall be wound up by the general partners unless the Court otherwise orders. 426 AUDITING. (4) Application to the Court to wind up a limited partnership shall be b}^ petition under the Companies Acts 1862 to 1900 and the pro- visions of those Acts relating to the winding-up of companies by the Court and of the rules made thereunder (including provisions as to fees) shall, subject to such modifications (if any) as the Lord Chancellor, with the concurrence of the President of the Board of Trade, may by rules provide, apply to the winding-up by the Court of limited part- nerships, with the substitution of general partners for directors. (5) Subject to any agreement expressed or implied between the partners — (a) Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the general partners ; (b) A limited partner may, with the consent of the general partners, assign his share in the partnership, and upon such an assign- ment the assignee shall become a limited partner with all the rights of the assignor ; (r) The other partners shall not be entitled to dissolve the partner- ship by reason of any limited partner suffering his share to be charged for his separate debt ; (d) A person may bs introduced as a partner without the consent of the existing limited partners ; (e) A limited partner shall not be entitled to dissolve the partnership by notice. Laza as to Private Partne'-shifs to apply where not Excluded by this Act. 7. — Subject to the provisions of this Act, the Partnership Act 1890 (53 & 54 Vict. c. 39) and the rules of equity and of common law applicable to partnerships, except so far as they are inconsistent with the express provisions of the last-mentioned Act, shall apply to limited partnerships. Manlier and Particulars of Registration. 8. — The registration of a limited partnership shall be effected by sending by post or delivering to the Registrar at the register office in that part of the United Kingdom in which the principal place of business of the limited partnership is situated or proposed to be situated a statement signed by the partners containing the following particulars : — THE LIMITED PARTNERSHIPS ACT I907. 427 (a) The firm-name ; (d) The general nature of the business ; (c) The principal place of business ; (d) The full name of each of the partners ; (e) The term, if any, for which the partnership is entered into, and the date of its commencement ; (/) A statement that the partnership is limited, and the description of every limited partner as such ; {g) The sum contributed by each limited partner, and whether paid in cash or how otherwise. Registration of Changes in Partner shifs. 9. — (i) If during the continuance of a limited partnership any change is made or occurs in — (a) the firm-name, [b] The general nature of the business, (c) the principal place of business, [d] the partners or the name of any partner, {e) the term or character of the partnership, (/) the sum contributed by any limited partner, {g) the liability of any partner by reason of his becoming a limited instead of a general partner or a general instead of a limited partner, a statement, signed by the firm, specifying the nature of the change, shall within seven days be sent by post or delivered to the Registrar at the register office in that part of the United Kingdom in which the partnership is registered. (2) If default is made in compliance with the requirements of this section each of the general partners shall on conviction under the Summary Jurisdiction Acts be liable to a fine not exceeding one pound for each day during which the default continues. Advertisetnent in Gazette of Statement of General Partner becoming a Limited Partner and of Assignment of Share of Li7niied Partner. 10. — (i) Notice of any arrangement or transaction under which any person will cease to be a general partner in any firm, and will become 428 AUDITING. a limited partner in that firm, or under which the share of a limited partner in a firm will be assigned to any person, shall be forthwith advertised in the Gazette^ and until notice of the arrangement or trans- action is so advertised, the arrangement or transaction shall, for the purposes of this Act, be deemed to be of no effect. (2) For the purposes of this section, the expression " the Gazette " means — In the case of a limited partnership registered in England, the London Gazette; In the case of a limited partnership registered in Scotland, the Edinburgh Gazette; In the case of a limited partnership registered in Ireland, the Dublin Gazette. Ad Valorem Stamf Duty on Contributions by Limited Partners. II. — The statement of the amount contributed by a limited partner, and a statement of any increase in that amount, sent to the Registrar for registration under this Act, shall be charged with an ad valorem stamp duty of five shillings for every one hundred pounds, and any fraction of one hundred pounds over any multiple of one hundred pounds, of the amount so contributed, or of the increase of that amount, as the case may be ; and in default of paj^ment of stamp duty thereon as herein required, the duty with interest thereon at the rate of five per cent, per annum from the date of delivery of such statement shall be a joint and several debt to His Majesty, recoverable from the partners, or any of them, in the said statements named, or, in the case of an increase, from all or any of the said partners whose discontinuance in the firm shall not, before the date of delivery of such statement of increase, have been duly notified to the Registrar. Maying False Returns to be Misdemeanour . 12. — Every one commits a misdemeanour, and shall be liable to imprisonment with hard labour for a term not exceeding two years, who makes, signs, sends, or delivers for the purpose of registration under this Act any false statement known by him to be false. Registrar to File Statement and Issue Certificate of Registration. 13. — On receiving any statement made in pursuance of this Act the Registrar shall cause the same to be filed, and he shall send by post to THE LIMITED PARTNERSHIPS ACT I907. 429 the firm from whom such statement shall have been received a certificate of the registration thereof. Register and Index to be Keft. 14. — At each of the register offices hereinafter referred to the Regis- trar shall keep, in proper books to be provided for the purpose, a register and an index of all the limited partnerships registered as aforesaid, and of all the statements registered in relation to such partnerships. Registrar of Joint Stock Com-panies to be Registrar under Act. 15. — The Registrar of Joint Stock Companies shall be the Registrar of Limited Partnerships, and the several offices for the registration of joint-stock companies in London, Edinburgh, and Dublin shall be the offices for the registration of limited partnerships carrying on business within those parts of the United Kingdom in which they are respectively situated. Insfection of Statements Registered. 16. — (i) Any person may inspect the statements filed by the Registrar in the register offices aforesaid, and there shall be paid for such inspection such fees as may be appointed by the Board of Trade, not exceeding one shilling for each inspection ; and any person may require a certificate of the registration of any limited partnership, or a copy of or extract from any registered statement, to be certified by the Registrar, and there shall be paid for such certificate of registra- tion, certified copy, or extract such fees as the Board of Trade may appoint, not exceeding two shillings for the certificate of registration, and not exceeding sixpence for each folio of seventy-two words, or in Scotland for each sheet of two hundred words. (2) A certificate of registration, or a copy of or extract from any statement registered under this Act, if duly certified to be a true copy under the hand of the Registrar or one of the Assistant Registrars (whom it shall not be necessary to prove to be the Registrar or Assistant Registar) shall, in all legal proceedings, civil or criminal, and in all cases whatsoever be received in evidence. Power to Board of Trade to Make Rules. 17. — The Board of Trade may make rules (but as to fees with the concurrence of the Treasury) concerning any of the following matters : — 430 AUDITING. {a) The fees to be paid to the Registrar under this Act, so that they do not exceed in the case of the original registration of a limited partnership the sum of two pounds, and in any other case the sum of five shillings ; (b) The duties or additional duties to be performed by the Registrar for the purposes of this Act ; (c) The performance by Assistant Registrars and other officers of acts by this Act required to be done by the Registrar ; {d) The forms to be used for the purposes of this Act ; (e) Generally the conduct and regulation of registration under this Act and any matters incidental thereto. COMPANIES. COMPANIES (CONSOLIDATION) ACT, 1908. S Edw. 7 Ch. 6g. Prohibition of Large Partner shifs. I.— (i) No compan}', association, or partnership consisting of more than ten persons shall be formed for the purpose of carrying on the business of banking, unless it is registered as a company under this Act, or is formed in pursuance of some other Act of Parliament, or of letters patent. (2) Xo company, association, or partnership consisting of more than twenty persons shall be formed for the purpose of carrying on any other business that has for its object the acquisition of gain b}^ the company, association, or partnership, or by the individual members thereof, unless it is registered as a company under this Act, or is formed in pursuance of some other Act of Parliament, or of letters patent, or is a company engaged in working mines within the stannaries and subject to the jurisdiction of the Court exercising the stannaries jurisdiction. 26. — (i) Ever}' company having a share capital shall once at least in every year make a list of all persons who, on the fourteenth day after the first or only ordinary general meeting in the J^ear, are members of the company, and of all persons who have ceased to be members since the date of the last return or (in the case of the first return) of the incorporation of the company. t COMPANIES (consolidation) ACT I908. 431 (2) The list must state the names, addresses, and occupations of all the past and present members therein mentioned, and the number of shares held by each of the existing members at the date of the return, specifying shares transferred since the date of the last return or (in the case of the first return) of the incorporation of the company by persons who are still members and have ceased to be members respec- tively and the dates of registration of the transfers, and must contain a summary distinguishing between shares issued for cash and shares issued as fully or partly paid up otherwise than in cash, and specify- ing the following particulars : — a) The amount of the share capital of the company, and the number of the shares into which it is divided ; d) The number of shares taken from the commencement of the company up to the date of the return ; c) The amount called up on each share ; d) The total amount of calls received; e) The total amount of calls unpaid ; /) The total amount of the sums (if any) paid by way of commission in respect of any shares or debentures, or allowed by way of discount in respect of any debentures, since the date of the last return ; g) The total number of shares forfeited ; h) The total amount of shares or stock for which share warrants are outstanding at the date of the return ; ?■) The total amount of share warrants issued and surrendered respec- tively since the date of the last return ; k) The number of shares or amount of stock comprised in each share warrant ; /) The names and addresses of the persons who at the date of the return are the directors of the company, or occupy the position of directors, by whatever name called ; and m) The total amount of debt due from the company in respect of all mortgages and charges which are required (or, in the case of a company registered in Scotland, which, if the company had been registered in England, would be required) to be registered with the Registrar of Companies under this Act, or which would have been required so to be registered if created after the first day of July nineteen hundred and eight. 432 AUDITING. (3) The summary must also (except where the company is a private company) include a statement, made up to such date as maj' be specified in the statement, in the form of a Balance Sheet, audited by the company's Auditors, and containing a summary of its share capital, its liabilities, and its assets, giving such particulars as will disclose the general nature of those liabilities and assets, and how the values of the fixed assets have been arrived at, but the Balance Sheet need not include a statement of profit and loss. (4) The above list and summary must be contained in a separate part of the register of members, and must be completed within seven days after the fourteenth day aforesaid, and the company must forthwith forward to the Registrar of Companies a copy signed by the manager or by the secretary of the company. (5) If a company makes default in complying with the requirements of this section it shall be liable to a fine not exceeding five pounds for every day during which the default continues, and every director and manager of the company who knowingly and wilfully authorises or permits the default shall be liable to the like penalty. 27. — No notice of any trust, expressed, implied, or constructive, shall be entered on the register, or be receivable by the Registrar, in the case of companies registered in England or Ireland. 20. — (i) The register of members, commencing from the date of the registration of the company, shall be kept at the registered office of the company, and, except when closed under the provisions of this Act, shall during business hours (subject to such reasonable restrictions as the company in general meeting may impose, so that not less than two hours in each day be allowed for inspection) be open to the inspection of any member gratis, and to the inspection of any other person on payment of one shilling, or such less sum as the company may prescribe, for each inspection. (2) Any member or other person may require a copy of the register, or of any part thereof, or of the Ust and summary required by this Act, or any part thereof, on payment of sixpence, or such less sum as the company may prescribe, for every hundred words or fractional part thereof required to be copied. (3) If any inspection or copy required under this section is refused, the company shall be liable for each refusal to a fine not exceeding two pounds, and to a further fine not exceeding two pounds for every day during which the refusal continues, and every director and > f COMPANIES (consolidation) ACT 1908. 433 n^.anager of the company who knowingly authorises or permits the refusal shall be liable to the like penalt}- ; and, as respects companies registered in England or Ireland, any Judge of the High Court, or the Judge of the Court exercising the stannaries jurisdiction in the case of companies subject to that jurisdiction, may by order compel an immediate inspection of the register. 31. — A company may, on giving notice by advertisement in some newspaper circulating in the district in which the registered office of the companj' is situate, close the register of members for any time or times not exceeding in the whole thirty days in each year. 40. — (i) When a company has accumulated a sum of undivided profits, which with the sanction of the shareholders may be distributed among the shareholders in the form of a dividend or bonus, it may, by special resolution, return the same, or any part thereof, to the share- holders in reduction of the paid-up capital of the company, the unpaid capital being thereb}^ increased by a similar amount. (2) The resolution shall not take effect until a memorandum, show- ing the particulars required by this Act in the case of a reduction of share capital, has been produced to and registered by the Registrar of Companies, but the other provisions of this Act with respect to reduction of share capital shall not apply to a reduction of paid-up share capital under this section. (3) On a reduction of paid-up capital in pursuance of this section any shareholder, or any one or more of several joint shareholders, may within one month after the passing of the resolution for the reduction, require the company to retain, and the company shall retain accord- ingly the whole of the money actuall}^ paid on the shares held b}^ him either alone or jointly with any other person, which, in consequence of the reduction, would otherwise be returned to him or them, and thereupon those shares shall, as regards the payment of dividend, be tleemed to be paid up to the same extent only as the shares on which payment has been accepted by the shareholders in reduction of paid-up capital, and the company shall invest and keep invested the money so retained in such securities authorised for investment by trustees as the company may determine, and on the money so invested or on so much thereof as from time to^time exceeds the amount of calls subsequently made on the shares in respect of which it has been retained, the com- pany shall pay the interest received from time to time on the securities. (4) The amount retained and invested shall be held to represent the future (alls which may be made to replace the share capital so reduced F F -13-1 AUDITIXG. on those shares, whether the amount obtained on sale of the whole or such proportion thereof as represents the amount of any call when made produces more or less than the amount of the call. (5) On a reduction of paid-up share capital in pursuance of this section, the powers vested in the directors of making calls on share- holders in respect of the amount unpaid on their shares shall extend to the amount of the unpaid share capital as augmented b}- the Reduction. (6) After an\' reduction of share capital under this section the com- pany shall specify in the annual list of members required by this Act the amounts retained at the request of any of the shareholders in pur- suance of this section, and shall specify in the statements of account laid before any general meeting of the companv the amount of undivided profits returned in reduction of paid-up share capital under this section. Reduction of Share Capital. 46. — (i) Subject to confirmation b}- the Court, a compan\- limited by shares, if so authorised b}' its articles, may by special resolution reduce its share capital in any waj', and in particular (without prejudice to the general it V of the foregoing power) may — (a) Extinguish or reduce the liability on any of its shares in respect of share capital not paid up ; or (b) Either with or without extinguishing or reducing liability on anj- of its shares, cancel any paid-up share capital which is lost or unrepresented by available assets ; or ((') Either with or withoLit extinguishing or leducing liabilit}- on an}' of its shares, pay off any paid-up share capital which is in excess of the wants of the company, and may, if and so far as is neces.'^ar}-, alter its memorandum by reducing the amount of its share capital and of its shares accordingly. (2) A special resolution under this section is in this Act called a resohition for reducing share capital. 47. — Where a compan\' has passed and confirmed a resolution for reducing share capital it may apply by petition to the Court for an order confirming the reduction. 48.. — On and from the confirmation by a company of a resolution for reducing share capital, or where the reduction does not involve either the diminution of an\' liability in respect of unpaid share capital or the payment to any shareholder of any paid-up share capital, then on and (' COMPANIES (consolidation) ACT 1908. 435 from the presentation of the petition for confirming the reduction, the compan}' shall add to its name, until such date as the Court may fix, the words " and reduced," as the last words in its name, and those words shall, until that date, be deemed to be part of the name of the compan}- : Provided that, where the reduction does not involve either the diminution of any liability in respect of unpaid share capital or the payment to any shareholder of anj' paid-up share capital, the Court may, if it thinks expedient, dispense altogether with the addition of the words " and reduced." 49. — (i) Where the proposed reduction of share capital involves either diminution of liability in respect of unpaid share capital or the payment to any shareholder of any paid-up share capital, and in any other case if the Court so directs, every creditor of the company who at the date fixed by the Court is entitled to any debt or claim which, if that date were the commencement of the winding-up of the company, would be admissible in proof against the company, shall be entitled to object to the reduction. (2) The Court shall settle a list of creditors so entitled to object, and for that purpose shall ascertain, as far as possible without requiring an application from any creditor, the names of those creditors and the nature and amount of their debts or claims, and may publish notices fixing a day or days within which creditors not entered on the list are to claim to be so entered or are to be excluded from the right of objecting to the reduction. (3) Where a creditor entered on the list whose debt or claim is not discharged or determined does not consent to the reduction, the Court may, if it thinks fit, dispense with the consent of that creditor, on the company securing payment of his debt or claim by appropriating, as the Court may direct, the following amount ; (that is to say)— (i.) If the company admits the full amount of his debt or claim, or, though not admitting it, is willing to provide for it, then the full amount of the debt or claim ; (ii.) If the companj^ does not admit or is not willing to provide for the full amount of the debt or claim, or if the amount is contingent or not ascertained, then an amount fixed by the Court after the like inquiry and adjudication as if the company were being wound up by the Court. F F 2 43^ AUDITING. 50. — The Court, if satisfied, with respect to every creditor of the company who under this Act is entitled to object to the reduction, that either his consent to the reduction has been obtained or his debt or claim has been discharged or has determined, or has been secured, may make an order confirming the reduction on such terms and conditions as it thinks fit. 51. — (i) The Registrar of Companies on production to him of an order of the Court confirming the reduction of the share capital of a company, and the delivery to him of a cop}- of the order and of a minute (approved by the Court), showing with respect to the share capital of the company, as altered by the order, the amount of the share capital, the number of shares into which it is to be divided, and the amount of each share, and the amount (if any) at the date of the registration deemed to be paid up on each share, shall register the order and minute. (2) On the registration, and not before, the resolution for reducing share capital as confirmed by the order so registered shall take effect. (3) Notice of the registration shall be published in such manner as the Court may direct. (4) The Registrar shall certify under his hand the registration of the order and minute, and his certificate shall be conclusive evidence that all the requirements of this Act with respect to reduction of share capital have been complied with, and that the share capital of the company is such as is stated in the minute. 52.— (i) The minute when registered shall be deemed to be substituted for the corresponding part of the memorandum of the compan}', and shall be valid and alterable as if it had been originally contained therein ; and must be embodied in every copy of the memorandum issued after its registration. (2) If a company makes default in complying with the requirements of this section it shall be liable to a fine not exceeding one pound for each copy in respect of which default is made, and every director and manager of the company who knowingly and wilfully authorises or permits the default shall be liable to the like penalty. 53. — A member of the company, past or present, shall not be liable in respect of any share to any call or contribution e.xceeding in amount the difference (if any) between the amount paid, or (as the case may be) the reduced amount, if any, which is to be deemed to have been paid, on the share and the amount of the share as fixed by the minute : I. COMPANIES (consolidation) ACT I908. 437 Provided that if any creditor, entitled in respect of any debt or claim to object to the reduction of share capital, is, by reason of his ignorance of the proceedings for reduction, or of their nature and effect with respect to his claim, not entered on the list of creditors, and, after the reduction, the company is unable, within the meaning of the pro- visions of this Act with respect to winding up by the Court, to pay the amount of his debt or claim, then — (i.) every person who was a member of the company at the date of the registration of the order for reduction and minute, shall be liable to contribute for the payment of that debt or claim an amount not exceeding the amount which he would have been liable to contribute if the company had commenced to be wound up on the day before that registration ; and (ii.) if the company is wound up, the Court, on the application of any such. creditor, and proof of his ignorance as aforesaid, may, if he thinks fit, settle accordingly a list of persons so liable to contribute, and make and enforce calls and orders on the contributories settled on the list as if they were ordinary contributor! es in a winding up. Nothing in this section shall affect the rights of the contributories among themselves. 's 54. — If any director, manager, or officer of the company wilfully conceals the name of any creditor entitled to object to the reduction, or wilfull}-- misrepresents the nature or amount of the debt or claim of any creditor, or if any director or manager of the company aids or abets ia or is privy to any such concealment or misrepresentation as aforesaid, every such director, manager, or officer shall be guilty of a misdemeanour. 1^^. — In any case of reduction of share capital, the Court may require the company to publish as the Court directs the reasons for reduction, or such other information in regard thereto as the Court may think expedient with a view to give proper information to the public, and, if the Court thinks fit, the causes which led to the reduction. 56. — A company limited by guarantee and registered on or after the first day of January nineteen hundred and one, may, if it has a share capital, and is so authorised by its articles, increase or reduce its share capital in the same manner and subject to the same conditions in and subject to which a company limited by shares maj' increase or reduce its share capital under the provisions of this Act. 438 AUDITING. Meetings and Proceedings. 64. — (i) A general meeting of every company shall be held once at the least in every calendar 3'ear, and not more than fifteen months after the holding of the last preceding general meeting, and, if not so held, the company and every director, manager, secretary, and other officer of the company, who is knowingly a party to the default, shall be liable to a fine not exceeding fifty pounds. (2) When default has been made in holding a meeting of the com- pany in accordance with the provisions of this section, the Court may, on the application of any member of the company, call or direct the calling of a general meeting of the company. 65. — (i) Every company limited by shares and registered on or after the first day of January nineteen hundred and one shall, within a period of rot less than one month nor more than three months from the date at which the company is entitled to commence business, hold a general meeting of the members of the company which shall be called the statutory meeting. (2) The directors shall, at least seven days before the da}' on which the meeting is held, forward a report (in this Act called " the statutory report ") to ever}- member of the company and to every other person entitled under this Act to receive it. (3) The statutory report shall be certified by not less than two directors of the company, or, where there are less than two directors, by the sole director and manager, and shall state — ((7) the total number of shares allotted, distinguishing shares allotted as fully or partly paid up otherwise than in cash, and stating in the case of shares partly paid up the extent to which they are so paid up, and in either case the consideration for which they have been allotted ; (1^) the total amount of cash received by the company in respect of all the shares allotted, distinguished as aforesaid ; (c) an abstract of the receipts of the company on account of its capital, whether from shares or debentures, and of the payments made thereout, up to a date within seven days of the date of the report, exhibiting under distinctive headings the receipts of the com- pany from shares and debentures and other sources, the pay- ments made thereout, and particulars concerning the balance remaining in hand, and an account or estimate of the preliminary expenses of the company ; COMPANIES (consolidation) ACT IQcS. 439 (a) the names, addresses, and descriptions of the directors, auditors (if any), managers (if any), and secretary of the compan}^ ; and (e) the particulars of any contract, the modification of which is to be submitted to the meeting for its approval together with the par- ticulars of the modification or proposed modification. (4) The statutory report shall, so far as it relates to the shares allotted by the company, and to the cash received in respect of such shares, and to the receipts and payments of the company on capital account, be certified as correct by the Auditors, if any, of the company. (5) The directors shall cause a copy of the statutory report, certified as by this section required, to be filed with the Registrar of Companies forthwith after the sending thereof to the members of the compan}'. (6) The direc-tors shall cause a list showing the names, descriptions, and addresses of the members of the compan}-, and the number of i shares held by them respectively, to be produced at the commencement of the meeting, and to remain open and accessible to any member of the company during the continuance of the meeting. (7) The members of the company present at the meeting shall be at liberty to discuss any matter relating to the formation of the company, or arising out of the statutory report, whether previous notice has been given or not, but no resolution of which notice has not been given in accordance with the articles may be passed. (8) The meeting may adjourn from time to time, and at any adjourned meeting any resolution of which notice has been given in accordance with the articles, either before or subsequently to the fcrmer meeting, may be passed, and the adjourned meeting shall have the same powers as an original meeting. (()) If a petition is presented to the Court in manner provided by Part I\'. of this Act for winding up the company on the ground of default in filing the statutory report or in holding the statutory meet- ing, the Court may, instead of directing that the company be wound up, give directions for the statutory report to be filed or a meeting to be held, or make such other order as may be just. (10) The provisions of this section as to the forwarding and filing of the statutory report shall not apply in the case of a private company. 66. — (i) Notwithstanding anything in the articles of a company, the directors of a company shall, on the requisition of the holders of not less than tjne-tenth of the issued share capital of the company upoa 44° AUDITING. which all calls or other sums then due have been paid, forthwith proceed to convene an extraordinary general meeting of the company. (2) The requisition must state the objects of the meeting, and must be signed by the requisitionists and deposited at the registered office of the company, and may consist of several documents in like form, each signed by one or more requisitionists. (3) If the directors do not proceed to cause a meeting to be held within twent3--one days from the date of the requisition being so deposited, the requisitionists, or a majority of them in value, may themselves convene the meeting, but any meeting so convened shall not be held after three months from the dale of the deposit. (4) If at an}' such meeting a resolution requiring confirmation at another meeting is passed, the directors shall forthwith convene a further extraordinary general meeting for the purpose of considering the resolution and, if thought fit, of confirming it as a special resolu- tion ; and, if the directors do not convene the meeting within seven days from the date of the passing of the first resolution, the requisi- tionists, or a majorit}' of them in value, may themselves convene the nieeting. (5) Any meeting convened under this section by the requisitionists shall be convened in the same manner, as nearly as possible, as that in which meetings are to be convened by directors. Appointment, Qualification, &^c., of Directors. 72. — (i) A person shall not be capable of being appointed director of a company by the articles, and shall not be named as a director or proposed director of a company in any prospectus issued by or on behalf of the company, or in any statement in lieu of prospectus filed by or on behalf of a company, unless, before the registration of the articles or the publii ation of the prospectus, or the filing of the state- ment in lieu of prospectus, as the case may be, he has by himself or by his agent authorised in writing — (i.) Signed and filed with the Registrar of Companies a consent in writing to a>:t as su;h director; and (ii.) Either signed the meni'irandum for a number of shares not less than his qualification (if any), or signed and filed with the Registrar a contract in writing to take frmu the company and pay for his qualification shares (if any). I COMPANIES (consolidation) ACT I908. 44I (2) On the application for registration of the memorandum and articles of a company the applicant shall deliver to the Registrar a list of the persons who have consented to be directors of the company, and, if this list contains the name of any person who has not so consented, the applicant shall be Uable to a fine not exceeding fifty pounds. (3) This section shall not apply to a private company nor to a pro- spectus issued by or on behalf of a company after the expiration of one year from the date at which the company is entitled to commence business. 73. — (i) Without prejudice to the restrictions imposed by the last foregoing section, it shall be the duty of every director who is by the regulations of the company required to hold a speciiied share qualifica- tion, and who is not already qualified, to obtain his qualification within two months after his appointment, or such shorter time as may be fixed b}' the regulations of the company. 1 (2) The office of director of a company shall be vacated, if the director does not within two months from the date of his appointment, or within such shorter time as may be fixed by the regulations of the company, obtain his qualification, or if after the expiration of such period or shorter time he ceases at any time to hold his qualification; and a person vacating office under this section shall be incapable of being reappointed director of the company until he has obtained his qualification. (3) If after the expiration of the said period or shorter time any unqualified person acts as a director of the company, he shall be liable to a fine not exceeding five pounds tor every day between the expiration of the said period or shorter time and the last day on which it is proved that he acted as a director. 74. — The acts of a director or manager shall be \-alid notwithstanding any defect that niav afterwards be discovered in his appointment or qualification. j^. — (i) Every company shall keep at its registered office a register containing the names and addresses and the occupations of its directors or managers, and send to the Registrar of Companies a copy thereof, and from time to time notify to the Registrar any change among its directors or managers. (2) If default is made in compliance with this section, the company shall be liable to a fine not exceeding five pounds for every day during which the default continues; and every director and manager of the / 44- AUDITING. company who knowingly and wilfully authorises or permits the default shall be liable to the like penalty. Prosfeciris. So. — (i) Kvery prospectus issued by or on behalf of a company or in relation to any intended company shall be dated, and that date shall, unless the contrary be proved, be taken as the dat<; of publication of the prospectus. [2\ A copy of ever}' such prospectus, signed b}- every person who is named therein as a director or proposed director of the company, or by his agent authorised in writing, shall be filed for registration with the Registrar of (Companies on or before the date of its publication, and no such prosp'cctus shall be issued until a copy thereof has been so filed for registration. (3) Th(-' Registrar shall not register anv prospectus unless it is dated, and the copy thereof signed, in manner required by this section. (4) f>-ery prospectus shall state on the face of it that a copy has been filed for registration as required by this section. (5) If a prospectus is issued without a copy thereof being so filed, the company, and every person who is knowingly a party to the issue of the prospectus, shall be liable to a fine not exceeding five pounds for e\'ery day from the date of the issue of the prospectus until a copy thereof is so filed. Si. — (i) Kverv prospectvis issued bv or on behalf of a company, or by or on behalf of any person who is or has been engaged or interested in the formation of the company, must state — ((/) the contents of the memorandum, with the names, descriptions, and addresses of the signatories, and the number of shares sub- scribed for by them respectively ; and the number of founders" or management or deferred shares, if any, and the nature and extent of the interest of the holders in the property and profits of the company ; and {b) the number of shares, if any, fixed by the articles as the qualifica- tion of a director, and any provision in the articles as to the remuneration of the directors ; and (r) the names, descriptions, and addresses of the directors or •proposed directors: and {d) the mminujm subscription on which the directors may proceed to allotment, and the amount payable on application and allot- ment on each share; and in the case of a second or subsequent f COMPANIES (CONSOLIDATION) ACT I908. 443 offer of shaves, the anion nt offered for subscription on each previous allotment made within the two preceding 3'ears, and the amount actually allotted, and the amount, if any, paid on the shares so allotted ; and (e) the number and amount of shares and debentures which within the two preceding years have been issued, or agreed to be issued, as fully or partly paid up otherwise than in cash, and in the latter case the extent to which they are so paid up, and in either case the consideration for which those shares or debentures have been issued or are proposed or intended to be issued ; and (/) the names and addresses of the vendors of anv propertv pur- chased or acquired by the company, or proposed so to be purchased or acquired, which is to be paid for wholly or partly out of the proceeds of the issue offered for subscription by the prospectus, or the purchase or acquisition of which has not been completed at the date of the issue of the prospectus, and the amount payable in cash, shares, or debentures, to the vendor, and where there is more than one separate vendor, or the com- pany is a sub-purchaser, the amount so pavablc to each vendor : Provided that where the vendors or anv of them are a firm the meinbers of the firm shall not be treated as separate vendors ; and {g) the amount (if any) paid or payable as purchase-money in cash, shares, or debentures, for any such propert)^ as aforesaid, specifying the amount (if any) payable for goodwill ; and (//) the amount (if any) paid within the two preceding years, or pa}^- able, as commission for subscribing or agreeing to subscribe, or procuring or agreeing to procure subscriptions, for any shares in, or debentures of, the company, or the rate of any such commis- sion : Provided that it shall not be necessary to state the com- mission pa\'able to sub-underwriters ; and (/) the amount ur estimated amount of preliminary expenses; and (j) the amount paid within the two preceding years or intended to be paid to any promoter, and the consideration for any such payment; and (k) The dates of and parties to every material contract, and a reason- able time and place at which any material contract or a copy thereof may be inspected : Provided that this requirement shall not apply to a contract entered into in the ordinary course of the business carried on or intended to be carried on b}^ the company, or to any contract entered into more than two years before the date of issue of the prospectus ; and 444 AUDITING. (/) the names and addresses of the Auditors (if any) of the company; and {»/) full particulars of the nature and extent of the interest (if any) of every director in the promotion of, or in the property pro- posed to be acquired by, the compan}', or, where the interest of such a director consists in being a partner in a firm, the nature and extent of the interest of the firm, with a statement of all sums paid or agreed to be paid to him or to the firm in cash or shares or otherwise by an}- person either to induce him to become, or to qualify him as, a director, or otherwise for services rendered by him or b}' the firm in connection with the promotion or formation of the company ; and («) where the company is a company having shares of more than one class, the right of voting at meetings of the company conferred by the several classes of shares respectively. (2) For the purposes of this section every person shall be deemed to be a vendor who has entered into any contract, absolute or conditional, for the sale or purchase, or for any option of purchase, of any property to be acquired by the company in any case where — {a) the purchase-monev is not fuUv paid at the date of issue of the prospectus ; (jr (d) the purchase-money is to be paid or satisfied wholly or in part out of the proceeds of tho issue offered for subscription by the prospectus ; or (f) the contract depends for its validity or fulfilment on the result of that issue. (3) \Miere any of the property to be acquired b}- the company is to be taken on lease, this section shall apply as if the expression " vendor" included the lessor, and the expression " purchase-money " included the consideration for the lease, and the expression "sub-purchaser" included a sub-lessee. (4) An}- condition requiring or binding any applicant for shares or debentures to waive compliance with any reciuirement of this section, or purporting to affect him with notice of any contract, document, or matter not specifiiall\- referred to in the prospectus, shall be void. (5) ^^'here any surh prospectus as is mentioned in this section is published as a newspaper ad\-ertisement, it shall not be necessary in the advertisement to specify the contents of the memorandum or the signa- tories thereto, and the number of shares subscribed for by them. COMPANIES (CONSOLIDATION) ACT I908. 4^5 (6) In the event of non-compliance with an}- of the requirements of this section, a director or other person responsible for the prospectus shall not incur any liability by reason of the non-compliance, if he proves that — (a) as regards any matter not disclosed, he was not cognisant thereof ; or (b) the non-compliance arose from an honest mistake of fact on his part : Provided that in the event of non-compliance with the requirements contained in Paragraph (w) of Subsection (i) of this section no director or other person shall incur any liability in respect of the non-com- pliance unless it be proved that he had knowledge of the matters not disclosed. (7) This section shall not appl}' to a circular or notice inviting exist- ing members or debenture-holders of a company to subscribe either for shares or for debentures of the company, whether with or without the right to renounce in favour of other persons, but subject as afore- said, this section shall apply to an}-- prospectus whether issued on or with reference to the formation of a company or subsequentl3\ (8) The requirements of this section as to the memorandum and the qualification, remuneration, and interest of directors, the names, descriptions, and addresses of directors or proposed directors, and the amount or estimated amount of preliminar}' expenses, shall not apply in the case of a prospectus issued more than one year after the date at which the company is entitled to commence business. (g) Nothing in this section shall limit or diminish any liability which any person may incur under the general law or this Act apart from this section. 82. — (i) A company which does not issue a prospectus on or with reference to its formation, shall not allot any of its shares or deben- tures unless before the first allotment of either shares or debentures there has been nled with the Registrar of Companies a statement in lieu of prospectus signed by every person who is named therein as a director or a proposed director of the company or by his agent autho- rised in writing, in the form and containing the particulars set out in the Second Schedule to this Act. (2) This section shall ngt apply to a private company or to a com- pany which has allotted any shares or debentures before the first day of July nineteen hundred and eight. 446 AUDITING. ^3. — A company shall not previously to the statutory meeting vary the terms of a contract referred to in the prospectus or statement in lieu oi prospectus, except subject to the approval of the statutory meeting. S4. — (i) Where a prospectus invites persons to subscribe for shares in or debentures of a company, every person who is a director of the company at the time of the issue of the prospectus, and everj' person who has authorised the naming of him and is named in the prospectus as a director or as having agreed to become a director either immediately or alter an interval of time, and every promoter of the company, and every person who has authorised the issue of the pro- spectus, shall be liable to pa}' compensation to all persons who subscribe for any shares or debentures on the faith of the prospectus for the loss or damage they may have sustained b}' reason of any untrue statement therein, or in any report or memorandum appearing on the face thereof, or by reference incorporated therein or issued therewith, unless it is proved — (a) \Vith respect to every untrue statement not purporting to be made on the authority of an expert, or of a public official document or statement, that he had reasonable ground to believe, and did up to the time of the allotment of the shares or debentures, as the case may be, believe, that the statement was true ; and (b) With respect to everj- untrue statement purporting to be a state- ment by or contained in what purports to be a copy of or extract from, a report or valuation of an expert, that it fairly represented the statement, or was a correct and fair copy of or extract from the report or valuation. Provided that the director, person named as director, promoter, or person who authorised the issue of the prospectus, shall be liable to pay compensation as aforesaid if it is proved that he had no reasonable ground to believe that the person making the statement, report, or valuation was competent to make it -. and (c) With respect to every untrue statement purporting to be a state- ment made by an official person or contained in what purports to be a copy of or extract from a public official document, that it was a correct and fair representation of the statement or copy of or extract from the document : or unless it is proved — (i.) tliat having consented to become a director of the company he withdrew his consent before the issue of the prospectus, and it' t. that it was issued without his authority or consent ; or » COMPANIES (consolidation) ACT I908. 447 (ii.) that the prospectus was issued without his knowledge or con- sent, and that on becoming aware of its issue he forthwith gave reasonable public notice that it was issued ^without his knowledge or consent ; or (iii.) that after the issue of the prospectus and before allotment thereunder, he, on becoming aware of any untrue statement therein, withdrew his consent thereto, and gave reasonable public notice of the withdrawal, and of the reason therefor. (2) Where a company existing on the eighteenth day of August one thousand eight hundred and ninet}' has issued shares or debentures, and for the purpose of obtaining further capital by subscriptions for shares or debentures issues a prospectus, a director shall not be liable in respect of any statement therein, unless he has authorised the issue of the prospectus, or has adopted or ratified it. (3) Where the prospectus contains the name of a person as a director of the company, or as having agreed to become a director thereof, and he has not consented to become a director, or has withdrawn his consent before the issue of the prospectus, and has not authorised or consented to the issue thereof, the directors of the company, except any without whose knowledge or consent the prospectus was issued, and any other person who authorised the issue thereof, shall be liable to indemnify the person named as aforesaid against all damages, costs, and expenses to which he may be made liable by reason of his name having been inserted in the prospectus, or in defending himself against any action or legal proceedings brought against him in respect thereof. (4) Every person who by reason of his being a director, or named as a director or as having agreed to become a director, or of his having authorised the issue of the prospectus, becomes liable to make any pay- ment under this section may recover contribution, as in cases of contract, from any other person who, if sued separately, would have been liable to make the same pa3m'ient, unless the person who has become so liable was, and that other person was not, guilty of fraudulent misrepresentation. (s) For the purposes of this section — The expression " promoter " means a promoter who was a party to the preparation of the prospectus, or of the portion thereof, containing the untrue statement, but does not include any person by reason of his acting in a professional capacity for persons engaged in procuring the formation of the company : The expression " e.xpert " includes engineer, valuer, accountant, and any other person whose profession gives authority to a statement made bv him. 448 AUDITING. Allotment. 85. — (i) No allotment shall be made of any share capital of a companj^ offered to the public for subscription, unless the following conditions have been complied with, namely : — [a) the amount (if an}') fixed by the memorandum or articles and named in the prospectus as the minimum subscription upon which the directors ma}' proceed to allotment ; or [h) if no amount is so fixed and named, then the whole amount of the share capital so offered for subscription, has been subscribed, and the sum payable on application for the amount so fixed and named, or for the whole amount offered for subscription, has been paid to and received by the company. (2) The amount so fixed and named and the whole amount aforesaid shall be reckoned exclusively of any amount payable otherwise than in cash, and is in this Act referred to as the minimum subscription. (3) The 'amount payable on application on each share shall not be less than 5 per cent, of the nominal amount of the share. (4) If the conditions aforesaid have not been complied with on the expiration of forty days after the first issue of the prospectus, all money received from applicants for shares shall be forthwith repaid to them without interest, and, if any such money is not so repaid within forty-eight days after the issue of the prospectus, the directors of the company shall be jointly and severally liable to repay that money with interest at the rate of 5 per centum per annum from the expiration •of the forty-eighth day : Provided that a director shall not be liable if he proves that the loss -of the money was not due to any misconduct or negligence on his part. (5) Any condition requiring or binding any applicant for shares to waive compliance with any requirement of this section shall be void. (6) This section, except Subsection (3) thereof, shall not apply to any allotment of shares subsequent to the first allotment of shares •offered to the public for subscription. (7) In the case of the first allotment of share capital payable in casli ■of a company which does not issue any in\itation to the public to subscribe for its shares, no allotment shall be made unless the minimum subscription (that is to say) : — COMPANIES (consolidation) ACT 1908. 449 (a) the amount (if any) fixed by the memorandum or articles and named in the statement in lieu of prospectus as the minimum subscription upon which the directors may proceed to allotment; or (b) if no amount is so fixed and named, then the whole amount of the share capital other than that issued or agreed to be issued as fully or partly paid up otherwise than in cash, has been subscribed and an amount not less than 5 per cent, of the nominal amount of each share payable in cash has been paid to and received b}' the company. This subsection shall not apply to a private company or to a com- pany which has allotted anv shares or debentures before the first day of Juh' nineteen hundred and eight. 86. — (i) An allotment made by a company to an applicant in contra- vention of the provisions of the last foregoing section shall be void- able at the instance of the applicant within one month after the hold- ing of the statutory meeting of the company and not later, and shall be so voidable notwithstanding that the company is in course of being wound up. (2) If any director of a company knowingly contravenes or permits or authorises the contravention of any of the provisions of the last foregoing section with respect to allotment he shall be liable to com- pensate the company and the allottee respectively for any loss, damages, or costs which the company or the allottee may have sustained or incurred thereby: Provided that proceedings to recover any such loss, damages, or costs shall not be commenced after the expiration of two years from the date of the allotment. 87. — (i) A company shall not commence any business or exercise any borrowing powers unless — (a) shares held subject to the payment of the whole amount thereof in cash have been allotted to an amount not less in the whole than the minimum subscription ; and (b) every director of the company has paid to the company on each of the shares taken or contracted to be taken by him, and for which he is liable to pay in cash, a proportion equal to the proportion payable on application and allotment on the shares offered for public subscription, or in the case of a company which does not issue a prospectus inviting the public to sub- scribe for its shares, on the shares payable in cash ; and G G 45° AUDITING. (<:) there has been filed with the Registrar of Companies a statutory declaration by the secretary or one of the directors, in the pre- scribed form, that the aforesaid conditions have been complied with ; and (d) in the case of a company which does not issue a prospectus inviting the public to subscribe for its shares, there has been filed with the Registrar of Companies a statement in lieu of prospectus. (2) The Registrar of Companies shall, on the filing of this statutory declaration, certify that the company is entitled to commence business, and that certificates shall be conclusive evidence that the company is so entitled : Provided that in the case of a company which does not issue a prospectus inviting the public to subscribe for its shares the Registrar shall not give such a certificate unless a statement in lieu of prospectus has been filed with him. (3) Any contract made by a company before the date at which it is entitled to commence business shall be provisional only, and shall not be binding on the company until that date, and on that date it shall become binding. (4) Nothing in this section shall prevent the simultaneous offer for subscription or allotment of any shares and debentures or the receipt of any money payable on application for debentures. (5) If any company commences business or exercises borrowing powers in contravention of this section, ever}- person who is responsible for the contravention shall, without prejudice to anj- other liability, be liable to a fine not exceeding fifty pounds for every da}' during which the contravention continues. (6) Nothing in this section shall apply to a private company, or to a company registered before the first day of January nineteen hundred and one, or to a company registered before the first day of July nineteen hundred and eight, which does not issue a prospectus inviting the public to subscribe for its shares. 88. — (i) Whenever a company limited by shares makes any allot- ment of its shares, the company shall within one month thereafter file Avith the Registrar of Companies — (a) a return of the allotments, stating the number and nominal amount of the shares comprised in the allotment, the names, addresses, and descriptions of the allottees, and the amount (if any) paid or due and payable on each share ; and COMPANIES ^consolidation) ACT I908. 451 (b) in the case of shares allotted as fully or partly paid up other- wise than in cash, a contract in writing constituting the title of the allottee to the allotment, together with any contract of sale, or for services or other considerations in respect of which that allotment was made, such contracts being duh^ stamped, and a return stating the number and nominal amount of shares so allotted, the extent to which they are to be treated as paid up, and the consideration for which they have been allotted. (2) Where such a contract as above mentioned is not reduced to writing, the company shall within one month after the allotment file with the Registrar of Companies the prescribed particulars of the con- tract stamped with the same stamp duty as would have been payable if the contract had been reduced to writing, and those particulars shall be deemed to be an instrument within the meaning of the Stamp Act 1891, and the Registrar may, as a condition of filing the particulars, require that the duty paj'able thereon be adjudicated under Section 12 of that Act. (3) If default is made in complying with the requirements of this section, every director, manager, secretary, or other officer of the com- pany, who is knowingly a party to the default, shall be liable to a line not exceeding fifty pounds for every day during which the default continues : Provided that, in case of default in filing with the Registrar of Com- panies within one month after the allotment any document required to be filed by this section, the company, or any person liable for the default, maj' apply to the Court for relief, and the Court, if satisfied that the omission to file the document was accidental or due to inadvert- ence, or that it is just and equitable to grant relief, may make an order extending the time for the filing of the document for such period as the Court may think proper. Commissions aud Discounts. 8g. — (i) It shall be lawful for a company to pay a commission to any person in consideration of his subscribing or agreeing to subscribe, whether absolutely or conditionally, for any shares in the company, or procuring or agreeing to procure subscriptions, whether absolute or conditional, for an}- shares in the company, if the payment of the com- mission is authorised by the articles, and the commission paid or agreed to be paid does not exceed the amount or rate so authorised, G G 2 452 AUDITING. and if the amount or rate per cent, of the commission paid or agreed to be paid is — (a) In the case of shares offered to the public for subscription, disclosed in the prospectus; or {b) In the case of shares not offered to the public for subscription, disclosed in the statement in lieu of prospectus, or in a state- ment in the prescribed form signed in like manner as a state- ment in lieu of prospectus and filed with the Registrar of Com- panies, and, where a circular or notice, not being a prospectus, inviting subscription for the shares is issued, also disclosed in that circular or notice. (2) Save as aforesaid, no company shall apply any of its shares or capital money either directly or indirectly in payment of any com- mission, discount, or allowance, to any person in consideration' of his subscribing or agreeing to subscribe, whether absolutely or con- ditionally, for any shares of the company, or procuring or agreeing to procure subscriptions, whether absolute or conditional, for any shares in the compan}^, whether the shares or money be so applied by being added to the purchase-money of any property acquired by the company or to the contract price of any work to be executed for the company, or the money be paid out of the nominal purchase-money or contract price, or otherwise. (3) Nothing in this section shall affect the power of any company to pay such brokerage as it has heretofore been lawful for a company to pay, and a vendor to, promoter of, or other person who receives pa}^- ment in money or shares from, a company shall have and shall be deemed always to have had power to apply any part of the money or shares so received in payment of any commission, the payment of which, if made directly by the company, would have been legal under this section. 90. — Where a company has paid any sums by way of commission in respect of any shares or debentures, or allowed any sums by way of discount in respect of any debentures, the total amount so paid or alloAved, or so much thereof as has not been written off, shall be stated in every Balance Sheet of the company until the whole amount thereof has been written off. Faynient of Interest out of Capital. 91. — Where any shares of a company are issued for the purpose of raising money to defray the expenses of the construction of any works or buildings or the provision of any plant which cannot be made profit- able for a lengthened period, the company may pay interest on so much COMPANIES (consolidation) ACT 1908. 453 of that share capital as is for the time being paid up for the period and subject to the conditions and restrictions in this section mentioned, and may charge the same to capital as part of the cost of construction of the work or building, or the provision of plant : Provided that — (i) No such payment shall be made unless the same is authorised by the articles or by special resolution : {2) No such payment, whether authorised by the articles or by special resolution, shall be made without the previous sanction of the Board of Trade : (3) Before sanctioning any such payment the Board of Trade may, at the expense of the company, appoint a person to inquire and report to them as to the circumstances of the case, and may, before making the appointment, require the company to give security for the payment of the costs of the inquiry : (4) The payment shall be made only for such period as may be determined by the Board of Trade ; and such period shall in no case extend beyond the close of the half-j^ear next after the half-year during which the works or buildings have been actually completed or the plant provided : (5) The rate of interest shall in no case exceed 4 per cent, per annum or such lower rate as may for the time being be pre- scribed by Order in Council : (6) The payment of the interest shall not operate as a reduction of the amount paid up on the shares in respect of which it is paid : (7) The accounts of the company shall show the share capital on which, and the rate at which, interest has been paid out of capital during the period to which the accounts relate : (8) Nothing in this section shall affect any company to which the Indian Railways Act 1894, as amended by any subsequent enactment, applies. Information as to Mortgages, Charges, &=€. 93. — (i) Every mortgage or charge created after the first day of July nineteen hundred and eight by a company registered in England or Ireland and being either — {a) a mortgage or charge for the purpose of securing any issue of debentures ; or (^) a mortgage or charge on uncalled share capital of the company ; or 454 AUDITING. (c) a mortgage or charge created or evidenced b}^ an instrument which, if executed by an individual, would require registration as a bill of sale ; or (d) a mortgage or charge on any land, wherever situate, or any interest therein ; or {e) a mortgage or charge on any book debts of the company; or (/) a floating charge on the undertaking or property of the companj', shall, so far as an}' security on the companj-'s property or undertaking is thereby conferred, be void against the liquidator and any creditor of the compan}', unless the prescribed particulars of the mortgage or charge, together with the instrument (if any) by which the mortgage or charge is created or evidenced, are delivered to or received by the Registrar of Companies for registration in manner required by this Act within twent^'-one days after the date of its creation, but without prejudice to an\' contract or obligation for repayment of the money thereby secured, and when a mortgage or charge becomes void under this section the money secured thereby shall immediatel}' become payable. Provided that — (i.) in the case of a mortgage or charge created out of the United Kingdom comprising solely property situate outside the United Kingdom, the delivery to and the receipt by the Registrar of a copy of the instrument by which the mortgage or charge is created or evidenced, verified in the prescribed manner, shall have the same effect for the purposes of this section as the delivery and receipt of the instrument itself, and twenty-one da)-s after the date on which the instrument or copy could, in diie course of post, and if despatched with due diligence, have been received in the United Kingdom, shall be substituted for twenty-one days after the date of the creation of the mortgage or charge, as the time within which the particulars and instrument or copy are to be delivered to the Registrar ; and (ii.) where the mortgage or charge is created in the United King- dom but comprises property outside the United Kingdom, the instrument creating or purporting to create the mortgage or charge may be sent for registration notwithstanding that further proceedings may be necessary to make the mortgage or charge valid or effectual according to the law of the country in which the property is situate ; and COINIPANIES (consolidation) ACT 1908. 455 (iii.) where a negotiable instrument has been given to secure the payment of any book debts of a company, the deposit of the instrument for the purpose of securing an advance to the company shall not for the purposes of this section be treated as a mortgage or charge on those book debts ; and (iv.) the holding of debentures entitling the holder to a charge on land shall not be deemed to be an interest in land. (2) The Registrar shall keep, with respect to each company, a register in the prescribed form of all the mortgages and charges created by the company after the first day of July nineteen hundred and eight and requiring registration under this section, and shall, on payment of the prescribed fee, enter in the register, with respect to every such mortgage or charge, the date of creation, the amount secured by it, short par- ticulars of the property mortgaged or charged, and the names of the mortgagees or persons entitled to the charge. (3) Wliere a series of debentures containing, or giving by reference to any other instrument, any charge to the benefit of which the deben- ture-holders of that series are entitled -pari -passu is created by a com- pany, it shall be sufficieirt if there are delivered to or received by the Registrar within twenty-one days after the execution of the deed con- taining the charge or, if there is no such deed, after the execution of anj' debentures of the series, the following particulars : — (a) the total amount secured by the whole series ; and [h] the dates of the resolutions authorising the issue of the series and the date of the covering deed, if any, by which the security is created or defined ; and (y the directors. r ~ 96. The directors may from time to time pay to the members such interim dividends as appear to the directors to be justified by the profits of the company. 97. No dividend shall be paid otherwise than out of profits. 98. Subject to the rights of persons, if any, entitled to shares with special rights as to dividends, all dividends shall be declared and paid according to the amounts paid on the shares, but if and so long as nothing is paid up on any of the shares in the company dividends may be declared and paid according to the amounts of the shares. Xo amount paid on a share in advance of calls shall, while carrying interest, be treated for the purposes of this article as paid on the share. 99. The directors may, before recommending any dividend, set aside out of the profits of the company such sums as they think proper as a reserve or reserves which shall, at the discretion of the directors, be applicable for meeting contingencies, or for equalising dividends, or for any other purpose to which the profits of the company may be properly applied, and pending such application may, at the like discretion, either be employed in the business of the company or be invested in such investments (other than shares of the company) as the directors may from time to time think fit. 100. If several persons are registered as joint holders of any share any one of them may give effectual receipts for any dividend payable on the share. loi. Notice of any dividend that may have been declared shall be given in manner hereinafter mentioned to the persons entitled to share therein. 102. Xo dividend shall bear interest against the company. COMPANIES (consolidation) ACT 1 908. ^71 A ccounts. 103. The directors shall cause true accounts to be kept — Of the sums of money received and expended b}' the company and the matter in respect of which such receipt and expenditure takes place, and Of the assets and liabilities of the company. 104. The books of account shall be kept at the registered office of the company, or at such other place or places as the directors think fit, and shall alwaj^s be open to the inspection of the directors. 105. The directors shall from time to time determine whether and to what extent and at what times and places and under what conditions or regulations the accounts and books of the company or any of them shall be open to the inspection of members not being directors, and no member (not being a director) shall have any right of inspecting any account or book or document of the company except as conferred by statute or authorised by the directors or by the company in general meeting. 106. Once at least in every year the directors shall lay before the company in general meeting a Profit and Loss Account for the period since the preceding account or (in the case of the first account) since the incorporation of the company, made up to a date not more than six months before such meeting. 107. A Balance Sheet shall be made out in every year and laid before the company in general meeting made up to a date not more than six months before such meeting. The Balance Sheet shall be accom- panied by a report of the directors as to the state of the company's affairs, and the amount which they lecommend to be paid by way of dividend, and the amount, if any, which they propose to carry to a reserve fund. 108. A copy of the Balance Sheet and report shall, seven days pre- viously to the meeting, be sent to the persons entitled to receive notices of general meetings m the manner in which notices are to be given hereunder. A tidit. 109. Auditors shall be appointed and their duties regulated in accordance with Sections 112 and 113 of the Companies (Consolidation) Act, 1908, or any statutory modification thereof for the time being in force. ^7-' AUDITING. THl. COMPAXJKS (COXSOLiDATIOX) ACT, 1908. LIMITED. STATEMENT IN LIEU OF PROSPECTUS. The nominal share capital of the company Divided into Names, descriptions, and addresses of directors or proposed directors. Minimum subscription (if any) fixed by the memorandum or articles of association on which the company may proceed lo allotment. Number and amount of shares and deben- tures agreed to be issued as fully or partly paid-up otherwise than in cash. The consideration for the intended issue of those shares and debentures. Names and addresses of (u) vendors of property purchased or acquired, or pro- posed to be (b) purchased or acquired by the company. Amount (in cash, shares or debentures) payable to each separate vendor . . Amount (if any) paid or payable (in cash or shares or debentures) for any such property, specifying amount (if any) paid or payable for goodwill. Amount (if any) paid or payable as com- mission for subscribing or agreeing to subscribe or procuring or agreeing to procure subscriptions for any shares or debentures in the company, or Kate of the commission Estimated amount of preliminary expenses Amount paid or intended to be paid to any promoter. Consideration for the payment Shares of i" each. i' 1. shares of £ fully paid. 2. shares upon which £ per share credited as paid. 3. debenture £ 4. Consideration. Total purchase price Cash . . Shares Debentures i £ £ Goodwil Amount paid. „ payable. Rate per clui. Name of promoter. Amount £ Consideration : — (a) For definition of vendor, see Section 8i (a) of the Companies (Consolidation) Act, 1908. (,:su' ■^. COMPANIES (consolidation) ACT 1908. 473 \, contract (other than contracts entered into in the ordinary course of the business intended to be carried on by the company or entered into more than two years before the tiling of this statement). 1 Time and place at which the contracts or copies thereof may be inspected. Names and addresses of the auditors of the company (if any). Full particulars of the nature and extent of tlie interest of every director in the pro- motion of or in the property proposed to be acquired by the company, or. where the interest of such a director consists in being a partner in a firm, the nature and extent of the interest of the firm, with a statement of all sums paid or agreed to be paid to him or to the firm in cash or shares, or otherwise, by any person either to induce hiui to become, or to qualify him as, a director, or otherwise, for services rendered by him or by the firm in connection with the promotion or formation of the company. Whether the articles contain any provisions precluding holders of shares or deben- tures receiving and inspecting balance sheets or reports of the auditors or other reports. Nature of the provisions (Signatures of the persons above named as directors or proposed directors, or of their agents authorised in writing.) FORM C. Form of Statk-\[kxt to be PubHshed by Banking and Insurance Companies, and Deposit, Provident, or Benent Societies. (Section 108.) *The share capital of the company is , divided into shares of each. The number of shares issued is Calls to the amount of pounds per share have been made under which the sum of pounds has been received. * If the Company has no Share Capital, the portion of the Statement relating to Capital and Shares must be omitted. j 474 AUDITING. The liabilities of the compan_v on the First day of January (or July) were : — Debts owing to sundry persons by the company — On judgment, £ On specialty, £ On notes or bills, £ On simple contracts, £ On estimated liabilities, £ The assets of the company on that day were — Government securities (stating them). Bills of exchange and promissory notes, £ Cash at bankers, /." Other securities, £ i PARLIAMENTARY COMPANIES. THE COMPANIES CLAUSES CONSOLIDATION ACT, 1845. c^ Vict. c. 16. Register of Shareholders. g. — The company shall keep a book to be called the " Register of Shareholders," and in such book shall be fairly and distinctly entered, from time to time, the names of the several corporations, and the names and addresses of the several persons entitled to shares in the company, together with the number of shares to which such share- holders shall be respectively entitled, distinguishing each share by its i number and the amount of the subscriptions paid on such shares, and the surnames or corporate names of the said shareholders shall be placed in alphabetical order; and such book sliall be authenticated bv the common seal of the' company being aifixed thereto ; and such authentication shall take place at the first ordinary meeting, or at the next subsequent meeting of the company, and so from time to time at each ordinary meeting of the company. .\ddresscs of Shareholders. 10. — In addition to the said Register of Shareholders, the company shall provide a book to be called the " Shareholders' Address Book," in which the secretary shall, from time to time, enter in alphabetical order the corporate names and places of business of the several share- I I THE COMPANIES CLAUSES CONSOLIDATION ACT 1845. 475 holders of the company, being corporations, and the surnames of the several other shareholders, with their respective (liristian names, places of abode, and descriptions, so far as the same shall be known to the company. Register of Mortgages and Bonds. 45. — A register of mortgages and bonds shall be kept by the sec- retary, and within fourteen days after the date of any such mortgage or bond an entry or memorial, specifying the number and date of such mortgage or bond and the sums secured thereb}', and the names of the parties thereto, with their proper additions, shall be made in such register. Register of Stock. 63. — The company shall, from time to time, cause the names of the several parties who may be interested in any such stock as aforesaid, with the amount of the interest therein possessed by them respec- tively, to be entered in a book to be kept for the purpose, and to be called " The Register of Holders of Consolidated Stock." Election of Auditors. loi. — Except where, by the special Act, Auditors shall be directed to be appointed otherwise than by the company, the company shall, at the first ordinary meeting after the passing of the special Act, elect the prescribed number of Auditors, and, if no number is prescribed, two Auditors, in like manner as is provided for the election of directors ; and at the first ordinary meeting of the company in each \'ear thereafter the compan}' shall in like manner elect an Auditor to supply the place of the Auditor then retiring from ofhce, according to the provision hereinafter contained ; and everj-^ Auditor elected as hereinbefore provided, being neither removed nor disqualified nor having resigned, shall continue to be an Auditor until another be elected in his stead. 102.- — Where no other qualification shall be prescribed by the special Act, every Auditor shall have at least one share in the undertaking ; and he shall not hold any office in the company, nor be in any other manner interested in its concerns except as a shareholder. 103. — One of such Auditors (.to be determined in the first instance by ballot between themselves, unless they shall otherwise agree, and afterwards by seniorit}^) shall go out of office at the first ordinary meet- ing in each year ; but the Auditor so going out shall be immediately re-eligible, and after any such re-election shall, with respect to the going out of office by rotation, be deemed a new Auditor. 104. — If an\- vacancy take place among the Auditors in the course of the current 3'ear, then, at an}- general meeting of the company, the 476 AUDITING. vacancv may, if the company think fit, be supplied by election of the shareholders. 105. — The provision of this Act respecting the failure of an ordinary meeting at which directors ought to be chosen shall apply, mutatis , mutandis, to any ordinary meeting at which an Auditor ought to be : afipointed. Powers and Duties of Auditors. 106. — The directors shall deliver to such Auditors the half-yearly or other periodical accounts and Balance Sheet fourteen days at the least before the ensuing ordinary meeting at which the saine are required to ^ be produced to the shareholders, as hereinafter provided. 107. — It shall be the duty of such Auditors to receive from the directors the half-j'early or other periodical accounts and Balance Sheet required to be presented to the shareholders, and to examine 9 the same. loS. — It shall be lawful for the Auditors to employ such account- arits and other persons as they may think proper, at the expense of the com.pany, and they shall either make a special report on the said accounts or simply confirm the same ; and such report or confirmation shall be read, together with the report of the directors, at the ordinary f meeting. < Accounts. 115. — The directors shall cause full and true accounts to be kept of all sums of money received or expended on account of the company- by the directors and all persons employed by or under them, and of the matters and things for which such sums of money shall have been received or disbursed and paid. lit). — The books of the company shall be balanced at the prescribed periods, and, if no periods be prescribed, fourteen days at least before each ordinary meeting ; and, forthwith, on the books being so balanced, an exact Balance Sheet shall be made up, which shall exhibit a true statement of the capital, stock, credits, and property of every descrip- tion belonging to the company, and the debts due by the company at the date of making such Balance Sheet, and a distinct view of the profit or loss which shall have arisen on the transactions of the company in the course of the preceding half-year ; and previously to each ordinary meeting such Balance Sheet shall be examined by the directors, or any three of their number, and shall be signed by the chairman or deputy-chairman of the directors. THE COMPANIES CLAUSES ACT 1863. 477 iiS. — The directors shall produce to the shareholders assembled at such ordinary meeting the said Balance Sheet, applicable to the period immediately preceding such meeting, together with the report of the Auditors thereon, as hereinbefore provided. Dividends. 120. — Previously to every ordinary meeting at which a dividend is intended to be declared, the directors shall cause a scheme to be pre- pared showing the profits (if any) of the company for the period current since the preceding ordinary meeting at which a dividend was declared, and apportioning the same, or so much thereof as they may consider applicable to the purposes of dividend, among the shareholders, accord- ing to the shares held by them respectively, the amount paid thereon, and the periods during which the same may have been paid, and shall exhibit such scheme at such ordinary meeting, and at such meeting a dividend mav be declared according to such scheme. 121. — -The company shall not make any dividend whereby their capital stock will be in any degree reduced : provided always that the word "dividend" shall not be construed to apply to a return of any portion of the capital stock, with the consent of all the mortgagees and bond creditors of the company, due notice being given for that purpose at an extraordinary meeting to be convened for that object. 122. — Before apportioning the profits to be divided among the share- holders the directors may, if they think fit, set aside thereout such sum as they may think proper to meet contingencies, or for enlarging, repairing, or improving the works connected with the undertaking, or any part thereof, and maj^ divide the balance only among the shareholders. 123. — Xo dividend shall be paid in respect of any share, until all calls then due in respect of that and every other share held by the person to whom such dividend may be pa3^able shall have been paid. THE COMPANIES CLAUSES ACT. 1863. 2O and 27 Vict. c. 118. Issues of Frtfcrcnce Shares and Slock. 13. — Where any such company is authorised by any special Act here- after passed and incorporating this part of this Act to raise any 478 AUDITING. additional sum or sums b}- the issue of new preference shares, or by the issue of new preference stock, or (at the option of the company) by either of those modes, then and in every such case the company, with the like sanction as aforesaid, may for the purpose of raising such additional sum or sums from time to time create and issue (accord- ing as the authority given by the special Act extends to shares only or to stock only or to both) such new shares or new stock either ordinarv or preference, and either of one class and with like privileges, or of several classes and with different privileges, and of the same or different amounts, and respectively with any fixed, fluctuating, con- tingent, preferential, perpetual, terminable, deferred, or other divi- dend or interest, not exceeding the rate prescribed in the special Act ; and if no rate is prescribed, then not exceeding the rate of five pounds per centum per annum, and subject (as to any such new shares) to the payment of calls of such amounts and at such times as the company from time to time thinks fit. Provided always that any preference assigned to any shares or stock so issued under the special Act shall not affect any guarantee or any preference or priority in the payment of dividend or interest on any shares or stock that may have been granted by the company under or confirmed by any previous Act, or that may be otherwise lawfully subsisting. Preference Dividends not Cumulative. 14. — The preference shares or preference stock shall be entitled to the preferential dividend, or interest assigned thereto, out of the profits of each vear in prioritv to the ordinary shares and ordinary stock of the company ; but if in any year ending on the day prescribed in the special Act, and if no day is prescribed, then on the thirty-first day of December, there are not profits available for the payment of the full amount of preferential dividend or interest for that j'-ear, no part of the deficiency shall be made good out of the profits of any subsequent year, or out of any other funds of the company. Separate Accounts of Debenture Stock. 2,^. — Separate and distinct accounts shall be kept by the company showing how nuich money has been received for or on account of debenture stock, and how much money borrowed or owing on mortgage or bond, or which the}' have power so to borrow, has been paid off by debenture stock, or raised thereby, instead of being borrowed on mortgage or bond. I THE COMPANIES CLAUSES ACT 1869. 479 THE COMPANIES CLAUSES ACT, 1869. J2 atid jj Vict. c. 4S. Power to Issue Shares or Stock at a Discount. 5. — Section 21 of the Companies Clauses Act, 1863, shall, with respect to any company to which it is applicable under the provisions of this or any other Act, be read and have effect as if the following words — that is to say, " but so that not less than the full nominal amount of any share or portion of stock be payable or paid in respect thereof," had not been inserted in that section. 6. — Any shares forming part of the capital (whether original or additional) authorised to be raised by any special Act of the company passed before the present Session which have not been disposed of may be disposed of in manner provided by Part II of the Companies Clauses Act, 1S63, as amended by this Act, and that part, as so amended, shall be deemed incorporated with such special Act accordingly. 7. — Provided that any shares, the creation whereof has been authorised by the company, but which have not been issued before the passing of this Act, shall not be issued on any terms other than those whereon the same might have been issued if this Act had not been passed, unless and until the issue thereof on terms other than as aforesaid is after the passing of this Act authorised by the companj' in manner provided by Part II of the Companies Clauses Act, 1863. 8. — Provided always that this Act shall not be construed to alter or extend the provisions of any Act relating to share capital in respect of which the amount of profits to be divided is limited to a fixed rate per centum upon the paid-up capital of the company. LICENSED PROPERTY. THE LICENSING ACT, 1904. 4 Edw. 7 c. 2j. I. — (i) The power to refuse the renewal of an existing on-licence, on any ground other than the ground that the licensed premises have been ill-conducted or are structurally deficient, or structurally unsuitable, or grounds connected with the character or fitness of the proposed holder of the licence or the ground that the renewal would be void, shall be vested in Quarter Sessions instead of the Justices of the Licensing District, but shall only be exercised on a reference from 480 AUDITING. those justices, aud on payment of compensation in accordance with this Act. (2) In every case of the refusal of the renewal of an existing on-licence by the Justices of a Licensing District, they shall specify in writing to the applicant the grounds of their refusal. 2. — (i) \A"here Quarter Sessions refuse the renewal of an existing on-licence under this Act, a sum equal to the difference between the value of the licensed premises (calculated as if the licence were subject to the same conditions of renewal as were applicable immediate!}- before the passing of this Act, and including in that value the amount of an}' depreciation of trade fixtures arising by leason of the refusal to renew the licence) and the value which those premises would bear if they were not licensed premises shall be paid as compensation to the persons interested in the licensed premises. (2) The amount to be so paid shall, if an amount is agreed upon by the persons appearing to Quarter Sessions to be interested in the licensed premises, and is approved by Quarter Sessions, be that amount, and in default of such agreement and approval shall be deter- mined by the Commissioners of Inland Revenue in the same manner and subject to the like appeal to the High Court as on the valuation of an estate for the purpose of estate duty, and in any event the amount shall be divided amongst persons interested in the licensed premises (including the holder of the licence) in such shares as may be determined by Quarter Sessions : Provided that, in the case of the licence-holder, regard shall be had not only to his legal interest in the premises or trade fixtures, but also to his conduct and to the length of time during which he has been the holder of the licence, and the holder of a licence, if a tenant, shall (notwithstanding any agreement to the contrary) in no case receive a less amount than he would be entitled to as tenant from year to year of the licensed premises. (4) Any costs incurred by the Commissioners of Inland Revenue on an appeal from their decision to the High Court under this section shall, unless the High Court order those costs to be paid by some party to the appeal other than the Commissioners, be paid out of the amount to be paid as compensation. 2. — (i) Quarter Sessions shall, in each year, unless they certify to the Secretary of State that it is unnecessary to do so in any year, for the purposes of this Act impose, in respect of all existing on-licences THE LICENSING ACT I9O4. 481 renewed in respect of premises within their area, charges at rates not exceeding and graduated in the same proportion as the rates shown in the scale of maximum charges set out in the First Schedule to this Act. (2) Charges payable under this section in respect of any licence shall be levied and paid together with and as part of the duties on the corre- sponding excise licence, but a separate account shall be kept by the Commissioners of Inland Revenue of the amount produced b}' those charges in the area of any Quarter Sessions, and that amount shall in each 3'ear be paid over to that Quarter Sessions in accordance with rules made b}^ the Treasury for the purpose. (3) Such deductions from rent as are set out in the Second Schedule to this Act may, notwithstanding any agreement to the contrary, be niade by any licence-holder who pays a charge under this section, and also by any person from whose rent a deduction is made in respect of the payment of such a charge. (4) Any sums paid under this Act to Quarter Sessions in respect of the charges under this section, or received by Quarter Sessions from any other source for the payment of compensation under this Act, shall be paid b}' them to a separate account under their management, and the moneys standing to the credit of that account shall constitute the Compensation Fund. (:;) Any expenses incurred by Quarter Sessions in the payment of compensation under this Act, or otherwise in the exercise of their powers or the performance of their duties under this Act, and such expenses of the Justices of the licensing District incurred under this Act as Quarter Sessions may allow, shall be paid out of the Compensa- tion Fund, and Quarter Sessions, in the exercise of their powers under this Act, shall have regard to the funds available for the purpose. Quarter Sessions ma}', with the consent of a Secretary of State, borrow, in accordance with rules made under this Act on the security of the Compensation Fund, for the purpose of paying any compensation payable under this Act. 6. — A Secretary of State may make rules for carrying into effect this Act, and may by those rules, amongst other things : — (d) Provide for the enforcement oi any security given for money borrowed, and for the time, not exceeding fifteen years, within which money borrowed is to be replaced ; and (c) regulate the management and application of the Compensation Fund, and the audit of the Accounts of Quarter Sessions. I 1 482 AUDITING. Schedule I. Scale of Maximum Charges. Section 3. Annual Value of Premises to be taken as for the purpose of the Publican's Licence Duty. £ Ub der £ 15 15 and under 20 20 , 25 25 30 30 40 40 50 50 100 100 , 200 200 , 300 300 ) 400 400 , 500 600 , 700 , 800 500 600 700 800 900 900 and over Maximum Rate of Charge £ s d I 2 3 4 6 10 15 20 30 40 50 60 70 80 90 100 Schedule II. Scale of Deductions. Section 3. A person whose unexpired term does not exceed — I year, may deduct a sum equal to 100 per cent. of the charge. 2 years ,, 88 jj 3 82 5) 4 76 5) 5 70 JJ 6 6s JJ 7 60 JJ 8 55 3S 9 50 Jl 10 45 JJ II 41 JJ 12 37 JJ 13 33 JJ 14 29 JJ 15 25 JJ 16 23 JJ 17 ,, ,, 21 JJ 18 19 JJ •9 17 JJ 20 15 JJ 21 H JJ 22 13 J J 23 ,, ,, 12 JJ 24 ,, ,, II JJ 25 >> >) ^0 JJ THE LICENSING ACT 1904. 483 Exceeds 25, but does not exceed 30 years may deduct a sum equal to 7 per cent, of the charge. Exceeds 30, but does not exceed 35, years may deduct a sum equal to 6 per cent, of the charge. Exceeds 35, but does not exceed 40, years may deduct a sum equal to 5 per cent, of the charge. Exceeds 40, but does not exceed 45, years may deduct a sum equal to 4 per cent, of the charge. Exceeds 45, but does not exceed 50, years may deduct a sum equal to 3 per cent, of the charge. Exceeds 50, but does not exceed 55, years may deduct a sum equal to 2 per cent, of the charge. Exceeds 55, but does not exceed 60, years may deduct a sum equal to I per cent, of the charge. But the amount deducted shall in no case exceed half the rent. THE LICENSING RULES, 1904. Rules made by the Secretary of State for the Home Department, dated December 20th 1904, iinder Section 6 of the Licensing Act, 1904 :— Accounts. 61. — (i) It shall be the duty of the Compensation Authority to cause proper accounts to be kept in connection with the Compensation Fund, and a Financial Statement to be prepared at the close of each year in the form directed by the Secretary of State. (2) The accounts shall be made up for each calendar year, or for such other period as the Compensation Authority, with the approval of the Secretary of State, determine. Audit by Professional Accountant. 62. — (i) The Compensation Authority shall appoint a professional accountant, approved by the Secretary of State, to be the Auditor of their accounts. (2) The Auditor may be appointed for a term not exceeding three years, but a retiring Auditor shall be eligible for reappointment. (3) The remuneration of the Auditor shall be such as may be fixed by the Compensation Authority, with the consent of a Secretary of State. Examination of Accounts. 63. — As soon as may be after the close of the year for which the .accounts are made up the Compensation Authority shall submit to the I 12 484 AUDITING. Auditor for examination the detailed accounts, together with the vouchers and authorities for receipts and payments, and shall also submit, for the Auditor's certificate, the Annual Financial Statement required by these rules. 64. — A copy of the Financial Statement, as certified by the Auditor, shall be sent by the Compensation Authority to the Secretary of State, together with a copy of any report made by the Auditor in regard thereto. MINING COMPANIES. THE STANNARIES ACT, 1869. J 3 and J J Vict. c. ig. Interpretation. 2. -In this Act — The term " Stannaries " means the Stannaries of Devon and Cornwall : The term " company " includes any persons or partnership body work- ing a mine in the Stannaries : The term " purser " means the purser for the time being of a company, and if there is no purser, then the secretary for the time being, or if there is no secretary, then the principal agent for the time being of a company : The term " Cost Book" includes all books and papers relating to the business of a mine, which are for the time being kept by a purser or which according to the custom of the Stannaries, or the directions of the compan}', ought to be kept by him. 3. — This Act extends only to mines within the Stannaries, and subject to the jurisdiction of the Court, or within the cognisance of the Vice- Warden, and nothing in this Act shall extend to companies registered under any of the Joint Stock Companies Acts, except where such companies are expressly mentioned or necessarily implied. Entry of Accounts. g. — The purser of every company shall once at least in every four months truly enter in the Cost Book of the company accounts showing the actual financial position of the company at the end of the financial month of the company last preceding the time of entry, including a statement of all credits, debts, and liabilities, and distinguishing in such accounts the amount of calls paid and calls not paid, with accurate lists of all the shareholders for the time being in the company, with THE STANNARIES ACT 1887. 485 their respective addresses, corrected from time to time as occasion requires, and all other accounts, documents, and things which the purser is for the time being required to enter therein by the custom of the Stannaries, or b\' the directions of the company ; and after the passing of this Act all existing or future companies having any rules or regulations touching the management of the company or conduct of the business of any mine shall file a true copy of them at the office of the Registrar without payment of any fee ; and such rules or regula- tions shall be subject to the inspection of all applicants at reasonable times ; and if an}' company shall neglect to file such rules or regula- tions as above required, then any shareholder in or creditor of any such company may apply for an order of the Court to file such rules or regulations forthwith, which order shall be enforced by the process of the Court. A itdif. 10. — At any meeting of the company, with special notice, the accounts of the company may be audited, and a call may be made. THE STANNARIES ACT, 1887. ^o and 5/ Yict. c. ^J. Interpretation. 2. — In this Act — The term " company" means any persons or partnership bod}^ joint stock company, company constituted under the Companies Act, 1862, or any statutory modification thereof, and whether corporate or unin- corporate, and whether limited or unlimited, engaged in or formed for working mines within the Stannaries : The term " purser " means the purser for the time being of a company, or if there is no purser, then the secretary for the time being, or if there is no secretary, then the principal agent or manager for the time being of a company : The term " Cost Book " includes all books and papers relating to the business of a mine which are for the time being kept by a purser, or which, according to law or the custom of the Stannaries, ought to be kept by him : The term " lessors " means the lessor or grantor of any lease, or grant of any mine, or licence to exercise mining rights and powers, and includes every person entitled under any such lease, grant, or licence, or any other instrument whatever, to receive the rents or dues pay- able in respect of any mine : 486 AUDITING. The term " mortgagees " includes all holders of mortgage-debentures, mortgages, or other charges issued by any company : The term " sheriff " includes any officer charged with the execution of a writ or other process : The term " miners " includes all artisans, labourers, and other persons working in and about a mine, except the purser, secretary, agent, or manager : The term "wages" includes all earnings by miners arising from any description of piece or other work, or as tributers or otherwise : The term " mining effects " includes machinery, materials, goods, and chattels, and all ores and helvins, and all other personal property appertaining to a mine, or used or intended to be used for mining purposes. Extent of Act. 3. — This Act extends only to metalliferous mines and tin streaming ' | works within the Stannaries. Mortgages of Mining Plant and Effects to be Registered. 19. — All mortgages, mortgage debentures, and other documents what- ever, whereby power is given by any company to any person to take possession of any mining effects of or on a mine, shall, in addition to any registration thereof now required bj' law, be registered within twenty-eight days from the date thereof, at the of&ce of the said Regis- trar, in a book to be kept there for that purpose, without payment of any fee, and such book shall be subject to the inspection of all appli- cants at all reasonable times, and no such mortgage, mortgage deben- ture, or other document, unless so registered, shall confer any priority over or title as against the claims of any persons whatever for work and labour done or services performed in or upon such mine, or for goods or materials supplied to any company by which the said mine is carried on ; such registration shall not affect any priority in respect of wages under the provisions of this Act. Accounts to be Entered in Cost Book. 23. — The purser of every Cost Book rnine shall, once at least every sixteen weeks, truly enter in the Cost Book of the mine accounts showing the actual financial position of the company at the end either of the financial month of such company last preceding the time of entry, or of the calendar month last preceding that time, including a ^ statement of all credits, debts, and liabilities, and distinguishing in . I such accounts the amounts of calls paid, and calls not paid, and also all other accounts, documents, and things that the purser is required THE STANNARIES ACT 1887. 487 to enter therein by the custom of the Stannaries, or by the direction of the company, and if any purser shall fail to make such entries or any of them within the time or in manner above directed, he shall, when and so often as he shall so fail, be liable to a penalty not exceeding twenty pounds, to be recovered in a summary manner before any two or more justices of the peace. Penalty for False 'Entries, d^c. 24. — If in the said accounts any false statement or entry shall be made, or any material particular omitted with the knowledge of the purser, the said purser shall be liable in respect of every such false statement, entry, or omission to a penalty not exceeding fifty pounds, to be recovered in a summary manner before any two or more justices of the peace, and the said justices may, in their absolute discretion, award any portion of the penalty imposed by them (not exceeding one moiety thereof) to the prosecutor, provided he is a shareholder in the company or a person having a legal right to inspect the said accounts ; if such false statement, entry, or material particular has been made or omitted with the knowledge of the manager of the mine, such manager shall also be liable to a like penalty, to be recovered in like manner and with the like discretion in the justices as to their apportionment thereof. Meetings to be Held Once every Sixteen Weeks. 25. — The purser of every Cost Book mine shall duly convene an ordinary meeting of the shareholders in such mine at least once every sixteen weeks, for the transaction of the ordinary business of the said mine, and at every such meeting the Cost Book of the said mine, con- taining the accounts and other matters required by this Act to be entered therein, together with a list showing the name and address of e\ ery shareholder from whom any call is in arrear and unpaid, and the amount of the calls unpaid by him, shall be laid before the meeting, and be open to full and unrestricted inspection by any shareholder present, and if any purser shall fail to convene such meeting, or to duly hold the same, or shall fail to produce the said Cost Book thereat, or to permit it to be inspected as aforesaid, he shall forfeit for each and every such default a sum not exceeding ten pounds, to be recovered in a summary manner on the complaint of any shareholder in the company, before any two or more justices of the peace. Accounts to be Printed. 26. — The accounts by the twenty-third section of this Act directed to be entered in the Cost Book shall, after the same have been laid before a meeting of the shareholders in pursuance of the twenty-fifth section. 488 AUDITING. be printed, and a copy thereof sent to each shareholder in the company and also to the lessors of the mine. Evasions of this Act to be Void. 34.— Any contract expressed or implied with the employers, or terms of hiring, which would in effect deprive miners of any right secured to them by this Act, or impose any condition whatever in reference to the disposition of club or benefit funds, shall, so far as such rights are affected, and in respect of an}' such condition, be void and of no effect. Printed. Copies of this Act to be Posted Zip. 35. — Printed copies of this Act and of the rules and regulations for the time being in force in any mine, shall be kept posted up in the smiths' shop and in the miners' dry or changing shed of ever}- mine. ASSURANCE COMPANIES ACT, 1909. g Edw. 7 c. 4g. Companies to vhich Act applies. I. — This Act shall apply to all persons or bodies of persons, whether corporate or unincorporate, not being registered under the Acts relating to friendly societies or to trade unions (which persons and bodies of persons are hereinafter referred to as assurance companies), whether established before or after the commencement of this Act and whether established within or without the United Kingdom, who carry on within the United Kingdom assurance business of all or any of the following classes : — • {a) Life assurance business ; that is to say, the issue of, or the under- taking of liability under, pohcies of assurance upon human life, or the granting of annuities upon human life ; {b) Fire insurance business ; that is to say, the issue of, or the undertaking of liability under, policies of insurance against loss by or incidental to fire ; [c) Accident insurance business ; that is to say, the issue of, or the undertaking of liability under, policies of insurance upon the happening of personal accidents, whether fatal or not, disease, or sickness, or any class of personal accidents, disease, or sickness ; {d) Employers' liability insurance business ; that is to say, the issue of, or the undertaking of liability under, policies insuring employers against liability to pay compensation or damages to workmen in their employment ; I' ASSURANCE COMPANIES ACT IQOg. 489 («) Bond investment business : that is to say, the business of issuing bonds or endowment certificates by which the company, in return for subscriptions paj^able at periodical intervals of two montlis or less, contract to pay the bondholder a sum at a future date, and not being life assurance business as herein- before defined ; subject as respects any class of assurance business to the special piovisions of this Act relating to business of that class. A companj^ registered under the Companies Acts which transacts assurance business of any such class as aforesaid in any part of the world shall for the purposes of this provision be deemed to be a company transacting such business within the United Kingdom. General. Defosit. 2. — (i) Every assurance company shall deposit and keep deposited with the Paymaster-General for and on behalf of the Supi-eme Court the sum of tv^'entj' thousand pounds. (2) The sum so deposited shall be invested by the Paymaster- General in such of the securities usually accepted by the Court for the investment of funds placed under its administration as the company may select, and the interest accruing due on any such securities shall be paid to the company. (3) The deposit may be made by the subscribers of the memorandum of association of the company, or any of them, in the name of the proposed company, and, upon the incorporation of the company, shall be deemed to have been made by, and to be part of the assets of, the company, and the Registrar shall not issue a certificate of incorporation of the company until the deposit has been made. (4) Where a company carries on, or intends to carry on, assurance business of more than one class, a separate sura of twenty thousand pounds shall be deposited and kept deposited under this section as respects each class of business, and the deposit made in respect of any class of business in respect of which a separate assurance fund is required to be kept shall be deemed to form part of that fund, and all interest accruing due on any such deposit or the securities in which it is for the time being invested shall be carried by the company to that fund. (5) The Paymaster-General shall not accept a deposit except on a warrant of the Board of Trade. 490 AUDITING. (6) The Board of Trade may make rules with respect to applications for warrants, the payment of deposits, and the investment thereof or dealing therewith, the deposit of stocks or other securities in lieu of money, the payment of the interest or dividends from time to time accruing due on any securities in which deposits are for the time being invested, and the withdrawal and transfer of deposits, and the rules so made shall have effect as if they were enacted in this Act, and shall be laid before Parliament as soon as may be after they are made. (7) This section shall apply to an assurance company registered or having its head office in Ireland, subject to the following modifications : — References to the Supreme Court shall be construed as references to the Supreme Court of Judicature in Ireland, and references to the Paymaster-General shall be construed as references to the Accountant-Oeneral of the last-mentioned Court. Separation of Funds. 3. — (i) In the case of an assurance company transacting other busi- ness besides that of assurance or transacting more than one class of assurance business, a separate account shall be kept of all receipts in respect of the assurance business or of each class of assurance busi- ness, and the receipts in respect of the assurance business, or, in the case of a company carrying on more than one class of assurance busi- ness, of each class of business, shall be carried to and form a separate assurance fund with an appropriate name : Provided that nothing in this section shall require the investments of any such fund to be kept separate from the investments of any other fund. (2) A fund of any particular class shall be as absolutely the security ot the policy holders of that class as though it belonged to a company carrying on no other business than assurance business of that class, and shall not be liable for any contracts of the company for which it would not have been liable had the business of the company been only that of assurance of that class, and shall not be applied, directly or indirectly, for any purposes other than those of the class of business to which the fund is applicable. Accounts and Balance Sheets. ^. — Every assurance company shall, at the expiration of each financial year of the company, prepare — [a) A Revenue Account for the year in the form or forms set forth in the First Schedule to this Act and apphcable to the class or classes of assurance business carried on by the company ; ASSURANCE COMPANIES ACT igOQ. 49I (d) A Profit and Loss Account in the form set forth in the Second Schedule to this Act, except where the company carries on assurance business of one class only and no other business ; (c) A Balance Sheet in the form set forth in the Third Schedule to this Act. Actuarial Re-port and Abstract. 5. — ^(i) Every assurance company shall, once in every five years, or at such shorter intervals as may be prescribed by the instrument constituting the company, or by its regulations or bye-laws, cause an investigation to be made into its financial condition, including a valua- tion of its liabilities, by an actuary, and shall cause an abstract of the report of such actuary to be made in the form or forms set forth in the Fourth Schedule to this Act and applicable to the class or classes of assurance business carried on by the company. (2) The foregoing provisions of this section shall also apply when- ever at any other time an investigation into the financial condition of an assurance company is made with a view to the distribution of profits, or the results of which are made public. Statement of Assurance Business. 6. — Every assurance company shall prepare a statement of its assurance business at the date to which the accounts of the company are made up for the purposes of any such investigation as aforesaid in the form or forms set forth in the Fifth Schedule to this Act and applicable to the class or classes of assurance business carried on by the company : Provided that, if the investigation is made annually by any company, the company may prepare such a statement at any time, so that it be made at least once in every five years. Deposit of Accounts, Ss^c, with Board of Trade. 7. — (i) Every account. Balance Sheet, abstract, or statement herein- before required to be made shall be printed, and four copies thereof, one of which shall be signed by the chairman and two directors of the company and by the principal officer of the company and, if the company has a managing director, by the managing director, shall be deposited at the Board of Trade within six months after the close of the period to which the account. Balance Sheet, abstract, or statement relates : Provided that, if in any case it is made to appear to the Board of Trade that the circumstances are such that a longer period than six months should be allowed, the Board may extend that period by such period not exceeding three months as they think fit. (2) The Board of Trade shall consider the accounts, Balance Sheets, abstracts, and statements so deposited, and, if any sucb account, 492 AUDITING. Balance Sheet, abstract, or statement appears to the Board to be inaccurate or incomplete in any respect, the Board shall communicate with the company with a view to the correction of any such inaccuracies and the supply of deficiencies. (3) There shall be deposited with every Revenue Account and Balance Sheet of a company any report on the affairs of the company submitted to the shareholders or policy holders of the company in ; respect of the financial 3'ear to which the account and Balance Sheet relates. t^ (4) Where an insurance company registered under the Companies Acts in any year deposits its accounts and Balance Sheet in accord- ance with the provisions of this section, the company may, at the same time, send to the Registrar a copy of such accounts and Balance Sheet ; | and, where such copy is so sent, it shall not be necessary for the com- J pany to send to the Registrar a statement in the form of a Balance Sheet as required by Subsection (3) of Section 26 of the ("ompanies (Consolidation) Act, 1908, and the copy of the accounts and Balance Sheet so sent shall be dealt with in all respects as if it were a state- ment sent in accordance with that subsection. Right oj Shareholders, &c., to Co-pies of Accounts, iSr-v. S. — A printed copv of the last-deposited accounts, Balance i^heet, abstract, or statement, shall on the application of any shareholder or policy holder of the compan}' be forwarded to him by the compaii}' by post or otherwise. Audit of Accounts. 9. — Where the accounts of an insurance company are not subject to audit in accordance with the provisions of the Companies (Consolida- tion) Act, 1908, or the Companies Clauses Consolidation Act, 1S45, relating to audit, the accounts of the company shall be audited annually in such manner as the Board of Trade may prescribe, and the regulations made for the purpose may apply to any such company the provisions of the Companies (Consolidation) Act, n)o8, relating to audit, subject to such adaptations and modifications as may appear necessar)^ or expedient. I List of Shareholders. 10. — ICvery assurance company which is not registered under the Companies Acts, or which has not incorporated in its deed of settle- ment Section 10 of the Companies Clauses Consolidation Act, 1S45, shall keep a " Shareholders' Address Book," in accordance with the provisions ot that section, and shall, on the application of any share- holder of policy holder of the company, furnish to him a copy of such ' ,) i li ASSURANCE COMPANIES ACT I909. 493 book, on payment of a sum not exceeding sixpence for every hundred words required to be copied. Deed of Settlement. II. — Ever}^ assurance company which is not registered under the Companies Acts shall cause a sufficient number of copies of its deed of settlement or other instrument constituting the company to be printed, and shall, on the application of any shareholder or policy holder of the company, furnish to him a copy of such deed of settlement or other instrument on payment of a sum not exceeding one shilling. Publication of Authorised, Subscribed , and Paid-ii-p Cafital. 12. — ^Vhere any notice, advertisement, or other official publication of an assurance company contains a statement of the amount of the authorised capital of the company, the publication shall also contain a statement of the amount of the capital which has been subscribed and the amount paid up. Amalgaiuation or Transfer. 13. — (i) Where it is intended to amalgamate two or more assurance companies, or to transfer the assurance business of any class from one assurance company to another company, the directors of ony one or more of such companies may apply to the Court, by petition, to sanction the proposed arrangement. (2) The Court, after hearing the directors and other persons whom it considers entitled to be heard upon the petition, may sanction the arrangement if it is satisfied that no sufficient objection to the arrange- ment has been established. (3) Before any such application is made to the Court — - [a) notice of the intention to make the application shall be published in the Gazette ; and [h) a statement of the nature of the amalgamation or transfer, as the case may be, together with an abstract containing the material facts embodied in the agreement or deed under which the amalgamation or transfer is proposed to be effected, and copies of the actuarial or other reports upon which the agree- ment or deed is founded, including a report by an inde- pendent actuary, shall, unless the Court otherwise directs, be transmitted to each policy holder of each company in manner provided by Section 13b of the Companies Clauses Consolida- tion Act, 1845, ^'^'^ '^^^^ transmission to shareholders of notices not requiring to be served personally : Provided that it shall not be necessar}' to transmit such statement and other docu- ments to policy holders other than life, endowment, sinking -194 AUDITING. [ fund, or bond investment policy holders, nor in the case of a transfer to such policy holders if the business transferred is not life assurance business or bond investment business ; and (c) the agreement or deed under which the amalgamation or transfer is effected shall be open for the inspection of the policy holders and shareholders at the offices of the companies for a period of fifteen days after the publication of the notice in the Gazette. (4) No assurance coinpany shall amalgamate with another, or transfer its business to another, unless the amalgamation or transfer is sanc- tioned by the Court in accordance with this section. Statements in case of Amalgamation or Transfer. 14. — Where an amalgamation takes place between any assurance companies, or where any assurance business of one such company is transferred to another company, the combined company or the pur- chasing company, as the case may be, shall, within ten days from the date of the completion of the amalgamation or transfer, deposit with the Board of Trade — (a) certified copies of statements of the assets and liabilities of the companies concerned in such amalgamation or transfer, together with a statement of the nature and terms of the amalgamation or transfer ; and (/;) a certified copy of the agreement or deed under which the amalgamation or transfer is effected ; and (c) certified copies of the actuarial or (;ther reports upon which that agreement or deed is founded ; and (d) a declaration under th_e hand of the chairman of each company, and the principal officer of each company, that to the best of their belief every payment made or to be made to any person whatsoever on account of the amalgamation or transfer is therein fully set forth, and that no other payments beyond those set forth have been made or are to be made either in money, policies, bonds, valuable securities, or other property by or with the knowledge of any parties to the amalgamation or transfer. Extension of 8 Ediv. 7, c. 69, s. 274, to all Assurance Comfanies established outside the United Kingdom. If). — Section 274 of the Companies (Consolidation) Act, igo8 (which contains provisions as to companies incorporated outside the United Kingdom), shall apply to every assurance company constituted outside ASSURANXE COMPANIES ACT I909. 495 the United Kingdom which carries on assurance business within the United Kingdom, whether incorporated or not. Custody and Ins-pection of Documents deposited with Board of Trade. 20. — The Board of Trade ma}' direct any documents deposited with them under this Act, or certified copies thereof, to be kept by the Registrar or by an)^ other officer of the Board of Trade ; and any such documents and copies shall be open to inspection, and copies thereof may be procured by any person on payment of such fees as the Board of Trade may direct. Evidence of Documents. 21. — (i) Every document deposited under this Act with the Board of Trade, and certified by the Registrar or by any person appointed in that behalf by the President pf the Board of Trade to be a document so deposited, shall be deemed to be a document so deposited. (2) Every document purporting to be certified by the Registrar, or by any person appointed in that behalf by the President of the Board of Trade, to be a copy of a document so deposited shall be deemed to be a copy of that document, and shall be received in evidence as if it were the original document, unless some variation between it and the original document be proved. Alteration of Forms. 22.- — The Board of Trade may, on the application or with the consent of an assurance company, alter the forms contained in the schedules to this Act as respects that company, for the purpose of adapting them to the circumstances of that company. Penalty for N on-comfliance with Act. 23. — Any assurance company which makes default in complying with any of the requirements of this Act shall be liable to a penalty not exceeding one hundred pounds, or, in the case of a continuing default, to a penalty not exceeding fifty pounds for every day during which the default continues, and every director, manager, or secretary, or other officer or agent of the company who is knowingly a party to the default shall be liable to a like penalty ; and, if default continue for a period of three months after notice of default by the Board of Trade (which notice shall be published in one or more newspapers as the Board of Trade may, upon the application of one or more policy holders or shareholders, direct), the default shall be a ground on which the Court may order the winding up of the company, in accordance with the Companies (Consolidation) Act, 190S. 496 AUDITING. Penaltv for Falsifying Statements, d^c. 24. — If any account, Balance Sheet, abstract, statement, or other document required by this Act is false in any particular to the know- ledge of any person who signs it, that person shall be guilty of a mis- demeanour and shall be liable on conviction on indictment to fine and imprisonment, or on summary conviction to a fine not exceeding fifty pounds. Recovery and Application of Penalties. 25. — Every penalty imposed by this Act shall be recovered and applied in the same manner as penalties imposed by the Companies (Consolidation) Act, 1908, are recoverable and applicable. Service of Notices. 26.- Anv notice which is by this Act required to be sent to anj^ policy holder may be addressed and sent to the person to whom notices respecting such policy are usually sent, and any notice so addressed and sent shall be deemed and taken to be notice to the holder of such policy : % Provided that where any person claiming to be interested in a policy j has given to the company notice in writing of his interest, any notice which is by this Act required to be sent to policy holders shall also be sent to such person at the address specified by him in his notice. Accounts, ^T'c, to be laid before Parliament. 27. — The Board of Trade shall lay annually before Parliament the accounts, Balance Sheets, abstracts, statements, and other documents under this Act, or purporting to be under this Act, deposited with them during the preceding year, except reports on the affairs of assurance companies submitted to the shareholders or poUcy holders thereof, and may append to such accounts. Balance Sheets, abstracts, statements, or other documents any note of the Board of Trade thereon, and any correspondence in relation thereto. Savings. 28.— (i) This Act shall not affect the National Debt Commissioners or the Postmaster-General, acting under the authorities vested in them respectively by the Government Annuities Acts, 1829 to 1S88, and the Post Office Savings Bank Acts, 1861 to 1908. (2) This Act shall not apply to a member of Lloyd's, or of any other assbciation of underwriters approved by the Board of Trade, who carries on assurance business of any class, provided that he compUes with the requirements set forth in the lughth Schedule to this Act, and applicable to business of that class. I ASSURANCE COMPANIES ACT igOQ. 497 (3) Save as otherwise expressly provided by this Act, nothing in this Act shall apply to assurance business of any class other than one of the classes specified in Section i of this Act, and a policy shall not be deemed to be a policy of fire insurance by reason only that loss by fire is one of the various risks covered by the policy. Interpretation. 29. — In this Act, unless the context otherwise requires, — The expression " chairman " means the person for the time being presiding over the board of directors or other governing body of the assurance company ; The expression " annuities on human life " does not include super- annuation allowances and annuities pa3'able out of any fund applicable solety to the relief and maintenance of persons engaged or who have been engaged in any particular profession, trade, or employment, or of the dependants of such persons ; The expression " policy holder " means the person who for the time being is the legal holder of the policy for securing the contract with the assurance company ; The expression " underwriter " includes any person named in a policy or other contract of insurance as liable to pay or con- tribute towards the payment of the sum secured by such policy or contract ; The expression " financial year " means each period of twelve months at the end of which the balance of the accounts of the assurance company is struck, or, if no such balance is struck, then the calendar year ; The expression " Court " means the High Court of Justice in England, except that in the case of an assurance company regis- tered or having its head office in Ireland it means, in the pro- visions of this Act, the High Court of Justice in Ireland, and in the case of an assurance company registered or having its head office in Scotland it means, in the provisions of this Act other than those relating to deposits, the Court of Session, in either division thereof ; The expression " Companies Acts" includes the Companies (Con- solidation) Act, icjoS, and any enactment repealed by that Act; The expression " Registrar " means the Registrar of Joint Stock Companies ; K K 498 AUDITING. The expression " actuary " means an actuary possessing such qualifications as may be prescribed by rules made by the Board of Trade ; The expression " Gazette ^^ means the London, Edinburgh, or Dublin Gazette, as the case may be. Application to Special Classes of Business. Af-plicatio7i to Life Assurance Comfanies. 30. — Where a company carries on life assurance business, this Act shall apply with respect to that business, subject to the following modifications : — (a) " Policy on human life " shall mean any instrument by which the payment of money is assured on death (except death by acci- dent only) or the happening of any contingency dependent on human life, or any instrument evidencing a contract which is subject to pa3'^ment of premiums for a term dependent on human life; (h) Where the company grant annuities upon human life, " policy " shall include the instrument evidencing the contract to pay such an annuity, and " policy holder" includes annuitant; (c) The obligation to deposit and keep deposited the sum of twenty thousand pounds shall apply notwithstanding that the company has previousl}' made and withdrawn its deposit, or been exempted from making any deposit under any enactment hereby repealed ; {d) Where the company intends to amalgamate with or to transfer its life assurance business to another assurance company, the Court shall not sanction the amalgamation or transfer in any case in which it appears to the Court that the life policy holders representing one-tenth or more of the total amount assured in the company dissent from the amalgamation or transfer ; (e) Nothing in this Act providing that the life assurance fund shall not be liable for any contracts for which it would not have been liable had the business of the company been only that of life assurance shall affect the liability of that fund, in the case of a company established before the ninth day of August eighteen hundred and seventy, for contracts entered into by the company before that date ; ASSURANCE COMPANIES ACT I909. 499 {/) In the case of a company carrying on life assurance business and established before the ninth day of August eighteen hundred and sevent}', by the terms of whose deed of settlement the whole of the profits of all the business carried on by the company are paid exclusively to the life policy holders, and on the face of whose life policies the liability of the life assurance fund in respect of the other business distinctly appears, such of the pro- visions of this Act as require the separation of funds, and exempt the life assurance fund from liability for contracts to which it would not have been liable had the business of the company been only that of life assurance, shall not apply ; {g) Any business carried on by an assurance company which under the provisions of any special Act relating to that company is to be treated as life assurance business shall continue to be so treated, and shall not be deemed to be other business or a separate class of assurance business within the meaning of this Act; (/;) In the case of a mutual company whose profits are allocated to members wholly or mainly by annual abatements of premium, the abstract of the report of the actuary on the financial con- dition of the company, prepared in accordance with the Fourth Schedule to this Act, may, notwithstanding anything in Section 5 of this Act, be made and returned at intervals not exceeding five vears, provided that, where such return is not made annually, it shall include particulars as to the rates of abatement of premiums applicable to different classes or series of assurances allowed in each year during the period which has elapsed since the previous return under the Fourth Schedule. A-pflication to Fire Insurance Comfanies. 31. — Where a company carries on fire insurance business, this Act shall appl}' with respect to that business, subject to the following niodifications : — (a) It shall not be necessary for the company to prepare any state- ment of its fire insurance business in accordance with the Fourth and Fifth Sched ales to this Act : [b) Such of the provisions of this Act as relate to deposits to be made under this Act shall not apply with respect to the fire insurance business carried on by the company if the company has commenced to carry on that business within the United Kingdom before the passing of this Act : KK 2 ;oo AUDITING. (c) Such of the provisions of this Act as relate to deposits to be made under this Act shall not apply where the company is an asso- ciation of owners or occupiers of buildings or other property which satisfies the Board of Trade that it is carrying on, or is about to carry on, business wholly or mainly for the purpose of the mutual insurance of its members against damage by or incidental to fire caused to the houses or other property owned or occupied by them : (d) It shall not be necessary to make a deposit in respect of fire insurance business where the compan}' has made a deposit in respect of any other class of assurance business, and, where a company, having made a deposit in respect of fire insurance business, commences to carry on life assurance business or employers' liabilit}- insurance business, the company may transfer the deposit so made to the account of that other busi- ness, and after such transfer the deposit shall be treated as if it had been made in respect of such other business : {e) So much of this Act as requires an assurance companj' transact- ing other business besides assurance business, or more than one class of assurance business, to keep separate funds inta which all receipts in respect of the assurance business or of each class of assurance business are to be paid shall not apply as respects fire insurance business : (/) The provisions of this Act with respect to the amalgamation of companies shall not apply where the only classes of assurance business carried on by both of the companies are fire insurance business, or frre insurance business and accident insurance busi- ness, and the provisions of this Act with respect to the transfer of assurance business from one compan\' to another shall not apply to fire insurance business. Application to Accident Insurance Companies. 32. — Where a company carries on accident insurance business, this Act shall apply with respect to that business, subject to the following modifications : — [a) In lieu of the provisions of Sections 5 and 6 of this Act the following provisions shall be substituted : — • " The company shall anuualh" prepare a statement of its accident insurance business in the form set forth in the Fourth Schedule to this Act and applicable to accident insurance business, and the statement shall be printed, signed, and deposited at the Board of Trade in accordance with Section 7 of this Act " : ASSURAN'CE COMPANIES ACT 1909. 5OI (b) Such of the provisions of this Act as relate to deposits to be made under this Act shall not appl}- with respect to the accident insurance business carried on by the company if the company has commenced to carr}- on that business in the United King- dom before the passing of this Act : (c) It shall not be necessary to make or keep a deposit in respect of accident insurance business where the company has made a deposit in respect of any other class of assurance business, and, where a company, having made a deposit in respect of accident insurance business, commences to carry on life assurance busi- ness or employers' liability insurance business, the company may transfer the deposit so made to the account of that other business, and after such transfer the deposit shall be treated as if it had been made in respect of such other business : (d) So much of this Act as requires an assurance companj- transact- ing other business besides assurance business, or more than one class of assurance business, to keep separate funds into which all receipts in respect of the assurance business or of each class of assurance business are to be paid shall not apply as respects accident insurance business : (e) The provisions of this Act with respect to the amalgamation of companies shall not apply where the only classes of assurance business carried on by both of the companies are accident insurance business, or accident insurance business and fire insurance business, and the provisions of this Act with respect to the transfer of assurance business from one company to another shall not apply to accident insurance business : (/) The expression '' policy " includes an\r policv' under which there is for the time being an existing liability already accrued, or under which a liability maj^ accrue : (g) Where a sum is due, or a weekly or other periodical payment is payable, under any policy, the expression "policy holder" includes the person to whom the sum is due or the weekly or other periodical pa3-ment pa3'able. A ffU cation to Emfloyers^ Liability Insurance Com fames. 33. — (j) Where a company carries on emplo}'ers' liability insurance business, this Act shall apph' with respect to that business, subject to the following modifications : — [a) This Act shall not apply where the company is an association of employers which satisfies the Board of Trade that it is carrying on, or is about to carr\- on, business wholly or mainly for the purpose of the mutual insurance of its members against liability to pay compensation or damages to workmen employed by them, cither alone or in conjunction with insurance against any other risk incident to their trade or industry : 502 AUDITING. (b) This Act shall not appl}' where the company carries on the emploj-ers' liability insurance business as incidental only to the business of marine insurance by issuing marine policies, or policies in the form of marine policies, covering liability to pay compensation or damages to workmen as well as losses incident to marine adventure or adventure analogous thereto : (c) In lieu of the provisions of Sections 5 and 6 of this Act the following provisions shall be substituted : — " The company shall annually prepare a statement of its employers' liability insurance business in the form set forth in the Fourth Schedule to this Act and applicable to employers' liability insurance business, and shall cause an investigation of its estimated liabilities to be made by an actuary so far as may be necessary to enable the provisions of that form to be complied with, and the statement shall be printed, signed, and deposited at the Board of Trade in accordance with Section 7 of this Act "" : (d) Such of the provisions of this Act as relate to deposits to be made under this Act shall not apply with respect to the employers' liability insurance business carried on by a com- pany where the company had commenced to carry on that busi- ness within the United Kingdom before the twenty-eighth day of August nineteen hundred and seven : (e) As soon as the em plovers' liability fund set apart and secured for the satisfaction of the claims of polic}' holders of that class amounts to forty thousand pounds, the Paymaster-General shall, if the company has made a deposit in respect of any other class of assurance business, return to the company the money deposited in respect of its employers' liability insurance busi- ness, and it shall not thereafter be necessary for the company to keep any sum deposited in respect of that business, so long as the sum deposited in respect of au)^ other class of assurance business is kept deposited : (/) Where money is paid into a County Court under the provisions of the Eighth Schedule to this Act, the Court shall (unless the Court for special reasons sees fit to direct otherwise) order the lump sum to be invested or applied in the purchase of an annuity or otherwise, in such manner that the duration of the benefit thereof may, as far as possible, correspond with the probable duration of the incapacity : ASSURANCE COMPANIES ACT 1909. 503 iff) The expression " policy" includes any policy under which there is for the time being an existing liability already accrued, or under which any liability may accrue : {//) Where any sum is due, or a weekly payment is payable, under any policy, the expression " policy holder " includes the person to whom the sum is due or the weekly payment payable : {/) 11 the company carries on employers' liability insurance busi- ness outside the United Kingdom, that business shall not be treated as part of the employers' liability insurance business carried on by the company for the purposes of this Act. (2) In the application of this section to Scotland the expression " County Court " means Sheriff Court. A-ppUcation to Bond Investment Companies. 34- — ^^ here a company carries on bond investment business, this Act shall apply with respect to that business, subject to the following modifications : — [a] The expression " policy " includes any bond, certificate, receipt, or other instrument evidencing the contract with the company, and the expression " policy holder" means the person who for the time being is the legal holder of such instrument : [b] Such of the provisions of this Act as relate to deposits shall not apply with respect to the bond investment business carried on by the company, if the company has commenced to carry on that business in the United Kingdom before the passing of this Act : [c] As soon as the bond investment fund set apart and secured for the satisfaction of the claims of the policy holders of that class amounts to forty thousand pounds, the Paymaster-General shall, if the compan}^ has made a deposit in respect of any other class of assurance business, return to the company the money deposited in respect of its bond investment business, and it shall not thereafter be necessary for the company to keep any sum deposited in respect of that business, so long as the sum deposited in respect of any other class of business is kept deposited : id) The first statement of the bond investment business of the com- pany shall be deposited at the Board of Trade on or before the thirtietli day of June nineteen hundred and eleven : [e] The company shall not give the holder of any policy issued after the passing of this Act any advantage dependent on lot or chance, but this provision shall not be construed as in anywise prejudicing any question as to the application to any such trans- action, whether in respect of a policy issued before or after the passing of this Act, of the law relating to lotteries. 504 AUDITING. Power of Board of Trade to Exem-pt Unregistered Trade U iiiois and Friendly Societies. 35. — The Board of Trade may, on the apphcation of any unregis- tered trade union original!}' established more than twenty years before the commencement of this Act, extend to the trade union the exemp- tion conferred by this Act on registered trade unions, and may on the application of an unregistered friendly society extend to the society the exemption conferred by this Act on registered friendly societies if it appears to the Board, after consulting the Chief Registrar of Friendly Societies, that the society is one to which it is inexpedient that the provisions of this Act should appl}". Provisions as to Collecting Societies and Industrial Assmwice Com f allies. 36. — (i) Amongst the purposes for which collecting societies and industrial assurance companies may issue policies of assurance there shall be included insuring money to be paid for the funeral expenses of a parent, grandparent, grandchild, brother, or sister. (2) No policy effected before the passing of this Act with a collect- ing society or industrial assurance company shall be deemed to be void by reason only that the person effecting the policy had not, at the time the policy was effected, an insurable interest in the life of the person assured, or that the name of the person interested, or for whose benefit or on whose account the policy was effected, was not inserted in the policy, or that the insurance was not one authorised by the Acts relating to friendly societies, if the policy was effected by or on account of a person who had at the time a bond fide expectation that he would incur expenses in connection with the death or funeral of the assured, and if the sum assured is not unreasonable for the purpose of covering those expenses, and any such policy shall enure for the benefit of the person for whose benefit it was effected or his assigns. (3) Any collecting society or industrial insurance company which, after the passing of this Act, issues policies of insurance which are not within the legal powers of such society or company shall be held to have made default in complying with the requirements of this Act ; and the provisions of this Act with respect to such default shall apply to collecting societies, industrial insurance companies, and their officers, in like manner as they apply to assurance companies and their officers. (4) Without prejudice to the powers conferred by Section 71 of the Friendly Societies Act, 1896, the committee of management or other ASSURANCE COMPANIES ACT I909. 505 governing bod)' of a collecting society having more than one hundred thousand members maj' petition the Court to make an order for the conversion of the society into a mutual company under the Companies (Consolidation) Act, 1908, and the Court may make such an order if, after hearing the committee of management, or other governing body, and other persons whom the Court considers entitled to be heard on the petition, the Court is satisfied, on a poll being taken, that 55 per cent, at least of the members of the society over sixteen years of age agree to the conversion ; and the Court may give such directions as it thinks fit for settling a proper memorandum and articles of association of the company ; but, before any such petition is presented to the Court, notice of intention to present the petition shall be published in the Gazette, and in such newspapers as the Court ma\' direct. When a collecting society converts itself into a company in accord- ance with the provisions of this subsection. Subsection (3) of .Section 71 of the Friendl)' Societies Act, 1896, shall apply in like manner as if the conversion were effected under that section. (5) In this section the expressions "collecting society" and "industrial assurance company" have the same meanings as in the Collecting Societies and Industrial Assurance Companies Act, 1896. S Supplemental. Repeal. 37. — The enactments mentioned in the \inth Schedule to this Act are hereby repealed to the extent specified in the third column of that schedule : Provided that nothing in this repeal shall affect an}' investigation made, or any statement, abstract, or other document deposited, under any enactment hereby repealed, but every such investigation shall be deemed to have been made and every such document prepared and deposited under this Act. Short Title and Commencement. 38. — (i) This Act may be cited as the Assurance Companies Act, 1909. (2) This Act shall come into operation on the first day of Julv nineteen hundred and ten, except that as respects Section 36 it shall come into operation on the passing thereof. t So6 AUDITING. Q W u a o cn C-3 01 „ -:: o c ii c- ^ X tn o ^ ^^ cfl c: o _.' .'-; -O CJ CJ ^ o c rt u o 3 "in D PQ c Si H O & tn 05 Si^ C CJ V:* K = o « -^Q. t? O QJ to Q ^ •*i* w ,5.H >^ bl ffi o O u H .2 — 5 c •** 1 li (1) Ci4 i-3 ? (U ■S.«8 s -c; Jx C rt ^ c> •^'Ca k, n °^S 1 TJ-d s 1 c cd oj ^^ 3 bo <; c<.> "^■^ ^ .s ■^•cc ■i g — o o a, u; o S Cfl o ol a; m I- .- lU &. = .'I u; — rt (0 a O. o 0) c c "> — V 2 c c Xi 3-" & *^ .5^1 o o; C "> •4-1 c 2 11 c •.- e-o 3 2 11 o O o (J PI <: 11 ^11 C s.t: 11 J; 55^ > e (U 1 ^ o y. H V; -^ oj — aj Ci*. — ~ y^ 1 1 1 2 ° = - 1 1 1 «i^5 ^ '^l^g ■T3 a; o o c c.t;~ X 1 1 1 •3;s = ^ 1 1 1 3 .t: 3 .= V! CQ ^ UJ ^ : ; o . ..(/;.. 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O c/l H ^ C/1.C — G TS Busine out of t Unitec Kingdo c/1 1 1 1 ._ ~ 0) ■" d o •sic S 2? ^ 1 1 1 (-tJ n ! u -^ 9 ; '-+J ■a c X c a o 3 . »4- . <-4j • O 03 03 S*> 1/. c c C O '• 8 r: . c C • o u 1 U5 "" CS 3. .2?P ^ S ■ i tr. s.E 1 c 'C CO .P. c 1 .2 *> (U 'S — **- c " bop u a; iterest, di rents . . ess incom moun the b remiu '" < CU G « ■~1 O ■~ E y: OJ *j bo Qj ■-3 ~ "^ (/] 1/1 >,a„- 01 . 03 01 C 03 — 01 g . « 1/1 .. < .;t-,— , :i 01 *^ *^ ^ '-' ^ "^ C 01 OJ o OJ O ►I - o c/1 • ' T3 -3 : 3 o c o " : « p E_y 3 to 3-;: a 3 O U 03 ■" O c 01 .- - CI.— 3 O < .-0 01 _ t- c i:oiS-5ga.K "vh 01 01 £^ S 2"^ »J- u^ t t;^ 0-3 JJ:= o >< -CC 01 t/l 3 o;.h: S3t ^i- o Q t/l X ^ t: 3-^ >~»o o — ~ o bobc o JJ t/l l/llc r-" (/I 3 lL0iT:3>^l-,?^; E 5.3 ^i-S 3 I ai-g'S.s^E^^ 01 i« ' j; o?' I/1J3 ^i- . C/l *- Ul « IN to t}-^ waawOMatS' H h h H HJD UI 3 ' OOOO-CO,. Cm 2;ZZZ£Zr,3SS 3EE o o 01 I I I I 3"? S o 3 ■a o; -a ^ES Ul 01 01 t-* ^«.< u O, o ASSURANCE COMPANIES ACT I90Q. 507 fc o u CTi ^ 03 s s ■ « pa tn (U C CO «-tJ 3 oa a 6C >-t C V 13 u r-r tfl e a P. o a. u "-rt *- -— t/lu- o^ o U so 6 w T3 3 c o (J c a '5. P< 1) v:i O rtj •!: 5 • <" SS 1 c U^ ^ c ^ 0,^ s . u mium r ional ■s: J. , M t end edu esei M >-5 5 ji-goS < — (/5 C «; be a -a a 0) 4) 4j O c 3 ^-fj VJ <" 5 -— (^ , Ko) a > (fl -^ X 11 C^ c (1> ■- 3 iic i! rfl 'W c e ao 1 _o 0) T3 "^ OJ T1 n: g; Qi <: 5-5 a < c ^ c m u ■^ ^ c c a 3 CTl tr. a (1) s 3- ;a c D. ■o "■ 4,- if) u. c tr. ^ C rt ^ re „ ^ c 3 CD C w^ a C ^ 3 c flS £< •-' - (1) n Oj r,-° yc« -0 a> -^-• ,c-a e- 3 C -T3 o (u 5o8 AUDITING. Ol 10 iti 4) _c '35 3 m o c , ;t Vij c ^- ■ ~ O 3 ■*-• C.2 o - ^ fc OMO o ^ o - C « u d; *i^ o o ^ a; •J) ■"■" „ a — JSU >- :q o— -^ n 4) a)T3 a; ^ aStf) J: 0) o I- ° ^- p '*- «^ o ;r o otL. ^ H < «^ •hj '-fj o .'. Y C u tfl 2 2'= -a M S « " •^ a) 2 a 1 > (/} T3 s _^ r3 (fi a u a> 13 « ■3 u s 3 o o cu -H lU u 1i> 0) CQ J3 ^ «4H a! t/) tn n (D W n rn h J3 3 t/l c/5 c 01 u c !-• « CQ o.'S ■3 "^ ■a s :2 - '3 "D o c 1 - a a 3 W o „ (U S 3 S8 ^ o a u o "O .-e c :-•£ O cj 3 o C <• "> > 01 "(0 I I I- ^ a, (U (/I u o z za 3 01 ASSURANCE COMPANIES ACT 1909. 509 u u c fS u a u "5. S u / a iY\ >. a bc «» c >:; •^ -S> M -2 •»* -<-» rO c (3 D ►-) 0) J3 *o -*-i fe c l> *fl ■^ tij n ) ■ 4> ■S T3 ^ V c ?= rt 4) 2 •■^ >* "^ i: <0 tn C .0 U 3 ll. B 3 O (J o 4) «SJ C ^ 3 ■" .£•2 o »s O o ;^ o B..S 1-4 0} 1) m t: c c (u 3 a-, ^ a; rt 1. SO u = E 1) o J2 O (/J •— ■ 3 I tri tn I T-. — w ^ r— c ra 2 S — OJ H n (1) w Tl R c (U t: >-. (1) (/) &. -C 3 • OJ -^ 3 '^ CI. _o -5 j; n o . 'H.^^'u S ^ I- 3 "CO ■' 3 t* e^p ^ 5.3 u. .3 :3.s n! SO a u: w rt tn ^ 13 3 "^ 0) S-C u ID 3 O 3 I ■*■ 5 c -o o H m ^ tfi £ U) Ui 3 a P ^ 11 tfi u. « 3 (/) tfi 3 > % HP .3 CI c ,Q ' ' tfi 3 n J= ■^ p tf) E S V ca ca ^ D. "T tu 1 U) . '• (1) '^ (N^ u K H H -" 0-3 ii z i 3 V •a 5IO AUDITING. 73 C O PQ o 3 O o. to ■v (D 1-1 CO c -3 nj Q. C\ oq U3 4) "in D .5 «a o o a 73 a n U -4-1 c S o -a a W C c (U > J3 □ 3 O u o < o a c ■hi 'si •T3 U3 O ■" n o W ^-o • M (D G co'Q (/) ^ j:: oj Co c« o CO c S ■SrtS S C Boi tific erT o S w. 5 &. >^ 0(j I" 1/1 Ti ca PLh lOUl ine yea o U w o 0) > 1) 13 "-tJ o-p: C.S c« I" -a cfl C cj "o U ^- -rt C C'^ O 2 E^ ^ >hJ « S c 0) cs j: c T3 CU CU Q. J3 CO a > Ui 0) o CU *-• Tl lU c CO c lil ^ ^ CO CO & ■*^ c/5 -3 c CO 3 O -t-. c CU S bo CO CD g c« 5 C/5 c o c .^ CO (0 o _^ •=■2 0) a a 'u OJ3 u ■" (U 0) o > o 3 5 ■T3 O ^_^ v-a - r^ ,o J3 C ■" CU i/-, "■n — J£ 1 u ^ t/] w ;>, H-o H 3 H O CO o 9 :?. ^ 2"' D 3 en ASSURANCE COMPANIES ACT 1909. I I G\ ■^ B a ■ q: Ui o (U . 2 t. 3 u C 2 3.S - O tn-^ .^ •3 "! u r QJ CS /S J^ ex — -3 >i 3 fc 3 nj .3 u 3 01 3 ' S3 3 = 3 c yi ^ 3 .S'"/l !^ fc- OJ ■M 0) > 3 >-,E JJ 0-" o E c 1-, CJ - :: D > : ui yi c j«.S - 01 0) c 2;3.h o -^11., ^ 3 c/i o; O 3 (/■•'u E « U -. _ 0) ^ a ■3 1--C 2 1J 3 E-C 3 o *J- O) r- yi u >v3 x; a)'3 E n ■" «"" curit ept t d. T3 S JJ a; U 0) S X •" 3 rt c/1 01 i/l BX)> 3 .0 tfi .. o ed, si the ent b in J7 ■c E^-« jj ^•^s ""T! 3 1 COS King of bi been 0) appe fully inves 1 Oj tn n! UJ3 S c ."3 — -^ ^ *j ^ O 'c o tn «> tn Jf.C 0) 1- u c/1 01 C M O C; 03 i/l '- SJC ji: (U rt 3 (u CO en ; aj K 0! 0) 01 '-S S "-3 ~ - 0) rt 01 3X g cfl ^ " O ^_ _ <" ui 3 3 „ 3 •- 0J-- 3 ^ rt d) 3 *-< O rt S 3 5Jt3 o c !a>?ci,o'u3°-»:c S a, 3 _ o « OJ ts&'S-^l E o "i3 I: O (U cu aJ2" 2 S - S 'S o o ■3 •/> 52--a en 3 01-3 Cm— 3 — '^ - i-S-x^a cu 3 5-3 ri - 0) «)f OJ-O I- *. j; 3 S "3 .0)C/}--:»j-" |S^.^3;^a>;3sg tr\ 'P *-^7U f^ ri nJ _ ii)> S3t: «.^ffl Si "1 ^TfS a; 3 (U "S^-'^oi'^^O'n — 0) (u Ill's « w u 2ii 2 ^j=:h„"'hH(u -a JH O S2 " O O D.3 o » ^Zii "ZZ u'S* ^- ■<-' b 0) I- X.5 tn - O ASSURANCE COMPANIES ACT I909. 513 FOURTH SCHEDULE. N.B. — Where sinking fund or capital redemption insurance business is carried on, a separate statement signed by the actuary must be furnished, showing the total number of policies valued, the total sums assured, and the total office yearly premiums, and also showing the total net liability in respect of such business and the basis on which such liability is calculated. (A.) — Form a-pflicable to Life Assiiratice Business. Statement respecting the Valuation of the Liabilities under Life Policies and Annuities of the , to be made and signed by the Actuary. (The answers should be numbered to accord with the numbers of the corresponding questions.) 1. The date up to which the valuation is made. 2. The general principles adopted in the valuation, and the method followed in the valuation of particular classes of assurances, including a statement of the method by which the net premiums have been arrived at, and whether these principles were determined by the instrument constituting the company, or by its regulations or bye-laws, or how otherwise ; together with a statement of the manner in which policies on under average lives are dealt with. 3. The table or tables of mortality used in the valuation. In cases where the tables employed are not published, specimen policy values are to be given, at the rate of interest employed in the valuation, in respect of whole-life assurance policies effected at the respective ages of 20, 30, 40, and 50, and having been respectively in force for five years, ten years, and upwards at intervals of five years respectively ; with similar specimen policy values in respect of endowment assurance policies, according to age at entry, original term of policj', and duration. 4. The rate or rates of interest assumed in the calculations. 5. The actual proportion of the annual premium income, if any, reserved as a provision for future expenses and profits, separately specified in respect of assurances with immediate profits, with deferred profits and without profits. (If none, state how this provision is made.) L L 514 AUDITING. 6. The consolidated revenue account since the last valuation, or, io case of a company which has made no valuation, since the commence- ment of the business. (This return should be made in the form annexed. No return under this heading will be required where a statement under this schedule is deposited annually.) 7. The liabilities of the company under life policies and annuities at the date of the valuation, showing the number of policies, the amount assured, and the amount of premiums payable annuallj^ under each class of policies, both with and without participation in profits ; and also the net liabilities and assets of the compan}^, with the amount of surplus or deficiency. (These returns to be made in the forms annexed.) 8. The principles upon which the distribution of profits among the shareholders and policy holders is made, and whether these principles were determined by the instrument constituting the company or by its regulations or bye-laws or how otherwise, and the number of years' premiums to be paid before a bonus {a) is allotted, and {d) vests. 9. The results of the valuation, showing — (i) The total amount of profit made by the company, allocated as follows : — (a) Among the policy holders with immediate partici- pation, and the number and amount of the policies which participated ; (d) Among policy holders with deferred participation, and the number and amount of the policies which participated ; [c) Among the shareholders ; (d) To Reserve Funds, or other accounts ; {e) Carried forward unappropriated. (2) Specimens of bonuses allotted to whole-life assurance policies for /.'loo effected at the respective ages of 20, 30, 40, and 50, and ha\ing been respectively in force for five years, ten years, and upwards at intervals of five 3-ears respectively, together with the amounts apportioned under the various modes in which the bonus might be received ; with similar specimen bonuses and particulars in respect of endowment assurance policies, according to age at entr_v, original term of policy, and duration. A'o/e. — Separate statements to be furnished throughout in respect of Ordinary and Industrial business respective!}', the basis of the division being stated. ASSURANCE COMPANIES ACT 1909. 5^5: •4 'a Xi o O d bo B T3 a 3 (U u S o <-rt s? ■a o V? Cud .S 'a C s 6 o u c3 (U 'V c El O c o 6 O ■a c ■n rf c c; c 3 1-i X P cd H) _cj. lU c T* &. lA 'C c c c to to (O 4) a; a. u I-i >-J t-l OJ C "cS m a u o 73 4) c c 3 O c to cd c c 4) u. X M c 4; 4) Fi ■«-• 4> R OJ 3 TJ OJ oja -3 ♦^ c 4; c jii s cfl n! J= .a 1/: ^ 3 rt >, m ca a. 0) 1 aj XI ■ u : H -♦J i Ot) i z 2 1 s T3 1 5i6 AUDITING. o\ a T3 u )-< D O o (3 2 11 c 0) c 13 S o fa o 4) J3 Z o H <: > -a c ■< . 3 o ! t; o u 5 0>< su I/] CQ en SB n! fj « S >" 3 u a 3 O tnrn (ft ^^ a (U 0) 3 o;r 3 O o o as c/l 3 i-< H «-♦-. o CO W O z CD .-« e .-&. ■a. . 03 tn G a^:3 >-• « 3 c C 3 eu en e5 f/l ^ yi 3 z z < ■a 0) en '-C _;^ ■5 3 eu en Z< ^ j2 ^ eu 3 C^ ej 3 ft 3 O C a; ^ M -3 « ni ' .-3 .D T^ !-; (U "^ o b S a JeniJ ^ en "efl ^Oeu HO ■^ en-« wi fl) o •J1-- 3 3 y "> °t-s a)(4-> (1) S°3 ° ■" to ^ = >, -So. « 2 o en aj >>~ 3 C .--3 eu JJ ^° x: en O iU eu3 •£ rt C r- « 3 eu o il-B D 3 13^ 3 eu "UeS — 3--J3 OJ en eue;: 3 o ■ ■ O j; eu ■a c"^ 3'S « ■3 (u 5 "■ 3 en eu>^ en e o >. o •' ' en:^ ^ M-S O en ™ er! n! 3 - IU en Q o — en en •ij a; 3 o OJ *-• ■55-5 2-5 °-a 3 S = 2 OT3 3 dw^ a; c ^ 3 3 gS-"" .-S i " rt 3 S 3 i: eu •-: eu ca _, ■5 3x 5-3 a?, <-rt c c < n a! x; o in < e s 03 CJ i-S 03 ^ (T. a [I, p^ .ti c c c TJ < •a c <]} 1-1 E -1 (U '" < t/l a) U4 J E QJ c •n 3 c XT a ^ ca fll 01 3 c T1 s .0 CO Ui h 3 (/I o ;i8 AUDITING. (C.) — Form apflicable to Accident hisiirance Business. Statement of the Estimated Liability in respect of Outstanding Claims arising in the year of Account, and in the preceding 3'ear or years ; computed as at the end of the year in which the claims arose, and as at the end of the year of Account ; with particulars as to the number and amount of the claims actually paid in the intervening period. I. — Claims arising during the year of account ending 19 . {a) Particulars as to claims arising, and settled, during the year of account : — No. of Claims (2) Total amount paid Class of Claim (I) By Sums Insured | B^.^eekly (3) (4I (i) Fatal claims . . (ii) Non-fatal claims Totals (b) Particulars as to claims arising during and outstanding at the end of the vear of account : — Class of Claim (I) Amount paid ' NO. of Claims '^^010^--^ Estimated Liability (i) Fatal claims ii) Non-fatal claims, involving pay- ment of sums insured. iii) Non-fatal claims, involving pay- ment of temporary weekly allowances : — With maximum duration, not exceeding 26 weeks. With maximum duration ex- ceeding 26 weeks, but not exceed- ing 52 weeks. And so on, at intervals of 26 weeks, up to the longest period over which temporary weekly allowances are granted. (iv) Non-fatal claims, involving pay- ment of yearly allowances during permanent total disablement. Totals ASSURANCE COMPANIES ACT I909. 519 II. — Outstanding claims which arose during the first year preceding the year of account ending iQ Particulars of Claims Estimated Liability in respect of Claims Outstanding as at the Terminated above Date within such Period Claims paid during the Period of One Year between the above Date and the End of Year of Account Not terminated within such Fstimated Liability in respect of Claims Outstanding as at the End of Year of Account Totals of Columns (3), (4), and (5). (I) (2) (3) P eriod (4) (.=;> (6) Xo. .4mount No.iAmount; No. Amount No. .Amount No. .Amount (i) Fatal claims (ii) Non-fatal claims, : involving pay- ment of sums insured. 1 (iii) Non-fatal claitns, involving pay- ment of tempo- rary weekly al- 1 lowances: — With maximum duration not ex- ceeding 26 weeks. With maximum duration exceed- ing 26 weeks, but not exceeding 52 weeks. And so on, at intervals of 26 weeks, up to the longest period over which tem- porary weekly allowances are granted. i (iv) Non-fatal claims, ! 1 involving pay- ment of yearly allowances dur- 1 ing permanent total disablement. Totals . . t Note. — If temporary weekly allowances are granted by the company for periods exceeding 52 weeks, particulars are to be furnished, in a form or forms similar to II. above, showing, in respect of claims involving such extended allowances, the estimated liability as at the end of the year in which such claims arose, and as at the end of the 3'ear of account ; and the number and amount of such actual claims paid during the intervening period of two (or more) }'ears ; distinguish- ing claims terminated, and not terminated, within such period. 520 AUDITING. III.— Summary of estimated liability, in respect of claims outstanding as at the end of the year of account — As per column (4) of Statement I (3) £ (5) " " I^ ,, ,, (5) of further schedules in the form of Statement II (if required). In respect of yearly allowances during per- manent total disablement, outstanding at the end of the year of account, but not included in the above statements Total estimated liability, in respect of out- \ standing claims as at the end of the year of L y account, as per First Schedule (C.) ) (D.) — Form afflicable to Employers' Liability Insurance Business. Statement of the Estimated Liability in respect of outstanding Claims arising during each of the Five Years preceding the Year of Account, and in such Year ; computed as at the end of the Year in which the Claims arose, and as at the end of the Year of Account ; with Particulars as to the Number and Amount of the Claims actually paid in the intervening Period. I. — Claims arising during the year of account ending 19 . (a) Particulars as to claims arising and settled during the year of account :— Class of Claim (I) Number Amount paid (2) (3) Fatal claims Non-fatal claims £ Total (b) Particulars as to claims arising during, and outstanding at end of, the year of account : — Class of Claim (I) Number (2) Amount paid during year of account (31 Estimated Liability (4^ Fatal claims Non-fatal claims £ £ Total ASSURANCE COMPANIES ACT I9O9. 521 II. — Outstanding claims which arose during the first }'ear preceding the year of account, ending 19 . Particulars of Claims (I) Estimated Liability in respect of Claims outstanding as at the above date (2) No. Amt. Fatal claims Non-fatal c'aims — 1 Terminated Not terminated. . Claims paid during the period of i year between the above date and the end of the year of Account (3) No. Amt. Estimated Liability in respect of Claims outstanding as at the end of the year of Account (4) No. Amt. Total of Columns {3) and {4) (5) No. Amt. Total III. — Outstanding claims which arose during the second year preceding the year of account, ending the 19 . Estimated Claims paid Estimated Particulars Liability in during the Liability in Total of respect of period of 2 years respect of of C aims between the C.aims Columns (3) outstanding above date and outstanding as Claims as at the above the end of the at the end ot the and (4) date year of Account year of Account (I) (2) (3) (4) (5) No. Amt. No. Amt. No. Amt. No. Amt. £ £ £ £ Fatal claims Non-fatal claims — Terminated — — . Not terminated. . Total - IV. — Outstanding claims which arose during the third year preceding the year of account, ending the 19 . Particulars of Claim . (I) Estimated Liability in respect of Claims outstanding as at the above date (2) Claims paid during the period of 3 years between the above date and the end of the year of Account (3) Estimated Liability in respect of Claims outstanding as the end of the year of Account (4' Total of Columns {3) and {4) (5^ No. Fatal claims Non-fatal claims — Terminated Not terminated. . Total Amt. No. Amt. No. Amt. No. Amt. 22 AUDITING. \'. — Outstanding claims which arose during the fourth j'ear preceding the year of account, ending the 19 . Estimated Claims paid Estimated Particulars Liability in during the Liability in Total of respect of period of 4 years respect of of Claims between the Claims Columns (3) outstanding above date and outstanding as Claims as at the above the end of the at the end of the and (4) date year of account year of Account (I) (2) (3) (4) (5) No. Amt. No. Amt. No. Ann. No. Amt. £ £ £ £ Fatal claims Non-fatal claims — Terminated — ■ — Not terminated . 1 Total I 1 1 VI. — Outstanding claims which arose during the fifth year preceding the year of account, ending the ig Particulars of Claims (I) Estimated Liability in respect of Claims outstanding as at the above date (2) Claims paid during the period of 5 years between the above date and the end of the year of Account (3) Estimated Liability (included in Statement VII and valued by the method there specified) in respect of Claims outstanding as at the end of the year of Account (4) Total of Colunms (3) and (4) (5) No. Amt. 1 No. Amt. No. .'Vmt. No. Amt. Fatal claims Non-fatal claims- Terminated Not terminated. . £ £ £ £ 1 Total Note. — In cases where the date at which tne estimated liability required under column (2) in Forms IV, V, and VI above would fall in any year prior to 1908, such estimated liability is to be returned as at the end of the year of account terminated in 1908, and the claims paid, required under column (3) of such forms, are to be in lespect of the period between the end of the year of account terminated in njo8 and the end of the year of account rendered. VII. — Statement respecting claims of five years' duration and upwards outstanding as at the end of the }-ear of account. (To be made and signed by an actuary.) (i) The number of claims incumbent and having durations of five 3'ears and upwards as at the end of the year of account, including those separatel}' returned under Form \'l above; and the amount of the ASSURANCE COMPANIES ACT 1909. 523 weekly pa_vment, and of the annual payment, due in respect of such claims ; separately stated in respect of each year of life of the workmen, from the j'oungest to the oldest. (These particulars to be returned under columns (1) to (4) of the tabular statement given below.) (2) The estimated liability in respect of the claims specified above, computed, as at the end of the year of account, on the basis of the amount which would be required to purchase from the National Debt Commissioners, through the Post Office Savings Bank, an immediate life annuity for the workmen equal to 75 per cent, of the value of the weekly payment, according to the sex and true age of the workers. (These particulars to be returned under column (5) of the tabular state- ment given below, in respect of each }'ear of life of the workmen, from the youngest to the oldest.) (3) If the estimated liability, as reserved under the First Schedule in respect of the claims specified above, is computed on any basis other than that specified under Heading No. (2) above, the whole of the particulars required under Headings (i) and (2) above are to be returned in columns (i) to (5) of the tabular statement given below, together with the following additional particulars : — (i) If the estimated liability is determined on the basis of the value of an immediate life annuit}- : — (a) The table of mortality upon which such life annuity values are based ; (d) The rate of interest at which such life annuity values are computed ; (c) Whether such life annuity values are discriminated according to the sex of the workers ; (d) The proportion of such life annuity values representing the estimated liability ; {e) The modificatiiMTs (if any) made in the true ages of the workmen, in deducing the estimated liability; (/) The amount of the estimated liability. (To be returned, in respect of each year of life, in column (6) of the tabular statement given below.) (ii) If the estimated liability is not determined on the basis of the value of an immediate life annuity, full particulars are to be specified as to the precise method adopted in deducing such estimated liability, and the total amount of estimated liability is to be returned under column (6) of the tabular statement given below. 524 AUDITING. o g 6 '3 2:6 (I) Ages of the Workmen as at the end of the Year of Account (2) Amount of Weekly Payment (3) Amount of Annual Payment (4) Estimated Liability computed on Basis of 75 per cent, of Value of Life Annuity purchased through the Post Office (5) Estimated Liability, if computed on basis other than that specified in Column 5 (6) Note. — Separate particulars to be furnished in respect of male and female workers. Summary of estimated liability in respect of outstanding claims as at the end of the year of account — As per column (4) of Statement I [b) £ » (4) II » (4) III » (4) IV » (4) \ ,, (5) or (6) VII Total estimated liability in respect of | outstanding claims as at the end of the j- £ 3'ear of account as per First Schedule (D) (E.) — Form applicable to Bond hivestment Business. Statement respecting the Valuation of the Liability under Bonds and Endowment Certificates of the to be made and signed by the Actuary. (The answers should be numbered to accord with the numbers of the corresponding questions.) 1. The date up to which the valuation is made. 2. The principles adopted in the valuation of the liabilities under bond investment policies and endowment certificates, and whether these principles were determined by the instrument constituting the company, or by its regulations or bye-laws, or how otherwise. •4 ASSURANCE COMPANIES ACT I909. 525 3. The rate or rates of interest assumed in the calculations. 4. The actual proportion of the annual income from contributions, if any, reserved as a provision for future expenses and profits. (If none, state how this provision is made.) 5. The consolidated revenue account since the last valuation, or, in the case of a company which has made no valuation, since the commencement of the business. (This return should be made in the form annexed. No return under this heading will be required where the valuation is made annually.) 6. The liabilities of the company under bond investment policies and endowment certificates at the date of the valuation, showing the number of policies or certificates, the amounts assured, the amount of contribution payable annually, and the provision for future expenses and profits ; also the net liabilities and assets of the company, with the amount of surplus or deficiency. (These returns should be made in the forms annexed.) 7. The principles upon which the distribution of profits among the bond and certificate holders and shareholders is made, and whether those principles are determined by the instrument constituting the company, or by its regulations or bye-laws, or how otherwise, and the time during which a bond investment policy or endowment certificate must be in force to entitle it to share in the profits. 8. The results of the valuation, showing — (i) The total amount of profit made by the company, allocated as follows : — (a) among participating bond or certificate holders, with the number so participating and the total amount of their bonds or certificates ; (b) among the shareholders ; (c) to reserve funds, or other accounts ; (d) carried forward unappropriated. (2) Specimens of profit allotted to policies or certificates for ;i^ioo effected for different periods, and having been in force for different durations. 526 AUDITING. o bo a •r-t CS 2 b » , n! o vc HI c O ~ t/3 o ,« 01 O o cq o O c _ cu c ^*- OJ o HI c j: c rt < bo C -5 c I '-tJ z O o o < w Z M W Pi Q H < Q o Z O U <~tJ c?i E >«*- o ■a C M W.E ■:; c J C ., 01 V e-5 ^« c c_ u . c 1£ 0) > o Q) «iJ en Di o.--, ^- cS o c o su o* •^ c •75 < < t^ en c n o 1) u 31 -a J3 r « rt TS cu c h -a -a i? o V (a o c m J3 "O c O c a •0 "^ 0) 0) ;^ •0 1 — 1 C ^ k, n C •0 0.1 ni ^ QJ «4-< 'iii J 1-1 c >« s<-^ pq = u '^ rt cfl CU U' 0) '^ [/: ■^ fc>,S ^ -^ 3 •p - ►^ u rt rt Oh > > en ^1 3 ot: 3S«- rt< 1 > I ^. in SE 0) 3 13 ^'i IC :=: a; s u ! fe fed. u '3 rn ^§ -i lici uat: in C c ! £| in 1 u rt '5 "3 "o u CU rt t^ PL, d ■z • t! ■ CU • IC ■u . a: : & in _o in — rt T. • • 2 i-t % ^ c :n « c rt rt ^ ^_^ x.ii i_ Uy3 :: o ^3 QJ SM E ""S- rt' — IC o g in c o H u.E o h AUDITING. FIFTH SCHEi;ULE. N.B. — ^Yhere sinking iund or capital redemption business is carried on, a separate statement, signed b}' the actuary, must be furnished showing the total sums assured maturing in each calendar year and the corresponding office premiums. (A.) — Form a-pflicable to Life Assurance Business. Statement of the Life Assurance and Annuity Business of the on the 19 , to be signed by the Actuary. (The answers should be numbered to accord with the numbers of the corresponding questions. Statements of re-assurances correspond- ing to the statements in respect of assurances are to be given throughout.) Separate statements are to be furnished in the replies to all the headings under this schedule for business at other than European rates. Separate statements are to be also furnished throughout in respect of ordinary and industrial business respectively. 1. The published table or tables of premiums for assurances for the whole term of life and for endowment assurances which are in use at the date above mentioned. 2. The total amount assured on lives for the whole term of life which are in existence at the date above mentioned, distinguishing the portions assured with immediate profits, v.dth deferred profits, and without profits, stating separately the total reversionary bonuses and specifying the sums assured for each year of life from the youngest to the oldest ages, the basis of division as to immediate and deferred profits being stated. 3. The amount of premiums receivable annually for each 3'ear of life, after deducting the abatements made by the application of bonuses, in respect of the respective assurances mentioned under Heading No. 2, distinguishing ordinary from extra premiums. A separate statement is to be given of premiums payable for a limited number of years, classified according to the number of years' pay- ments remaining to be made. 4. The total amount assured under endowment assurances, specify- ing sums assured and ofiice premiums separately in respect of each year in which such assurances will mature for payment. The rever- ASSURANCE COMPANIES ACT 1909. 529 sionary bonuses must also be separately specified, and the sums assured with immediate profits, with deferred profits, and without profits, separately returned. 5. The total amount assured under classes of assurance business, other than assurances dealt with under Questions 2 and 4, distinguish- ing the sums assured under each class, and stating separately the amount assured with immediate profits, with deferred profits, and without profits, and the total amount of reversionary bonuses. 6. The amount of premiums receivable annually in respect of each such special class of assurances mentioned under Heading No. 5, dis- tinguishing ordinary from extra premiums. 7. The total amount of premiums which has been received from the commencement upon pure endowment policies which are in force at the date above mentioned. S. The total amount of immediate annuities on lives, distinguishing the amounts for each year of life, and distinguishing male and female lives. 9. The amount of all annuities on lives other than those specified under Heading No. 8, distinguishing the amount of annuities payable under each class, and the amount of premiums annually receivable. 10. The average rate of interest yielded by the assets, whether invested or uninvested, constituting the life assurance fund of the com- pany calculated upon the mean fund of each year during the period since the last investigation, without deduction of income-tax. It must be stated whether or not the mean fund upon which the average rate of interest is calculated includes reversionary investments. 11. A table of minimum values, if any, allowed for the surrender of policies for the whole term of life and for endowments and endowment assurances, or a statement of the method pursued in calculating such surrender values, with instances of the application of such method to policies of different standing and taken out at various interval ages from the youngest to the oldest. In the case of industrial policies, where free or paid up policies are granted in lieu of surrender values, the conditions under which such policies are granted must be stated, with specimens as prescribed for surrender values. M M 53© AUDITING. (E.) — Form af-plicable to Bond Investment Business. Statement of the Bond Investment Business of the on the ig . (To be signed by the Actuary.) (The answers should be numbered to accord with th^ numbers of the corresponding questions. Statements of re-insurances, correspond- ing to the statements in respect of insurances, are throughout to be given.) 1. The pubhshed table or tables of rates of contribution for bond I investment policies and endowment certificates which are in use at the date above-mentioned ; with full particulars as to the terms and con- ditions on which advances are made under such policies or certificates, whether on security of house property or land, or otherwise. 2. The total amounts assured under policies or certificates which are in existence at the date above-mentioned, distinguishing the portions insured with and without profits, stating separately the total additions by way of bonus, and specifying such sums insured and bonuses respectively according to the number of complete j'ears unexpired at such date. 3. The amount of premiums receivable annually, in respect of the respective insurances mentioned under Heading No. 2, separately specified according to the number of complete years unexpired at the date above mentioned. 4. The total amount of premiums which have been received from the commencement upon all policies or certificates mentioned under Headings Nos. 2 and 3, separately specified according to the number of complete years unexpired at the date above mentioned. 5. The average rate of interest realised by the assets, whether invested or uninvested, constituting the bond investment and endow- ment certificate fund of the company, calculated upon the mean fund of each year during the period since the last investigation, without deduction of income-tax. 6. Full particulars as to the terms and conditions upon which surrenders of policies and certificates are granted, with specimens of the values allowed in respect of different durations, and different unexpired terms at the date of surrender. 7. Full particulars as to the terms and conditions upon which allowances are made on the death of a policy or certificate holder, with specimen values as required under Heading No. 6. ASSURANCE COMPANIES ACT I909. 531 8. Full particulars as to the terms and conditions upon which transfers of the interest in a policy or certificate are granted, whether on the death of the policy or certificate holder, or during his lifetime. (). Full particulars as to the terms and conditions upon which redemption of advances is granted, with specimens of redemption values in respect of bonds or certificates of different durations, and having different unexpired terms, at the date of redemption. 10. A tabular statement in respect of policies or certificates lapsed during the period since the last investigation, showing the number, the amount insured, the 3^early premiums, and the total premiums received from the commencement ; classified according to the year in which such policies or certificates were effected, and lapsed, respectively; with a similar tabular statement in respect of policies or certificates surren- dered during the period : Provided that policies or certificates which have lapsed and been revived shall not be entered as lapses. 11. A statement of the total number of advances made under policies or certificates to the holders thereof, whether on the security of house property or land or otherwise, and the total amount of such advances outstanding at the date above mentioned, distinguishing the advances on first mortgage and those on second or subsequent mortgage. SIXTH SCHEDULE. RfLES FOR Valuing Policies and Liabilities. (A.) — As RESPECTS Life Policies and Annuities. Rule for Valuing an Annuity. An annuity shall be valued according to the tables used by the company which granted such annuity at the time of granting the same, and, where such tables cannot be ascertained or adopted to the satisfac- tion of the Court, then according to such rate of interest and table of mortality as the Court may direct. Rule for Valuing a Policy. The value of the policy is to be the difference between the present value of the reversion in the sum assured according to the contingency upon which it is payable, including any bonus or addition thereto made before the commencement of the winding-up, and the present value of the future annual premiums. M M 2 532 AUDITING. In calculating such present values interest is to be assumed at such rate, and the rate of mortality according to such tables, as the Court may direct. The premium to be calculated is to be such premium as according to the said rate of interest and rate of mortality is sufficient to provide for the risk incurred by the office in issuing the policy, exclusive of any addition thereto for office expenses and other charges. (B.) — As RESPECTS Fire Policies. Rule for Valuing a Policy. The value of a current policy shall be such portion of the last premium paid as is proportionate to the unexpired portion of the period in respect of which the premium was paid. (C.)— As RESPECTS Accident Policies. Rule for \'aluing a Periodical Payment. The present value of a periodical paj-ment shall, in the case of total permanent incapacity, be such an amount as would, if invested in the purchase of a life annuity from the National Debt Commissioners through the Post Office Savings Bank, purchase an annuit}' equal to seventy-five per centum of the annual value of the periodical payment, and, in any other case, shall be such proportion of such amount as may, under the circumstances of the case, be proper. Rule for Valuing a Policy. The value of a current policy shall be such portion of the last premium paid as is proportionate to the unexpired portion of the period in respect of which the premium was paid. (D.) — As RESPECTS EilPLOVERS' LlARILITV POLICIES. Rule for Valuing a Weekly Payment. The present value of a weekly pa3'ment shall, if the incapacity of the workman in respect of which it is payable is total permanent incapacity, be such an amount as would, if invested in the purchase of an immediate life annuity from the National Debt Commissioners through the Post Office Savings Bank, purchase an annuity for the workmen equal to seventy-five per cent, of the annual value of the weekly payment, and in any other case shall be such proportion of such amount as may, under the circumstances of the case, be proper. Rtile for Valuing a Policv. The value of a current policy shall be such portion of the last premium paid as is proportionate to the unexpired portion of the period in respect of whiih the premium was paid, together with, in ASSURANCE COMPANIES ACT 1909. 533 the case of a policy under which any weekly paj'ment is payable, the present value of that weekl}^ pa3'ment. (E.) As RESPECTS Bonds or Certificates. Rule for Valuing a Policy or Certificate. The value of a policy or certificate is to be the difference between the present value of the sum assured according to the date at which it is payable, including any bonus or addition thereto made before the commencement of the winding-up, and the present value of the future annual premiums. In calculating such present values, interest is to be assumed at such rate as the Court ma}^ direct. The premium to be calculated is to be such premium as, according to the said rate of interest, is sufficient to provide for the sum assured by the policy or certificate, exclusive of any addition thereto for ofl&ce expenses and other charges. SEVENTH SCHEDULE. Where an assurance company is being wound-up by the Court or subject to the supervision of the Court, the liquidator, in the case of all persons appearing by the books of the company to be entitled to or interested in policies granted by such company, is to ascertain the value of the liability of the company to each such person, and give notice of such value to such persons in such manner as the Court may direct, and any person to whom notice is so given shall be bound by the value so ascertained unless he gives notice of his intention to dispute such value in manner and within a time to be prescribed by a rule or order of the Court. EIGHTH SCHEDULE. Requirements to be complied with by Underwriters being Members OF Lloyd's or of any other Association of Underwriters APPROVED BY THE BOARD OF TRADE. (A.) — As resfects Life Assurance Business. I. Every underwriter shall deposit and keep deposited in such manner as the Board of Trade may direct a sum of two thousand pounds. The Board of Trade may make rules as to the payment, repayment, investment of, and dealing with, a deposit, the payment of interest and dividends from any such investment, and for any other 534 AUDITING. matters in respect of which they may make rules under Section 2 (6) of this Act in relation to deposits made by assurance companies. The sum so deposited shall, so long as any liability under any policy issued b}' the underwriter remains unsatisfied, be available solely to meet claims under such policies. 2. The underwriter shall furnish every _vear to the Board of Trade a statement in such form as may be prescribed by the Board showing the extent and character of the life assurance business effected by him. (B.) and (C.) — As resfects Fire and Accident Insurance Business. 1. Except as hereinafter provided, every underwriter shall comply with the following requirements : — [a] He shall deposit and keep deposited in such manner as the Board of Trade may direct a sum of two thousand pounds in respect of each class of business. The Board of Trade ma}' make rules as to the payment, repayment, investment of, and dealing with, a deposit, the payment of interest and dividends from any such investment, and for any other matters in respect of which they may make rules under Section 2 (6) of this Act in relation to deposits made by assurance companies. The sum so deposited shall, so long as any liabilit\' under any policy issued by the underwriter remains unsatisfied, be available solely to meet claims under such policies. (b) lie shall furnish every 3'ear to the Board of Trade a statement, in such form as may be prescribed by the Board, showing the extent and character of the fire or accident insurance business effected by him. 2. An underwriter who carries on fire insurance or accident insurance business may, in lieu of complying with the above requirements, elect to compl}' with the under-mentioned conditions : — - (a) All premiums received by or on behalf of the underwriter in respect of fire and accident insurance or re-insurance business carried on by him, either alone or in conjunction with any other insurance business for which special requirements are not laid down in this schedule, shall without any apportionment be placed in a trust fund in accordance with the provisions of a trust deed approved by the Board of Trade : (b) He shall also furnish security to the satisfaction of the Board of Trade (or, if the Board so direct, to the satisfaction of the committee of the association), which shall be available solely to meet claims under policies issued bj' him in connection with lire and accident business and an}' other non-marine business carried on by him for which special requirements are not laid down in this schedule. ASSURANCE COMPANIES ACT I909. 535 The security may be furnished in the form either of a deposit or a guarantee, or partly in the one form and partly in the other. The amount of the security to be furnished shall never be less than the aggregate of the premiums received or receivable by the underwriter in the last preceding year in connection with such fire and accident and other non-marine business : (f) The accounts of every underwriter shall be audited annually by an accountant approved by the committee of the association, who shall furnish a certificate to the committee of the association and to the Board of Trade in a form prescribed by the Board of Trade : {d) For the purpose of these requirements "non-marine insurance business " means the business of issuing policies upon subject- matters of insurance other than the following, namely : — Vessels of any description, including barges and dredgers, cargoes, freights, and other interests which may be legally insured by, in, or in relation to vessels, cargoes, and freights, goods, wares, merchandise, and property of whatever descrip- tion insured for an)' transit by land or water, or both, and whether or not including warehouse risks or similar risks in addition or as incidental to such transit. (D.) — As res-pects Emfloyers'' Liability Insurance Business. 1. Every underwriter shall deposit and keep deposited in such manner as the Board of Trade may direct a sum of two thousand pounds. The Board of Trade may make rules as to the payment, repay- ment, investment of, and dealing with, a deposit, the pa3aTient of interest and dividends from any such investment, and for any other matters in respect of which they may make rules under this Act in relation to deposits made by assurance companies. The sum so deposited shall, so long as an}' liability under any policy issued by the underwriter remains unsatisfied, be available solely to meet claims under such policies. 2. Where the person insured by any policy issued by an underwriter is liable to make a weekly payment to any workman during the incapacity of the workman, and the weekly payment has continued for more than six months, the liability therefor shall before the expiration of twelve months from the commencement of the incapacity be 536 AUDITING. redeemed bj' the payment of a lump sum in accordance with para- graph (17) of the First Schedule to the Workmen's Compensation Act, 1906, and the underwriter shall pay the lump sum into the County Court, and shall inform the Court that the redemption has been effected in pursuance of the provisions of this schedule. 3. The underwriter shall furnish every year to the Board of Trade a statement in such form as may be prescribed by the Board showing the extent and character of the employers' liability business effected by him. 4. For the purposes of this schedule " policy " means a policy i'nsuring any employer against liability to pay compensation or damages to workmen in his employment. (E.) — As res-pects Bond Investment Business. 1. Every underwriter shall deposit and keep deposited in such manner as the Board of Trade may direct a sum of two thousand pounds. The Board of Trade may make rules as to the payment, repay- ment, investment of, and dealing with, a deposit, the payment of interest and dividends from any such investment, and for any other matters in respect of which they may make rules under Section 2 (6) of this Act in relation to deposits made by assurance companies. The sum so deposited shall, so long as any liability under any policy issued bj' the underwriter remains unsatisfied, be available solely to meet claims under such policies. 2. The underwriter shall furnish every year to the Board of Trade a statement in such form as may be prescribed b}^ the Board showing the extent and character of the bond investment business effected by him. NINTH SCHEDULE. Enactments Repealed. Session and Chapter Short Title Extent of Repeal 33 & 34 Vict. c. 61 I The Life Assurance Companies Act, 1S70 34 & 35 Vict. c. 58 35 cSt 36 Vict. c. 41 39 & 40 Vict. c. 22 7 Edw. 7. c. 46 . . The Life Assurance Companies Act, 1871 . . The Life Assurance Companies Act, 1872 . . Tne Trade Union Act Amendment Act, 1876 The Employers' Liability Insurance Companies Act. iq07 The whole Act The whole Act The whole Act Section seven The whole Act THE GAS WORKS CLAUSES ACT 1847. 537 GAS ACCOUNTS. THE GAS WORKS CLAUSES ACT, 1847. 10 Vict. c. ij. Profits to be Limited. 30. — The profits of the undertaking to be divided amongst the under- takers in any year shall not exceed the prescribed rate, or where no rate is prescribed they shall not exceed the rate of ten pounds in the hundred by the year on the paid-up capital in the undertaking, which in such case shall be deemed the prescribed rate, unless a larger divi- dend be at any time necessary to make up the deficiency of any previous dividend which shall have fallen short of the said yearly rate. Reserved Fund. 31. — If the clear profits of the undertaking in any year amount to a [i larger sum than is sufficient, after making up the deficiency in the dividends of any previous year as aforesaid, to make a dividend at the prescribed rate, the excess beyond the sum necessary for such purpose shall from time to time be invested in Government or other securities ; and the dividends and interest arising from such securities shall also be invested in the same or like securities, in order that the same may accumulate at compound interest until the fund so formed amounts to the prescribed sum, or if no sum be prescribed a sum equal to one- tenth of the nominal capital of the undertakers, which sum shall form a reserved fund to answer any deficiency which may at any time happen in the amount of divisible profits or to meet any extraordinary claim or demand which may at any time arise against the undertakers ; and if such fund be at any time reduced it may thereafter be again restored to the said sum, and so from time to time as often as such reduction shall happen. 32. — Provided always that no sum of money shall be taken from the said fund for the purpose of meeting any extraordinary claim, unless it be first certified in England or Ireland by two justices, and in Scot- land by ihe sheriff, that the sum so proposed to be taken is required for the purpose of meeting an extraordinary claim within the meaning of this or the special Act. ^T,. — \\ hen such fund shall, b}' accumulation or otherwise, amount to the prescribed sum, or one-tenth of the nominal capital of the com- pany, as the case may be, the interest and dividends thereon shall no longer be invested, but shall be applied to any of the general purposes of the undertaking to which the profits thereof are applicable. 538 AUDITING. 34. — If in any year the profits of the undertaking divisible among the undertakers shall not amount to the prescribed rate, such a sum may be taken from the Reserve Fund as with the actual divisible profits of such }'ear will enable the undertakers to make a di^■idend of the amount aforesaid, and so from time to time as often as the occasion shall require. Appointmeyit of Inspectors. 35. — In England or Ireland the Court of Quarter Session, and in Scotland the sheriff, may, on the petition of any two gas ratepayers, within the limits of the special Acts, nominate and appoint some accountant or other competent person, not being a proprietor of any gas-works, to examine and ascertain at the expense of the undertakers (the amount of such expense to be determined by the said Court or sheriff) the actual state and condition of the concerns of the under- takers, and to make report thereof to the said Court at the then present or some following sessions, or to the sheriff ; and the said Court oi sheriff may examine any witnesses upon oath touching the truth of the said accounts, and matters therein referred to ; and if it thereupon appear to the said Court or sheriff that the profits of the undertakers for the preceding year have exceeded the prescribed rate, the under- takers shall, in case the whole of the said reserved fund has been, and then remains, invested as aforesaid, and in case dividend to the amount hereinbefore limited had been paid, make such a rateable deduction in the rate for gas to be furnished by them as in the judgment of the said Court or sheriff shall be proper, but at such rates as, when reduced, shall ensure to the undertakers (regard being had to the amount of profit before received) a profit as near as may be to the prescribed rate. 36. — Provided always, that if, in the case of anj^ petition so pre- sented, it appears to the said Court or sheriff that there was no sufficient ground for presenting the same, the said Court or sheriff may, if they or he think fit, order the petitioner to pay the whole or any part of the cost of, or incident to, such petition (the amount thereof to be determined by the said Court or sheriff), and the costs so ordered to be paid shall be recoverable in the same way as damages are recoverable under this or the special Act. 37. — If the undertakers shall, for seven days after being required to produce to the said Court or sheriff, or to the said accountant or other person as aforesaid, any books of account or other books, bills, receipts, vouchers, or papers, relating to the pecuniary affairs of the undertakers, refuse or neglect to produce such books, bills, receipts, vouchers, or papers, they shall forfeit the sum of one hundred pounds for every such refusal or wilful neglect, and the further sum of ten THE GAS WORKS CLAUSES ACT. 1871. 539 pounds for every day such refusal or wilful neglect shall continue after the expiration of the said seven days, such respective penalties to be recovered by any person who will sue for the same, with full costs of suit in any of the superior Courts. Accounts to be Lodged, &^c. 38. — With respect to the yearly receipts and expenditure of the under- takers, be it enacted, that the undertakers shall, in each year after they have begun to supply gas under the provisions of this or the special Act, cause an account in abstract to be prepared of the total receipts and expenditure of all rents or funds levied under the powers of this or the special Act for the year preceding, under the several distinct heads of receipt and expenditure, with a statement of the balance of such account, duly audited and certified by the chairman of the undertakers, and also by the Auditors thereof, if any ; and a copy of such annual account, if the gas-works be situated in England or Ireland, shall be transmitted, free of charge, to the clerk of the peace for the county in which the gas-works are situate, and if the gas-works be situated in Scotland, such copies shall be transmitted, free of charge, to the sheriff clerk of such county, and such transmission shall be made on or before the 31st day of January in each year, under a penalty of ;^20 for each default ; and the copy of such account so sent to the said clerk of the peace or sheriff clerk shall be kept by him, and shall be open to inspect tion by all persons at all reasonable hours, on payment of one shilling for each inspection. THE GAS WORKS CLAUSES ACT, 1871. J4 and jf Vict. c. 41. 35. — The undertakers shall fill up and forward to the local authority of every district within the limits of the special Act, on or before the twenty-fifth day of March in each year, an annual statement of accounts made up to the thirty-first day of December then next preceding, as near as may be in the form and containing the particulars specified in Schedule B to this Act annexed. The undertakers shall keep copies of such annual statement at their office, and sell the same to any applicant at a price not exceeding one shilling for each such copy. The Board of Trade, with the consent of the undertakers, may alter the said forms for the purpose of adapting them to the conveniences of the undertaking, or of better carrying into effect the objects of this section. 540 AUDITING. m XI f-< c a; CJ >-, OJ c , U ni <^ s 00 M t-4 ■k* o u (D K en J3 H ^ o C O H-1 -^^ W Q ►J U » ■*j < H < Q s in W ■^ •*-, (^ ffi be U o ^ w c/) T1 « s fl <; >^ Oi ffi fe, V-l (U > o J3 ^ H M < H cn 3 CD O t/> «| O ^ H .3 3 — U3 rt — b5 o o - c ^ ■s: ^ &■ 3 "S 3 T3 O-^ n "gw t/) ' ' I-l ni Qi U B. vj — O T3 g- J= SQS ou>«>.^>-3*..o — r-p*-(u>— rt-.-^x^noj y. rtl'WCO&cilD'-COC W JZ z z ox ^ ci rn -^ in ^s 1 54' AUDITING. <-rt CX3 M It V e 0) (O Q -a 0) c u 4) 4) XI 0) . . , V ^ *. o ^ Xiw- . 3 O n^ 83- M X 1-. O tn u. til « — o c feet), eet), at nder C ■Sot, "?c -^ o U) u « .S !i-~'^ ID io«-a s < 03 m u; rt u n U TJ |S H 3 O O n "^ Oi-l &< t/i w >< CQ o a" c o c u « ."^ t/i c/l c 3 D l^ ciH lU >^>, ■"^ moa 0) X! o o o S-. m u O H Z D O u o < a D z u > •-t! ^ ra ij , 4> 1> lU ^8 • S ^ ■ a to c . CJ 5. O 150 .S -.Sc 4''^ «u ^ - - cd o I-" ^ (/> > '^^ ■r ° Gj 3 i«j3s:s-3 > 3 o " o^ 1/1 «:;: •= ^ re = -^ i= ^ o-ssi/r-s.s;^^ I'm i/i"^^ S'2 S_^ I C 01 bcO c S " rt^ ■" :i = !« ■>: 1" s h ^ X C iS 3 re a aj ™ o (U 3 rtt/)> OJOiS N ro -^f |/^ O O to .53 "u 01 o . O M C 3 o i^-O u t; »S; 3 0) J 1/1 c= /T< „r 5^3 505 rt mIJ irj ^"rt so O-ra-o c c '>'! « 5 .-a 0/ 3 c S c« 1- ^ O yi CU o *- 3 ^ o rt C .-a hi c 3^3 U.W S-iJ 1/1 O S c "' C X ^1 *^ 3fi; .,-Q H 1/1 rt aj (/) u •- hJ S J2 t/i Ct lU G Qui o H IX ^ I lU ao 2 c < « a D z < ui 5 lu r- rt 4) M .i^ 1/1 trt tO.;3 O c ,_ 0) Q «CQ o OvS o o H S U c 3 o u u < o ►J •a 3 la o a. o « M M 0) THE GAS WORKS CLAUSES ACT 187I, 543 o u a Ml B 0) o to Q c u l-l a v H Z > H pi H 5, H Z D O O u <: u} in O Q Z < lb o Ph U '-a "~>3 a 3 n o o < « -O 60 3 O Ui o o &. c 3 o o o OJ rt ■-- 9 --i nl - ffl ro 2fQ5 c •~j T3 C 3 s :» :Q :° •a . c -a ca c ° ^ 03^ ° «J5'g S"^ O rt !X1 ■■■J) o " rt m aj j:i in •0 C ua T3 > S " re CM S£3.C tU C I^ re *- ^ ^ S t^ feP 0) I' s 1 < o H . 0) c • •— o • ■ 1,"^ cfl o o re m o O i~ J) o >^ m Tj- U-) ID t^ 0) (O o (U Q (L> C V ft 0) 0) XI o < a z D b Q > w (/; U fe s^ ■ c a o o o a ji^ > r- C G §§•- ^:s 2 M tic s o P - u i; c ^J2 o o " K re ™ (u "re re tJ «m^ a - - w 3 3 o .-, o 00 ^^ "^ O S S „ S 2 3 «Q g S U tr. Q <^ 3 O ^ a; re -^ c c -^■5 o ■r tfl re _ C ■ «»( a a o o o < 544 AUDITING. 'S u o > 4) t/5 H O D Q O OS J o Q 55 w Pi O H Z w S H H < H 2 -S-E E — 13 "cj^ 13 mK ,£! a ■ ^ ^ • O u a- °^ hJ O a! 1 "SlO ,:£ , ■- c o = « C O eH< a; X> B ^ « ^ - - - e CO 0) - . u u: • u c « 3 •£ o ci3<: m - ./1 ,9 O £ " u S-. 1)T3 «^ C C^O 3 Ut/) a. •-ij ■ c to O w o S o t- t- Ui (U O q; " C H ^ 5'S o " S 2 . ';^ ™ ct-i « a S o gs . C t Z Si— H O g" ■< 3 o n M K < t. CL. W < K H U < > H m 0. a U u Ci e: u < X K H fn P •< ii. o H Z H S H H • O s flS w w Q <: > OS 0. o o <: M m 11 CU tel n p. a < H c J > o < pa H Ph Q < U U ?^ O < « n H J < b o H Z H S M H o (D (^ H a o u J3 C/) ELECTRIC LIGHTING ACT 1 88 2. 551 O gr 03(2 i£ JE9^\ Suunp <-tj 81 OSQ i£ oj dn sjdigoay ■i EH Z U o o o <: < H <: U Id 0) S o u o o '-♦JSi'-a §--^ . . ■;: — 0- : : c == o. M I' "^ T3 e <" 3J ° 0-3 1^ o ^03 S oii n CO S OJ ■" *-< o c a 0) OJ c/: s QJ 0) -^ i ^ ^ 81 -OBQ i£ ojajnjipuadxg ^ Suunp papuadxg 81 -oaa i£ o; du gjtijipuadxa ^ c 73 u — ^ s^ ■« « o i. hi j: c rn -r^ TS U OJ -s C « • s c . c O m a .i3 C^ o "" - - 3; 4; o ^ o U rt r- -S - *a3 Cl o ffi h o a, u Q o o o a. V Q 55^ AUDITING. v O 73 Vj H Z D O U u CO l-l « B V o m z "2 > « I- sa c o < o =.o "5 CO 3 .< s- o o -= £osqs ^- S C G « 3 « « ■^ Ii QJ q; CQ O f^ c/] •-0 ^O t^20 Cl <-*J T3 (U S-l o V? Q " d a n Ui .. Kd u C -.( rr, u'- 3 t/3 7j rt (U u ■a -.2-S[-, o mwQ o < CO O 0) ^ 1-. -" CU . ,ii 3 = 2 O H l-i ■2-5 li c o 0) OJ -0-> k4 0) 3 3 w"5b ^ O 3 '.S to (6 <-j W ■£ a*-- in 5 to S _ CD 3 cO G S S E 3 CiJ Jn CO in cfl C CO <" OJ o cu «5m^ 3 •J- ^ ^ B 3 3 o s I-- (/) u *-• O rt "t-l t-l C CL o cu — x: 5° S 3 DS 3 en . CO • S O D O w CQ If O I H Z b o u u < u 3 Z > <-rt ^ o 33 c ■^ o '5 m WJtn an <&; o ^ ^ 3 .0 as - - 0) > ■ wT • „, c M i-v. • M -a D rt ^ r: *-* <-- r^ I- u C t- ^ Ci."a t; ui 5 5f u) I'-r; 2 u. o£-najc«3g "'C 3 :3 ^.2 11.-." .-•3o > J_ . - . = = > o .2 ^ -I — ^ ■s 2 = s ^ JCQfU I t •-I Cl -■o ■* io*0 t^ a o to o c •J o a'Z 3 ca c o c« n! ^S cri 3 a •fi o . 0) a. o H 3 c >■ (U cs; z o W H W ^1 ■c w VJ ■B '-iJ (/J •hJ O rj) ^ c ■~ u o (J < OJ t: c iJ : :'^ Ci 'u: *j cu o c > ,_ p. 3 ^ c t- u-- a i*.Q o 0) c dj , ^ o o S 3 3 ^ tfi rt> lU _5^ o aJ *-* u rt 3 ra ■ji m <; M >^ >. m e M CJ ro __, ^ m ^ tfl ^' ^ -• — L' p ^ u c 3 c "d c rt rr, era 3 o o 3 ; ace and Loa 01 5 ures ges rary renc o l^a^, s ■^ r.C Ul "rt 3 3 3 o o o o-o a t/5 (/I 1/1 (U ^ 3 C 3 5k o"" £ a M fi r^ '4- »J- -) H z o o o Q z D OS M o ■-rt ^ a • o ■"if ?! =» 5 o^ ° li ^' 3 3 "St; 5.2 >- fcl C 01 « 5 3 «<^ ra - - o "~ti "~t^ ■^ 3 o-o 3 3 O O << H Z D O O u < c z z o H 3 w Oi w Q "-rt i-i-a Zo ■>» %. to « ^ 0) O -M < 3 s Sg O a Ui H < a w z O >< H H U H W o H Z M S H •< H C/3 X o Total Maximum Supply demanded Number of Public Lamps Quantity not accounted for Total Quantity accounted for Quantity used on Works 1 1^ Private Consumers by Meter o ctl o O 3 E 3 CO ft--; 1 'E 3 H W a 1 s cu c n 3 a f I ELECTRIC LIGHTING CLAUSES ACT 1 899. 557 ELECTRIC LIGHTING CLAUSES ACT, 1899. 62 and 6 J Vict. c. ig. I. — The provisions contained in the schedule to this Act shall be incorporated with and form part of every provisional order made by the Board of Trade after the commencement of this Act under the Electric Lighting Acts, save so far as they are expressly varied or excepted by the order, and shall, subject to any such variations or exceptions, apply, so far as applicable, to the undertaking authorised by the order. The said provisions shall also, with the necessary modifications, and, in particular, with the substitution of the words " special Act " for " special order "' be incorporated with any special Act, save so far as they are expressly varied or excepted thereby. . . . The expression "special Act" means, in this Act, any Act passed after the commencement of this Act authorising the supply of electricity for any public or private purposes within any area. 2. — (2) Except in so far as any of the provisions contained in the schedule to this Act are incorporated with any provisional order made by the Board of Trade under the Electric Lighting Acts extending to the county of London, or with any special Acts so extending, this Act shall not apply to the county of London. Audit of Accounts. 6. — The following provisions shall apply as to the audit of accounts where the undertakers are not a local authority : — (i) The annual statement of accounts of the undertaking, before being published as provided by Section 9 of the Electric Lighting Act, 1S82, shall be examined and audited by such competent and impartial person as the Board of Trade appoint, and the remuneration of the Auditor shall be such as the Board of Trade direct, and that remunera- tion and all expenses incurred by him in or about the execution of his duties, to such an amount as the Board of Trade approve, shall be paid by the undertakers on demand, and shall be recoverable sum- marily as a civil debt. (2) The undertakers shall give to the Auditor, his clerks and assistants, access to such of the books and documents relating to the undertaking as are necessary for the purposes of the audit, and shall when required furnish to him and them all vouchers and information requisite for that purpose, and shall afford to him and them all facilities for the proper execution of his and their dutv. RAILWAY ACCOUNTS. THE RAILWAY COMPANIES SECURITIES ACT, 1866. 2Q and JO Vict. c. 108. 2. — In this Act the term "railway" includes a tramway authorised by Act of Parliament incorporating the Companies Clauses Consolida- tion Act, 1845, ^^t ^''^^ ^^y other tramway: The term " railway company " includes every company authorised by Act of Parliament to raise any loan capital for the construction or working of a railway, or for any purposes connected with the convey- ance by such a company of traffic on a railway either alone or in conjunction with other purposes : The term " debenture stock " includes mortgage preference stock and funded debt and any stock or shares representing loan capital of a railway company, by whatever name called. Half-yearly Accounts. 4. — Half-years shall, for the purpose of this Act, be deemed to end on the thirtieth day of June and the thirty-first day of December ; and the first half-year to which this Act applies shall be that ending on the thirty-first day of December one thousand eight hundred and sixty-six ; but the Board of Trade, on the application of any railway company, may (by writing under the hand of one of their secretaries or assistant secretaries, which shall be registered by the railway company at the office of the said Registrar) appoint, with respect to that company, other days for the ending of half-years (including the first). 5. — Within fourteen days after the end of each half-year every railway shall make an account of their loan capital authorised to be raised and ? 558 AUDITING. (3) The Board of Trade may make and vary regulations prescribing the times at and the mode in which the audit shall be made and con- ducted, or otherwise for the purpose of giving effect to the provisions of this section. i (4) Any report made by the Auditor, or such portion thereof as the ij Board of Trade direct, shall be appended to the annual statement of j accounts, and shall form part thereof for the purposes of the said I Section 9. i THE RAILWAY COINIPANIES SECURITIES ACT 1 866. 559 actually raised up to the end of that half-year, specifying the particulars described in the first schedule to this Act, Part I. (which account for each half-year is in this Act referred to as the Loan Capital Half- jearly Account). Form of Accounts. 6. — The Board of Trade may, from time to time, by notice published in the London, Edinburgh, and Dublin Gazettes, prescribe the form in which the Loan Capital lialf-yearh'^ Account is to be made. THE FIRST SCHEDULE. Part I. — Particulars to be Specified in Loan Capital Half-Yearly Account. A. — Every half-yearly account to show — (i) The Act or Acts of Parliament under the powers of which the company have contracted any mortgage or bond debt existing at the end of the half-year, or have issued any debenture stock then existing, or the Act or Acts of Parliament by or under which any mortgage or bond debt or debenture stock of the company then existing has been confirmed, and the Act or Acts of Parliament under which the com- pany have any subsisting power to contract any mortgage or bond debt, or to issue any debenture stock (either on fulfilment of any condition or otherwise). (2) The amount or respective amounts of mortgage or bond debt or debenture stock thereby authorised or confirmed. (3) Whether or not by any such Act or Acts the obtaining of the certificate of a justice or sheriff for any purpose, or the obtaining of the assent of a meeting of the company, has been made a condition precedent to the exercise of the power thereby conferred of borrowing on mortgage or bond, or of creating and issuing debenture stock. (4) The date at which such condition has been fulfilled. (5) The amount or the aggregate amount under the powers of such Act or Acts actual!}' borrowed up to the end of the half-vear on mortgage or bond (distinguishing them), and then being an existing debt, and of debenture stock actually issued up to that time and then existing. (6) The amount or the aggregate amount remaining to be borrowed. B. — The second and every subsequent half-yearly account to show also — 560 AUDITING. (7) The items described in paragraphs (2) and (5) of this part of the present schedule for two consecutive half-years, and the increase or decrease of anj' of these items in the second of those half-years as compared with the first. THE RAILWAY COMPANIES (SCOTLAND) ACT, 1867. JO and J7 \ict. c. 126. Audit of Railway Accounts. 30. — No dividend shall be declared by a companj' until the Auditors have certified that the half-yearty accounts proposed to be issued ccntain a full and true statement of the financial condition of the ccmpany, and that the dividend proposed to be declared on any shares is bond -fide due thereon after charging the revenue of the half-year with all expenses which ought to be paid thereout in the judgment of the Auditors; but if the directors differ from the judgment of the Auditors with respect to the payment of any such expenses out of the income of the half-year, such difference shall, if the directors desire it, be stated in the report of the shareholders, and the company in general meeting may decide thereon, subject to all the provisions of the law then existing, and such decision shall, for the purposes of dividend, be final and binding ; but if no such difference is stated, or if no decision is given on any such difference, the judgment of the Auditors shall be final and binding ; and the Auditors may examine the books of the ccmpany at all reasonable times, and may call for such further accounts, and such vouchers, papers, and information as they think fit, and the directors and officers of the company shall produce and give the same as far as they can, and the Auditors may refuse to certify as aforesaid until they have received the same; and the Auditors may at any time add to their certificate, or issue to the shareholders inde- pendently, at the cost of the company, any statement respecting the financial condition and prospects of the company which they think material for the information of the shareholders. THE RAILWAY COMPANIES ACT, 1867. JO and J/ Vict. c. I2j. Audit of Railway Accounts. 30. — No dividend shall be declared by a company until the Auditors have certified that the half-yearly accounts proposed to be issued THE RECUIATION OF RAILWAYS ACT (868. 561 contain a full and true statement of the financial condition of the com- pany, and that the dividend proposed to be declared on any shares is bond fide due thereon after charging the revenue of the half-year with all expenses which ought to be paid thereout in the judgment of the Auditors ; but if the directors differ from the judgment of the Auditors with respect to the payment of any such expenses out of the revenue of the half-3'ear, such difference shall, if the directors desire it, be stated in the report to the shareholders, and the company in general meeting may decide thereon, subject to all the provisions of the law then existing, and such decisions shall for the purpose of the dividend be final and binding ; but if no such difference is stated, or if no such decision is given on any such difference, the judgment of the Auditors shall be final and binding ; and the Auditors may examine the books of the company at all reasonable times, and may call for such further accounts, and such vouchers, papers, and information as they think fit, and the directors and officers of the company shall produce and give tlic same as far as they can, and the Auditors may refuse to certify' as aforesaid until they have received the same ; and the Auditors may at any time add to their certificate, or issue to the share- holders independently, at the cost of the company, any statement respecting the financial condition and prospects of the company which thev think material for the information of the shareholders. THE REGULATION OF RAILWAYS ACT. 1868. _,'/ and ;^2 Vic/, c. iig. Uniform Accounts &~v., to he Kept. 3. — Every incorporated company, seven days at least before each ordinary half-yearly meeting held after the thirty-first dav of December one thousand eight hundred and sixty-eight, shall prepare and print, according to the forms contained in the first schedule to this Act, a statement of accounts and Balance Sheet for the last preceding half- year, and the other statements and certificates required by the same schedule, and an estimate of the proposed expenditure out of capital for the next ensuing half-year, and such statement of accounts and Balance Sheet shall be the statement of accounts and Balance .Sheet which are submitted to the Auditors of the companv. Every companv which makes default in complying with this section shall be liable to a penalty not exceeding five pounds for every day during which such default continues. The Board of Trade, with the consent of a com- pany, may alter the said forms as regards such company for the purpose O O 562 AUDITING. of adapting them to the circumstances of such company, or of better carrying into effect the objects of this section. Accou)tts, (^c, to be Signed and Printed Copies Distributed. 4. — Every statement of accounts, Balance .Sheet, and estimate of expenditure, prepared as required by this Act, shall be signed by the chairman or deputy chairman of the directors and by the accountant or other officer in charge of the accounts of the company, and shall be preserved at the company's principal office. A printed copy thereof shall be forwarded to the Board of Trade. Penalty for Falsifying Accounts, ks^c. 5. — If any statement. Balance Sheet, estimate, or report which is required by this Act is false in any particular to the knowledge of any person who signs the same, such person shall be liable, on conviction thereof on indictment, to fine and imprisonment, or on summary conviction thereof to a penalty not exceeding fifty pounds. Auditor not necessarily a Shareholder. II. — Whenever, after the passing of this Act, Section 102 of the Com- panies Clauses Consolidation Act, 1845, i^ incorporated in a certificate or special Act relating to a railway company, it shall be construed as if the words, " where no qualification shall be prescribed by the special Act every Auditor shall have at least one share in the undertaking," were omitted therefrom ; and so much of every certificate and special Act relating to a railway company, and in force at the passing of this Act, as incorporates that portion of the said section, and so much of any special Act relating to a railway company, and so in force as contains a like provision, is hereby repealed. Auditors of Compatiy, and Appointment of Auditor by Board of Trade. 12. — With respect to the Auditors of the company the following provisions shall have effect : — (1) The Board of Trade may, upon application made in pursuance of a resolution passed at a meeting of the directors or at a general meet- ing of the company, appoint an Auditor in addition to the Auditors of such company, and it shall not be necessary for any such Auditor to be a shareholder in the company ; (2) The company shall pay to such Auditor appointed by the Board of Trade such reasonable remuneration as the Board of Trade may prescribe ; (3) The Auditor so appointed shall have the same duties and powers as the Auditors of the company, and shall report to the company ; THE REGULATION OF RAILWAYS ACT 1 868. 563 (4) Where, in consequence of such appointment of an Auditor or otherwise, there are three or more Auditors, the company may declare a dividend if the majority of such Auditors certify in manner required by Section 30 of the Railway Companies Act, 1S67, and the Railway Companies (Scotland) Act, 1867, respectively; (:;) Where there is a difference of opinion among such Auditors the Auditor who so differs shall issue to the shareholders, at the cost of the company, such statement respecting the grounds on which he differs from his colleagues, and respecting the financial condition and pro- spects of the company, as he thinks material for the information of the shareholders. Issue of Preferred and Deferred Ordinary Stock. 13. — Any company which, in the year immediately preceding, has paid a dividend on their ordinary stock of not less than three pounds per centum per amncm ma}-, pursuant to the resolution of an extra- ordinary general meeting, divide their paid-up ordinarj' stock into two classes, to be and to be called, the one preferred ordinary stock, and the other deferred ordinary stock, and issue the same subject and according to the following provisions, and with the following consequences (that is to say): — (i) Preferred and deferred ordinary stock shall be issued only in substitution for equal amounts of paid-up ordinary stock, and by way of division of portions of ordinary stock into two equal parts ; (6) As between preferred ordinary stock and deferred ordinary stock, preferred ordinary stock shall bear a fixed maximum dividend at the rate of six per centum per annum ; (7) In respect of dividend to the extent of the maximum aforesaid, preferred ordinary stock shall at the time of its creation, and at all times afterwards, have priority over deferred ordinary stock created or to be created, and shall rank pari passu with the undivided ordinary stock and the ordinary shares of the company created or to be created ; and in respect of dividend, preferred ordinary stock shall at all times and to all intents rank after all preference and guaranteed stock and shares of the compan}- created or to be created ; (8) In each year after all holders of preferred ordinary stock for the time being issued have received in full the maximum dividend afore- said, all holders of deferred ordinary stock for the time being issued shall, in respect of all dividend exceeding that maximum paid by the company in that year on ordinary stock and shares, rank pari passu 002 564 AUDITING. with the holders of undivided ordinary stock and of ordinar}- shares of the compan\' for the time being issued ; (9) If, nevertheless, in any year ending on the thirty-first day of December, there are not profits available for payment to all the holders of preferred ordinary stock of the maximum dividend aforesaid, no part of the deficienc}' shall be made good out of the profits of any subsequent year, or out of z.ny other funds of the company. Extension of Scope of Hailway Companies Pozccrs Act, 1S64. 38. — The Railwray Companies Powers Act, 1864, shall take effect and apply in the following cases in the same manner as if they were specified in Section 3 of that Act (that is to say) : Where a company desire to make new provisions, or to alter any of the provisions of their special Act, or of the Companies Clauses Con- solidation Act, 1845, so far as it is incorporated therewith, with respect to all or any of the matters following ; namely- (6') The appointment and duties of Auditors. THE REGULATION OF RAILWAYS ACT l8t)8. 565 SCHEDULE I. Forms of Account Prescribed by Regulation of Railways Act, 1868. RAILWAY. Half-year ending iS . [Xo. I.] Statement of Capital Authorised, and Created by the Company. Capital Althorised Capital Created or Sanctioned Balance or Certificates of the Board of Trade i 'a in C/5 c g ■a M ID 3 .-1 H 1. / [Except where capital powers 2. are comprised in a Consolida- 3. tion Act, each Act or Certificate 4. "1 authorising Capital to be stated 5. 1 here separately in order of &c. I date.] J ' £ £ £ £ £ £ i- £ £ Total [Xo. 2.] Statement of Stock and Share Capital Created, showing the Proportion Received. Sl3 s-g = « ^y> -■a 3 2 3 3 Description n! SSi < Amo recei Call arre Amo unca < 3 r r r. r £ '^ [State each class of Stock or Shares in order of date of creation, showing the premium or discount, if any, at which it was issued, the preferential or fixed dividends, if any, to which it is entitled, and any other con- ditions attached to it.] Total 566 AUDITING. [No. 3.] Capital Raised by Loans and Debenture Stocks. Raised by Loans Raised by I Debenture SSUE 01- Stocks 15 c £0 Amount received during Half-year Total To Expenditure — On Lines open for Traffic (No. 5) On Lines in course of construction (No. 5) Working Stock (No. 5) Subscriptions to other Railways (No. 5) . . Docks, Steamboats, and other special items (No. 5) £ s d £ sd £ sd By Receipts- Shares and Stock, per Account No. 2 Loans, per .\ccount No 3 Debenture Stock, per Account No. 3 Sundries (in detail) £ sd £ sd £ sd To Balance THE REGULATION OF RAILWAYS ACT 1 868. 567 [No. 5.] Det.\ils of Capital Expenditure for Half-year ending 18 . Lines open Traffic : Particulars — I [Showing under separate heads amount paid for \ Land (Purchase and Compensation), Construc- J tionof Way and Stations, including Rails, Chairs, . . ■ f\ Sleepers, &c., Engineering and Surveying, Law Lines in course 01 charges. Parliamentary Expenses, Interest, Construction Particulars — I Commission, &c.] i Working Stock : Particulars — Showing each description of Stock Subscriptions to other Railways : Particulars — Stating Lines Docks, Steamboats, and other special items : Particulars . . Total Expenditure for Half-year as per Account No. 4 [No. 6.] Retirn of Working Stock. Loco- motive Coaching Merchaniiise and Mineral c '5) a W u (U a H a U u E (A m M U a a a ■a c ■> V in > -a u 3 H •a 2 h S « u 3 E Stock on the 18 Ditto on the 18 Increase during the Half - year Decrease during the Half - year 568 AUDITING. [No. 7.] Estimate of Further Expenditure on Capital Account. Lines open for Traffic (Particulars showing principal items) Lines in course of construction. . (Details of each line) Working Stock (Particulars) Subscription to other Railways (Specifying Lines) Docks, Steamboats, and other special items (Particulars) Works not yet commenced and in abeyance (in detail) Other items (in detail) Total estimated further Expenditure of Capital Further Expenditure During the Half-year ending In subsequent Half-years Total [No. 8.] Capital Powers and other Assets available to :Meet FURTHER Expenditure, as per No. 7. ■\ Share and Loan Capital authorised or created, but not yet received . . Any other Assets (in detail) Total [No. 9.] D> Revenue Account. Cr. Expenditure To Maintenance of Way, Works, and Stations See Ab- stract A. ..do. B. Locomotive Power Carriage and Wagon Repairs . . . . . .do. C. Traffic Expenses. . . .do. D. General Charges . . ..do. E. Law Charges Parliamentary Expenses Compensation (Accidents and Losses) . . Rates and Taxes Government Duty Special and Miscellaneous Ex- penses (if any) . . Balance carried to Revenue Account Net £sd 1-1 cd Receipts By Passengers „ Parcels, Horses, Carriages, &c. . . „ Mails „ Merchandise „ Live Stock „ Minerals . . » Special and Miscel- laneous Receipts — Such as Navigation Steamboats Rents .. Transfer Fees, Details /sd fsd THE REGULATION OF RAILWAYS ACT 1 868. 569 [No. 10.] Dr. Net Reven'ue Accolxt. C r. ^ £ s d i 1. £ sd >•£ >^« ^^ i'S cd d) cd (u ai To Interest on Mortgage X By Balance brought from and Debenture last Half-year's Ac- Loans ! count „ Interest on Deben- „ Ditto Revenue Ac- ture Stock . . count, No. 9.. „ Interest on Calls in „ Dividends on Shares advance in other Companies ., Interest on Tempo- „ Bankers and General rary Loans . . Interest Account (if „ Interest on Lloyd's in credit) Bonds „ Special and Miscel- „ Interest on Banking laneous Receipts (if Balances .. any) „ General Interest Account (if in 1 debit) (Details to be given.) „ Rents of Leasfd Lines, Guarantees, &c Details. „ Special and Miscel- laneous Payments (if any) 1 Details. „ Balance, being Pay- ments available for dividend ISec No. 13.] £ £ [No. II.] Proposed AppRorRiATiON of Balance available for Dividend. X Balance available for Dividend as per Account No. 10 . . Prefere^nce Stock ( ,^ ^^ ^^^^^^ .^ ^^^^^ ^^ ^^^^^.^^ , £ Pq' 1 with rate of dividend 1 Ordinary .Stock (being at the rate of per cent.) ■ ■£ Balance to ne.xt Half-year £ 57° AUDITING. [No. 12.] Abstracts. (U"0 — c X rt oj Maintenance of Way, Works, &c. Salaries, Office Expenses and General Superin- tendence Maintenance and Re- newal of Permanent Way Wages Materials Repairs of Roads, Bridges, Signals, and Works . . Repairs of Stations and Buildings Special Expenditure (if any) Miles Maintained : Double . . Single Total Total A" s d £ s d Locomotive Power. Salaries, Office Expenses and General Superin- tendence Running Expenses : Wages connected with the working of Loco- motive Engines Coal and Coke . . Water Oil, Tallow, and other Stores . . Repairs AND Renewals: Wages Materials Special Expenditure £ s d £ s d ! D. (U •V p-,^ v.. TS n K X Repairs and Renewals OF CARRIA..i:s-ANn Wagons Carriages : Salaries, Office Ex- penses and General Superintendence . . Wages Materials Wagons : Salaries, Office Ex- penses and General Superintendence . . Wages . . Materials Total .. £ s d £ sd Trafiic Expenses. Salaries and Wages, &c. Fuel, Lighting, Water, and General Stores Clothing, Printing, Stationery, and Tickets Horses, Harness, Vans, Pro- vender, &c. Wagon Covers, Ropes, &c. Joint Station Expenses Miscellaneous Expenses Special Expenditure (if any) . . £ s d General Charges. Directors . . Auditors and Public Account- ants (if any) Salaries of Secretary, General Manager, Accountant, and Clerks Office Expenses do. do. Advertising Fire Insurance . . Electric Telegraph Expenses Railway Clearing House Ex- penses Special Expenditure (if any) . . THE REGULATION OF RAILWAYS ACT 1 868. 571 [No. 13.] Dr. General Balance Sheet. Cr. To Capital Account, Balance at credit thereof, as per Ac- count No. 4 . . „ Net Revenue Account, Balance at credit thereof, as per Account No. 10 „ Unpaid Dividends and Interest „ Guaranteed Dividend? and Interest payable or accru- ing and provided for „ Temporary Loans „ Lloyd's Bond and other obliga- tions not included in Loan Capital Statement, No. 3 . . „ Balance Due to Bankers „ Debts Due to other Companies „ Amount Due to Clearing House „ Sundry Outstanding Accounts „ Fire Insurance Fund on Stat ons, Works, and Build- ings „ Insurance Fund on Steam- boats ,/ Special Items i s d By Cash at Bankers — Current Account „ Cash on Deposit at Interest . . „ Cash Invested in Consols and Government Securities „ Cash Invested in Shares of other Railway Companies not charged as Capital Expenditure . „ General Stores — Stock of Materials on hand ., Traffic Accounts Due to the Company „ Accounts Due by other Com- panies . „ Do. Clearing House . . „ Do. Post Office „ Sundry Outstanding Accounts „ Suspense Accounts (if any) . . To be enumerated. „ Special Items £ sd [No. 14] Mileage Statpzment. Half-year ended Lines Owned by Com- pany Lines Partly Owned Lines Leased or Rented Total .. Lines Worked . . Foreign Lines Worked 0\er . . Total .. Miles Authorised Miles Con- structed Miles Con- structed or to be Con- structed Miles Worked by Engines [No. 15.] Half-year ended St.atement 01-" Train Mileage. Passenger Trains Goods and Mineral Trains Total (Signed) Chairman or Deputy-Chairvicvi of Company. Secretary or Accountant of Company. 572 AUDITING. rKRTIFICATK RKSl'ECTING THE PkR.MANENT ^^'AV, &:C. I hereb}' certify that the whole of the Company's Permanent ^^ ay, Stations, Buildings, Canals, and other Works have during the past half-vear been maintained in good working condition and repair. ]3ate iS . Engineer . CeRTIKUATE RESI'ECTIXG THE ROLLING StOCK. I hereby certify that the whole of the company's Plant, Engines, Tenders, Carriages, Wagons, Machinery, and Tools, also the Marine Engines of the Steam Vessels, have during the past half-year been maintained in good working order and repair. Date i8 . f Chief Engineer or [ Locomotive Superintendent. At"1)1TOr's Cert I Fir ate. [As prescribed hy Act 30 and 31 Victoria, cap. 12^, sec. 30.) THE REGULATION OF RAILWAYS ACT, 1889. 52 a//d 59 L/V/. c. 57. Capital and 'Rc7^ S 43 ^Z. *- < Ph "a eu "E a 3 u cfl aa n eu J3 -^ ■" u c u si < a m iijosa -0 5U 2 eu >. P„ X -0 cfl -c Examined by me in c of March i88 , am 0^ 5 H tn Q H So>- in to 5 eD "" ^ j= -a V43 t-rt Z u s z > xpenditur or that D District] , ui z < tn a. u en a. ey-j ■a ' .J < u and E: Board f in that s • 2 ■ en PS z • « ■ .0 . '3 cr H s .Q . a; c . (U - •0 • u ■ s '• BS .•0 . 1- in 1. i) Ui 3 1 nS ■3 ■5 (d 0. * S o ft U .0 00 00 Securities in which Fund is invested, and Rate of Interest Payable on theia 4 punj ui mng |B)ox ^ pasBq SI punj qoiij.w UO JS3J3JUI Ijo ajEH 1 JJCdB )3S .((IBnUUB junoiuy ^ _2 z^ a OJ 7) "^ f;.i zc ."3 <^ 7} 586 AUDITING. 8 S. s I O O u < < o c? o 13 IS o PQ J2 !3C c o H O 5 H en ^ Q z Tl (U E (rt n 00 1 00 V M > o * ^ cS ' ^ *" " u c ■« •c >" c punj lit uing (Ejox pssBq SI punj qoii(M uo issaajui JO ajEH JIBcIe J9S A]]EnUUE junoiuv a o CQ o o iJ J3 ■^t. SUIMO [[IJS JEtJlOUlJcI JO junouiy 2'^ isaaajui IBdpUUfJ en ^ «j H Z u S P3 U > O O < u o J3 O CO B rt O (J c H z u s u H < asi.wjaqjo JO XjinuuE Aq jaqisqM ';uam -XEda^ JO apoj/V p,T3lIE.\pV K[iEuiSuo jiinouiv I THE MUNICIPAL CORPORATIONS ACT 1882. 587 THE MUNICIPAL CORPORATIONS ACT, 1882. ^5 and 46 Vict. c. 50. The Treasurer. iS. — (i) The council shall from time to time appoint a fit person, not a member of the council, to be the treasurer of the borough. (2) The treasurer shall hold office during the pleasure of the council. (3) A vacancy in the office shall be filled within twenty-one days after its occurrence. (4) The offices of town clerk and treasurer shall not be held by the same person. Other Borough Officers. 19. — The council shall from time to time appoint such other officers as have been usually appointed in the borough, or as the council think necessary, and ma}' at any time discontinue the appointment of any officer appearing to them not necessary to be reappointed. Security by, and Remuneration of. Officers. 20. — The council shall require every officer appointed b}' them to give such security as they think proper for the due execution of his office, and shall allow him such remuneration as they think reasonable. AccountaMlity of Officers. 21. — (i) Every officer appointed by the council shall at such times during the continuance of his office, or within three months after his ceasing to hold it, and in such manner as the council direct, deliver to the council, or as they direct, a true account in writing of all matters committed to his charge, and of his receipts and payments, with vouchers, and a list of persons from whom money is due for purposes of this Act in connection with his office, showing the amount due from each. (2) Every such officer shall pay all money due from him to the treasurer as the council direct. (3) If an)' such officer — {a) Refuses or wilfully neglects to deliver any account or list which he ought to deliver, or any voucher relating thereto, or to make any payment which he ought to make ; or 588 AUDITING. (l>) After three da^-s" notice in writing, signed by the town clerk or by three members of the council, given or left at his usual or last known place of abode, refu^-es or wilfully neglects to deliver to the council, or as they direct, any book or document which he ought so to deliver, or to give satisfaction respecting it to the council, or as they direct ; a Court of summary jurisdiction having jurisdiction where the officer is or resides may, by summary order, require him to make such delivery or payment, or to give such satisfaction. (4) But nothing in this section shall affect an)' remedy by action against an}- such officer or his surety, except that the officer shall not be both sued by action and proceeded against summarily for the same cause. Accounts axd Audit. T/!e Borotigh Auditors. 25. — (i) There shall be three Borough Auditors, two elected by the burgesses, called Elective Auditors, and one appointed by the ma3'or, called Mayor's Auditor. (2) An Elective Auditor must be qualified to be a councillor, but may not be a member of the council, or the town clerk, or the treasurer. (3) The Mayor's Auditor must be a member of the council. (4) The term of office of each Auditor shall be one year. (5) The appointment of the ^Mayor's Auditor shall be made on the ordinary day of election of the Elective Auditors. (6) On a casual vacancy in his office an appointment to fill it shall be made within ten days after the occurrence of the vacancy. Audit and Publication of Treasurer" s Accounts. 27. — (i) The treasurer shall, within one month from the date to which he is required to make up his accounts in each half-year, submit them, with the necessary vouchers and papers to the Borough Auditors, and they shall audit them. (2) After the audit of the accounts fur the second half of each financial year the treasurer shall print a full abstract of his accounts for that year. TilE MUNICIPAL CORPORATIONS ACT 1882. 589 T^etv.rns to Local Gover?imfiil Board. 28. — (i) The town clerk shall make a return to the Local Govern- ment Board of the receipts and ex[jenditure of the municipal corporation for each financial year. (2) The return shall be made for the financial j-ear ending on the twentv-fitth of March, or on such other dav as the I>ocal Ciovernment ]3oard, on the application of the council, from time to time prescribe. (3) The return shall be in such form and contain such particulars as the Local Government IJoard from time to time direct. (4) The return shall be sent to the Local Government Board within one month after ihe completion of the audit for the second half of each financial 3'ear. (5) If the town clerk fails to make any return required under this section he shall for each offence be liable to a fine not exceeding twenty pounds, to be recovered by action on behalf of the Crown in the High Court. (()) The Local Go\ernment Board shall in each year prepare an abstract of the returns made in pursuance of this section, under general heads, and it shall be laid before both Houses of Parliament. Corporate Laxh. Power to Purchase Laud for Toivn Hall, &^c. 105. — A municipal corporation may contract for the purchase of and hold an}' land not exceeding in the whole five acres, either in or out of the borough, and thereon, or on an}' land belonging to or held in trust for the corporation, may build a town hall, council house, justices' room, with or without a police station and cells, or lock-ups, or a quarter and petty sessions house, or an assize court-house, with or without Judges' lodgings, or a polling station, or any other building necessary or proper for any purpose of the borough. Power to Borrow luitii Approval of Treasury. io6. — The council may, with the approval of the Treasury, borrow at interest on the securit}- of any corporate land, or of any land pro- posed to be purchased by the council under this Act, or of the borough fund or borough rate, or of all or any of those securities, such sums as the council from time to time think requisite for the purchase of land, or for the building of any building which the council are by this Act authorised to build. 59° AUDITING. Restrictions on Alienation of Corporate Land without Affroval of Treasury. io8. — (i) The council shall not, unless authorised by Act of Parlia- ment, sell, mortgage, or alienate any corporate land without the approval of the Treasury. (2) The council shall not, unless authorised by Act of Parliament, lease or agree to lease any corporate land without the approval of the Treasury, except as follows : — {a) They may make a lease or agreement for a lease for a term not exceeding thirty-one j'^ears from the date of the lease or agree ment, so that there be reserved and made payable during the whole of the term such clear yearly rent as to the council appears reasonable, without any fine. {b) They may make a lease or agreement for a lease for a term not exceeding seventy-five years from the date of the lease or agree- ment and either at a reserved rent or on a fine, or both, as the council think fit, — (i) Of tenements or hereditaments, the greater part of the yearly value of which, at the date of the lease or agree- ment, consists of any building or buildings ; or (ii) Of land proper for the erection of any houses or other build- ings thereon, with or without gardens, yards, curtilages, or other appurtenances to be used therewith ; or (iii) Where the lessee or intended lessee agrees to erect a building or buildings thereon of greater yearly value than the land, — of land proper for gardens, yards, curtilages, or other appurtenances to be used with any other house or other building erected or to be erected on any such land, belonging either to the corporaton, or to any other pro- prietor, or proper for any other purpose calculated to afford convenience or accommodation to the occupiers of any such house or building. Working Men's Dwellings. Sites for Working Merits Dwellings, III. — (1) If a municipal corporation determines to convert any corporate land into sites for working men's dwellings, and obtains the approval of the Treasury for so doing, the corporation may, for that THE MUNICIPAL CORPORATIONS ACT 1 88 2. 591 purpose, make grants or leases for terms of nine hundred and ninety- nine years, or any shorter term, of any parts of the corporate land. (2) The corporation may make on the land any roads, drains, walls, fences, or other works requisite for converting the same into building land at an expense not exceeding such sum as the Treasury approve. (3) The corporation may insert in any grant or lease of any part of the land (in this section referred to as the site) provisions binding the grantee or lessee to build thereon as in the grant or lease prescribed, and to maintain and repair the building, and prohibiting the division of the site or building, and any addition to or alteration of the character of the building, without the consent of the corporation, and for the re-vesting of the site in the corporation, or its entry thereon, on breach of any provision in the grant or lease. (4) Every such provision shall be valid in law to all intents, and binding on the parties. (5) All costs and expenses incurred or authorised by a corporation in carrying into execution or otherwise in pursuance of this section, shall be paid out of the borough fund and borough rate, or by money borrowed by the corporation under this Part. (6) In this section the term " working men's dwellings " means build- ings suitable for the habitation of persons employed in manual labour and their families ; but the use of part of a building for purposes of retail trade or other purposes approved by the council shall not prevent the building from being deemed a dwelling. Rep.ayment of Loans. Power for Treasury to Impose Conditions as to Refayment 0} Money Borroived. 112. — (i) ^^'here the Treasury approve a mortgage or charge under this Part they may, as a condition of their approval, require that the money borrowed on the security of the mortgage or charge be repaid, with all interest thereon, in thirty years, or any less period, and either by instalments or by means of a sinking fund, or both. (2) In that case the sums required for providing for the repayment of the principal and interest of the money borrowed shall be by virtue of this Act a charge on all or any of the following securities, namely, the land comprised in the mortgage (without prejudice to the security thereby created), or any other corporate land, or the borough fund or the borough or other rates legalh' applicable to payment of the money V 59- AUDITING. borrowed or of the expenses which the money is borrowed to defray, as the Treasury direct. LOAXS FOR MfXrCII'AL BflLDINGS. Power to Borro'iO jor Buildings. I20. — I'he council of a borough may borrow monry from the Public Works Loan Commissioners for the purpose of building, enlarging, repairing, improving, and fitting up any building which they are by this Act authorised to build, and may levy a rate or an increase of the 4 borough rate for the purpose of paying the principal and interest of the loan, and may mortgage the rate or borough rate to the Commissioners in accordance with the Public Works Loans Act, 1875, or any amend- ment thereof, in such manner and form as the Commissioners direct. BoROiGH Find. Vavinenls to Borough Fitnd. 13c). — Ihe rents and profits of all corporate land, and the interest, dividends, and annual proceeds of all money, dues, chattels, and valuable securities belonging or payable to a municipal corporation, or to any member or officer thereof in his corporate capacity, and every fine or penalty for any offence against this Act (except where and as far as the application thereof is otherwise provided for) shall go to the borough fund. Afflication of Borough Fund. 140. — (i) The borough fund shall be applicable to and charged with the several pa3'ments specified in the Fifth Schedule. (2) The payments specified in Part L of that schedule may be made without order of the council : those specified in Part IL may not be made without such order. (3) Xo other payment shall be made out of the borough fund, e.xcept — {a) Cnder the authorit}' of an Act of Parliament ; or [b] By order of the Council ; or {c) By order of the Court of Quarter Sessions for the borough ; or {d) By order of a justice in pursuance of this Act ; or {e) In cases in which the Court of Quarter Sessions for a county, or a justice acting in and for a county in the discharge of his judicial duty, might make an order for the payment of money on the treasurer of the count}'. THE MUNICIPAL CORPORATIONS ACT 1882. 593 {4) Saving, nevertheless, in relation to the application of the borough fund as authorised by this section, or otherwise by this Act, all rights, interests, and demands of all persons in or on the real or personal estate of the municipal corporation, by virtue of an}^ legal proceeding, or of any mortgage, or otherwise. Payments to and by Treasurer. 142. — (i) All payments to and out of the borough fund shall be made to and by the treasurer. (2) All payments to the treasurer shall go to the borough fund. Af-plication of Surflus of Borough Fund. 143. — (i) If the borough fund is more than sufficient for the purposes to which it is applicable under this Act, or otherwise by law, the surplus thereof shall be applied under the direction of the council for the public benefit of the inhabitants and improvements of the borough. (2) If the surplus arises from the rents and profits of the property of the municipal corporation, and not from a borough rate, and the borough is a sanitary district under the Public Health Act, 1875, then the municipal corporation, as the sanitary authority for the borough, may apply the surplus in payment of any expenses incurred by them as such sanitary authority before or after the commencement of this Act, in improving the borough, or any part thereof, by drainage, enlargement of streets, or otherwise, under the Public Health Act, 1875, or any Act thereby repealed. Borough Rate. Power for Council to 7nake Borough Rate and assess Contribution thereto. 144. — (i) If the borough fund is insufficient for the purposes to which it is applicable under this Act or otherwise by law, the council shall ficm time to time estimate, as correctly as may be, what amount, in addition to the borough fund, will be sufficient for those purposes. (2) In order to raise that amount, the council shall, subject to the provisions of this Act, from time to time order a rate, called a borough rate, to be made in the borough. (3) A borough rate may be made retrospectively, in order to raise money for the payment of charges and expenses incurred, or which have come in course of payment, at any time within six months before the making of the rate. Q Q 594 AUDITING. (4) The council shall assess the contributions to the borough rate on the several parishes and parts of parishes in the borough in proportion to the total annual value of the hereditaments in each parish or part which are rateable to the poor, or in respect of which a contribution is made to the poor rate. (5) That value shall be estimated according to the valuation list (if any) in force for the time being, and if there is none, according to the last poor rate. (6) But if for any reason the council think that the valuation list or poor rate is not a fair criterion of value they may cause an independent valuation to be made. (7) For the purpose of assessing a borough rate, or for the purpose of an independent valuation, the council from time to time may cause any of the books of assessment of any rates or taxes. Parliamentary or parochial, on any property, and the valuation b}^ which the assess- ment is made, in the hands of the overseers, to be brought before them, and may take copies thereof or extracts therefrom, or may direct any person to take copies of or extracts from such books being in his hands, without having the same brought before the council, or may call before them any overseer to give evidence respecting the same ; and may cause copies of the total amount assessed in each parish in respect of any tax | payable to the Crown, and the total amount of the valuation of the property on which that assessment was made in any past year, to be j made out by the clerk to the commissioners of each district. (8) The overseers and such persons as the}'' select, by warrant of the council, signed by the mayor and sealed with a corporate seal, may enter on, view, and examine any land chargeable to the borough rate, in order to ascertain the annual value at which it ought to be charged ; but no such entry fhall in any case be made unless fourteen days' previous notice in writing, signed by the mayor and sealed with the corporate seal, of the intention to make the entr}', has been given to the overseers and to the persons on whose land the entry is to be made. (9) If on any occasion the overseers of a parish think that their parish is aggrieved by a borough rate, on account of the proportions assessed as the contributions of the respective parishes being unequal, or on account of some parish being without sufficient cause omitted, or on account of any other just cause of complaint, they may appeal to the recorder at the next quarter sessions for the borough, or if there is none, to the next quarter sessions for the county wherein the borough THE MUNICIPAL CORPORATIONS ACT 1 88 2. 595 is situate, or whereto it is adjacent, against such part of the rate only as affects their parish. (10) The recorder or quarter sessions shall hear and finally determine the appeal, and either confirm such parts of the rate as are appealed against, or correct any inequalities, disproportions or omissions proved to exist therein, as to him or them appears just. (11) The expenses of the appeal shall be paid by such parishes or persons and in such proportions as the recorder or Court having cognisance of the appeal directs. (12) If any person having custody of any book for which the council call under this section fails to produce it to the council, or to permit any copy thereof or extract therefrom to be made or taken, or to give such evidence as the council require, he shall, on summary conviction, be liable to a fine not exceeding ten pounds. (13) If any clerk to the commissioners of a district fails to make any copy, which he is required to make under this section, within a reason- able time after his receipt of the order to make it, he shall, on summary con-\'iction, be liable to a fine not exceeding twenty pounds. THE LOCAL GOVERNMENT ACT, 1888. 5/ and j2 Vict. c. 41. 68. — (i) All receipts of the County Council, whether for general or special county purposes, shall be carried to the county fund, and all payments for general or special county purposes shall be made in the first instance out of that fund. (2) In this Act the expression "general county purposes" means all purposes declared by this or any other Act to be general county pur- poses, and all purposes for contributions to which the County Council are for the time being authorised b}' law to assess the whole area of their administrative county: and the expression "general county account " means the account of the county fund to which the contri- butions so raised are carried, and any costs incurred for a general county purpose shall be general expenses, and all costs incurred by the County Council in the execution of their duties which are not by law made special expenses shall be general expenses. (3) In this Act the expression " special county purposes " means any purposes from contribution to which any portion of the county is for Q Q 2 59^ AUDITING. the time being exempt, and also includes anv purposes where the expenditure involved is by law restricted to a hundred, division, or other limited part of the countVj and the expression " special county account " means any account of the county fund to which contributions for special count}' purposes are carried, and any costs incurred for a special county purpose shall be special expenses. (4) If the moneys standing to the general county account of the county fund are insufficient to meet the expenditure for general count}' purposes, county contributions may be levied to meet the deficiency on the whole administrative county, and shall be assessed on all the parishes in the county. (5) If the moneys standing to any special county account of the county fund are insufficient to meet the expenditure for the special county pur- poses chargeable to that account, county contributions may be levied to meet the deficiency on any parishes in the county liable to be assessed to county contributions for those purposes. (7) The County Council shall keep such accounts as will prevent the whole administrative county from being charged with expenditure properly payable by a portion only of the county, and will prevent any sums raised in a portion only of the county being applied in reduction of expenditure properly payable by the whole or a larger part of the county and will prevent any sums by law specifically applicable to any particular purpose from being applied to any other purpose. (9) County contributions may be made retrospective in order to raise mcney for the payment of costs incurred or having become payable at any time within six months before the demand of the contributions. 71. — (i) The accounts of the receipts and expenditure of County Councils shall be made up to the end of each local financial year as defined by this Act, and be in the form for the time being prescribed by the Local Government Board. (3) The accounts of a County Council and of the county treasurer and officers of such council shall be audited by the District Auditors appointed by the Local Government Board in like manner as accounts of an urban authority and their officers under Sections 247 and 250 of the Public HeaUh Act, 1875. 74. — (i) At the beginning of every local financial year, every County Council shall cause to be submitted to them an estimate of the receipts I I t THE LOCAL GOVERNMENT ACT 1894. 597 and expenses of such council during that financial year, whether on account of property, contributions, rates, loans, or otherwise. (2) The council shall estimate the amount which will require to be raised in the first six months and in the second six months of the said finaocial }'ear b}^ means of contributions. (3) If at the expiration of the first six months of such financial year it appears to the council that the amount of contribution, or rate esti- mated at the commencement of the year, will be larger than is neces- sary, or will be insufficient, the council may revise the estimate and alter accordingly the amount of the contribution or rate. 80. — (i) All payments to and out of the county fund shall be made to and by the county treasurer, and all payments out of the fund shall, unless made in pursuance of the specific requirement of an Act of Parliament, or of an order of a competent Court, be made in pursuance of an order of the council, signed by three members of the finance committee, present at the meeting of the council, and countersigned by the clerk of the council, and the same order may include several payments. {3) Every County Council shall from time to time appoint a finance committee for regulating and controlling the finance of their county ; and the order for the payment of a sum out of the county fund, whether on account of capital 01 income, shall not be made by a County Council, except in pursuance of a resolution of the council passed on the recommendation of the finance committee, and (subject to the provisions of this Act respecting the standing joint committee) any costs, debt, or liability exceeding fifty pounds shall not be incurred except upon a resolution of the council, passed on an estimate sub- mitted by the finance committee. THE LOCAL GOVERNMENT ACT, 1894. §6 and ^y Vict. c. 37. 58. — (i) The accounts of the receipts and paj-ments of parish and district councils, and of parish meetings for parishes not having parish councils, and their committees and officers, shall be made up yearly to the thirty-first day of March, or in the case of accounts which are required to be audited half-3'earl3', then half-yearly to the thirtieth day of September and the thirty-first day of March in each yt&r, and in such form as the Local Government Board prescribe. 59^ AUDITING. (2) The said accounts shall, except in the case of accounts audited by the Auditors of a borough (but inclusive of the accounts of a joint committee appointed by a borough council with another council not being a borough council), be audited by a District Auditor, and the enactments relating to audit by District Auditors of accounts of urban sanitarj' authorities and their officers, and to all matters incid^tal thereto and consequential thereon, shall apply accordingly, except that in the case of the accounts of rural district councils, their committees and officers, the audit shall be half-yearly instead of yearly. (3) The Local Government Board may, with respect to any audit to v?hich this section applies, make rules modifying the enactments as to publication of notice of the audit, and of the abstract of accounts and the report of the Auditor. (4) E\ery parochial elector of a rural parish may, at all reasonable times, without pa3'ment, inspect and take copies of and extracts from all books, accounts, and documents belonging to or under the control of the parish council of the parish or parish meeting. (5) Every parochial elector of a parish in a rural district may at all reasonable times, without payment, inspect and take copies of and extracts from all books, accounts, and docunients belonging to or under the control of the district council of the district. 89. — The Acts specified in the second schedule to this Act are hereby repealed as from the appointed day to the extent in the third column of that schedule mentioned, and so much of an}- Act, whether public, general, or local and personal, as is inconsistent with this Act is also hereby repealed. THE LOCAL GOVERNMENT ACT 1894. 599 FORM A. [Form of Statement to be used when none of the Adoptive Acts are in force, and the Parish Council have no Financial transactions with regard to Charities.] Parish Council for the Parish of In the Rural District of In the Administrative County of FINANCIAL STATEMENT. THE DISTRICT AUDITORS ACT, 1879 (42 Vict. c. 6.) AND THE LOCAL GOVERNMENT ACT, 1894 (56 & 57 Vict. c. 73). Statement of Receipts and Payments of the Parish Council for the above-named Parish for the period ended the 31st day of March 1895. Name of Clerk {or other person^ keeping the Accounts) j Office Address _ Post Town^ 6oo AUDITING. FORM RECEIPTS AND PAYMENTS by the During the period ended the 31st day of March 1895, such Parish Local Government Act, 1894, and having RECEIPTS. PART Receipts other than from Loans From Overseers on Precept, viz. : — From Poor Rates . . . . . . . . [Mem. — The sums asked for in the Precepts issued during the period by the Parish Council were equal to pence in the £ on the rateable value of the parish, which was £ .] Sums received from other Local Authorities : — Name of Authority On what Account £ sd £ s d (The sums entered against the following headings are not to include receipts from other Local Authorities. See head- ing above.) Rents of Allotments Other Rents Dividends and Interest . . Sales of Buildings and Lands Sales of Securities Fees, Fines, and Penalties Other Receipts {specifying them) : — £ s d £ s Total Receipts THE LOCAL GOVERNMENT ACT 1 894. 601 A. — conti lined. Parish Council for the Parish of Council administering none of the Adoptive Acts (See sec. 7 of the no accounts in regard to Charities.) 1. PAYMENTS. Payments other than out of Loans. Payments to Joint Committees or other Local Authorities {naming them) : — Name of Authority On what Account £sA (The sums entered against the following headings are not to include payments to other Local Authorities. See head- ings above.) Salaries of Officers * Establishment Charges . . . . . . . . Cost of Meetings, Polls, and Elections . . t Allotments . . . . . . . . . . + Footpaths and Rights of Way t Commons, Open Spaces, Public Walks and Recreation Grounds, and Works connected therewith + Fire Engine and Fire Escape . . t Maintenance and Repair of Parish Property not specified under other headings Other Payments (specifyins them) : — £ sd :f S d Total Payments £ Balance in hand at the end of the year . . £ Total Payments and Balance . . . . £ £ s d * The cost of Stationery, Printing, Books, Postage, and Office Rent, Rates, and Taxes should be entered against this heading. I Where Salaries are paid exclusively to Officials employed on these or any other of the works and purposes enumerated on this page, the amounts of such salaries should be included in the items entered under the heading relating to the work or purpose, and not under the heading " Salaries of Officers." 6o: AUDITING. Form A — continued. PART II. SUMMARY of the Receipts and Payments shown in the foregoing Statement. Receipts : — Payments : — Deduct : — Payments under Precept to other Local Authorities, if any, viz. ; — Net Expenditure on which Stamp Duty is payable £ s d £ s d ( Clerk to Parish Council, or \ Chairman of Parish Council. This^ -day of- -1895. Total Payments as shown above . . Less Amount disallowed at Audit / s d Amount allowed at Audit I HEREBY certify that I have compared the entries in this Financial Statement with the vouchers and other Documents relating thereto, and that the regulations with respect to such Statement have beeu duly complied with. I HEREBY FURTHER CERTIFY that I have ascertained by Audit the correctness of such Statement, and that the amount e.xpended by the Parish Council during the period ended the 31st day of March 1895, as included in such Statement, and allowed by me at the Audit, is* _ District Auditor. The amount to be inserted in words at length. THE intestates" ESTATES ACT 1890. 603 EXECUTORSHIP ACCOUNTS. THE APPORTIONMENT ACT, 1870. 33 f^'id 34 l'^'^'^- c. 35. 2. — From and after the passing of this Act, all rents, annuities, divi- dends, and other periodical payments in the nature of income (whether reserved or made payable under an instrument in writing or other- wise) shall, like interest on money lent, be considered as accruing from day to day, and shall be apportionable in respect of time accordingly. 5. — In the construction of this Act : — The word " rents " includes rent service, rent charge, and rent seek, and all tithes and all periodical payments or renderings in lieu of or in the nature of rent or tithe. The word '' annuities " includes salaries and pensions. The word " dividends " includes (besides dividends strictly so called) all payments made by the name of dividend, bonus, or otherwise out of the revenue of trading or other public companies, divisible between all or any of the members of such respective companies, whether such payments shall be usually made or declared at any fixed times or otherwise ; and all such divisible revenue shall, for the purposes of this Act, be deemed to have accrued by equal daily increment during and within the period for or in respect of which the payment of the same revenue shall be declared or expressed to be made; but the said word "dividend" does not include payments in the nature of a return or reimbursement of capital. 6. — Nothing in this Act contained shall render apportionable any annual sums made payable in policies of assurance of any description. 7. — The provisions of this Act shall not extend to anjr case in which it is or shall be expressly stipulated that no apportionment shall take place. THE INTESTATES' ESTATES ACT, 1890. 5 J and 5^ Vict. c. 2p. I. — The real and personal estates of every man who shall die intestate after the first day of September one thousand eight hundred and ninety, leaving a widow but no issue shall, in all cases where the net value of such real and personal estates shall not exceed five hundred pounds, belong to his widow absolutely and exclusivelv. 6o4 AUDITING. 2. — Where the net value of the real and personal estates in the pre- ceding section mentioned shall exceed the sum of five hundrd pounds, the widow of such intestate shall be entitled to five hundred pounds part thereof absolutely and exclusively, and shall have a charge upon the whole of such real and personal estates for such five hundred pounds, with interest thereon from the date of the death of the intestate at four per cent, per annum until payment. 3. — As between the real and personal representatives of such intestate such charge shall be borne and paid in proportion to the values of the real and personal estates respectivel}'. 4. — The provision for the widow intended to be made by this Act shall be in addition and without prejudice to her interest and share in the residue of the real and personal estates of such intestate remaining after payment of the sum of five hundred pounds, in the same way as if such residue had been the whole of such intestate's real and personal estates and this Act had not been passed. 5. — The net value of such real estates as aforesaid shall for the pur- pose of this Act be estimated in the case of a fee simple upon the basis of twenty years' purchase of the annual value by the year at the date of the death of the intestate as determined by law for the purposes of property tax, less the gross amount of any mortgage or other principal sum charged thereon, and less the value of any annuity or other periodical payment chargeable thereon to be valued according to the tables and rules in the schedule annexed to the statute sixteenth and seventeenth Victoria, chapter fifty-one, and in the case of an estate for a life or lives according to the said tables and rules. 6. — The net value of such personal estate as aforesaid shall be ascertained by deducting from the gross value thereof all debts, funeral and testamentary expenses of the intestate, and all other lawful liabilities and charges to which the said personal estate shall be subject. S. — This Act shall not extend to Scotland. The rules by which the estate of intestates is distributed are given below. PERSONAL ESTATE. If the intestate die leaving — Wife and Child, or Children. — One-third to wife, rest to child or children, to be divided equally amongst them, and if children are dead, THE intestates' ESTATES ACT 189O. 605 then to the representatives (that is, their lineal descendants) ; except such child or children, not heirs-at-law, who had estate by settlement of intestate, or were advanced by him, in which case exceptional rules apply. Wife t only, no blood relation. — Half to wife, other half to the Crown. Wife, t no near relations. — Half to wife, rest to those next-of-kin equal in degree to intestate. No Wife or Child. — All to next-of-kin. No Wife, but Child, Children, or representatives of them, whether such Child or Children by one or more Wives. — All to him, her, or them. Children by two Wives. — Equally to all. // 710 Child, Children or representatives of thein. — All to next-of-kin equal in degree to intestate. Child and Grandchild by deceased Child. — Half to child, half to grandchild who takes by representation. Husband. — Whole to him. Father, and Brother or Sister. — Whole to father. Mother, and Brother or Sister. — Whole to them divided equally. Wife,\ Mother, Brother, Sisters, and Nieces. — Half to wife, residue to mother, brothers, sisters, and nieces. Wife,f and Father. — Half to wife and half to father. Wife,f Mother, Nephews and Nieces. — Half to wife, one-fourth to mother, and other fourth to nephews and nieces. Wife,-\ Brothers, or Sisters, and Mother. — Half to wife, half to brothers or sisters and mother. Mother, but no Wife, Child, Father, Brother, Sister, Nephew, or Niece. — The whole to mother. Wifef and Mother. — Half to wife and half to mother. Brother or Sister of whole blood, and Brother or Sister of half blood. — Equally to both. Posthutnous Brother or Sister and Mother, — Equally to both. Posthumous Brother or Sister and Brother or Sister born in lifetime of Father. — Equally to both. Father^s Father and Mother''s Mother. — Equally to both. s \ In all these cases the wife is entitled to a clear £500 in addition to her share, such sum being a charge upon the realty and the personalty rateably. If the estate does not exceed £500 in value she takes the whole. (Intestacy Act, 1890.) 6o6 AUDITING. Uncle^s or AunV s Children and Brother^ s or Sisters Grandchildren. — Equally to all. Grandmother, Uncle, or Aunt. — All to grandmother. T-wo Aunts, Ne-phew, and Niece. — Equally to all. Uncle and deceased Uncle^s Child. — All to uncle. Uricle by M. other'' s side and deceased Uncle's or Aunt's Child. — All to uncle. Ne-pheiv by Brother, and Nepheiu by Half-sister. — Equally fer ca-pita.* Nephew bv deceased Brother and Nephezvs and Nieces by deceased Sister. — Each in equal shares per capita, and not per stirpes. Brother and Grandfather. — Whole to brother. Brother's Grandson, and Brother's or Sister's Daughter. — All to daughter. Brother and iivo Aunts. — All to brother. Brother and Wife. — Half to brother, half to wife. Mother and Brother. — Equally. Wife,-\' Mother and Children of a deceased Brother {or Sister). — Half to wife, a fourth to mother, and a fourth per stirpes to deceased brother's or sister's children. Wife,\ Brother or Sister, and Children of a deceased Brother or Sister. — Half to wife, one-fourth to brother or sister fer capita, one- fourth to deceased brother's or sister's children per stirpes. Brother or Sister and Children of a deceased Brother or Sister. — Half to brother or sister per capita, half to children of deceased brother or sister per stirpes. Grandfather, no nearer relation. — All to grandfather. REAL ESTATE. No illegitimate child is capable of inheriting real estate. Custom of Gavelkind (descent to all sons alike) still exists in Kent, and custom of Borough English (descent to j'oungest son) in divers ancient boroughs. Custom of London for Administration ot Personal Estate abolished in 1856. Leaseholds are Personal Estate. The Dower (viz., widow's thirds) of widows married since 1S33 is in the majority of cases barred by the purchase deed. Generally put in b}- solicitors to avoid the inconveni- ence of dower attaching. In each instance it is supposed that there are no nearer relations than those named. * That is, taking individually and not by representation. Thus, if A. die, leaving three brothers, or sisters, they each take an equal part of his effects, in his or her own right. But if either of them die, leaving children, his children would take his share per stirpes, that is, through him, and not in their own right. By the Act ig and 20 Vict, all special local customs relating to intestates' estates are abolished. THE intestates' ESTATES ACT 1890. 607 {The fersons named unthin brackets are those who are entitled to administer.) If intestate die leaving — Wife only, no blood relations. — Real propert}' would descend one- third to wife for life, rest to Crown ; copyholds to lord of manor. [Wife.-] Wife and Child, or Children, and Children of a deceased Child. — One-third to wife for life in an}' case. [Wife.] Rest to eldest son or his issue^ such son and his issue, whether male or female, being preferred to any other son and his issue, and all sons and their issue, whether male or female, being preferred to all daughters and their issue, whether male or female. If no son, rest to daughters equally. [Either daughter, or not exceeding three.] If daughters and grandchildren (sons and daughters of deceased daughter) rest to daughters, and eldest son of deceased daughter. Wife and Father. — One-third to wife for life ; rest to father, if deceased purchased same or had it left him by will. \\Vife.] Wife and Mother. — One-third to wife for life ; rest to mother, there being no heirs on father's side. [Wife.] Wife, Brother, or Sister, and Children of a deceased Brother or Sister. — One-third to wife for life in any case, rest to eldest brother or his issue. [See above, " Rest to eldest son or his issue," under head "Wife and child," Szc). [Wife.] Wife, Sister, and Children of a deceased Brother or Sister. — One- third to wife for life in any case ; rest equally between sister and nephew (eldest). \\\'ife.] Sisters and nieces only, children of deceased sister, rest equally between nieces. [Wife.] Wife, Mother, Ne-pheivs, and Nieces. — One-third to wife for life ; rest to nephew (eldest), or nieces, if brother left no son. [Wife.] Wife, Mother, Brothers, Sisters and Nieces {Children of deceased Brothers and Sisters). — One-third to wife for life in any case; rest to eldest brother. [Wife.] Rest to nieces equally, if children of elder brother deceased. No Wife or Child or issue of a deceased Child. — Lineal ancestor paternal, males of whole blood first. [Father or grandfather, as case may be.] Children by one or more Wives, and the issue of deceased Children. — All to eldest son or his issue. {See above, " Rest to eldest son or his 6o8 AUDITING. issue," under head " Wife and child," &c.) {Either so7is or daughters, not exceeding three.'] Daughters equally. Husband and Child or Children. — Husband for life; afterwards to only child or to eldest son or issue of a deceased eldest son. \Husband.'] If all daughters, to them equally. Mother, but no Wife, Child, or issue of a Child, Father, Brother, Sister, Nefhew, or Niece, or more distant descendants of Father. — All to mother in default of lineal ancestors on the father's side, or issues of such ancestors. ]_Mother.'\ Mother, and Brothers and Sisters. — All to eldest brother. \]SIother.'\ Mother and Sisters. — All to sisters. [/I/c//z£r.] Father, and Brother and Sisters. — All to father. {Father.l Child and Grandchild by deceased Child. — See above, " Rest to eldest son or his issue," under head " Wife and child," &c. [Child.'\ Brother and Grandfather. — All to brother. \_Broiher.'] Brother'' s Grandson, and Brother or Sister's Daughter. — All to great nephew, if eldest brother's grandson. [Niece.] All to brother's daughter, if child of eldest brother. Brother and two Aunts. — Brother, all. [Brother.] Brother atid H^'//^.— One-third to wife for life ; rest to brother. [Wife.'] Grandfather (no nearer). — All to grandfather. [Grandfather.] Father's Father and Mother's Mother. — All to father's father. [Either or both.] Grandmother and Uncle, or Aunt on Father's side {no nearer). — All to uncle or aunt. [Grandmother.] Uncle, and deceased's Uncle' s Child. — Uncle, unless deceased uncle was elder brother, when his child takes all. [Uncle.] Uncle by Mother' s side, and deceased Uncle or Aunt's Child. — Child of deceased uncle on father's side, or (if none) child of deceased aunt on father's side. [Deceased uncle or aunt's children not exceeding three.] Two Aunts, Nephew, and Niece, Children of deceased Brother. — Nephew. [Two Aunts.] Uncle or Aunt's Children, and Brother's Grandchildreji through a Son. — Eldest brother's grandson, or if granddaughters between them equall}'. [Either, not exceeding three.] Nefhew by Brother, and Nefhew by Half-sister. — Nephew by brother. [Either, or both.] JUDICIAL TRUSTEES ACT 1896. 609 Nephew by deceased Brother, and Nefhews and Nieces by deceased Sister. — All to eldest nephew, son of deceased brother. [To either of the nefhews a>id nieces, not exceeding three.] JUDICIAL TRUSTEES ACT, 1896. 3p and 60 Vict. c. 35. 1. — (i) Where application is made to the Court by or on behalf of the person creating or intending to create a trust, or by or on behalf of a "trustee or beneficiary, the Court ma}^, in its discretion, appoint a person (in this Act called a judicial trustee) to be a trustee of that trust, either joiiitty with an}' other person or as sole trustee, and, if sufficient cause is shown, in place of all oi: any existing trustees. (2) The administration of the property of a deceased person, whether a testator or intestate, shall be a trust, and the executor or adminis- trator a trustee within the meaning of this Act. (3) Any fit and proper person nominated for the purpose in the appli- cation may be appointed a judicial trustee, and in the absence of such nomination, or if the Court is not satisfied of the fitness of a person so nominated, an official of the Court may be appointed, and in any case a judicial trustee shall be subject to the control and supervision of the Court as an ofiicer thereof. (4) The Court may, either on request or without request, give to a judicial trustee any general or special directions in regard to the trust or the administration thereof. (5) There may be paid to a judicial trustee out of the trust property such remuneration, not exceeding the prescribed limits, as the Court may assign in each case, subject to any rules under this Act respecting the application of such remuneration where the judicial trustee is an official of the Court, and the remuneration so assigned to any judicial trustee shall, save as the Court may for special reasons otherwise order, cover all his work and personal outlay. (6) Once in ever}' year the accounts of every trust of which a judicial trustee has been appointed shall be audited, and a report thereon made to the Court by the prescribed persons, and, in any case where the Court shall so direct, an inquiry into the administration by a judicial trustee of any trust, or into any dealing or transaction of a judicial tiustee, shall be made in the prescribed manner. R R 6lO AUDITING. 2. — The jurisdiction of the Court under this Act may be exercised by the High Court, and as respects trusts within its jurisdiction by a Palatine Court, and (subject to the prescribed definition of the juris- diction) by any Count}^ Court Judge to whom such jurisdiction may be assigned under this Act. THE- PUBLIC TRUSTEE ACT, 1906. 6 Edw. 7 c. jj. Esiablishment of Public Trustee. I. — (i) There shall be established the office of public trustee. (2) The public trustee shall be a corporation sole under that name, with perpetual succession and an official seal, and may sue and be sued under the above name like any other corporation sole, but any instru- ments sealed by him shall not, by reason of his using a seal, be rendered liable to a higher stamp duty than if he were an individual. Powers and Duties of Public Trustee. 2. — (i) Subject to and in accordance with the provisions of this Act and rules made thereunder, the public trustee ma}', if he thinks fit — (a) act in the administration of estates of small value ; {b) act as custodian trustee ; (c) act as an ordinary trustee ; {d) be appomted to be a judicial trustee ; (e) be appointed to be the administrator of the property of a convict under the Forfeiture Act, 1870. (2) Subject to the provisions of this Act, and to the rules made there- under, the public trustee may act either alone or jointly with any person or body of persons in any capacity to which he may be appointed in pursuance of this Act, and shall have all the same powers, duties, and liabilities, and be entitled to the same rights and immunities and be subject to the control and orders of the Court, as a private trustee acting in the same capacity. (3) The public trustee may decline, either absolutely or except on the prescribed conditions, to accept any trust, but he shall not decline to accept any trust on the ground only of the small \alue of the trust property. THE PUBLIC TRUSTEE ACT 1906. 61I (4) The public triu-^tee shall not accept any trust which involves the management or carrying on of any business, except in the cases in which he may be authorised to do so by rules made under this Act, nor any trust under a deed of arrangement for the benefit of creditors, nor the administration of any estate known or beUeved bj- him to be insolvent. (5) The public trustee shall not accept any trust exclusivel}' for religious or charitable purposes, and nothing in this Act contained, or in the rules to be made under the powers in this Act contained, shall abridge or affect the powers or duties of the official trustee of charity lends or official trustees of charitable funds. As Ciistodiiin Trttstce. 4. — (i) Subject to rules under this Act the public trustee may, if he consents to act as such, and whether or not the number of trustees has been reduced below the original number, be appointed to be custodian trustee of an}' trust — [a] b}- order of the Court made on the application of any person on whose application the Court may order the appointment of a new trustee ; or [b) by the testator, settlor, or other creator of any trust ; or ((f) by the person having power to appoint new trustees. (2) Where the public trustee is appointed to be custodian trustee of any trust — {a) The trust property shall be transferred to the custodian trustee as if he were sole trustee, and for that purpose vesting orders may, where necessary, be made under the Trustee Act, 1893 : [b] The management of the trust property and the exercise of any power or discretion exercisable by the trustees under the trust shall remain vested in the trustees other than the custodiin trustee (which trustees are hereinafter referred to as the managing trustees) : (c) As between the custodian trustee and the managing trustees, and subject and without prejudice to the rights of any other persons, the custodian trustee shall have the custody of all securities and documents of title relating to the trust property, but the managing trustees shall have free access thereto and be entitled to take copies thereof or extracts therefrom : R R 2 6l2 AUDITING. {d) The custodian trustee shall concur in and perform all acts neces- sary to enable the managing trustees to exercise their power of management or any other power or discretion vested in them (including the power to pay money or securities into Court), unless the matter in which he is requested to concur is a breach of trust, or involves a personal liability upon him in respect of calls or otherwise, but, unless he so concurs, the custodian trustee shall not be liable for any act or default on the part of the managing trustees or any of them : {e) All sums payable to or out of the income or capital of the trust property shall be paid to or by the custodian trustee : Provided that the custodian trustee may allow the dividends and other income derived from the trust property to be paid to the managing trustees or to such person as they direct, or into such bank to the credit of such person as they may direct, and in such case shall be exonerated from seeing to the application thereof and shall not be answerable for any loss or misapplication thereof : (/) The power of appointing new trustees, when exercisable by the trustees, shall be exercisable by the managing trustees alone, but the custodian trustee shall have the same power of applying to the Court for the appointment of a new trustee as any other trustee : {g) In determining the number of trustees for the purposes of the Trustee Act, 1893, the custodian trustee shall not be reckoned as a trustee : (h) The custodian trustee, if he acts in good faith, shall not be liable for accepting as correct and acting upon the faith of any written statement by the managing trustees as to any birth, death, marriage, or other matter of pedigree or relationship, or other matter of fact, upon which the title to the trust property or any part thereof may depend, nor for acting upon any legal advice obtained by the managing trustees independently of the custodian trustee : (?) The Court may, on the application of either the custodian trustee, or any of the managing trustees, or of any beneficiary, and on proof to their satisfaction that it is the general wish of the beneficiaries, or that on other grounds it is expedient, to terminate the custodian trusteeship, make an order for that purpose, and the Court may thereupon make such vesting orders and give such directions as under the circumstances may seem to the Court to be necessary or expedient. I THE PUBLIC TRUSTEE ACT 1906. 613 (3) The provisions of this section shall apply in like manner as to the public trustee to any banking or insurance company or other body corporate entitled by rules made under this Act to act as custodian trustee, with power for such company or body corporate to charge and retain or pay out of the trust property fees not exceeding the fees chargeable by the public trustee as custodian trustee. As an Ordinary Trustee, 5. — (i) The public trustee may b}- that name, or any other sufficient description, be appointed to be trustee of any will or settlement or other instrument creating a trust or to perform any trust or duty belonging to a class which he is authorised by the rules made under this Act to accept, and may be so appointed whether the will or settle- ment or instrument creating the trust or duty was made or came into operation before or after the passing of this Act, and either as an original or as a new trustee, or as an additional trustee, in the same cases, and in the same manner, and by the same persons or Court, as if he were a private trustee, with this addition, that, though the trustees originally appointed were two or more, the public trustee may be appointed sole trustee. (2) Where the public trustee has been appointed a trustee of any trust, a co-trustee may retire from the trust under and in accordance with Section 11 of the Trustee Act, 1893, notwithstanding that there are not more than two trustees, and without such consents as are required by that section. (3) The public trustee shall not be so appointed either as a new or additional trustee where the will, settlement, or other instrument creating the trust or duty contains a direction to the contrar}-, unless the Court otherwise order. (4) Notice of any proposed appointment of the public trustee either as a new or additional trustee shall where practicable be given in the prescribed manner to all persons beneficially interested who are resi- dent in the United Kingdom and whose addresses are known to the persons proposing the make the appointment, or, if such beneficiaries are infants, to their guardians, and if an}- person to whom such notice has been given within twenty-one days from the receipt of the notice applies to the Court, the Court may, if having regard to the interests of all the beneficiaries it considers it expedient to do so, make an order prohibiting the appointment being made, provided that a failure to give any such notice shall not invalidate any appointment made under this section. 6l4 AUDITING. 6. — (i) If in pursuance of any rule under this Act, the public trustee is authorised to accept by that name probates of wills or letters of administration, the Court having jurisdiction to grant probate of a will or letters of administration may grant such probate or letters to the public trustee by that name, and for that purpose the Court shall consider the public trustee as in law entitled equally with any other person or class of persons to obtain the grant of letters of administra- tion, save that the consent or citation of the public trustee shall not be required for the grant of letters of administration to any other person, and that, as between the public trustee, the widower, widow, or next- of-kin of the deceased, the widower, widow, or next-of-kin shall be preferred, unless for good cause shown to the contrary. (2) Any executor who has obtained probate or any administrator who has obtained letters of administration, and notwithstanding he has acted in the administration of the deceased's estate, may, with the sanction of the Court, and after such notice to the persons beneficially interested as the Court may direct, transfer such estate to the public trustee for administration either solely or jointly with the continuing executors or administrator, if any. And the order of the Court sanc- tioning such transfer shall, subject to the provisions of this Act, give to the public trustee all the powers of such executor and administrator, and such executor and administrator shall not be in an}^ way liable in respect of any act or default in reference to such estate subsequent to the date of such order, other than the act or default of himself or of persons other than himself for whose conduct he is in law responsible. Liability : Officers and Offices: Fees. 7. — (i) The Consolidated Fund of the United Kingdom shall be liable to make good all sums required to discharge any liability which the public trustee, if he were a private trustee, would be personally liable to discharge, except where the liability is one to which neither the public trustee nor any of his officers has in any way contributed, and which neither he nor any of his officers could by the exercise of reason- able diligence have averted, and in that case the public trustee shall not, nor shall the Consolidated Fund, be subject to any liability. (2) All sums payable in pursuance of this section out of the Con- ilidated Fund shall be c' growing produce thereof. solidated Fund shall be charged on and issued out of that fund or the THE PUBLIC TRUSTEE ACT 1906. 615 Supplemental Provisions as to I'ltblic Trustee. 10. — (i) A person aggrieved by any act or omission or decision of the public trustee in relation to any trust may apply to the Court; and the Court may make such order in the matter as the Court thinks just. (2) Subject to rules of Court, an application under this section to the High Court shall be made to a Judge of the Chancery Division of the High Court in Chambers. II. — (1) The public trustee shall not, n( r shall any of his ofhcers, act under this Act for reward, except as provided by this Act. (2) The public trustee may, subject to the rules made under this Act, emplo}' for the purposes of an}' trust such solicitors, bankers, accountants, and brokers, or other persons as he may consider neces- sary, and in determining the persons to be so emplo3'ed in relation to any trust the public trustee shall have regard to t'ne interests of the trust, but subject to this shall, whenever practicable, take into con- sideration the wishes of the creator of the trust and of the other trustees (if an}'), and of the beneficiaries, either expressed or as implied by the practice of the creator of the trust, or in the previous management of the trust. (3) On behalf of the public trustee such person as may be prescribed may take any oath, make any declaration, verify any account, give personal attendance at any Court or place, and do any act or thing whatsoever which the public trustee is required or authorised to take, make, verify, give, or do : Provided that nothing in this Act or in any rule made under this Act shall confer upon any person not otherwise entitled thereto any right to appear, or act, or be heard in or before any Court or tribunal, on behalf or instead of the public trustee, or to do any act whatsoever on behalf or on the instructions of the public trustee, which could otherwise only be lawfully done by a barri-ter or a duly certified solicitor. (4) ^^'here any bond or security would be required from a pri\ate person upon the grant to him of administration, or upon his appoint- meni to act in any capacity, the public trustee, if administration is granted to him or if he is appointed to act in such capacity as afore- said, shall not be required to give such bond or security, but shall be subject to the same liabilities and duties as if he had given such bond or security. (5) The entry of the public trustee by that name in the books of a company shall not constitute notice of a trust, and a company shall 6 1 6 AUDITING. not be entitled to object to enter the name of the public trustee on its books by reason only that the public trustee is a corporation, and, in dealings with property, the fact that the person or one of the persons dealt with is the public trustee shall not of itself constitute notice of a trust. 12. — -The provisions of this Act with respect to the High Court shall, in their application to cases within the jurisdiction of a palatine Court, include that Court, and the public trustee shall provide an address within the county palatine where service upon him of an}' proceedings under this Act in such palatine Court may be effected ; the rules of Court relating to the exercise of the jurisdiction of a palatine Court under this Act shall be made b}' the authority having power to make general rules and orders of that Court. Investigation and Audit of Trust Accounts. 13. — (i) Subject to rules under this Act and unless the Court other- wise orders, the condition and accounts of any trust shall, on an appli- cation being made and notice thereof given in the prescribed manner by any trustee or beneficiary, be investigated and audited b}' such solicitor or public accountant as may be agreed on b}- the applicant and the trustees or, in default of agreement, by the public trustee or some person appointed by him : Provided that (except with the leave of the Court) such an investiga- tion or audit shall not be required within twelve months after any such previous investigation or audit, and that a trustee or beneficiary shall not be appointed under this section to make an investigation or audit. (2) The person making the investigation or audit (hereinafter called the auditor) shall have a right of access to the books, accounts, and vouchers of the trustees, and to any securities and documents of title held by them on account of the trust, and may require from them such information and explanation as may be necessary for the performance of his duties, and upon the completion of the investigation and audit shall forward to the applicant and to every trustee a copy of the accounts, together with a report thereotj, and a certificate signed by him to the effect that the accounts exhibit a true view of the state of the affairs of the trust and that he has had the securities of the trust fund investments produced to and verified by him or (as the case may be) that such accounts are deficient in such respects as may be specified in such certificate. (3) Ever}' beneficiary under the trust shall, subject to rules under this Act, be entitled at all reasonable times to inspect and take copies THE PUBLIC TRUSTEE ACT I906. 617 of the accounts, report, and certificate, and, at his own expense, to be furnished with copies thereof or extracts therefrom. (4) The Auditor may be removed by order of the Court, and, if any Auditor is removed, or resigns, or dies, or becomes bankrupt or incapable of acting before the investigation and audit is completed, a new Auditor may be appointed in his place in like manner as the original Auditor. (5) The remuneration of the Auditor and the other expenses of the investigation and audit shall be such as may be prescribed by rules under this Act, and shall, unless the public trustee otherwise directs, be borne by the estate; and, in the event of the public trustee so direct- ing, he may order that such expenses be borne by the applicant or by the trustees personally or partly by them and partly by the applicant. (6) If any person having the custod}' of any documents to which the Auditor has a right of access under this section fails or refuses to allow him to have access thereto or in anywise obstructs the investi- gation or audit, the Auditor may apply to the Court, and thereupon the Court shall make such order as it thinks just. (7) Subject to rules of Court, applications under or for the purposes of this section to the High Court shall be made to a Judge of the Chancery Division in Chambers. (8) If any person in any statement of accounts, report, or certificate required for the purposes of this section wilfully makes a state. n'jnt false in any material particular, he shall be liable on conviction on indictment to imprisonment for a term not exceeding two years, and on summary conviction to imprisonment for a term not exceeding six months, with or without hard labour, and in either case to a fine in lieu oi or in addition to such imprisonment. 6lS AUDITING. HOSPITAL ACCOUNTS. M ro V -4-» .S o^ a! D O = o C (U ■ nl ■J'^ H •^s Q Z — as W ^M x; :p-,-- t1 „ - (U o z Mea Fish Butt .t; " O fc 5 « o^^ CB u- c J3 Hh < s ■ — ' Cr'^ ■ • -C S - '-^ S ''^ Jii rt (-» tU *j rt ^-j~ u u aj J2 =aj K ^ M O S < 2> p M CI m -t mio I>.DD c^ O ^ «r ^'■< en :-, ^ 1- ^ .:, a -- M w ro -1- m u- O .^ l- ■^ CO'*. • tJD 'J) — ^~ « .J2 -■5 o • o CUCL, *A niei ert) en . Kntertain be separa sted Prop Dividend 3 « II to Oj'cn CO en -> I- •a 3 0.55 11 . CO CD 3 o « 2 TS •-. < o y. X X -" I-H y. HOSPITAL ACCOUNTS. 619 -3 '-s^ in V! ^ C/5 ^ 1 u c 2 ■a ^ . . . . •2 M CI ro -^ o U o C --3 .Si ::£ •^;h "t:; Qi ;« a. s. <; g -;;] O 1-, 2 ™0 o'C ^ -^ S cH cti 3 5 acoo^J<;Lr) M en -i- 100 txcd • as i c- o ; ^ -^^ 3 O o h o h < a z . . u < en 3 1- •^0>i. - - o<^ 55 'Ji v (1) x: •A u 01 6C4) c f. C) J3 u c 0) ^_ m 01 s H a 620 AUDITING. Hj '-n 1- II o \ j:: C u ° Dt<-,rT, a c (/) o i ^ 53 _ o , u o H ra S "2i JS ^ « ^ a « SL 5 0) c Cl rt ■^ '—• -^' — nj o pa Q Z a t/} U) (U c , c o.g- , .r, c 3 a- £ -C Q, ri r!^ u ~ =3 oc(£^as^ j,.^ a; I/: ^77: c W --. u , •-. u H Ji fe — ^ fc- fri 3 a; o *j njl— I ro 0.0 c .c I- c U-. (J K Z o D O _>> 2c.5 rt - 1- &.g 3 CU S 3 t/5 c c ^ WW to ^ H U Fd cn o z ■a; < o ft, 13 ^ Sj <-rt a A c 0) 10 .o 8 St z O h ^^ o al ^ I' < o I E ID O , "^c I i:W p. 2 a o " K u ;'--^~ CO «■:;•£. c z 1 0) J2 u r B. X 1 z h Pl So c _ o .Tl o o -i a o 'J. ja 1 , H .— 1 T) \i O o •< (T. 0) t; >> T3 G C bt o ■s o c et ; bu format follow (/I 0) C D rt !^ J3 — J3 Ui CD t/5 ^*' rt t+- (U p. r1 J3 o lane cess cas T! Xi nl

- - &. j= 2 tJiJ::; -r O "US 'o°c w J:w^ n't; S .tl c to £ c ■S« ° o c 3 ■" CO o OJ co_ CD .-t; 2 ^, - .a en (-« „, O C »J § «■" 13 C CO CO J3 >i en " CO OJ - ° s t- 3 OhW ja.2 O o p O cj O o ^=^ ;^ C eu •■^ o c .2 "E < ■a c S c ." u 1- CJ OJ ce; .'.[/} n o , iZ ^ -2 a> ^^i:^^ o y, S ^ '■■ O t/: 0-*" *-• ni _ M Co u. 0) -' dJ 5 1^ S O cTj >., O — — - *j '■^ -, <- ^ .— 3 ™ iJ o Swl H..5 :£ .S o o ;w;r __ - Ui qj ^ .— en C03 ?^ u 02; -3 5 C 3 0.0 .3 CD I- -3 jj « O S CU!"' S g ^ J'o a C-S -- .- „> - 2-aS«i5-iirtoS,'S5f ^-f-eTJ (i; ce3 2- E -. en en.:S;r^^ l>j^x, a '3. - > J CO c^ X c g (u E.!2c y. ca w s c c i^ CO X o C7\ P. u O CO -C 3 CO .. o •o 03 ,w .-o-t: o "^ S c " o o OJ M 3 c CO to I- O,— O r^ — -P §1° ! C" 3 TS 1-3 fO 2u« .5.2 ^ ^ S rt.2 II W O.- THE BUILDING SOCIETIES ACT 1874. 621 BUILDING SOCIETY ACCOUNTS. THE BUILDING SOCIETIES ACT, 1874. 27 and j8 Vict. c. 42. 13. — Any number of persons may establish a society under this Act, either terminating or permanent, for the purpose of raising by the subscriptions of the members a stock or fund for making advance^: to members out of the funds of the society, upon security of freehold, copyhold, or leasehold estate, by way of mortgage ; and any society ander this Act shall, so far as it is necessary for the said purpose, have power to hold land with the right of foreclosure, and may from time to time raise funds by the issue of shares of one or more denominations, cither paid up in full, or to be paid by periodical or other subscriptiors, and with or without accumulating interest, and may repay such fund, when no longer required for the purposes of the society : Provided always, that any land to which any such society may become absolutely entitled by foreclosure, or by surrender, or other extinguishment of the right of redemption, shall as soon afterwards as may be conveniently practicable be sold or converted into money. 14. — The liability of any member of any society under this Act in respect of any share upon which no advance has been made shall be limited to the amount actually paid or in arrear on such share, and in respect of any share upon which an advance has been made shall be limited to the amount payable thereon under any mortgage or other security, or under the rules of the society. Power to Borrow. 15. — With respect to the borrowing of money by societies under this Act, the following provisions shall have effect : — (i) Any society under this Act may receive deposits or loans, at interest within the limits in this section provided, from the members or other persons, or from corporate bodies, joint-stock companies or from any terminating building society to be applied to the purposes of the society : (2) In a permanent society the total amount so received on deposit or loan and not repaid by the society shall not at any time exceed two-thirds of the amount for the time being secured to the society by mortgages from its members : (3) In a terminating society the total amount so received and not repaid may either be a sum not exceeding such two-thirds as 622 AUDITING. aforesaid, or a sum not exceeding twelve months' subscriptions on the shares for the time being in force : (4) An}' deposits with or loans to a societ_v under this Act made before the commencement of this Act in accordance with its certified rules are hereby declared to be valid and binding on the societ}^, but no further deposits or loans shall be received by such society, except within the limits provided by this section : (5) Every Deposit Book or acknowledgment or security of any kind given for a deposit or loan by a societ}- shall have printed or written therein or thereon the whole of the fourteenth and fifteenth sections of the present Act. ir7?(7/' Relies must Provide. 16. — The rules of every societ}' hereafter established under this Act shall set forth : — (6) The manner of appointing, remunerating, and removing the board of directors or committee of management, Auditors, and other oflicers : (8) Provision for an annual or more frequent audit of the accounts, and inspection b\' the Auditors of the mortgages and other securities belonging to the societ}'. Investment of Siirflits Funds. 25. — Any society under this Act may from time to time, as the rules permit, invest any portion of the funds of the society not immediately required for its purposes, upon real or leasehold securities, or in the public funds, or in or upon any Parliamentary stock or securities, or in or upon an}- stock or securities, payment of the interest on which is guaranteed by authority of Parliament, or in the case of terminating societies, with other societies under this Act ; and for the purpose of investments in the public funds or upon security of copyhold or customary estate, the society, or the board of directors and committee of management thereof, may from time to time appoint and remove trustees. Decease of Member or Depositor Intestate. 29. — If any member of or depositor with a society under this Act, having in the funds thereof a sum of money not exceeding fifty pounds, shall die intestate, then the amount due may be paid to the person who shall appear to the directors or committee of management to the society to be entitled under the Statute of Distributions to receive the same, without taking out letters of administration, upon the society THE BUILDING SOCIETIES ACT 1 894. 623 receiving satisfactory evidence of death and a statutory declaration that the membir or depositor died intestate, and that the person so claiming is entitled as aforesaid : Provided that, whenever the society after the decease of any member or depositor has paid an}^ such sum of money to the person who at the time appeared to be entitled to the effects of the deceased, under the belief that he had died intestate, the payment shall be valid and effectual with respect to any demand from any other person as next-of-kin or as the lawful representative of such deceased member or depositor against the funds of the society, but, nevertheless, such next-of-kin or representative shall have his lawful remedy for the amount of such payment as aforesaid against the person who has received the same. Annual Accounts. 40. — The secretary or other officer of every society under this Act shall, once in every year at least, prepare an account of all the receipts and expenditure of the society since the preceding statement, and a general statement of its funds and effects, liabilities and assets, show- ing the amounts due to the holders of the various classes of shares respectively, to depositors and creditors for loans, and also the balance due or outstanding on their mortgage securities (not including prospec- tive interest), and the amount invested in the funds or other securities ; and every such account and statement shall be attested by the Auditors, to whom the mortgage deeds and other securities belong- ing to the society shall be produced, and such account and statement shall be countersigned by the secretarj- or other officer ; and every member, depositor, and creditor for loans shall be entitled to receive fiom the society a copy of such account and statement, and a copy thereof shall be sent to the Registrar within fourteen days after the annual or other general meeting at which it is presented, and another copy thereof shall be suspended in a conspicuous place in every office of the society under this Act. THE BUILDING SOCIETIES ACT, 1894. ^j and 5cS' Vict. c. 4~. Matters to be set forth in Rules. I. — The rules of every society under the Building Societies Acts established or substituting a new set of rules for its existing rules after the passing of this .Vet shall be set forth — [a] The manner in which the stock or funds of the society is or are to be raised ; 624 AUDITING. (b) The terms upon which unadvanced subscription shares are to be issued ; the manner in which the contributions are to be paid to the society, and withdrawn by the members, with tables, where appHcable in the opinion of the Registrar, showing the amount due by the society for principal and interest separately ; (c) The terms upon which paid-up shares, if any, are to be issued and withdrawn, with tables, where applicable in the opinion of the Registrar, showing the amount due by the society for prin- cipal and interest separately ; (d) Whether preferential shares are to be issued, and, if so, within what limits ; (e) The manner in which advances are to be made and repaid ; the deductions, if any, for premiums, and the conditions upon which a borrower can redeem the amount due from him before the expiration of the period for which the advance was made, with tables, where applicable in the opinion of the Registrar, showing the amount due from the borrower after each stipulated payment ; (/) The manner in which losses are to be ascertained and provided for; (g) The manner in which membership is to cease ; and (k) Whether the society intends to borrow money, and, if so, within what limits not exceeding those prescribed by the Building Societies Acts. Annual Accouttts. 2. — (i) Every annual account and statement under Section 40 of the Building Societies Act, 1874, shall be made up to the end of the official year of the society to which it relates, and shall be in such form and shall contain such particulars as the Chief Registrar of Friendly Societies may from time to time, with the approval of a Secretary of State, direct, either generally or with respect to any society or class of societies. The form of annual account and statement prescribed for general use by the Chief Registrar under this section, and every altera- tion of that form, shall, as soon as practicable, be laid before each House of Parliament, and shall not come into operation until the expiration of forty days from the date at which it is so laid. Provided that every such account and statement shall set forth — {a) With respect to mortgages to the society upon each of which the present debt does not exceed five thousand pounds (not being mortgages where the repayments are upwards of twelve months in arrear, or where the property has for upwards of twelve THE BUILDING SOCIETIES ACT 1894. 625 months been in possession of the society), the number of all such mortgages, and the aggregate amount owing thereon at the date of the account or statement, such information being given separately in respect of each of the four following classes : — (i) Where the debt does not exceed five hundred pounds : (ii) Where the debt exceeds five hundred pounds and does not exceed one thousand pounds : (iii) Where the debt exceeds one thousand pounds and does not exceed three thousand pounds : (iv) Where the debt exceds three thousand pounds and does not exceed five thousand pounds ; and {b) With respect to any other mortgage to the society, the particulars shown by the appropriate tabular form in the First Schedule to this Act. (2) Every Auditor, in attesting any such annual account or statement, shall either certify that it is correct, duly vouched, and in accordance with law, or specially report to the society in what respects he finds it incorrect, unvouched, or not in accordance with law, and shall also certify that he has at that audit actually inspected the mortgage deeds and other securities belonging to the society, and shall state the number of properties with respect to which deeds have been produced to and actually inspected by him. (3) A cop}- of every such annual account and statement shall be sent to the Registrar within fourteen days after the annual or other general meeting at which it is presented, or within three months after the expiration of the official year of the society, whichever period expires first. (4) For the purposes of this section the expression "official year" shall mean, in the case of any society established after the passing of this Act, the year ending with the thirty-first day of December ; and in the case of any society established before the passing of this Act, the year ending with the time up to which its annual account and state- ment is made at the passing of this Act. (5) This section shall not come into operation until the expiration of twelve months after the passing of this Act. S S 626 AUDITING. Auditors. 3. — Notwithstanding anything in the rules of any society under the Building Societies Acts, one at least of the Auditors of the society shall be a person who publicly carries on the business of an accountant. Dissolution. II. — If a society under the Building Societies Acts is dissolved in manner prescribed by its rules or in pursuance of the consent of three- fourths of the members, the liquidators, trustees, or other persons having the conduct of the dissolution shall, within twenty-eight days from the termination of the dissolution, send to the Registrar an account and Balance Sheet signed and certified by them as correct, and showing the assets and liabilities of the society at the commencement of the dissolution, and the mode in which those assets and liabilities have been applied and discharged ; and in default of so doing shall each be liable to a fine not exceeding five pounds for every day during which the default continues. Prohibition of Advances. 13. — (i) A society under the Building Societies Acts shall not advance money on the security of any freehold, copyhold, or leasehold estate which is subject to a prior mortgage, unless the prior mortgage is in favour of the society making the advance. (2) Provided that this section shall not apply to any society in Scot- land or Ireland which is at the passing of this Act authorised by the rules to make advances upon second mortgage. (3) If any advance is made in contravention of this section, the directors of the society who authorised the advance shall be jointly and severally liable for any loss on the advance occasioned to the society. Borrowing Powers, d^v. 14. — In calculating the amount for the time being secured to a society under the Building Societies Acts by mortgages from its members for the purpose of ascertaining the limits of its power to receive deposits or loans at interest, the amount secured on properties the payments in respect of which were upwards of twelve months in arrear at the date of the society's last preceding annual account and statement, and the amount secured on properties of which the society had been twelve months in possession at the date of such account and statement, shall be disregarded. Provided that this section shall not affect the validity of any deposit or loan which was within the limit provided by law at the time when it was received, and so far as regards any amount secured either on . THE BUILDING SOCIETIES ACT 1894. 627 properties the payments in respect of which are upwards of twelve months in arrear at the passing of this Act, or on properties in the possession of the society at the passing of this Act, shall not come into operation until the expiration of three years from the passing of this Act. 15. — (i) A society under the Building Societies Acts shall not use any name or title other than its registered name, and shall not accept any deposit except on the terms that not less than one month's notice may be required by the managers of the society before repayment or withdrawal. (2) if a society contravenes this section, the society, and also every director or member of the committee of management who is a party to the contravention, shall be liable, on summary conviction, to a fine not exceeding ten pounds, and, in the case of a continuing offence, to an additional fine not exceeding ten pounds for every week during which the offence continues. 16. — (i) A society under the Building Societies Acts may — ■ (a) Deposit in a saving bank any money belonging to the society, provided that the whole amount, exclusive of Government stock, credited by the bank to the society does not exceed three hundred pounds at any one time ; and {b) Invest in Government stock through a savings bank any money of the society, provided that the whole amount of Government stock credited bj' the bank to the society does not exceed five hundred pounds stock at any one time. (5) In this section the expressions " savings bank " and " Govern- ment stock " have respectively the same meaning as in the Savings Bank Act, 1893. Power of Tnvestinent. 17. — The powers of investment under Section 25 of the Building Societies Act, 1874, shall include power to invest in or upon any securit}^ in which trustees are for the time being authorised by law to invest. Penalties. 21. — If any society under the Building Societies Acts neglects or refuses^ — [a) To give any notice, send any return or document, or do or allow to be done anything which the society is by those Acts required to give, send, do or allow to be done ; or [b] To do any act or furnish any information required for the pur- poses of those Acts by the Registrar or by an inspector ; the society and also every officer thereof bound by the rules thereof S S 2 628 AUDITING. to fulfil the dut\' whereof a breach has been so committed, and if there is no such officer, then every member of the committee of management or board of directors of the society, unless it appears that he was ignorant of or attempted to prevent the breach, shall for each offence be liable, on summary conviction^ to a fine not exceeding twenty pounds, and, in the case of a continuing offence, to an additional fine not exceeding five pounds for every week during which the offence continues. Illicit Bonuses, cS-c. 23. — Xo director, secretary, surveyor, solicitor, or other officer of a society under the Building Societies Acts shall, in addition to the remuneration prescribed or authorised by the rules of the society,, receive from any other person any gift, bonus, commission, or benefit,, for or in connection with any loan made b}^ the society, and any person paying or accepting any such gift, bonus, commission, or benefit, shall be liable, on summary conviction, to a fine not exceeding fifty pounds, and, in default of payment, to be imprisoned with or without hard labour for any time not exceeding six months, and the person accepting any such gift, bonus, commission, or benefit shall, as and when directed by the C'ourt by whom he is convicted, pay over to the society the amount or value of such gift, bonus, commission, or benefit, and in default of such pajmient shall be liable to be imprisoned with or without hard labour for any time not exceeding six months. Application of 1X74 Act. 25. — (i) Section 40 of the Building Societies XcV, 1874, shall apply to every society which has been certified under the Building Societies Act, 1836 (that is to say, the Act of the session held in the sixth and seventh years of King William the Fourth, chapter 32, intituled " An Act for the regulation of Benefit Building Societies "), and has not been incorporated under the Building Societies Act, 1874, and exists at the passing of this Act, and if any such society fails to comply with the requirements of that section, the society and its members and officers shall be subject to the like penalties as if the society were a society under the Building Societies Acts. (2) On the expiratitjn of two j'-ears from the passing of this Act, the said Building Societies Act, 1836, shall be repealed as to all societies certified thereunder after the year one thousand eight hundred and fifty- six. T' onns. 26. — The forms in the Third Schedule to this Act shall, after the commencement of this Act, be used under the Building Societies Acts. 1 THE BUILDING SOCIETIES ACT iSg^. 629 SCHEDULES. FIRST SCHEDULE. Part I. Particulars to be set forth in the case of a Mortgage where the repayments are not upwards of twelve months in arrear, and the property has not been upwards of twelve months in possession of the Society, and where the present Debt exceeds £5, 000. I 2 2o - 3 4 5 6 7 S 9 CJ MO — (J s 4) a) D a 3 ^ (4-1 V 2 ^-2 D ■j: < -5 2 ■^ — u "C — 1 en = s <£< c = b > 1-1 V .a / i^ iC £ £" Total . . Part II. Particulars to be set forth in the case of Property of which the Society has been upwards of twelve months in possession. I n 3 4 u 5 6 7 8 9 10 II 12 s z "0 > < 'o Q is.S 5 ., 7; .a ^ 'X nJ a, ^1 2 j-n 2 2 - c .0 ~ D > 2^ ■a'o n c >■ •J QJ n c/] cd 0, = m D in ■" ■- u 1-1 "is .5>< 5 1/1 c > u u > = ^ i £ £ £ £ £ Total.. i Part III. Particulars to be set forth in the case of a Mortgage where the repayments are upwards of twelve months in arrear and the Property has not been upwards of twelve months in possession of the Society. 630 AUDITING. SECOND SCHEDULE. Enactments Repealed. Session and Chapter Short Title Extent of Repeal 37 & 38 Vict. c. 42 40 tV 41 Vict. c. 63 The Building Societies Act, 1874 The Building Societies Act, 1877 Paragraphs 2 and 4 of section sixteen. In sec. 43 the words "in forwarding to the "Registrar any returns or information by "this Act required or"; the words "or " makes a return wilfully false in any " respect " ; the words " or who shall have "made such wilfully false return"; and the words " or false return." Sec. 6, and the schedule. Certificate of Auditors. We, the undersigned, , being a person who publicly carries on the business of an accountant at No. , Street, and residing at , the duly appointed Auditors of the above-mentioned Society, do hereby attest the foregoing accounts and statements, and certify that they are correct, duly vouched, and in accordance with law, and we certify that we have, and each of us has, at this audit actually inspected the Mortgage Deeds and other securities belonging to the Society, in respect of each of the Properties in mortgage to the Society referred to in the foregoing accounts and statements. Signed _ day of i8 Presented to the Annual General Meeting of the Society on the day of and adopted. Signed. Chairman. Countersigmd, Secretary THE BUILDING SOCIETIES ACT 1894. 63 1 Form of Annual Account and Statement to be made by a Society under the Building Societies Acts prescribed for general use by the Chief Registrar of Friendly Societies, with the approval of the Secretary of State. Statement of Accounts of the Building Society (incorporated i8 and having its registered chief office or place of meeting at in the County of ) for its th year, ending the day of 18 . The number of members of the Society is 632 AUDITING. BS c ^ 6 A J3 ^ >% 1 % p en (1) (li 0. « en V < ^ ? z <: u tn z i-i TD 'O z C/3 o H Q Z <: ►J H O o C/) HH THE BUILDING SOCIETIES ACT 1894. 633 H P O O o < a o H I— I Q w X w Q <; -< H 1-H o z 1—4 Q D O 2 W > >■§ ^*- „ o ^ _> v~ ° ■"J - c .a tn O 3 to 3 Q o - 3 ~ O ~ « > O'Z U - C-c o u 3 « c > 1/1 t, 3 C C S « ° ■■3 c C 3 3 3 O C c.S =;= ^ Q iS ^T3 (0 (« • s ■*^ ■ 2 o — rt *j;3 1- c/l ^ "C a) tj J3 ^ 5 *2^ o -C-3 < J? o • O o T3 01 Si Cud o -a w -a ■" u s-i. 5 «-3 "! 0.3 O 2i >- U Ui 31 •^i. '— *-■ ^ f- — o («J= c o & 3 i2 (rt ^ ■ 0) oj : C in „ ) o o o QJ — O tu o a Bo H ^- y^ « K CO ui M ■" >< 3 CO 0) i-< a NJ XI tn Cfl 'A c 0) ,0 (0 t; &, TI "u tn rt (J CJ i/l <1) _D ^ t/5 C o .a< C «-^ 3 0) — _a. o a. a 2 T3 3 ■" -^ 3 n! fi T. ^ > ir; ^ 0)^ c c rt < ffl CQ J3 o s ; 3 .2J-- ■•-• .Hi! h >" ■0 : a Q, . «, . 01 tfi ^3 u . 01 . ac ^c > ca ac in O'S MS a. CU 01 3 • a as -O 1/1 >-^ _ Be U) " C u 'C ILI 3 c '-tJ 5 "(5 -3 O o cfi V! N i* 3 flu ii — £ J3 O c -3 c 0) o '•a o o o en '5 c 53 3 ^ J- "" J3 S. :^ :-2 O 13 T! « '!J (U (U > r; X „ X --5 ^ i« o O rt 2 s c - a Q o payable lext 12 n ppyable xt 12 mo payable — 0) — C _*; .IS OJ fSi -^ \fi a\ ffi > O" Oj3 g - &.C ft" cx 3 O'S GhO o h ■a c 0} OS tic c ■5 ■ 3 ' ■4= O e^ = .^ ■a a c (/) ^2 Si o eu H II THE BUILDING SOCIETIES ACT 1894. 635 f-'^ ^°>. yme ar, a s of ety, le ^ ,n-^ • rt li-TS'S 3 ifty sward lown e rep in an up war he So Sched Prop en u , as s J= Ul ^ ,11 re t onth beet n of f th ^ c c^.2 C en lie whe 2 m not ssio [I. c Si ■5 "i^S- HJ-^ trt ^So-SSt: rtgag iety n pc H j3 > a .0 2t/;j= -"•5 S i/l c = 0.£ g 0) (U D •SE " n^ cto c c 01 c !/) « (11 J= M 1^ f/1 tfl m uu oa CQ < i) u •*-» -a c 0) ex X W •a c rt ID m C Vi v > v <1 J3 D c f= 0) 3 cd n f ) tC: •«-* rp )H m 5. — (i) Ever}- officer of a registered societv or branch having receipt or charge of money shall, at such times as bv the rules of the society or branch he should render account, or upon demand made, or notice in writing given or left at his last or usual place of residence, give in his account as may be required by the society or branch, or by the trustees or committee thereof, to be examined and allowed or disallowed by them, and shall, on the like demand or notice, pay over all sums of mone)^ and deliver all property in his hands or custody to such person as the societv or branch, or the committee or the trustees, appoint. (2) In case of any neglect or refusal to deliver the account, or to pay over the sums of money or to deliver the property in manner aforesaid, the trustees or authorised officers of the society or branch may sue upon the bond or security before mentioned, or may apply to the County Court or to a Court of sunmiary jurisdiction, and the order of either such Court shall be final and conclusive. Offences, Penalties, and Legal Proceedings. 88. — If any person wilfully makes, orders, or allows to be made any entry, erasure in, or omission from a Balance Sheet of a registered society or branch, or a return or document required to be sent, pro- FRIENDLY SOCIETIES ACT 1896. 645 duced, or deli\-er£d for the purposes of this Act, with intent to falsify the same, or to evade any of the provisions of this Act, he shall be liable to a fine not exceeding fiftv pounds. AffUcation of Act. lor. — (i) This Act sliall apply to societies and branches subsisting at the commencement of this Act, which, or the rules of which, have been registered, enrolled, or certified under any Act relating to friendly societies or cattle insurance societies, as if they had been registered under this Act, and the rules of those societies and branches shall, so far as the}' are not contrary to any express provision of this Act, continue in force until altered or rescinded. (2) \A'here the contingent annual paj-ments to which the members or the nominees of the members of friendh' societies or branches, estab- lished before the fifteenth .day of August one thousand eight hundred and fifty, may become entitled exceed the limit fixed by this Act, the rules of those societies and branches shall continue to be valid, an3fthing in this Act to the contrary notwithstanding. 102. — In the application of this Act to .Scotland : — • The expression " land "' shall include heritable subjects of whatever description ; The expressions " ("ourt of summary jurisdiction " and " County Court " shall mean the .Sheriff Court of the count}'; The expression " administration " shall mean confirmation ; The expression " misdemeanour " shall mean crime and offence. SCHEDULES. The First Schedule. Matters to be frovided lor by the Rules of Societies Registered under this Act. 1. The name and place of office of the society. 2. The whole of the objects for which the societ}- is to be established, the purposes for which the funds thereof shall be applicable, the terms of admission of members, the conditions under which any member may become entitled to anj' benefit assured thereby, and the fines and forfeitures to be imposed on any member, and the consequences of non-payment of any subscription or fine. 646 AUDITING. 3. The mode of holding meetings and right of voting, and the manner of making, altering, or rescinding rules. 4. The appointment and removal of a committee of management (by whatever name), of a treasurer and other officers, and of trustees, and in the case of a society with branches the composition and powers of the central body, and the conditions under which a branch may secede from the society. 5. The investment of the funds, the keeping of the accounts and the audit of the same once a year at least. 6. Annual returns to the Registrar of the receipts, funds, effects, and expenditure, and number of members of the society. 7. The inspection of the books of the society by every person having an interest in the funds of the society. 8. The manner in which disputes shall be settled. 9. In case of dividing societies, a provision for meeting all claims upon the society existing at the time of division before any such division takes place. And also in the case of friendly and cattle insurance societies. 10. The keeping separate accounts of all mone3's received or paid on account of every particular fund or benefit assured for which a separate table of contributions payable shall have been adopted, and the keep- ing separate account of the expenses of management, and of all con- tributions on account thereof. 11. (Except as to cattle insurance societies) a valuation once at least in every five }-ears of the assets and liabilities of the society, including the estimated risks and contributions. 12. The voluntary dissolution of the society by consent in a friendly society of not less than five-sixths in value of the members, and of every person for the time being entitled to any benefit from the funds of the society, unless his claim be first satisfied or adequately provided for ; and in a cattle insurance societ}- by consent of three-fourths in numbers of the members. 13. The right of one-fifth of the total number of members, or of one hundred members in the case of a society of one thousand members and not e.xceeding ten thousand, or of five hundred members in the case of a society of more than ten thousand members, to apply to the Chief Registrar, or in the case of societies registered and doing business exclusively in .Scotland or Ireland to the Assistant Registrar for Scot- land or Ireland, for an investigation of the affairs of the society, or for winding-up the same. FRIENDLY SOCIETIES ACT 1896. 647 AXXUAL RETl-RX AS PRESCRIBED BY THE CHIEF REGISTRAR. The frincifal -points to be attended to in filling tip the Return are : — 1. Receipts and expenditure. It must be carefully remembered that this is not a mere Cash Account, giving particulars of cash received and cash expended. Accordingl}^ such items as — [a) Cash withdrawn from bank or cash paid into bank, [b) Cash expended in purchase of investments, or cash received on sale of investments, or on discharge of mortgages, &:c. &c. must not appear bej'ond entering as a profit or loss, as the case may be, the difference between the amount received and the amount at which the asset previously stood in the society's Balance Sheet. 2. Interest on the funds which have become due and payable in the course of the year should appear as a receipt, and if not actually paid at end of year will appear in the assets of the Balance Sheet as interest due and unpaid. 3. Where under the rule separate funds are required to be kept for the various benefits, the amounts of these \arious funds should always be stated separately in the Balance Sheet (Form B), the total amount of junds agreeing witJi that stated under Receipts and Expenditure Account. 4. Where any particular fund has no assets, but is indebted for the time being to other funds, the amount of such indebtedness, clearly described, must appear under " Other assets," and when a deficiency in any fund exists, both at the beginning and end of the year, the amount of such deficiency at the beginning of the year must be stated below the item " Amount of funds at end of the year, as per Balance Sheet," and the amount of such deficiehcy at the end of the year below the item " Amount of funds at the beginning of the vear," in each case being clearly described. 5. The amount of benefit (or management) fund (or funds) brought forward at beginning of year must agree with corresponding amounts at close of the previous year. 6. Whatever the rules may provide as to date of annual meeting and annual accounts, the annual return required under the Act to be made and sent to the Registrar niust always be made up for the year ending 31st December. 7. The amount of contributions received in the course of the year in respect of any particular fund should be so entered as to include con- tributions remaining unpaid at 31st December, but not in arrear to the 6.(8 AUDITING. extent of forfeiture of nienibership, and this latter should appear as " contributions in arrear " among the assets of the Balance Sheet, and would consequently not be included in the item "contributions"' for the next year. 8. Unless the Auditor is one of the public Auditors appointed by the Lords of the Treasur}' under the Act, the annual return must be signed by at least two Auditors appointed under the society's rules, as well as by the officers specified. (). That each account be correctly added up. 10. The totals at the bottom, on the opposite sides of each account, to be the same. 11. That the funds of the society are invested in htri( t accordance with the registered rules of the society. The investment of moneys on notes of hand and other personal securities is not legal. 12. That all receipts and expenditure outside the objects of the society, such as for banners, fetes, anniversaries, lV-c, be not included in the return. Societies are reminded tJiat the valuations under the Act must lie sent to the Registrar once at least in jive years. [See Section 14 (i) (./) of the 38 dr-- 39 Vict. c. 60.) {^Fill u-p the blank lines with Name, Registered Office, and Registered Number of tlie Society.] Name of Society Registered Office of Society in the County of Register No.. Received a document purporting to be the Annual Return of the Society for the year 1894. N.B. — On receipt with the return of an envelope of sufficient size, written on the top " 0« His Majesty^ s Service,^'' directed as the society may desire, the above acknowledgment (which is not to be taken as imp]3'ing that a \alid return has been received) will be forwarded. FRIENDLY SOCIETIES ACT 1896. 649 AXNTAI. KETIRX AS PKE.SLK IHKD HV TIIK CHIKF KEGISTRAR COnfiuued. Forms A and B. RkTUKN REQl iked KRoM a REGISTERED SOCIETV. (Xot being a collecting Societ}^ within s. 30 of the Act.) Year ending 31st December 1894. [The Societ3''.s Balance Sheet cannot be accepted as a substitute for this Return.] This Return is to be sent to the Registrar before the 1st of June 1895. A copy of the Auditor's Report, if any, should also be sent. Xame of Society Register Xo. Date of Commencement of Society 18 . When first Enrolled, Certified, or Registered Xames of the present Trustees * X'ame and address of the Treasurer and of any ) other Officer in receipt or charge of mone}' ) Amount of Security given by him or them ... ... £ Number of benefit members at the beginning of the 3'ear ... X'umber of benefit members admitted during the year Together ... X'umber of benefit members who died during the j'ear , Number of benefit members who left from other causes J Total number of benefit members at the end of the vear ... ^ Average amount of Funds per member (that is, the total p funds on the 31st December 1S94, divided by the total ■-P number of benefit members) ... ... ... ... £ z. State what provision, if any, is made for old age ... •^ The Audit for the year has been conducted b}' Mr. , Public ^ Auditor,* [or by of whose calling or profession is , and of , whose calling or profession is , who were appointed Auditors by under the authorit}- of Rule X'o. ]. Registered Office of the Societyf in the county of Date '^95- * This term means only a Public .Auditor appointed under the Friendly Societies Acts. t State full postal address. 6so AUDITING. en ■4-t G H 3 u; ^ O iM W -4.^ K c o o rr a Q o ^ w X < o H r- ^, a H (U Ci o t-H Q W CQ o ^ & q: w 01 05 m w ^i ^■^ ft C-Tl 01 ; I/: a CO b £^ Si) ^ 'C C ^ tfi 1) ft *^> in 01 t7 . • ■? -o^o ■ 1/1 -. .■-^ u . . . o" 'S -2 ^ ^^ ^ . c u a> t^ £ S E ■ 3 5 c r. H H e -1 ^ 3 S ^ '--^ CJ«*- (-1 := = 5^ 'So-S 3 0) 3 n in (U r 3 3 b^ >^ 'a -3 S r a! c c M c 3 3 (0 TO flj ni 000 u 0. D XBd SS9U>(01S qj.a it: siuns ■-tJ c/l >^ 3 C o rt O OJ 3 3 a; . . £ M . . 3 S S og = . 3 t. • C D c • ■^Ks ■ S ft 3 rt rt «J Ota,— Q,C/1 > i" O o; o 3 O ^^Ci Si! fe S 3 p 4-< -^ Ew«c . 3 . 3 _ft v *a; r3 o "^ V t; 3 a a 3 3 o i2 "Is >; §§&.•£ 3^ r- 3 ;: 3 c rt oJ 72 ft O— rt w QJ I (U i; o C/3 u ^ rt ■° H Cud 3 FRIENDLY SOCIETIES ACT 1 896. 6; I ^ ts 8 a K H 5 z H X W fe Bi < K H l/i O ^ ^ fc u H u Z K w H ^ > u « C <: 03 z < K § cr. W K 0. X < z K P H W K >J < & z z < ^ c p 4J »j : ac ac M cs rt SJ 652 AUDITING. o fa in 1 H K U *^ W H in (1. (I. O n W < d. in H Q Z C) D fa w ^ fc H O >• H B W W O J::; U rn n o C/5 W o z (d <: rr: J c < V) CQ < z BS D H W Pi ■J < D Z z < V Q 5 o a>-T- Q) li r^ 'J^ "Zl "iS'-'S^- ~ t/3 ^■— r; Ti 5 = =7) C 5 o ^ ^ -c- CJ -s; lu jscr > = j= -5 a • 32 •- o •O "! O a£ 'u «5 O- C/3 ,"< . C O 0) •2 -tj ^ = s „, . g «-^ ci X u p^ 01 5 ^ 5 -£&< ii ^^' ■c -^ .;: i-r^ £ s£5Po S" — o ■?; ° °^ ° 0.2 3 3./, 2-^^^ <<:q cjO ■hJ o H t/3 S oj OJ —■r- o — U; ^ Ui rt O _ T3 0) (U (U > s ^ rt ^ -- n1 t > 'C 0) rt c o a x: o rt 2 « ■^• to -^ ■Ji 3 <-• o ^ CJ tj: o < Cfl r^ n a c 1/1 ^ ,.'« o o o ?. W o ■£ <^ 3 o'a; QJ -" ;- ,_ ^ t; o ■=_§ V-. 13 O a (/I 0) dj '-' ..n H "36 o 3-r; 11 (U •' J3 a he < o OJ e _ c aj rt in w ^ "^ 3 o - u o = .t: X G o ii OJ tn o -'^ — -3 (D — CJ3 ^ -3 -^ — Ho 3 O *j = £; c "^ ^ t/) <-. (U 3„-^ I" 2 ^ Ui en n o — o < J5 u « o 3 O '^ o S b Sis 3 0<*^ 2 2:-^ — 3 ^- D. FRIENDLY SOCIETIES ACT 1896. 65 DO ANNLAL RETURN AS PRESCRIBED DV THE CHIEF REGISTRAR — continued. Extracts from 38 and 39 Vict. c. 60. Duties and Obli Rations of Societies. 14.— With respect to the duties and obhgations of registered societies the following provisions shall have effect : — (i) Every registered society shall — Audit. [c] Once at least in every year submit its accounts for audit either to one of the -public Auditors appointed as herein mentioned, or to two or more -persons appointed as the rules of the society provide, which Auditors shall have access to all the books and accounts of the society, and shall examine the general statement of the receipts and expenditure, funds and effects of the society, and verify the same with the accounts and vouchers relating thereto, and shall either sign the same as found by them to be correct, duly vouched, and in accordance with law, or specially report to the society in what respects they find it incorrect, unvouched, or not in accordance with law. Annual Returns. {d) Once in every year before the first day of June send to the Regis- trar a general statement (to be called the annual return) of the receipts and expenditure, funds and effects of the society as audited, which shall show separately the expenditure in respect of the several objects of the society, and shall be made out to the thirty-first December then last inclusively, and a copy of the Auditor's report, if any, shall also be sent to the Registrar with such general statement ; and such annual return shall state whether the audit has been conducted by a public Auditor appointed as in this Act provided, and by whom ; and, if by any person or persons other than a public Auditor, shall state the name, address, and calling or profession of each of such persons, and the manner in which, and the authority under which, they were respectivel}' appointed. Supplying Copies of Annual Returns. (/?) Supply gratuitously every member or person interested in the funds of the society, on his application, with a copy of the last annual return of the society for the time being. Provided that it shall be deemed a sufficient compliance with this requirement if the society supplies gratuitously every member or person 654 AUDITING. interested with a Balance Sheet or other document duly audited, containing the same particulars as to the receipts and expendi- ture, funds and effects of the society as are contained in the annual return. (?) Keep a copy of the last annual Balance Sheet for the time being and of the last quinquennial valuation for the time being, together with the report of the Auditors, if any, always hung up in a conspicuous place at the registered office of the society. Offences. (3) It shall be an offence under this Act if any registered society or any officer or member thereof — [a) Fails to give any notice, se7id any return or document, or do or allow to be done, any act or thing which the society, officer, or person is by this Act required to give, send, do, or allow to be done. {h) Wilfully neglects or refuses to do any act, or to furnish any information required for the purposes of this Act by the chief or any other Registrar, or other person authorised under this Act, or does any act or thing forbidden by this Act. {c) Makes a return, or wilfully furnishes any information, in any respect false or insufficient. Offence by Societies to be also Offences by Officers, &^c. (4) Every offence by a society under this Act shall be deemed to have been also committed by every officer of the same bound by the rules thereof to fulfil any duty whereof such offence is a breach, or if there be no such officer, then by ever}' member of the committee of manage- ment of the same, unless such member be proved to have been ignorant of or to have attempted to prevent the commission of such offence; and every default under this Act constituting an offence if continued, constitutes a new offence in every week during which the same continues. Returns to be in Prescribed Form. (5) Every aiinual or other return, abstract of valuation, and other document required for the purposes of this Act, shall be made in such jorm, and shall contain such particulars, as the Chief Registrar prescribes. Penalties. 32. — With respect to penalties under this Act, the following provisions shall have effect : — FRIENDLY SOCIETIES ACT 1896. 655 Penally for Falsification. (i) If an}' person wilfully makes, orders, or allows to be made, any entry, erasure in, or omission from any Balance Sheet of a registered society, or any contribution or collecting book, or any return or docu- ment required to be sent, produced, or delivered for the purposes of this Act, with intent to falsify the same, or to evade any of the pro- visions of this Act, he is liable to a penalty not exceeding fifty pounds, recoverable at the suit of the Chief or any Assistant Registrar, or of any persou aggrieved. Penalties for Ordinary Offences. (2) Every society, officer, or member of a society, or other person guilty of an offence under this Act for which no penalty is expressly provided herein is liable to a penalty of not less than one -pound, and not more than five pounds, recoverable at the suit of the Chief or any Assistant Registrar, or of any person aggrieved. Recovery of Penalties. (3) All penalties imposed by this Act, or to be imposed by any regula- tions under the same, or by the rules of a registered society, are recoverable in a Court of summary jurisdiction. 6^6 AUDITING. q:3 C3 1-1 O c o ■*-i V. < - to "^ c o o C o s o u ir^ x: rn u Vi -M C H to Z 03 1 O a I-* fa C a. I— I fa O C/3 fa w •^ lU fa ■^ XJ i-N-^ •^ a »^ » Q> <1> (U >^ 3 o 3 -5 o n rf OJ '^ Q. fl) o r. Ciu~, If: TO (U c c: - ^11 1J -^ - - ■" c CJ C/] C r- — t/} ' — ^ ' — ' r/i Xbj SS9U>10]S qjE3QjB suing 3 o <■ o 3?-2 §i S c "2 t: ."5 -r 3 « M <;wo> J c iij3 S? o &.~ i FRIENDLY SOCIETIES ACT 1896. 657 » s s p pq m o I OS < H en O M fa s U w H > K Q W CJ S u en M « « o H M < b z z < H H z u Q P H W w o < (n H M O Ed CT3 •5 §i a • a lir i ** « m Qi o o u c.S •-1.9'C n !U o o u — ^ 4> IS o -^ s < o U U 658 AUDITING. m s B5 b . ji H rr; <• W (6 H 7) u pa Q z < (I. •-* in Q 33 Z D W fc w lb H >• H cu H Q W n « H 0. 1/1 r. H < M tA D. < U) PQ <: z K D H M OS >J < a z x. < n c , — - Ui M B rtT) to to 5 C/1 ■-(J c -a " O (1) *-■ . .03 . o *w 0) ri 1-" ^ t^ ^- ,1 o .•- u C 5 C a - 2 cxii, - 3 C 3 (fi o — ,'a■- c/) ^5 (/; . t- (D O ■tj• : Ui o ™ £C0 ■" 0! ^■^ *j ci; -.-J rt _^ "-,„-«- — > z GtL,3^C^O*J .^ ^ (1) *-■ •— ni Ul ??Si|S 'J3 (DO"" •565 ^ 3 f o ^ oj So liOS ^ ^1 u c 3 l- *- •— V- ^ o w o .< 0.0 a, c " S ° D ::,r:^ rt ;_, Cd 5J ^ rt ij ^^ !;i CI- c« <^ 1) (U QJ QJ u [/:;-< -^ oj lu.=. *-''t; •" '-' 3 c c 3 — ' *.— o - 3 - 01 o o oW < ")<; ui ■o g'ol « o o H rt t/J _ 0) i; •- o rt tn -a 3<; o 'JP Lu, **- ^ ^ 3 l^ S* OOOOO0300O C 3 3 C 3 3 O O O o O O S ESS S 3 a.G3CCCC"Cc3 «33S333;^333 ^'OOOOOO-^OoO BESeS SEE «<<« «< 9 I ■§ 2 f^ 03 „-5-3 (U g.3 ni C (jc u u. >^ f, G O i^ <^ :2 M ° OS 3 0) wis " r- '-' 0) ^ O '- ^ . — - Zr:£ - S o 5^ t3 " jd O : cj 3 t. ^ 3.C — -a CJ nJ >. . >. u- U OJ -- S ^.^ "-^JS 3 D, ^■s tl« -^ P X (U tn in tC tn •:- fc« s IUT3 > 2< 1 w rt - & C n! 0^- E-c 0.- wg -1 .? hc'^ e c ^ H,^ *J (U c CO U (Q - M "^--O (U > 2 m.3 o .^ 3 2 -^ r!2 THE TRUSTEE SAVINGS BANKS ACT 1 863. 659 FRIENDLY SOCIETIES ACT, 1908. S Ed-w. 7 c. 32. An Act to amend the Friendly Societies Act, 1896 — [ist August 190S.] Membership of Minors tinder the Age of One Year. 2. — (i) A person of or under one year of age may be admitted as a member of a registered society or branch, and accordingly in Section 36 of the principal Act (which relates to the membership of minors) the words "but above one 3^ear of age" shall be repealed. {2) Where the rules of a registered friendly society or branch, in force at the commencement of this Act, provide for the admission as members of persons from the minimum age authorised by the principal Act, the rules shall be construed as providing for the admission as members of persons from birth. Limitation of Benefits. 3. — In Section 41 of the principal Act " three hundred pounds " shall be substituted for " two hundred pounds," and " fift3'-two pounds " for " fifty pounds," as the maximum amount a member or person claiming through a member of a registered friendl}' society or branch is entitled to receive b\^ way of gross sum and by way of annuity respectively. Pozuers to Invest Funds in Trust Securities. 4. — In Subsection (i) of Section 44 of the principal Act (which relates to the manner in which the funds of registered societies and branches may be invested) the following paragraph shall be added after Paragraph [e) : — "or (/) in anjr investment in which trustees are for the time being by law authorised to invest trust funds." TRUSTEE SAVINGS BANKS. THE TRUSTEE SAVINGS BANKS ACT, 1863. 26 and 2y Vict. c. 8j. No Savings Bank, subject to froviso hereinafter contained with res-pect to Branch Offices, &^c., shall have benefit of this Act, unless in Rules, &-v.^ it shall be ex\fressly provided as herein specified. 6. — No savings bank, subject to the proviso hereinafter contained with respect to the branch offices or local receivers of an}' savings bank, shall have the benefit of this Act unless in the rules and regula- tions for the management thereof it shall be expressly provided — U U 2 66o AUDITING. (i) That no person or persons being treasurer, trustee, or manager of such savings bank, or having any control in the management thereof, shall derive any benefit from any deposit made in such savings bank, save only and except such salaries and allowances or other necessary expenses as shall according to such rules and regulations be provided for the charges of managing such savings bank, and for remuneration to officers emplo3'ed in the management thereof, exclusive of the treasurer or treasurers, trustee or trustees, manager or managers, or other persons having direction in the management of such savings bank, who shall not directly or indirectly have any salary, allowance, profit, or benefit whatsoever therefrom bej^ond their actual expenses for the purposes of such savings bank : (2) That not less than two persons, being either trustees, managers, or paid officers appointed for that specific purpose, and where two only, except in the case of savings banks which are open for more than six hours in every week, one such person to be a trustee or manager, be present on all occasions of public business, and be parties to every transaction of deposit and repayment, so as to form at least a double check on every such transaction with depositors : (3) That the depositor's Pass Book shall be compared with the Ledger on every transaction of repayment, and on its first prodtiction at the bank after each twentieth day of November : (4) That every depositor in a savings bank established under this Act shall once at least in ever}^ j^ear cause his deposit book to be produced at the office of the said savings bank for the purpose of being examined : (5) That no money be received from or paid to depositors except at the office or branch oflices where the business of the savings bank is carried on under the authority of the board of managers, and during the usual hours of public business. (6) That a public accountant or one or more auditors be appointed by the trustees and managers, but not out of their own body, to examine the books of the bank, and to report in writing to the board or committee of management the result of such audit, not less than once in ever)^ half-year, also to examine an extracted list of the depositors' balances made up every year to the twentieth daj^ of November, and to certif}' as to the correct amount of the liabilities and assets of the bank : (7) That a book containing such extracted list of every depositors' balance, omitting the name, but giving the distinctive number and I THE TRUSTEE SAVINGS BANKS ACT 1 863. 66 1 separate amount of each, and showing the aggregate number and amount of the whole, checked and certified by such public accountant or Auditors, be open at any time during the hours of public business for the inspection of every depositor as respects his own account, to examine his own Deposit Book therewith, and the general results of the same : (8) That the trustees and managers or committee of management shall hold meetings once at least in every half-year, and shall keep minutes of their proceedings in a separate book provided for that purpose : (9) Provided that where savings banks are established with agents or local receivers elsewhere than at the head office, the rules shall provide for the due receipt of, and accounting for, all moneys by such agents or local receivers on account of such savings banks respectively, and also for the presence of a second party in every transaction when money is paid or received, and also for the periodical examination of the depositors' books with the Ledger once at least in every j'ear. Weekly Retttrns to be made by Savings Banks to the Commissioners. 7. — The trustees and managers of every savings bank shall transmit weekly returns to the Commissioners for the Reduction of the National Debt, in such form and giving such particulars as the said Commis- sioners ma}'' direct, showing the amounts of the week's transactions of such savings bank, and the amount of the cash balances remaining in the hands of the treasurer or any other person on account of such savings bank. Trustees of Savings Banks shall Invest all Money in the Banks of Etigland or Ireland and not in any other Security. 15. — The several sums of mone}' belonging to any savings bank which the trustees of such savings bank respectively are authorised to invest under this Act or under an}- rules or regulations of any such savings bank shall, except as hereinafter excepted, be paid into and vested in the Bank of England or the Bank of Ireland, as the case may require, in the names of the Commissioners for the Reduction of the National Debt according to the provisions of this Act, enabling such trustees to make investments in the names of the said Commissioners, and no such sum or sums shall be paid or laid out by the trustees of such savings bank in any other manner or upon any other security whatever, except as aforesaid, and except such sums of money as from time to time shall necessarily remain in the hands of the treasurer or treasurers of such savings bank to answer the exigencies thereof : 6Q2 auditing. Provided alwaj-s, that nothing herein contained shall restrain or prevent an}^ depositor, or an\" trustee or trustees acting on behalf of any depositor or depositors, or any friendly society, or any charitable or provident institution or society, or penny savings bank, from with- drawing from any such savings bank any sum or sums of money which shall have been deposited by such depositor, friendly society, charitable or provident institution or societ}", or penny savings bank, and investing the same in any other securities : Provided always, that the trustees of any savings bank already established, or which shall take the benefit of this Act in manner hereinbefore provided, shall be and they are hereby empowered to pay into the Bank of England or Ireland (as the case may be) any sum or sums of money, not being less than fifty pounds, to the account of the Commissioners for the Reduc- tion of the Xalional Debt, upon the declaration of the trustees of such savings bank, or any two or more of them, that such moneys belong exclusively to the savings bank for which such payment is intended to be made, whether such moneys shall have been deposited therein before the passing of this Act or thereafter shall be deposited therein, and the cashier or cashiers of the Banks of England and Ireland respect ivelv are hereby required to receive all such moneys, and to place the same into the account raised in the names of the said Com- missioners in the books of the Banks of England and Ireland respec- tively, denominated " The fund for the banks for savings " : Provided, nevertheless, that previous to any payment being made into the Banks of England or Irchuid as aforesaid, the person or persons applj'ing fiu' that jiurpose shall in all cases produce to the officer of the said ("onnnissioners, at their office in London or Dublin (as the case may be), an order under the hands of two of the trustees of such savings banks on the account of which such payment is to be made. Trns/ees not to receive from any one Depositor more than £^o in an V onr rear. 3(). — It shall not be lawful for the trustees of any savings bank to receive from any one present or future depositor, within any one year ending nn the twentieth day of Novenihcr (whether any sum (jr sums of money had been previcjusly withdrawn or ncA) any sum or sums exceeding in the whole thirty pounds, exclusi\e of compound interest. Provided that nothing in this Act lontained shall prevent or be con- strued to prevent the trustees of any savings bank from paying interest to any depositor whose deposit on the twenty-eighth day of July one tliousand eight liundred and twent}-eight amounted to and has since cfiutinued to amount to or exceed the sum of two hundred pounds : nor to i)re\cnt any depositnr, having closi-d his , c v S c > o O -a V c u a nOu-iOOOO>pO>nO§^0_ ^^( ,( ,[ ^f -r -( ^^ -. u — < k.. / ' ri r\i " • 60 la ■u ■'3 3 t/: ill J I ^ ' > r- : c~ ►7 O . ^^ rl M O o 1- o c '-ki^j^ ,VJ ^•5 "SI H-2 O 3 D. yi O Q 3 S ..SicT o 5 C3 U. 00 > N c O M tuO c 'S c . u O «5q ;-i J3 > o VJ • S • o . J3 ~ • g. c/i-Q qi. ■£ ~~- a w c o - S — c o-^ ^ .o-r- . « ^ rr^ -- ^ V :?]cs :^ : 0.3 •c: = :. E u o ^ 1 _ M o .. -3 i^Q ~ en - iS 3.3.2 «> rt c- •« - Q -^ 3 g-5 ScE 3 5 ^'i: 5 S E (/) ^ (f) {n C/;«Pm u >^ >> >N "^ cQ ca CQ oa C O •-♦J ■^ c/l o o j= j± •;:.«) o •= OC/J o -S3 m tn •— iw "7, £^ . u > o o o Z^|Z asa^ 8 so" III o a: < (U Ui 1^ S 3 £ > u U ■^ a'S t. (U *" ^, o rt a o H 6.5 3 cn o . m . a „ « o •2so ^oa4= ■ u MO) S2 m 3. O o • ^ 'tn I =*' ! "■ •±'3 0. 3 1; 1) , cg.SQ. OCdJ O ; .^ •-' *j > 0) rt !2ifi |OS 3 3 ^ o o s ^ o -Co" o •T3 .ID ■pa" 3 ■" O 3 E'i O S •(J « •5 »■ ^'Z. n.. E K JTT U >- 3 « oj o « o t-l ,/, *- t-l *- 3 W O r- " « ^.^ O 3 3 o.:<; «i.° O o T3 en " tn O 3 .2 Ul ^j *- rj "3 S £t/)-S E t-" (11 .^1— 5S o o o •?E o o ^ < THE TRUSTEE SAVINGS BANKS ACT 1863. 667 c c < c a > .^ '■' j; c/3 o O n O s en 3!Q o a O •— ' S ■*■ ox: 02:5 c S ^ .2 § = -5^ ° ^A s. Z^ !:- CJ c £. Xi c3_ *-' c/: - (_ o o £ ? Sh s o « 5; c a =* =" i 5 W ™ CT5 9 3 c ^ < O o — u «■> — r'^ °-> ~ c o > t:^ = u5^ OS tn-S O « o == « 2 o u H H w Q H Z s H en W > o w H H cn 'sJ 7i n J3 u a' Z — — ■" Tr '5 p ■11 '% C) z '/I ij /i! ID M yo 5) = — .2 ■r. H-( -^ c ■:j 7) OJ3 ^ o Z c ^ u 3 C o a ■668 AUDITING. THE SAVINGS BANKS ACT, 1891. jj and j6 Vict. c. 21. Establishment of Insfection Comvnttee. 2. — (i) There shall be established an inspection committee of trustee ■savings banks. Powers and Duties of Insfection Committee. 3. — (4) The trustees of every trustee savings bank shall, on the requi- sition of the committee, supply the committee with a copy of the pass book in use in the bank, of the annual general statement of the accounts of the bank, and of the rules of the bank, and of any amend- ments thereof. (5) If in the opinion of the committee the rules of any such bank are insufficient for the purpose of maintaining an efficient audit, the bank shall with all convenient speed make such additional rules as may, in the opinion of the committee, be required for the purpose. (6) If the bank do not, within the time specified by the committee from the date of being required to make an\' such rules comply with the requirement, the committee may make such rules, and shall submit the rules so made to the Registrar of Friendly Societies, to be certified by him ; and, when so certified, they shall be binding on the trustees. Form of Annual Statement by Trustees of Trustee Savings Banks. 8. — The annual statement required by Section 55 of the Trustee Savings Banks Act, 1863, to be made by the trustees and managers of every trustee savings bank, shall be in such form and contain or be accompanied by such particulars as the National Debt Commissioners direct. A similar statement shall be sent to the inspection committee ■each year at the same time. Amendment of Law as to Limit of Dc-posit and Interest on Deposit. II. — Whereas it is not lawful for tlie trustees of a savings bank or for the Postmaster-General to receive from any depositor any sum which shall make the sum to which such depositor shall be entitled exceed the sum of one hundred and fifty pounds in the whole, exclusive of interest, but the sum standing in the name of any depositor ma)' be increased by accumulations of interest to any sura not exceeding two hundred pounds in the whole, and difficulties have arisen in the due apportion- ment between principal and interest of sums standing to the credit of depositors in e.xcess of one hundred and fifty pounds ; be it therefore enacted as follows : — THE INDUSTRIAL AND PROVIDENT SOCIETIES ACT 1893. ^69- (i) A savings bank shall not receive any deposit which makes the sura standing in the name of any depositor in the bank exceed two hundred pounds. (2) So much of any enactment as prohibits the receipt from any depositor of an}' sum of money which makes the sum to which he is.. entitled exceed the sura of one hundred and fifty pounds in the whole exclusive of interest is hereby repealed. (3) Interest shall be allowed in full on the sum standing in the name of a depositor in a savings bank so long as it does not exceed two . hundred pounds, but whenever the sura standing in the name of any depositor in any savings bank exceeds that amount, interest shall not be allowed on an}' sum in excess of two hundred pounds. (4) Notwithstanding any restriction on the amount to be deposited; in any one year, a depositor in the savings bank may, not more than once in any savings bank year, deposit money to replace money pre- viously withdrawn in one entire sum during that year. For the purposes of this provision the expression " savings bank year " means, with reference to trustee savings banks, the year ending the twentieth, day of November, and with reference to the Post Office Savings banks, the year ending the thirty-first day of December. CO-OPERATIVE ACCOUNTS, &c. THE INDUSTRIAL AND PROVIDENT SOCIETIES ACT, 1893. j6 and ^y Vict. c. jp. Audit. 13. — (i) Every registered society shall, once at least in every year, submit its accounts for audit, either to one of the public Auditors in the Act mentioned, or to two or more persons appointed as the rules of the society provide. (2) The Auditor shall have access to all the books, deeds, documents, and accounts of the society, and shall examine the Balance Sheets, showing the receipts and expenditure, funds and effects of the society, and verify the same with the books, deeds, documents, accounts, and vouchers relating thereto, and shall either sign the same as found by them to be correct, duly vouched, and in accordance with law, or specially report to the society in what respects they find them incorrect, . unvouched, or not in accordance with law. bJO AUDITING. Ainmal Ri-turus. 14. — (i) Every registered society shall, once in every year, not later than the thirty-first day of March, send to the Registrar an annual return of the receipts and expenditure, funds and effects, of the society as audited. (2) The annual return — [a) Shall be signed by the Auditor or -Auditors ; and {h) shall show separately the expenditure in respect of the several objects of the society ; and (c) shall be made out from the date of its registration or last annual return to that of its last published Balance Sheet, pro- vided that the last-named date is not more than one month before or after the thirty-first day of December then last, or otherwise to the said da^^ of December inclusive ; and [d) shall state whether the audit has been conducted by a public Auditor appointed as by this Act is provided, and by whom, and if by any persons other than a public Auditor, shall state the name, address, and calling or profession of every such person, and the manner in which, and the authority under which, he is appointed. The society shall, together with the annual return, send a copy of the report of the Auditors, or if more than one such report has been made -during the period included in the return, a copy of each of such reports. Suffly of Cofies of Annual Returns. 15. — Every registered society shall supply gratuitously to every member or person interested in the funds of the society, on his appli- cation, a cop3' of the last annual return of the society for the time being. Cofy of last Balance Sheet. 16. — Every registered societ}^ shall keep a copy of the last Balance Sheet for the time being, together with the report of the Auditors, always hung up in a conspicuous place at the registered office of the society. Public Auditors. 72. — The Treasury may appoint public Auditors for the purposes of this Act, and may determine the rates of remuneration to be paid by registered societies for the services of such Auditors, but the employ- ment of such Auditors shall not be compulsory. THE INDUSTRIAL AND PROVIDENT SOCIETIES ACT 1893. 67I PUBLIC AUDITORS. Official rates of payment : For auditing the Accounts of Friendly Societies and specially autho- rised Societies granting Friendly Society benefits, the scale of payments shall be : — ;^ S d For Societies consisting of not more than 100 members ... i i o For Societies with over 100 members but not exceeding 500 members, in respect of each 100 members or part thereof i i o For Societies consisting of over 500 members, in respect of the first 500 members ... ... ... ... 5 5 o With an additional ids. 6d. in respect of each additional 100 members or part thereof, no fee, however, to exceed ^,^52 los., unless by special arrangement. For auditing the Accounts of all other Societies registered under the Friendly Societies Acts, viz., Cattle Insurance Societies, Benevolent Societies, Working Men's Clubs, specially authorised Societies (except such as grant Friendly Society benefits), the scale of payment shall be:— £ s d For Societies whose total gross receipts do not exceed _ii^2,ooo per annum ... ... ... ... ... ... i i o For Societies whose total gross receipts exceed ^2,000, but do not exceed ^'10,000 per annum, in respect of each _^2,ooo or fraction thereof ... ... ... ... ... i i o AVhere the gross receipts exceed ;,^io,ooo per annum, the fee to be fixed by private arrangement. For auditing the accounts of Industrial and Provident Societies, the scale of payment shall be : — £ s d For Societies whose total sales do not exceed ^^2,000 per annum ... ... ... ... ... ... ... ... i i o For Societies whose total sales exceed ^"2,000, but do not exceed ;i/rio,ooo per annum, in respect of each ^2,000 or fraction thereof ... ... ... ... ... i i o For Societies whose total sales exceed ^,^"10,000, but do not exceed ;ir25,ooo per annum, in respect of the first ;^io,ooo 550 With an additional los. 6d. in respect of each additional ;,{^2,ooo, or fraction thereof. Where the sales exceed ^25,000 per annum, the fee to be fixed by special arrangement. The word " sales " in the case of societies for the buying and selling of land, to include instalments in repayment of advances. 672 AUDITING. The scales of fees apply only in cases where the society is located within the district assigned to the Auditor employed. If a society employs an Auditor appointed for any other district, special terms may be arranged. The Auditor may accept audits on terms lower than those of the above scale. PUBLIC VALUERS. When the benefits to be valued do not exceed two classes of sick allowance and deferred annuities, together with sums payable on the death of members and of their wives, the scales of payment to public valuers are as follows : — Societies of not more than 75 members ,, over 75 and not exceeding 100 ,, 100 ,, ,, „ 150 55 >> 55 200 „ ,, „ 300 >> n ,, 400 ,, ,, „ 500 " " „ 600 „ ,, With a further ^^5 5s. for every 500 members or portion thereof beyond the total number of members not exceeding 2,500. Beyond 2,500 members the fee to be the matter of special arrangement, as well as in all cases where the number of benefits exceed that above men- tioned. Valuers may accept valuation on terms lower than those of the above scale. Valuers must take such steps as they think fit for obtaining payment of their fees. Note. — Employment of a Public Valuer under the Friendly Societies Act is not compulsor}' on any society. bers • £2 3 \ 100 4 4 150 . 5 5 200 6 6 300 7 7 400 8 8 500 9 9 600 10 10 750 • 12 12 1,000 •• 15 15 THE COLLECTING SOCIETIES AND INDUSTRIAL ASSURANCE COMPANIES ACT, 1896. 5p and 60 Vict. c. 26. I. — This Act shall appl}' to every such — ■ [a) Friendly societ\' or branch, whether registered or unregistered (in this Act referred to as a collecting society) ; and {b) Person or body of persons, whether corporate or unincorporate, granting assurances on anj^ one life for a less sum than twenty pounds (in this Act referred to as an industrial assurance company), THE FINANCE ACT I907. 673 as receives contributions or premiums by means of collectors at a greater distance than ten miles from the registered office or principal place of business of the society or company, and, in the case of an industrial assurance company, at less periodical intervals than two months : Provided that nothing in this Act shall, except as expressly provided thereby, apply to any assurance with an industrial assurance company the premiums in respect of which are receivable at greater periodical intervals than two months. Balance Sheets and Annual Returns. 6. — (1) A cop3' of every Balance Sheet of a collecting society shall, during the seven da3^s next preceding the meeting at which the Balance Sheet is to be presented, be kept open b}' the society for inspection at ever\- ofhce at which the business of the society is carried on, and shall be delivered or sent by post to every member on demand. (2) The annual returns required to be sent to the Registrar under the Friendly Societies Act, 1806, shall, in the case of a collecting society, be certified b}- some person not an officer of the societj- (otherwise than an Auditor thereof) carrying on publicly the business of an accountant, and if not so certified shall be deemed not to have been made. Penalties for Falsification. 15. — If any per.son wilfully makes, orders, or allows to be made any entry, erasure in, or omission from a Contribution or Collecting Book with intent to falsifj- that book, or to evade any of the provisions of this Act, he shall be liable to a fine not exceeding fifty pounds, recover- able at the suit of the Chief or any Assistant Registrar, or of any person aggrieved. THE FINANCE ACT, 1907. 7 Ed^.■. 7 c. 13. Part V. Income Tax. iQ- — (i) Any individual who claims and proves, in manner provided by this section, that his total income from all sources does not exceed two thousand pounds, and that any part of that income is earned income, shall be entitled, subject to the provisions of this section, to such relief from income tax as will reduce the amount payable on the earned income to the amount which would be payable if the tax were charged on that income at the rate of nine pence. X X 674 AUDITING. (2) The relief given by this section shall be in addition to and not in derogation of any exemption or other relief or abatement under the Income Tax Acts, except that where an individual is entitled to relief from income-tax under Section 8 of the Finance Act, 1898, or, in respect of the payment of premiums, under Section 54 of the Income Tax Act, 1853 (as extended by any subsequent enactment), relief shall be given under this section only in respect of such earned income (if any) as remains after deducting therefrom the amount on which he is relieved of income-tax under the said Sections 8 and 54. (3) Where relief is given under Section 8 of the Finance Act, 1898, or Section 54 of the Income Tax Act, 1853, by way of repayment of the tax after relief has been given under this section, the amount repaid shall be adjusted so that the total amount of the relief given under this section and under the said Sections 8 and 54 does not exceed the amount which would have been given if the whole relief had been claimed simultaneously. (4) An individual who desires relief under this section must, in cases where he is required to make a return for the purpose of the assess- ment of income-tax, claim that relief at the time the return is made and must, in any case, claim that relief before the thirtieth day of September in the year for which the tax is charged. For the purpose of making a claim for relief under this section with respect to income-tax charged under this Act for the current year, any individual may, before the thirtieth day of September nineteen hundred and seven, substitute a fresh return for any return previously made by him. (5) An individual shall not be entitled to relief under this section in respect of any income the tax on which he is entitled to charge against any other person, or to deduct, retain, or satisfy out of any payment which he is liable to make to any other person. (6) Subject to the provisions of this section, all the provisions of the Income Tax Acts which relate to claims for exemption, relief, or abate- ment, or the proof to be given with respect to those claims, shall apply to claims for relief under this section and the proof to be given with respect to those claims. (7) For the purposes of this section the expression " income " means income as estimated according to the several rules and directions of the Income Tax Acts ; and the expression " earned income " means — THE FINANCE ACT I907. 675 (a) any income arising in respect of any remuneration from any office or employment of profit held by the individual, or in respect of any pension, superannuation, or other allowance, deferred pay, or compensation for loss of office given in respect of the past services of the individual or of the husband or parent of the individual in any office or employment of profit, whether the individual or husband or parent of the individual shall have contributed to such pension, superannuation allowance, or deferred pay or not ; and (1^) any income from any property which is attached to or forms part of the emoluments of any office or employment of profit held by the individual ; and (c) any income which is charged under Schedules B or D in the Income Tax Act, 1853, or the rules prescribed by Schedule D in the Income Tax Act, 18^2, and is immediately derived by the individual from the carrying on or exercise by him of his pro- fession, trade, or vocation either as an individual, or, in the case of a partnership, as a partner personally acting therein. In cases where a wife's profits are deemed to be profits of the husband, any reference in this provision to the individual includes either the husband or the wife. (8) Section 34 of the Finance Act, 1894, shall cease to have effect so far as it gives relief or abatement to persons who are entitled to relief under Section 8 of the Finance Act, 1898. 20. — Where an individual carrying on or exercising any profession, trade, or vocation in partnership with any other person makes any claim for exemption, relief, or abatement under the Income Tax Acts, the income of the individual from the partnership for the year to which the claim relates may be treated separately for the purpose of any such exemption, relief, or abatement, and if so treated shall be deemed to be the share to which he is entitled during the said year in the partnership profits, such profits being estimated according to the several rules and directions of those Acts. 21. — (i) Every employer, when required to do so by notice from an assessor, shall, within the time limited by the notice, prepare and deliver to the assessor a return of the names and places of residence of any persons employed by him, to whom this provision applies, and of the payments made to those persons in respect of that employment, and Section 55 of the Income Tax Act, 1842, shall apply with respect to any such return as it applies with respect to the fists, declarations, or statements mentioned in that section. X X 2 676 AUDITING. This provision applies to all persons employed by an employer, except persons who are not emplo3-ed in any other employment, and whose renuineration in the employment for the year does not exceed the sum for the time being fixed as the limit for total exemption from income-tax. (2) \\ here the employer is a body of persons, corporate or unincor- porate (including a company), the secretary of the body, or other officer (b}' whatever name called) performing the duties of secretary, shall be deemed to be the employer for the purposes of this provision, and any director of a company, or persons engaged in the management of a company, shall be deemed to be a person employed. 22. — (i) Every person upon whom notice is served in manner pre- scribed b}' Section 48 of the Income Tax Act, 1842 (which relates to the delivery of notices by assessors), reqiiiring him to make a return of any profits, gains, or income in respect of which he is chargeable with duty under Schedule 1) or Schedule K in the Income Tax Act, 1S53, shall make a return in the form required by the notice, whether he is or is not chargeable with duty, and in default shall be liable to a penalty under Section 55 of the Income Tax Act, 1842, accordingly : Provided that a penalty inflicted in the case of a person proceeded against for not compl^dng with this provision, who proves that he was not chargeable to duties, shall not exceed five pounds for any one offence. (2) The duties imposed on officers of any corporation, company, fraternity, fellowship, or society by Sections 40 and 54 of the Income Tax Act, 1842, and by Section 18 of the Customs and Inland Revenue Act, 1879, shall, in the case of any company, be performed by the sec- retary of the company or other officer (by whatever name called) performing the duties of secretary. 23. — (i) Notwithstanding an3'thing in an Acte concerninge Informers, being chapter five of the Acts of the thirty-first 3'ear of the reign of Queen Elizabeth, or in .Subsection (4) of Section 21 of the Taxes Management Act, 1880, or in Subsection (2) of .Section 22 of tlie Inland Revenue Regulation Act, i8qo, or in any other enactment, pro- ceedings for the recovery of any fine or penalty incurred under the Income Tax Acts may be conunenced within tliree years next after the fine, or penalty is incurred. (2) The time during which an assessment mav be amended or an additional first assessment made under Section 52 of the Taxes ]\lanage- n:ent Act, 1880 (which relates to the amendment of assessments), or during which an assessment may be made on the estate of a deceased person under Section 24 of the Customs and Inland Revenue Act, 1890 THE FINANCE ACT I907. 677 (which relates to the power to make such assessments), shall be any time within the year of assessment or within three years after the expiration thereof, and the time during which in cases of omission to charge any person a charge may be made and allowed or signed under Section 63 of the Taxes Management Act, 1880 (which relates to the powers of surveyors to make such charges), shall be a period of three years after the expiration of the year for which the person ought to .have been charged. (3) Nothing in this section shall affect proceedings for the recovery of fines or penalties incurred before the commencement of this Act, or extend the time during which any assessment maj' be made or amended, or a charge ma}' be made on an\' person in respect of income- tax charged under any .\ct passed before the commencement of this Act. 24. — (i) Section 133 of the Income Tax Act, 1842, and Section 6 of the Revenue Act, 18G5 (which provide for the reduction of assessments or the repayment of dut}- in certain cases where the profits of the year of assessment fall short of the sum on which the assessment has been made), shall cease to have effect as respects income-tax charged for the year beginning the sixth da)' of April nineteen hundred and seven, or for any subsequent year. (2) Wliere a person charged or chargeable with income-tax in respect of any profession, trade, or vocation which has been set up or com- menced within the period of three years upon the average of which the profits or gains are to be taken under the Income Tax Acts, or within the year of assessment, proves at the end of the year of assess- ment to the satisfaction of the Commissioners by whom the assessment has been or can be made that the actual profits or gains arising from the profession, trade, or vocation in the year of assessment fall short of the profits or gains as computed in accordance with those Acts, he shall be entitled to be charged on the actual amount of the profits or gains so arising instead of on the amount of the profits or gains so computed, and, if he has paid the full amount of the tax on the profits or gains so computed, be entitled to repayment of the amount overpaid. (3) Where a profession, trade, or vocation is discontinued in any year, any person charged or chargeable with income-tax in respect of that profession, trade, or vocation, shall be entitled to be charged on the actual amount of the profits or gains arising from the profession, trade, or vocation in that year, and shall also, if he proves to the satisfaction of the Commissioners, by whom the assessment has been or could have been made, that the total amount of the income-tax paid during the three previous years in respect of that profession, trade, or vocation, exceeds the total amount which would have been paid if he had been assessed in each of those years on the actual amount of the profits or gains arising in respect of the profession, trade, or vocation, be entitled to repayment of the excess. 678 AUDITING.. 25. — (i) In estimating, under any schedule of the Income Tax Acts, the amount of the profits and gains arising from any trade, manu- facture, adventure, concern, profession, or vocation, no deduction shall be made on account of any royalty, or other sum, paid in respect of the user of a patent, but the person paying the royalty or sum shall be authorised, on making the payment, to deduct and retain thereout the amount of the rate of income-tax chargeable during the period through which the royalty or sum was accruing due. (2) Subsection (3) of Section 24 of the Customs and Inland Revenue Act, 1888, shall apply to any such royalties or sums as it applies to interest of money or annuities charged with income-tax under Schedule D in the Income Tax Act, 1853. 26. — (i) For the purpose of enabling deductions for wear and tear to be allowed b}'' the additional Commissioners, claims in respect of those deductions shall be included in the annual statement required to be delivered under the Income Tax Acts of the profits or gains of the con- cern for the purpose of which the machinery or plant is used, and the additional Commissioners in assessing those profits and gains shall make such allowances in respect of those claims as they think just and reasonable. (2) No deduction for wear and tear or repayment on account of any such deduction shall be allowed in any year if the deduction when added to the deductions allowed on that account in any previous years to the person by whom the concern is carried on will make the aggre- gate amount of the deductions exceed the actual cost to that person of the machinery or plant, including in that actual cost any expendi- ture in the nature of capital expenditure on the machinery or plant by way of renewal, improvement, or reinstatement. (3) Where as respects any trade, manufacture, adventure, or concern full effect cannot be given to the deduction for wear and tear in any year owing to there being no profits or gains chargeable with income- tax in that year, or owing to the profits or gains so chargeable being less than the deduction, the deduction or part of the deduction to which effect has not been given, as the case may be, shall, for the purpose of making the assessment for the following year, be added to the amount of the deduction for wear and tear for that year and deemed to be part of that deduction, or if there is no such deduction for that year, be deemed to be the deduction for that year, and so on for succeeding years. 27. — Any application for relief under Section 23 of the Customs and Inland Revenue Act, 1890, may be made either to the Commissioners for the general purposes of the Acts relating to income-tax as provided in that section or to the Commissioners for the special purposes of those Acts, and the last-named Commissioners shall have the same power under that section as the first-named Commissioners have. THE FINANCE (1909-IO) ACT I910. 679 THE FINANCE (1909-10) ACT, 1910. Part IV. — Income Tax. 65. — (i) Income-tax for the year beginning on the sixth day of April nineteen hundred and nine shall be charged at the rate of one shilling and two-pence. (2) All such enactments relating to income-tax as were in force on the fifth day of April nineteen hundred and nine shall, subject to the pro- visions of this Act, have full force and effect with respect to any duties of income-tax hereby granted. (3) The annual value of any property which has been adopted for the purpose either of income-tax under Schedules A and B in the Income Tax Act, 1853, or of inhabited house duty, during the year ending on the fifth day of April nineteen hundred and nine shall be taken as the annual value of such property for the same purpose during the next subsequent year ; provided that this subsection — [a] so far as respects the duty on inhabited houses in Scotland, shall be construed with the substitution of the twenty-fourth day of May for the fifth day of April ; and (b) shall not apply to the metropolis as defined by the Valuation (Metropolis) Act, 1869. (4) Section 38 of the Finance Act, 1894 (which relates to duty on divi- dends, &c., paid prior to the passing of the Act), shall be applied with respect to the year which commenced on the sixth day of April nineteen hundred and nine, as it was applied with respect to the year which commenced on the sixth day of April eighteen hundred and ninety-four. 66. — (i) In addition to the income-tax charged at the rate of one shilling and twopence under this Act, there shall be charged, levied, and paid for the year beginning on the sixth day of April nineteen hundred and nine, in respect of the income of any individual, the total of which from all sources exceeds five thousand pounds, an additional duty of income-tax (in this Act referred to as a super-tax) at the rate of sixpence for every pound of the amount by which the total income exceeds three thousand pounds. (2) For the purposes of the super-tax, the total income of any indi- vidual from all sources shall be taken to be the total income of that individual from all sources for the previous year, estimated in the same manner as the total income from all sources is estimated for the pur- poses of exemptions or abatements under the Income Tax Acts ; but, in estimating for the purpose of super-tax the income in respect of any 68o AUDITING. land on which income-tax is charged upon the annual value estimated otherwise than in relation to profits, there shall be deducted (in addi- tion to any other deduction) any sum b}-^ which the assessment is reduced for the purposes of collection under Section 35 of the Finance Act, 1894, or on which duty has been repaid under the provisions of this Act relating to the payment of duty in respect of the cost of main- tenance, repairs, insurance, and management, and in estimating total income there shall be deducted the amount of anj^ premiums in respect of which relief from income-tax may be allowed under Section 54 of the Income Tax Act, 1853 (as extended by any subsequent enactment), and also in the case of a person in the service of the Crown abroad, any such sum as the Treasury may allow for expenses which in their opinion are necessarily incidental to the discharge of the functions of his oifice and for which an allowance has not already been made. 67. — Section 19 of the Finance Act, 1907, shall apply to any individual who claims and proves, in manner provided by that section, that his total income from all sources exceeds two thousand pounds and does not exceed three thousand pounds, as if one shilling were substituted for ninepence, and as if, as respects any such individual, the thirty- first day of July nineteen hundred and ten were substituted for the thirtieth day of September nineteen hundred and seven. 68. — (i) If any individual who has been assessed or charged to income- tax, or has paid income-tax either by deduction or otherwise, claims and proves in manner prescribed by the Income Tax Acts that his total income from all sources, although exceeding one hundred and sixty pounds, does not exceed five hundred pounds, and that he has a child or children living and under the age of sixteen 3'ears at the commence- ment of the year for which the income-tax is charged, he shall be entitled, in respect of every such child, to relief from income-tax equal to the amount of the income-tax upon ten pounds. (2) Any relief under this section shall be given either by reduction of the assessment, or repayment of the excess which has been paid, or by both those means, as the case may require. (3) Subsections (2) and (3) of Section 19 of the Finance Act, 1907, shall be construed as if this section were mentioned therein as well as Section 8 of the Finance Act, 1898, and Section 54 of the Income Tax Act, 1853, and the provisions of the Income Tax Acts which relate to claims for exemption, relief, or abatement, or the proof to be given with respect to those claims, shall apply to claims for relief under this section and the proof to be given with respect to those claims. THE FINANCE ([909-10) ACT I91O. 681 69. — (i) If the owner of any land or houses to which this section applies shows that the cost to him of maintenance, repairs, insurance, and management, according to the average of the preceding five 3'ears, has exceeded, in the case of land, one-eighth part of the annual value of the land as adopted for the purpose of income-tax under Schedule .\, and in the case of houses one-sixth part of that value, he shall be entitled, in addition to any reduction of the assessment under Section 35 of the Finance Act, 1894, on making a claim for the purpose, to repay- ment of the amount of the duty on the excess, not exceeding in the case 01 land one-eighth part and in the case of houses one-twelfth part of the duty on an amount equal to the annual value. (2) This section shall apply to any land (inclusive of farm-houses and other buildings, if any) the assessment on which is, for the purpose of collection, reduced under Section 35 of the Finance Act, 1S94, and to any houses the annual value of which, as adopted for the purpose of income-tax under Schedule A, does not exceed eight pounds, the assess- ment on which is so reduced. (3) In comparing the cost of maintenance, repairs, insurance, and management of an}' land or houses for the purpose of this section with the annual value of the land or houses, the total cost of the main- tenance, repairs, insurance, and management on any land managed as one estate, or of any houses on any such land, shall be compared with the total annual value of the land or houses as the case may be. (4) All the provisions of the Income Tax Acts which relate to claims for exemption, relief, or abatement, or the proof to be given with respect to those claims, shall apply to claims for repayment under this section and the proof to be given with respect to those claims : Provided that if the owner of any land or house makes and delivers to the surveyor of taxes of any district in which the land or house is wholly or partly situate a declaration as to the cost to him of main- tenance, repairs, insurance, and management, and the surveyor is satisfied as to the correctness of the declaration, the amount of the allowance to which the owner is entitled under this section shall be certified by the surveyor, and repayment shall thereupon be made in accordance with his certificate. (5) In computing the five-year average for the purposes of this sec- tion, the year shall be taken to be the year ending on the thirty-first day of March, or such other date as may be adopted by the owner of the land or houses with the consent of the survej'or of taxes of the 682 AUDITING. district, and the five preceding years shall be taken to be those pre- ceding the commencement of the year for which the duty in respect of which a claim for repayment is made is charged. 70. — The exemption from income-tax granted by the Income Tax Acts to a friendly society, and by the Trade Union (Provident Funds) Act, 1893, to a registered trade union, by the rules of which it appears that the sums assured to any person by the society or union do not exceed if by way of gross sum two hundred pounds, or if by way of an annuity thirty pounds a year, shall extend to any registered friendly society and to any registered trade union, if the society or union are restricted either by virtue of any Act of Parliament or by their rules from assuring to any person any sum exceeding three hundred pounds by way of gross sum or fifty-two pounds a year by way of annuity. 71. — (i) No exemption, abatement, or relief under the Income Tax Acts which depends wholly or partially on the total income of an indi- vidual from all sources shall be given to any person, unless the person claiming the exemption, abatement, or relief is resident in the United Kingdom : Provided that any person who is or has been employed in the service of the Crown abroad, and any person resident in the Isle of Man or Channel Islands and any person resident abroad who satisfies the Commissioners that he is so resident for the sake of health, shall be entitled to any relief, exemption, or abatement to which he would be entitled it he were resident in the United Kingdom, and if his total income from all sources were calculated as including any income in respect of which income-tax may not be chargeable as well as income in respect of which income-tax is chargeable. (2) Income-tax shall not be payable in respect of the interest or divi- dends of any securities of a foreign State or a British possession which are payable in the United Kingdom, where it is proved to the satisfac- tion of the Commissioners that the person owning the securities and entitled to the interest or dividends is not resident in the United King- dom ; but, save as provided by this or any other Act, no allowance shall be given or repayment made in respect of the income-tax on the interest or dividends on the securities of any foreign State or any British possession which are payable in the United Kingdom. THE FINANCE (1909-I0) ACT 1910. 683 Relief from income-tax under this subsection may be given by the Commissioners either by way of allowance or repayment on a claim being made to them for the purpose within six months of the end of the year for which the income-tax is charged. 72. — (i) The super-tax shall be assessed and charged by the Commis- sioners for the special purposes of the Acts relating to income-tax (in this Act referred to as the Special Commissioners). (2) Every person upon whom notice is served in manner prescribed by regulations under this section by the Special Commissioners requiring him to make a return of his total income from all sources or, in the case of a notice served upon any person who is chargeable with or liable to be assessed to income-tax under Section 41 of the Income Tax Act, 1842, or Section 24 of the Customs and Inland Revenue Act, 1890, as representing an incapacitated, non-resident, or deceased person, of the total income from all sources of the incapacitated, non-resident, or deceased person, shall, whether he is or is not charge- able with the super-tax, make such a return in the form and within the time required by the notice. (3) It shall be the duty of every person chargeable with the super- tax to give notice that he is chargeable to the Special Commissioners before the thirtieth day of September in the year for which the super- tax is chargeable : Provided that for the purpose of this provision the thirty-first day of July nineteen hundred and ten shall, as respects the year beginning on the sixth day of April nineteen hundred and nine, be substituted for the thirtieth day of September of that year. (4) If any person without reasonable excuse fails to make any return or to give any notice required by this section, he shall be liable to a penalty of fifty pounds, and after judgment has been given for that penalty to a further penalty of fifty pounds for every day during which the failure continues. Any penalty under this provision shall be recoverable in the High Court, or in Scotland in the Court of Session. (5) If any person fails to make a return under this section, or to give any notice required by this section, or if the Special Commis- sioners are not satisfied with any return made under this section, the .Special Commissioners may make an assessment of the super-tax according to the best of their judgment. 684 AUDITING. (6) All provisions of the Income Tax Acts relating to persons who are to be chargeable with duty, assessments, and appeals against those assessments, and to the collection and recovery of duty, and to cases to be stated for the opinion of the High Court shall, so far as they are applicable, apply to the charge, assessment, collection, and recovery of duty under this section, and the Special Commissioners shall, for the purpose of assessment, have any powers of an inspector or sur- veyor of taxes, and for the purpose of the representation of the Crown on any appeal before the Special Commissioners, any person nominated in that behalf by the Commissioners of Inland Revenue shall have the same powers at and upon the determination of the appeal as a surveyor of taxes has at and upon the determination of any appeal under the Income Tax Acts. i ^' ■ APPENDIX B. REPORTS OF CASES, THE DECISIONS ON WHICH ARE OF PROFESSIONAL INTEREST. The case of THE LEEDS ESTATE BUILDING AND INVESTMENT SOCIETY, LIM. V. SHEPHERD. (Decided by Stirling, J., in the Chancery Division, on qth August 1887.) Held to he an Aiiditor^s duty to see that Accounts he Certifies are acttiaily Correct — Liability for Neglect. In 1S60 the plaintiff company was formed and registered under the Act of 1862 for the purpose of deahng in lands and lending money on mortgage. In 1882 it went into voluntary liquidation. By article 63 it was provided that when the company paid a dividend of 5 per cent, the directors were to receive los. for every meeting attended by them, and the remuneration was to be increased by 2s. 6d. for every additional i per cent, of dividend. By articles 79 and So the directors were authorised to declare a divi- dend upon such estimate of profits as they might think proper to recommend, but no dividend was to be payable except out of profits. Articles 86 to 89 provided that the directors should cause true accounts to be kept, and should lay before the company once in every year a statement of the income and expenditure, and also a Balance Sheet in the form prescribed by Table A of the Companies Act, 1862. iVrticles 90 to loi related to the auditing of the accounts and provided that the Auditors should state in their report whether, in their opinion, the Balance Sheet was a full and fair Balance Sheet, properly drawn up so as to exhibit a true and correct view of the state of the company's affairs. The articles also provided for the appointment of a manager and secretary, whose remuneration was to be fixed by the directors. Except in 1876 the company made no profits during the whole period during which it carried on business. 686 AUDITING. This action was brought by the company in liquidation against the directors, the manager, and the Auditor of the company to make them liable in respect of certain sums paid out of capital for dividends, and for fees and bonuses to the directors and manager respectively. The Balance Sheets were false and misleading and contained fictitious items, and were framed with a view to the declaration of dividend. They were prepared by the manager and examined by the Auditor. In examining the Balance Sheets the Auditor was not fur- nished with a copy of the articles, and he did not comply with their provisions. The directors did not investigate the accounts, but trusted entirely to the manager and the Auditor ; and they did not know that the company had been paying dividends out of capital, or that the Balance Sheets were inaccurate. The Balance Sheets were not shown to the shareholders as required by the articles. JUDGMENT. Stirling, J., held, following In re The Oxford Benefit Building and Investment Society (56 L.J. Rep. Ch. 98), that the directors were bound to make good the several sums paid out of capital, and that the manager and Auditor were liable for damages to the like amount. With reference to the case against the Auditor, his Lordship said that it was the duty of the Auditor not to confine himself merely to the task of ascertaining the arithmetical accuracy of the Balance Sheet, but to see that it was a true and accurate representation of the company's affairs. It was no excuse that the Auditor had not seen the articles when he knew of their existence. The Statute of Limitations had been pleaded on his behalf, and the plea had not been resisted, so that his liability would be limited to the dividends paid within six years of the commencement of the action. (L. J. Notes, 1S87, p. 130.) \ The (appeal in the) case of LEE v. NEUCHATEL ASPHALTE COMPANY, LIM. (Decided by Cotton, Lindley, and Lopes, L.JJ., in the Court of Appeal, on 9th February 1889.) Held that a Company may by its Articles of Association frovide for the distribution of Profits arrived at before making good the de-preciation of Fixed Assets — Af-plication for Injunction refused. The Court of Appeal delivered judgment in this important company case, which was argiied before them on the 4th, 5th, and 6th inst., on an appeal by the plaintiff in the action from the decision of Mr. Justice I LEE V. NEUCHATEL ASPHALTE CO., LIM. 687 Stirling. The action was brought by Mr. Charles John Lee, on behalf of himself and all of the ordinary shareholders of the Neuchatel Asphalte Company, against that company and the directors, one of whom, Mt. J. Varley, had been appointed to represent the preference shareholders of the company. The object of the action was to restrain the payment of a dividend of gs. per share, proposed to be paid out of what were alleged by the defendants to be the profits of the company for the year ending December 31 1885. The company was on July 9 1S73 incorporated under the Companies Act of 1862, with a capital of _^'i,i50,ooo, divided into 35,000 preferred shares, and So, 000 ordinary shares, of ;^io each respectively. One of the objects of the company, as defined by the memorandum of association, was to acquire, as from July I 1873, and on the terms expressed in an agreement dated July 17 1873, a concession granted by the Government of the Canton of Neuchatel, in Switzerland, and held by the Neuchatel Rock Paving Company, and the exclusive right thereunder of getting the bituminous rock and mineral products from the Val de Travers, and also all the mines, works, business, property, and assets of the last-mentioned company, and also all the concessions held by five other companies, and all the businesses, properties, and assets of these various companies. The company had also power to work and get bituminous rock, according to any concession granted to the companies, and the product of any mines acquired by the company, and to sell and dis- pose of the same, and to carry on the business of manufacturers of asphalte and bituminous rock pavement in every branch, and also to grant concessions and establish subsidiary companies. By the agree- ment of July 17 1873, the Neuchatel Company agreed to pay for the original concession and all the sub-concessions granted to the five subsidiary companies, and all the mines, properties, and assets of the reconstituted original company and the five subsidiary companies in fully paid preferred and ordinary shares in the Neuchatel Company. Thus the selling companies were to be paid not on a valuation in cash, but in shares, and the whole of the ordinary shares of the defendant company and 33,700 out of the 35,000 preferred shares were to be allotted to the selling companies in consideration of the transfer to the Neuchatel Company of their entire assets, including the con- cession granted by the Canton of Neuchatel. The agreement was duly carried into effect, and the concessions, properties, and assets which were the subject-matter thereof were duly transferred to the Neuchatel Company, and the 80,000 ordinary shares and 33,700 preferred shares duly allotted and issued to the seUing companies. With a nominal exception, no other shares in the Neuchatel Company had ever been issued. The articles of association of the company provided that no distribution of profits^ — except an interim dividend not exceeding 7 per I 688 AUDITING. i cont. on the preferred and 4 per cent, on the ordinary shares — should be made without the consent of a general meeting, whose decision was to be final in case of any dispute as to the amount of net profits ; and it was provided by article too that the directors might, before recom- mending anv dividend, set aside and invest out of the net profits of the companj' such sum as they thought proper as a reserved fund to meet contingencies or equalise dividends, or repair or maintain the company's works, but should not be bound to reserve moneys for the renewal or replacing of any lease or of the company's interest in any pi'opertj' or concession. The concession referred to in the agreement and in the memorandum of association was for a period of 20 years commencing December 15 1S67, and ending December 14 1S87, and conferred on the concessionaires the exclusive right of working the asphalte mines within a certain defined area situate in the communes of Cou\et and Travers, in the Canton of Neuchatel. The considera- tion for that concession originally consisted of a v^inimuin annual rent of 40,ooof. and a royalty of ig.75f. per ton of asphalte tTirned out; but for the 11 years between December lO 1S70 and December 16 1881 these terms were modified as follows — there was to be paid a minimum annual rent of ioo,ooof. and a royalty varying from ig./Sf. to 5f. per ton. After December 16 1881 the parties were to return to the terms of the original concession. Soon after that concession had, with the consent of the Government of the Canton, been transferred to the Xeuchatel Company, it appeared from the annual reports of that com- pan}- that the terms of it began to be felt unduly burdensome to the company, and negotiations were entered into for the modification and extension of it, and ultimately these were effected by a convention agreed on in November 1877, and finalty adopted on January 22 187S. The more material modifications thus introduced were these — (i) The duration of the concession was extended for 20 years, so that instead of J expiring on December 14 1887, it would not expire until December 14 1907; (2) the area under which the mines could be worked was very considerably enlarged ; (3) the consideration for the modified conces- sion consisted of {a) a present payment in cash of 2oo,ooof. (;;<"8,ooo), [b] a royalty of 6f. per ton of asphalte taken out of the mine, subject to a proviso that (c) if the annual working at the price of 6f. per ton sliould not produce i5o,ooof., the concessionaires should nevertheless pay that amount by way of minimum royalty or dead rent. The result of the modification of the royalty as applied to the actual working of the company between the beginning of 1878 and the end of December 1885 was that the Government of Neuchatel had received about ;f39,ooo less than would have come to it had the terms of the concession remained as they stood in 1873. The company had worked the mines and carried M LEE V. NEUCHATEL ASPHALTE CO., LIM. 689 on business from its formation down to the present time. For the year ending December 31 1879 the accounts showed an excess of receipts over expenditure to the amount of /C8,i6e, 12s. id., and in respect of this year's working a dividend amounting to 2s. 6d. per share, and making ^C'i'-S^ ^°^-' '^^'^ ^°^ ^^^ ^^^^ ^™^ declared. All the subse- quent accounts showed a like excess of receipts over expenditure to a considerable extent. Dividends were declared for the years 1881, 18S2, and 1SS3 of 5s., 3s. 6d., and 5s. per share. In 1884 no dividend was declared, although the accounts showed a balance of £39,339 fo the balance of the Profit and Loss Account on December 31 1884 ; and this large sum was dealt with as follows — ^1,000 was written off in respect of the sum paid for the modification and extension of the con- cession in 1877, and the balance of ;f38,359 was written off the cost in shares of the original concession and other assets taken over by the companv on its formation. It appeared from the report for 1884 that the directors 1^ad resolved that the sum paid for the renewal of the concession should be written off at the rate of ^1,000 a year. The accounts for the year 1885 showed an excess of receipts over expendi- ture to the amount of ^"17,140 13s. 2d., out of which, after setting aside a sum of ^1,000 in reduction of the sum paid in 1887 for the renewal of the concession, it was recommended b}' the directors and resolved by a majority of the shareholders that a dividend on the preferred shares at the rate of gs. a share should be paid. Mv. Justice Stirling, before whom the action was tried, dismissed the action, and the plaintiff now appealed. JUDGMENT, The Court dismissed the appeal. Lord Justice Cotton, in giving judgment, after stating the nature and objects of the respondent compari}', and referring to the fact that the assets of the respondent company consisted of the concession and the other subsidiary rights taken over from the previously existing com- panies, and that these assets had not been paid for in cash, said : — Three points had been raised on behalf of the appellant. First, it was said that a principal part of the capital of the company had been lost. If by that it was meant that an}^ part of the assets had been lost, in my opinion that is not correct, for the evidence shows that the assets of the company at present are of larger amount; its nominal capital, or, as I should prefer to call it, its share capital, is improved in value now to what it was when the company was formed in 1873, additional time for the concession to run having been obtained and less royalty having to be paid. Secondly, it was said that the property of the com- pany was not sufficient to make good its nominal or share capital, and that the deficiency should be made up before any dividend ought to be [)aid. In my opinion, that argument is entirely wrong and involves a Y Y 690 AUDITING. misapplication of the term "capital." "Capital" is used in man^^ senses, but the share capital of a company means the amount of its nominal capital divided into so many shares. The Companies Acts do not require, and it would be impossible that the assets of a company should be stated in its memorandum of association, though its share capital must be. No alteration can be made in the share capital of a company except in the manner provided for by the Companies Acts, and the share capital must not be applied except for some of the purposes for which the company was formed. But, in my opinion, there is no obligation on the company to make up the assets of the company so as to meet its share capital where the share capital has been issued under a duly registered contract, enabling allotment for something different from cash. Of course, if the contract was fraudulent or illusory, it might well be that the shareholders would be bound to pa}- up, in cash, the difference ; but there is no suggestion of anything of that kind here. The payment of the proposed dividend, therefore, is not a return of capital ; it is not a return of money which the shareholders were bound to provide in order to make up the nominal amount of their shares. The third point raised was one of more difficulty : it was said that this concession being a wasting property, the payment of this dividend was dividing part of the capital of the company represented by this con- cession. It is a well-established principle of compan}' law that the capital assets of a company must not be applied for any purpose not one of the objects of the company, and though there is nothing in the Company Acts which says that dividends are not to be paid except out of profits — for the article to that effect in Table A in the schedule to the Act of 1862 is merely a matter of internal regulation — yet it is well established that the paying of a dividend is not one of the objects of a company, and therefore that the capital assets of a company must not be applied in that way. If the directors were to sell what was a per- manent property of the company and then to declare a dividend, that would come within the principle laid down in Gitinness v. Land Corpo- ration of Ireland (L.R. 22 Ch.D. 349) — that the capital of a company cannot be applied for purposes not authorised. But that is not the case here, and we must take a reasonable and sensible view of the circumstances of this case. If it could be shown that this dividend was declared " for the purposes of fraud, or for any other improper motive, and that .... the company has thereby in effect taken away from its creditors a portion of the capital which was available for their debts," to use the words of Lord Justice Selwyn in Stringer's case (L.R. 4 Ch. App., at p. 488), then this Court would interfere to prevent such improper dealing. But when the Court sees that the directors of the company have acted fairly and reasonably in ascer- I.EE V. NEUCHATEL ASPHALTE CO., LIM. 69 1 taining whether this is in lealit)- a part of the capital assets or not, then the Court is very unwilling to interfere with the discretion exercised by directors who have the management and regulation of the affairs of the company. In my opinion, it was not necessary, as Mr. Rigby suggested, that the directors should set apart each year a sum to answer the supposed annual diminution of this property by reason of its wasting nature. The Lord Justice then referred in detail to the cases of Davison v. Gillies (L.R. 14 Ch.D.' 347n) and Dent v. London Tram- ways Comfany (L.R. 16 Ch.D. 344), which, he said, were consistent both with each other and with the view which he took in the present case, and said that, having regard to the nature and constitution of this mercantile company, he was not satisfied that a proper provision had not been made for depreciation by the establishment of a Reserve Fund, and considered that it would be wrong for the Court to interfere to prevent the payment of the proposed dividend. Lord Justice Lindley agreed. His Lordship said the actual point to be decided is an easy one, but the difficulty arises from the fact that the Court is urged to lay down general principles of law, which, if adopted, would paralyse the whole trade of the country. The respon- dent company was formed for the purpose of working certain asphalte mines of which it had got a lease. It was quite obvious that with respect to such a property every ton of stuff got out of that which was bought with capital represented a portion of capital. It was said that a division of the profit arising from the sale of such was a return of capital. If that was so, it is not, at all events, such a return of capital as is prohibited by the Company Acts. There is nothing in any of the Company Acts prohibiting anything of the kind. The only provisions in those Acts relating to capital were Sections S, 12, 26, 28, and 34 in the Act of 1S62; Sections 9-20 in the Act of 1867; and Sections 3-5 in the amending Act of 1877. There was nothing in any of those sections as to the mode of payment of profits or dividends. It has been ^•ery judiciously and properly left to the commercial world to settle how the accounts were to be kept. The Acts do not say what expenses are to be charged to Capital Account and what to Revenue Account. Such matters were left to the shareholders ; they may or may not have a sinking fund or a deterioration fund, the articles of association may or may not contain regulations on these matters ; if they do, the regula- tions must be observed ; if they do not, the shareholders can do as they like so long as they do not misapply their capital. In this case one of the articles provides that the directors shall not be bound to reserve I moneys for the renewal or replacing of any lease or of the company's interest in an}' property or concession. Mr. Rigby says that that pro- vision in the articles is contrary to law. Now, the Companies Act, 1862, V V 2 692 AUDITING. does not require the capital to be made up if lost, and it does not prohibit payment of dividends so long as the assets are of less value than the capital called up, nor does it make loss of capital a ground for winding-up. The argument seems to be founded on the notion that the company is somehow a debtor to its capital ; that may be a con- \'enient notion from an accountant's point of view, but has nothing to do with law. Though the Acts do not say so, there are general principles of law which prohibit the capital of a company being applied for pur- poses other than those mentioned in the memorandum of association, and, further, if any of the purposes mentioned in the memorandum of association are expressly or impliedly forbidden by the statutes, then the capital of the company cannot be applied for those purposes (see Trevor v. W hitworth, 12 App. Cas. 409). But if a company is formed to acquire or work property of a wasting nature, e.g., a mine, quarry, or patent, the capital expended in acquiring the property may be regarded as sunk and gone, and if the company retains assets sufficient to pay its debts, any excess of money obtained by working the property over the cost of working it may be divided among the shareholders ; and this is true, although some portion of the property itself is sold, and in one sense the capital is thereby diminished. If it is said that such a course involves payment of dividends out of capital, the answer is that the Acts nowhere prohibit such a payment as is here supposed. The proposition that it is ultra vires to pay dividends out of capital is very apt to mislead, and must not be understood in such a wa\' as to prohibit honest trading. It is not true, as an abstract proposition, that no dividends can be properly declared out of moneys arising from the sale of property bought by capital. But it is true that if the working expenses exceed the current gains, proirts cannot be divided, and that if in such a case capital is divided and paid away as dividend, the capital ^, is misapplied, and the directors implicated in the misapplication may be compelled to make good the amount misapplied. This was the case in Ranee's case (L.R. 6 Ch. App. 104) ; in the Oxjord Benefit Building Society' s case (L.R. 35 Ch.D. 502) ; in Leeds, St'c, Investment Company V. Shepherd (L.R. 36 Ch.D. 787) ; and in Stringer's case (L.R. 4 Ch. App. 47S)- In the present case the articles say that there need be no sinking fund ; consequently, capital lost need not be replaced ; nor, having regard to these articles, need an}- loss of capital by removal of bituminous earth appear in the Profit and Loss Account of the working of the company's property. Our decision, therefore, in this case is quite consistent v/ith the two cases before the late Master of the Rolls of Davison v. Gillies and Dent -v. London Tramn'ays Company. Lord Justice Lopes : Very important questions are raised in this case. It is said by the appellants that a company is not to be at liberty to pay n dividend unless they can show that their available property at the s I BOLTON V. NATAL LAND, ETC., CO.. LIM. 693 time of declaring the dividend is equivalent to their nominal or share capital. In my opinion, such a contention is untenable. The nominal or share capital is diminished in value, not by means of any improper dealing with it by the company, but by reason of causes over which the ccmpany has no control or by reason of its inherent nature. That diminution need not, in my opinion, be made good out of revenue. In such a case a dividend may be paid out of current annual profits — out of profits arising from the excess of ordinary receipts over expenses properly chargeable to the Revenue Account, provided there is nothing contrary to the articles of association prohibiting such an application, and provided it is done honestly. If the contrary views were adopted, it might be successfully contended that where, owing to extraneous circumstances, the capital is increased in value, that increase might be dealt with as revenue profits and go to increase the dividend. That is contrary to all practice and to principle. It is said that where the capital is of a wasting character a sum must be laid aside to meet the depreciation, and that until such sum is laid aside there is nothing in the nature of profit divisible among the shareholders. The Lord Justice referred to the article providing that the directors should not be bound to reserve moneys for the renewal or replacing of any lease or of the company's interest in any property or concession, and proceeded : — Unless this article is ultra vires no question arises. Is the article ultra vires? I know of no obligation imposed by law or statute to create a Reserve Fund out of revenue to recoup the wasting nature of capital. Subject to any provision to the contrary contained in the articles, I believe the disposition of the revenue is entirely in the hands and under the control of the company. Provided there is by the company no infraction of the capital and nothing in the articles to the contrary, the disposition of the revenue is a matter of internal arrangement. I am unable to see in this case that either capital or the product of capital has been dealt with in a way which is not authorised. [Arct. L.R.,'1889, p. 26.) The case of BOLTON v. NATAL LAND AND COLONISATION COMPANY, LIM. (Decided by Romer, J., in the Chancery Division, on 8th, gth, and loth December 1891.) Held that a Com-pany may declare a Dividend out of current Profits ■without being obliged to show all its Capital is intact. The fact that some portion of the capital of an incorporated com- pany limited by shares has been lost, and not made good, affords no ground for restraining the payment of a dividend out of profits subse- 694 AUDITING. quentl)- earned. The business of an incorporated company, limited by shares in the ordinary way, consisted mainly in buying, holding, culti- vating, letting, selling, and otherwise dealing with land in South Africa. In 1882 the company, under peculiar circumstances, debited their Profit and Loss Account for that year with the whole loss occa- sioned by writing off a certain debt of over ;^7o,ooo as a bad debt, and -per contra credited the same Profit and Loss Account with a sum of nearly ;^7o,ooo in respect of an increase in value attributed (rightly or wrongly) to their lands (or a portion of them) in South Africa, above and beyond the cost price at which such lands previously stood in the books of the company, the result being to make the profit and loss practically balance each other upon the year's accounts. The company, having subsequently earned a working profit, declared a dividend thereout, in respect of the year 1885. Thereupon the pliantiff, in an action commenced in 1886 to restrain the payment of such dividend, contended that, at the time the value of the lands was written up in 1882, they were valued, and now stood in the company's books at an amount considerably exceeding their true value, and that, before a profit could be deemed to have been made which would be properly available for the payment of a dividend, the lands in question must be written down to their true value, and the difference debited to the Profit and Loss Account, in the same way as the supposed increase had been credited to the Profit and Loss Account for the year 1882. JUDGMENT. Held that, assuming that a part of the capital had in fact been lost, and not subsequently made good, no sufficient ground was thereby afforded for restraining the payment of the dividend ; that the fact of the company having written up the value of their land in 1882, and ^ credited the increase to the profit of that year in the manner described, ,4; did not place them under any obligation to bring into account in every subsequent year the increase or decrease in the value of their lands ; and that, having regard to the case of Lee v. The N euchdtel Asfhalte Company (61 L.T. Rep. N.S. 11; 41 Ch.D. i), it was not correct, in estimating the profits of a year, to take into account the increase or decrease in the value of the capital assets of the company. (92 L.T. Rep. 109.) The case of LUBBOCK v. THE BRITISH BANK OF SOUTH AMERICA, LIM. (Decided by Chitty, J., in the Chancery Division, on ist April 1892.) Held that if a Comfany''s Articles of Association so provide j a Profit made on the Sale of a fart of the Undertaking is available for Dividend. This was a motion by the plaintiff, on behalf of himself and all others — the shareholders of the defendant company — to restrain the company from acting upon or carrying into effect a resolution passed by the i LUBBOCK V. THE BRITISH BANK OF S. AMERICA, LIM. 695 directors of the compan}' on March 24 last, and from placing a sum of ;^'205,ooo to the Profit and Loss Account of the company, and from deal- ing with or distributing the same as if it were income of the company. It was stated that the company was incorporated in 1863 for the pur- pose of carrying on a banking business, with a capital of _^i,ooo,ooo divided into 100,000 shares of ;/.'io each. All the shares of the com- pany had been issued with ^^5 each paid up, constituting a paid-up capital of /,"5oo,ooo. The companj^ had carried on business all over the world, but chiefly in America. Up to July 1891, the name of the company was the English Bank of Rio de Janeiro, but in January 1891 an agreement was entered into between the company and a Brazilian bank — namely, the Banco de Crediro Universal (of Rio de Janeiro) — for the sale by the copipany of its goodwill and property in Brazil to the Brazilian bank for a sum of /.'875,ooo, and the company also agreed on the payment of the ;^875,ooo to discontinue the use of its name, and to adopt a name not indicating a bank doing business in Brazil, and the agreement contained provisions restricting the company from carrying on business in Brazil. At the end of June all the ,,^875, 000 was paid. In November the restriction against the company's carrying on busi- ness in Brazil was released by the Brazilian bank on payment by the company to the latter of ^^75,000. The ^205,000 in question was the net balance of the ;:f875,ooo, after deducting the ^500,000 paid-up capital of the company, the ^75,000 repayment, and divers sums for outgoings and compensation in reference to the sale to the Brazilian bank. On March 24 last a resolution was passed by the directors that the profit derived from the sale and repurchase of the bank's busi- ness in Brazil be treated as profit to be carried to the Profit and Loss Account of the bank, and dealt with accordingly. It was stated that the present proceedings were of a friendly character, both parties being desirous of obtaining the opinion of the Court. Mr. \\ hitehorne, Q.C., and Mr. S. Dickinson, in support of the motion, submitted that to carry over the ;,^205,ooo to a Profit and Loss Account appeared to be ultra vires the company, as, according to the authorities. Frames v. Bultfontein Mining Comfany (L.R. i Ch. 1891, 140), Lee V. Neuchdtel Asfhalte Comfany (L.R. 41 Ch.D. i, -per Lord Justice Lopes, p. 26), a sum like the present, produced by the sale of part of the undertaking of the company, and not by earnings, should be treated as an accretion of capital to be placed to the Capital Account, and it was also argued that, having regard to the statements issued to the shareholders by the directors with regard to this particular fund, it was not competent for the directors to act on the resolution in question or carry the fund to the Profit and Loss Account. 696 AUDITING. JUDGMENT. Mr. Justice Chitt}' held that the _;^'205,ooo was plainly profit on capital, and not part of the capital itself, for that sum was the surplus ascertained on tlie assets' side after the liabilities and capital were placed on one side of the account and the assets on the other. Under the articles of the company the directors were justified in carrj-ing over the _;^205,ooo to a Profit and Loss Account, and having appropriated to the Reserve Fund so much of the sum as they thought fit, they could distribute the remainder as dividends after an ordinary meeting called in pursuance of the articles had passed the requisite resolution. {Ac-cL L.R., 1892, p. 56.) The case of THE EDINBURGH UNITED BREWERIES, LIM., AND OTHERS v. JAMES A. MOLLESON (NICIiOLSON'S TRUSTEE) AND ANOTHER. (Decided in the Scottish Court of Appeal before the Lord President, and Lords AD.\>r, M'Laren, and Kinnkar, on 17th March 1S93.) Held that a Contract of Sale of a Business cannot be upset on the ground that the Accounts submitted for Inspection -prior to Purchase ttir7i out to be false, provided the Sale was made bond fide and without Wa> ra/ity. In this action the Edinburgh United Breweries, Lim., and William H. Dunn, 27 Bishopsgate Street, London, sued James A. Molleson, C.A., Edinburgh, as trustee of David Nicholson,. Parson's Green, for the reduction of the sale of the Palace Brewery, on the ground that the books had been falsified in order to show a larger profit than that actually earned during the two years preceding the sale. Lord Kyllach}- assoilzied the defenders, with expenses, on the ground that if there was a fraud the pursuer had opportunity of discovering it by examina- tion of the books. The pursuers reclaimed, and to-day the Court, following Lord M'Laren, adhered to the judgment of the Lord Ordinary, with expenses. JUDGMENT. Lord M'Laren, who ga\e the judgment of the Court, said the case was peculiar in this respect, that while the action was laid on the ground of fraudulent representations, no personal fault was attributable to Mr. Molleson, who was known to be a gentleman of high standing in his profession. The case against him was that he employed Andrew Smith Geddes to keep the books of the brewery while it was under his management as trustee ; that Geddes, for his own purposes. RE EDI.XBURGII UNITED BREWERIES, UM. 697 falsified the books and the Balance Sheets ; that Mr. Dunn was induced to become the purchaser in reliance on the apparent profits exhibited on the face of the books and Balance Sheets, and was in that sense deceived by representations for which it was said Mr. Molleson was civilly responsible. So far as his Lordship understood, Geddes had no motive to falsify the books beyond the wish to please his employer and keep his situation by giving an aspect of fictitious prosperity to the business. By the agreement of November between Mr. Molleson and Mr. Dunn the sum of ;i^3,7oo was to be paid down, and the balance of the price was to be paid on 31st December, when the conveyance was granted. By the tenth clause of that agreement it was provided that the arrangement proceeded upon the basis that the net profits from the brewery and wine businesses during each of the two years 1887 and 1S88 amounted to /.3,7So, or thereabout, upon an average; and in the event of its being ascertained that that was not the fact, this arrange- ment should be at an end, and the second party (Mr. Molleson) should be bound to repay the sum of _;^3,70o. The first party (Mr. Dunn), with the view of verifying the amount of the profits for the two years, should be entitled to have the books, accounts, and vouchers con- nected with the businesses examined by an accountant named by him. The question was whether Mr. Molleson, as vendor, was affected by the fact that false entries were made in the books by the clerk Geddes for the purpose of bringing out an apparent profit in excess of the real profit. Th ; excess was stated at ,^1,250, but the exact sum was immaterial to the present inquiry. It was a condition of the bargain that the books had to be delivered to the purchaser for examination, and his Lordship thought that condition was not fulfilled by delivering dishonest books. It was just the same as giving no books at all; and his Lordship had come to the conclusion that Mr. Dunn was not barred by the loth article from challenging the sale on the ground of fraudu- lent representations as to the profits of the business, because he only agreed to take the risk of profits on the condition that books containing a true record of the brewery transactions should be submitted to him for examination. But, while his Lordship held it to be established that a fraud ivas committed inducing Mr. Dunn to enter into the contract, it did not follow that the pursuers, severally or collectively, were in a position to enforce the claim of restitution. The really important question was whether Mr. Dunn had a right to reduce his contract of sale — such a right as he could communicate to the United Breweries, to whom he had sold the brewery for ;^28,5oo, the price he paid to Mr. Molleson being ^20,500. Mr. Dunn resold the brewery at a profit, and he was not proposing to relinquish the profit of ;^8,ooo which came to him indirectly through the false impression which the books produced * 698 AUDITING. on the minds of the purchasers from him. On the discovery of the fraud which had been practised upon him, Mr. Dunn was under no obUgation to cancel the sale to the United Breweries. He had sold to them in good faith and without warranty. If Mr. Dunn proposed to repay the _,^8,ooo on the ground that he could not conscientiously retain it, and to assign his claim of restitution against Mr. Molleson in order that the United Breweries might obtain redress, he would have foiind in him (Lord M'Laren) a convinced partisan of the duty of restitution. It would be no answer to him to say that he had the means of recouping himself by holding the United Breweries to their bargain. A purchaser in such a case was entitled to say — " I refuse to take a benefit which has been obtained by fraud : and I will neither hold my purchaser to his engagements nor will I submit to be bound by the deception which has been practised on myself." His Lordship was not imputing any blame to Mr. Dunn, or to the parties whom he represented, because they had not begun by making restitution. He did not know that they had been asked to do so. He only wished to put their case in a clear light. He understood Mr. Dunn's position to be this — that he meant to keep the _^"8,ooo, which he was enabled to make by the exhibition of forged books and fraudulent Balance Sheets, and at the same time to try and cut down his title to the subject of sale on the ground that the title was vitiated by that very fraud. It was clear that, if Dunn were suing by himself alone, it would be a con- clusive answer to his claim that he had sold the subjects at a price calculated on the erroneous value attributed to the subjects, that he had not repaid the price to his siib-vendor, and that he had, therefore, made a profit out of the fraud. The circumstance that he had bought back the property, and was thus enabled to offer restitution, would not, in his Lordship's judgment, improve his position. Plainly Dunn could communicate no higher right to the United Breweries than he himself possessed. The United Breweries had no direct claims of any kind either against Molleson or against Dunn. Whatever right of action they might acquire through Dunn, by being joined with him as pursuers, must be measured by his right, and it followed that the action, considered as an action at the instance of the United Breweries, must also fail. Their Lordships concurred. [Acct. 1893, P- 301-) VERNER V. GENERAL AND COMMERCIAL INVESTMENT 699 TRUST, LIM. The case of VERNER v. THE GENERAL AND COMMERCIAL INVESTMENT TRUST, LIM. (Decided by Lindlev^ Ka\\, and Smith^ LJJ-) iri the Court of Appeal, on 7th April 1894.) Held that an Injunction to restrain a Comfany from faying a fro-posed Dividend out of current Profits on the ground that the Cafital of the Comfany is not intact, must be. refused if the Company is solvent, and acting within its Articles. This was an appeal from a decision of Mr. Justice Stirling. It raised a very important question in company law — viz., whether, where there has been a loss in the capital of a company through depreciation in the value of its assets, the company is entitled to pay dividends out of profits earned by means of its investments without first reducing its capital so as to meet such depreciation. The action was brought by William Henry Verner, on behalf of himself and all other stockholders of the defendant company other than the directors, against the com- pany and the directors. It came before the Court upon a motion by the plaintiff asking that the defendants might be restrained from declaring and from distributing among the members of the company any divi- dend in respect of the financial year of the compan}^ terminating on February 28 1894. The company was incorporated on January 26 1888, under a memorandum and articles of association, with a capital of ;f6oo,ooo in 60,000 shares of ;,^io each, all of which had been issued and full}^ paid up in cash and converted into stock of two classes — pre- ferred and deferred. In addition to its original share capital the com- pany had borrowed ^'300,000 on the security of debenture stock, bearing interest at 4 per cent., and secured by a floating charge upon all the assets of the company. There had thus come to the hands of the com- pany ;i^9oo,ooo, which had been invested in various securities autho- rised by the memorandum of association. The present market value of such investments was only ;^654,776, showing a depreciation of ^^240,000. According to the evidence of the plaintiff it appeared that " of such depreciation ;^75,ooo or thereabouts represented the amount which there was no prospect of recovering within any reasonable period of time." During the past year the receipts of the company in respect of income derived from their investments had exceeded the expenditure b}' upwards of ^23,000. The question for the Court upon the motion was whether, there being a loss of capital to the amount of ;i^75)Ooo and an excess of profits over expenditure of ,^23,000, a dividend could law- fully be declared and paid. The company was formed for the purpose ( /OO AUDITING. of raising mone)'' and investing the same in various investments men- tioned in the memorandum of association, and one of the objects of the company was "to receive the dividends, income, _ profits, bonuses, and advantages of every description from time to time payable or receivable in respect of the company's investments, and to apply the same respec- tively according to the provisions of the articles of association in force for the time being." The articles provided : — (84) " Subject to the rights of members holding share capital issued upon special conditions the receipts of the company from the dividends, income, profits, bonuses, and advantages payable or receivable in respect of the com- pany's investments shall be applicable as follows : — First, to the pay- ment of a dividend for the particular year at the rate of 5 per cent, per annum on the preferred stock ; second, to the payment of such a divi- dend on the deferred stock as the same shall suffice to pay, and the trustees may, with the sanction of the company in general meeting, declare a dividend to be paid to the members accordingly." (85) " The trustees may, before recommending any dividend, set aside out of the profits of the company such sum as they think proper as a Reserve Fund to meet contingencies, or for equalising dividends, or for any other purposes of the compan_y ; and may from time to time apply the whole or any part of such fund for any purposes of the company." Mr. Justice Stirling, having regard to the nature of the constitution of this company, held that there was no legal obligation on the part of_ the company to make good the loss arising from the diminution in the value of the investments before declaring a dividend, and he dismissed the action. The plaintiff appealed. The Court dismissed the appeal. JUDGMENT. Lord Justice Lindley delivered the judgment of himself and Lord Justice A. L. Smith as follows : — The broad question raised by this appeal is whether a limited company which has lost part of its capital can lawfully declare or pay a dividend without first making good the capital which has been lost. I have no doubt it can — that is to say, there is no law which prevents it in all cases and under all circum- stances. Such a proceeding may sometimes be very imprudent, but a proceeding may be perfectly legal and may j^et be opposed to sound commercial principles. We, however, have only to consider the legality or illegality or what is complained of. As was pointed out in Lee v. Neuchdtel Asfhalte Company (41 Ch.D. i), there are certain provisions in the Companies Acts relating to the capital of limited companies ; but no provisions whatever as to the payment of dividends or the division of profits. Each company is left to make out its own regula- tions as to such payment or division. The statutes do not even VERNER V. GENERAL AND COMMERCIAL INVESTMENT 70I TRUST, LIM. expressly and in plain language prohibit a pa3'ment of dividend out of capital. But the provisions as to capital, when carefully studied, are^ wholl}' inconsistent with the return of capital to the shareholders,, whether in the shape of dividends or otherwise, except, of course, on a winding-up, and there can, in my opinion, be no doubt that even if a memorandum of association contained a provision for paying dividends out of a capital such provision would be invalid. The fact is that the main condition of limited liability is that the capital of a limited com- pan_y shall be applied for the purposes for which the company is formed, and that to return the capital to the shareholders either in the shape of dividend or otherwise is not such a purpose as the Legislature con- templated. But there is a vast difference between paying dividends out of capital and paying dividends out of other money belonging to the company, and which is not part of the capital mentioned in the com- pany's memorandum of association. The capital of a company is intended for use in some trade or business, and is necessarily exposed to risk of loss. As explained in Lee v. N euchdtel Asfhalte C orm-pany , the capital even of a limited company' is not a debt owing by it to its share- holders, and if the capital is lost the company is under no legal obliga- tion either to make it good or, on that ground only, to wind-up its affairs. If, therefore, the company has an}' assets which are not its capital within the meaning of the Companies Acts, there is no law / which prohibits the division of such assets amongst the shareholders./ Further, it was decided in that case, and, in my opinion, rightly decided, that a limited company formed to purchase and work a wasting property, such as a leasehold quarry, might lawfully declare and pay dividends out of the money produced b}' working such wasting property without setting aside part of that money to keep the capital up to its original amount. There is no law which prevents a company from sinking its capital in the purchase or production of a money-making property or undertaking, and in dividing the money annually yielded by it without preserving the capital sunk so as to be able to reprodu>e it intact either before or after the winding-up of the company. A com- pany ma}- be formed upon the principle that no dividends shall be declared unless the capital is kept undiminished, or a company may contract with its creditors to keep its capital or assets up to a given value. But in the absence of some special article or contract there is no law to this effect, and, in my opinion, for very good reasons. It would, in my judgment, be most inexpedient to lay down a hard and fast rule which would prevent a flourishing company either not in debt or well able to pay its debts from paying dividends so long as its capital sunk in creating the business was not represented by assets which would, if 702 AUDITING. sold, reproduce in money the capital sunk. Even a sinking fund to replace lost capital by degrees is not required by law. It is obvious that dividends cannot be paid out of capital which is lost : they can only be paid out of money which exists and can be divided. More- over, when it is said, and said truly, that dividends are not to be paid out of capital, the word "capital" means the money subscribed pur- suant to the memorandum of association, or what is represented by that mone3\ Accretions to that capital may be realised and turned into money which may be divided amongst the shareholders, as was decided in Lubbock v. British Bank of South America (1892, 2 Ch. 199). But, although there is nothing in the statutes requiring even a limited com- pany to keep up its capital, and there is no prohibition against pay- ment of dividends out of any other of the company's assets, it does not follow that dividends may be lawfully paid out of other assets regardless of the debts and liabilities of the company. A dividend pre- supposes a profit in some shape, and to divide as dividend the receipts, say, for a year, without deducting the expenses incurred in that year in producing the receipts, would be as unjustifiable in point of law as it would be reckless and blameworthy in the eyes of business men. The same observation applies to payment of dividends out of borrowed money. Further, if the income of any year arises from a consumption in that year of what may be called circulating capital, the division of such income as dividend without replacing the capital consumed in producing it will be a payment of a dividend out of capital within the meaning of the prohibition which 1 have endeavoured to explain. It has been already said that dividends pre-suppose profits of some sort, and this is unquestionably true. But the word " profits " is by no means free from ambiguity. The law is much more accurately expressed by saying that dividends cannot be paid out of capital than by sa3'ing that they can only be paid out of profits. The last expres- sion leads to the inferences that the capital must always be kept up and be represented by assets which, if sold, would produce it ; and this is more than is required by law. Perhaps the shortest way of express- ing the distinction which I am endeavouring to explain is to say that fixed capital may be sunk and lest, and yet that the excess of current receipts over current payments may be divided, but that floating or circulating capital must be kept up, as otherwise it will enter into and form part of such excess, in which case to divide such excess without deducting the capital which forms part of it will be contrary to law. The Companies Acts do not require even limited companies to keep accounts, still less to keep them in any particular form. The only enactment on the subject is Section 26 of the Companies Act, 1862, and Form D in the third schedule, and these relate solely to the nominal VERNER V. GENERAL AND COMMERCIAL INVESTMENT 703 TRUST, LIM. capital and calls. But although this is so, yet, as a matter of business, accounts of some sort must be kept, and in order to show what has been subscribed by the shareholders and what has become of the money so subscribed, and to show the results of the company's trading or business, it is practically necessar}' to keep a Capital Account, and what is called a Profit and Loss Account, and as a matter of business these accounts ought to be kept as business men usually keep them. Accordingly, we find provisions for keeping such accounts in Table A in the Appendix to the Companies Act, 1S62 (see articles 78-82), and in the articles of association of most, if not all, companies. But there is no law which compels limited companies in all cases to recoup losses shown by the Capital Account out of the receipts shown in the Profit and Loss Account, although care must be taken not to treat capital as if it were profit. This is in accordance with Bolton v. Natal Land. Company (1892, 2 Ch. 124), which is the latest reported case on the subject. Further, it is obvious that capital lost must not appear in the accounts as still existing intact ; the accounts must show the truth and not be misleading or fraudulent. The Acts of 1867 and 1877 are in no wa}^ inconsistent with these observations. They provide for the reduction of the nominal capital mentioned in the memorandum of association. They do not render it obligatory on a company which has lost some of its capital to reduce the nominal amount mentioned in its memorandum. There are advantages in doing so, and the Acts were passed to enable limited companies to obtain these advantages, but there is nothing in these Acts, any more than in the Act of 1S62, which prevents a company which has lost part of its capital from continuing to carry on business and declaring and paying dividends. A law forbidding this may well have been considered by the Legislature far too rigid, and in their desire to check dishonest and reckless trading. Courts must be careful not to put tighter fetters on companies than the Legislature has authorised. It follows from what has been said above that the proposed payment of dividend in this particular case cannot be restrained. Mr. Justice Stirling has, in his judgment, examined the memorandum and articles of association so fulh^ that I do not think it necessary to examine them again. It is plain there is nothing in them which requires lost capital to be made good before dividends can be declared. On the contrary, they are so framed as to authorise the sinking of capital in the purchase of speculative stocks, funds, and securities, and the payment of dividends out of whatever interest, dividends, or other income such stocks, funds, and securities yield, although some of them are hopelessly bad, and the capital sunk in obtaining them is lost beyond recovery. There is no suggestion of 704 AUDITING. any improper juggling with the accounts, and there is no payment of dividend out of capital. There is no insolvency, and we have not to deal with a petition to wind up. Some capital is lost, but that is all that can be truly said, and that is not enough to justify such an injunction as is sought. The appeal must be dismissed. Lord Justice Kay gave judgment to the same effect. (Times, cS April 1894.) The case of WILMER v. M'NAMARA & CO., LIM. (Decided by Stirling, J., in the Chancery Division, on 26th April 1895.) Held that a Company cannot be restrained from declaring a Dividend out of current Profits, because no -provision has been made for Depreciation of Fixed Assets. This was a motion on behalf of the ordinary shareholders of the defendant company asking for an injunction to restrain the directors from acting upon a resolution passed at a general meeting of the company, that a sum of /.■5,8i6 12s. 6d. should be applied in payment of a dividend to the preference shareholders, and also from declaring or paying an}' dividend for the year ending the 30th June 1S94. The real object of the action, which was a friendly one, was to ascertain whether or not the dividend in question could be lawfully paid. The defendant company was formed in 1887 to acquire and develop a carrier's business previously known as Arthur McNamara & Co., and to carry on the business of general carriers of mails, parcels, goods, &c. The capital of the company was ^120,000, divided into 12,000 shares of /."lo each, 7,000 of which were preference shares, carrying a fixed preferential cumulative dividend at the rate of 8 per cent, per annum, and the remaining j^5,ooo were ordinary shares, the holders thereof dividing all surplus profits after payment of the said preferential divi- dend. By an agreement dated the 8th of July 1887, the company agreed to purchase the business in question, including the goodwill, leasehold premises, horses, vans, plant, &c., thereunto belonging, for the sum of ^54,000 in cash and 5,000 ordinary shares, which were to be deemed fully paid-up. The 7,000 preference shares were offered to and taken up by the public, being fully paid-up in cash, the vendors receiving their purchase-money {,^54, 000) thereout. At the end of the fir.st year of the company's e.xistence (the 30th of June 1888) an allowance of ;i^3,8io vas made in the accounts for depreciation in the value of the leases, goodwill, and plant, and in each of the following 3'ears up to and including 1891 an allowance of ^"2,000 was made for the like purpose. In 1892, however, the allowance in respect of this accoamt was only WILMER V. M NAMARA AND CO.. LIM. 705 ^250 ; but in all of these years there were substantial charges against income for van-maintenance, horses, and repairs to buildings. A valua- tion made for the year ending the 30th of June 1893 showed assets about ;i^62,8oo, goodwill ;i<^2o,ooo, and liabilities ^12,400, leaving a balance of ^1^70, 400. No dividend was either declared or paid in this year. For the year ending the 30th June 1894 a like valuation showed a balance of ^^76,250, the Profit and Loss Account on that year's working showing a balance of /l^^^^^ ^^^- ^d. to the good. By a resolution passed at a meeting of the company held on the nth of September 1894, it was resolved that the said sum of ;r^5,8i6 12s. 6d. should be applied in paj'ment of a dividend to the preference shareholders. This was a motion by the ordinary shareholders to restrain the directors of the company from acting upon the said resolution, on the ground that until the loss of capital had been made up no dividends ought to be paid. The company was solvent, and the subject in dispute affected the share- holders alone. A scheme had been prepared for the reduction of the capital of the company, but it had fallen through. The real question was whether or not the proposed dividend could be lawfully paid. JUDGMENT. Stirling, J., after stating the facts as above set out, delivered a reserved judgment as follows : — The nominal share capital of the defendant company amounts to ;^i2o.,ooo, and the assets at the date of the last valuation fell short of that sum by over ;^'43,ooo. Of the capital, however, only ^1^70, 000 was received in cash, the remaining ^50,000 being paid over to the vendors in the form of 5,000 ordinary shares of _,^'io each fully paid, in part payment of the purchase-money due to them. Under these circumstances the decision in the case of Lee v. Neuchdtel Asphalte Company (37 W.R. 247, 41 Ch.D. i) applies to this extent — i.e., that dividends may be paid although the assets are not sufficient to make up the nominal amount of the share capital. Beyond this, however, the case does not assist in point of decision, for in that case the assets of the company were at the period in question of greater value than the}- were at the date of the formation of the company. In a later case, however, V enter v. General Investment Trust (1894, 2 Ch. 239), the Court of Appeal laid down that in determining whether a divi- dend might or might not be paid by a company, regard was to be had to the constitution of the company and its articles. Lindley, L.J., at page 265, says: "A company may be formed upon the principle that no dividend shall be declared unless the capital is kept undiminished, or a company may contract with its creditors to keep its capital or assets up to a given value, but in the absence of some special article or con- tract, there is no law to this effect." Here there is no such contract with creditors, and it is, therefore, only necessary to consider the Z 2 7o6 AUDITING. articles of association, which closely resemble those in Table A to the Companies Act, 1862. Article 117 provides that " no dividend shall be payable except out of the profits arising out of the business of the company." What are these profits? [Upon this point his Lordship referred at some length to the judgment of Lindley, L.J., in Verner v. General Investment Trust (supra), and continued.] Apart from the use of the word " profits " in article 117, there is nothing in the articles to show that the capital of the company (or, rather, assets of the value of those acquired by the company at its formation) must be kept up. Further, the articles appear to contemplate " profits " as the excess of receipts over all expenditure properly attributable to the year. It is necessary, however, to consider whether the depreciation in goodwill and leaseholds is to be treated as loss of " fixed " capital or of " float- ing " or " circulating " capital, and on this point I am of opinion that it is to be treated as loss of " fixed " capital. It very closel}^ resembles the loss which a railway company may be said to suffer if it be found that their line, which was made, say, ten years ago, at a certain cost, could now be made at a much smaller cost. Having regard to the remarks of Lindley, I>.J., in Lee v. Neuchdtel Asphalte Company (supra), I think that the Balance Sheet cannot be impeached simply because it does not charge anything against revenue in respect of goodwill. I feel much more doubt whether ;^2oo is a sufficient sum to allow in respect of depreciation of leaseholds, but I do not think under the circumstances that a case has been made out for an injunction, and the motion must be refused. (39 S.J. 45^-) The case of THE LONDON AND GENERAL BANK, LIM. (Decided by Lindley, Lopes, and Rigby, L.JJ., in the Court of Appeal on 6th August 1895.) Held that an Auditor is guilty oj Misfeasance who, when dissatisfied with the Accounts of a Company, does not plainly draiv attention to the grounds for his dissatisfaction in his Report. JUDGMENT. Lord Justice Lindley : This is an appeal by Mr. Theobald, one of the Auditors of the London and General Bank, which is being wound up, against an order made by Mr. Justice Vaughan Williams, under Section 10 of the Companies Act, iSqo. By this order Mr. Theobald and the directors of the bank are declared jointl}' and severally liable to pay to the (Official Receiver of the company two sums of £S'94^ 1 23. od. and _;,^'8,486 iis. od., being respectively the amounts of dividends declared and paid by the bank for the years 1890 and 1891, RE LONDON AND GENERAL BANK, LIM. 707 with interest on those sums. The grounds on which this order was made on Mr. Theobald are that these dividends were paid out of capital, and that such payment was made pursuant to resolutions of the share- holders based upon recommendations of the directors of the bank, and upon Balance Sheets prepared and certified by Mr. Theobald, and which did not truly represent the financial position of the company. Mr. Theobald's appeal was supported by arguments to the effect (i) that Mr. Theobald was not an officer of the company within the meaning of Section 10 of the Winding-up Aot, 1890; (2) that the Balance Sheets and certificates given by Mr. Theobald were in accordance with the books of the bank, and that Mr. Theobald's duty as Auditor was confined to framing the Balance Sheets, which showed the position of the bank as disclosed by its books ; (3) that the dividends in question were not really paid out of capital, and that however imprudent and reckless it may have been to pay them, Mr. Theobald, as Auditor, is not legally responsible for such payment ; (4) that even if Mr. Theobald, as Auditor, failed adequately to discharge his duty, and even if the dividends were paid out of capital, his failure to discharge his duty was the remote and not the proximate cause of the non-payment of the dividends, and that he, consequently, is not legally liable to make good the amount so paid ; (5) that at any rate the order is wrong in declaring him liable jointly and severally with the directors to repay the •dividends in question. The first of these contentions was argued and decided last April, and the Court then held that an Auditor of a banking company governed by the Companies Act, 1879, and by such articles as regulated the present company, was an officer of the company within the meaning of Section 10 of the Winding-up Act, 1890, and was liable to have pro- ceedings taken against him under that section. This point, having been thus decided, was, of course, not again raised, and nothing further need be said about it. It remains, however, to consider what the duties of an Auditor are as respects companies governed by the Companies Act, 1879, ^^^ ^Y ^^^^ articles as regulate this particular company. It will be convenient to do this before examining the facts relied upon by the liquidator as making Mr. Theobald liable to make good the dividends which he has been ordered to pay. Section 7 of the Companies Act of 1879, Clauses I, 5, and 6, are material. "7. (i) Once at least in every year the accounts of every banking company registered after the passing of this Act as a limited company shall be examined by an Auditor or Auditors, Z Z 2 7o8 AUDITING. who shall be elected annually by the company in general meeting." I'hen Clause 5 is: — " Every Auditor shall have a list delivered to him of all books kept by the company, and shall at all reasonable times have access to the books and accounts of the company ; and any Auditor may, in relation to such books and accounts, examine the directors or any other officer of the company." Then there is a proviso, which one need not read, about banks beyond the limits of Europe. Then 6 is : — " The Auditor or Auditors shall make a report to the members on the accounts examined by him or them, and on every Balance Sheet laid before the company in general meeting during his or their tenure of office ; and in every such report shall state whether, in his or their opinion, the Balance Sheet referred to in the report is a full and fair Balance Sheet properly drawn up, so as to exhibit a true and correct view of the state of the company's affairs, as shown by the books of the company, and such report shall be read before the company in general meeting." Then " 7. The remuneration of the Auditor or Auditors shall be fixed by the general meeting appointing such Auditor or Auditors, and shall be paid by the company." It is necessary also to read Articles 106, 107, and 114. Article 106, which is under the head "Accounts/' runs thus: — "At every ordinary meeting the directors shall lay before the meeting a Balance Sheet showing the financial state of the company for the previous financial year, duly audited, and every such Balance Sheet shall be accompanied by a report of the directors as to the state and condition of the company, and as to the amount which they recommend to be paid out of the profits b}' way of dividend or bonus to the shareholders, after allowing for any interim dividend which the directors may have declared, and any sum which they may have set aside under Article 116 hereof." Then Article 107, which is under the head "Audit," runs thus: — "The accounts of the company shall be from time to time examined and the correctness of the statements shall be from time to time ascertained, by two or more Auditors, in accordance with these presents." Then Article 114, which, I think, is the only further one I need read at this moment, runs thus : — " The Auditors shall be supplied with copies of the state- ment of accounts intended to be laid before the meeting, and it shall be their duty to examine the same with the accounts and vouchers relating thereto." These are the enactments and regulations which bear directly on the duties of the Auditors, and although Articles 107 and 114 are in terms more explicit than Section 7 of the statute as regards the duty of the Auditors to examine and ascertain the correctness of the statements laid before them, and of the accounts laid before the shareholders, yet it is tolerably plain from the language of Section 7 of the Act, Clause 5, that the articles add little, if anything, to the duties imposed on the Auditors by the statute alone. / II RE LONDON AND GENERAL BANK, LIM. 7 09 In connection with these articles, and in order to save repetition, it should be stated that by the articles of this bank it is the duty of the directors, and not of the Auditors, to recommend to the shareholders the amounts to be appropriated for dividends ; and it is the duty of the directors to have proper accounts kept so as to show the true state and position of the company. Lastly, it is for the shareholders, but only on the recommendation of the directors, to declare a dividend. It is impossible to read Section 7 of the Companies Act, 1879, without being struck with the importance of the enactment that the Auditors are to be appointed by the shareholders, and are to report to them directly, and not to, or through, the directors. The object of this enactment is obvious. It evidently is to secure to the shareholders independent and reliable information respecting the true financial position of the com- pany at the time of the audit. The articles of this particular company are even more explicit on this point than the statute itself, and remove any possible ambiguity to which the language of the statute, taken alone, may be open if very narrowly criticised. It is no part of an Auditor's duty to give advice either to directors or shareholders as to what the}' ought to do. An Auditor has nothing to do with the prudence or imprudence of making loans with or without security. It is nothing to him whether the business of a company is being conducted prudently or imprudently, profitably or vmprofitably ; it is nothing to him whether dividends are properly or improperly declared, provided he discharges his own duty to the shareholders. His business is to ascertain and state the true financial position of the company at the time of the audit, and his duty is confined to that. But then comes the question : How is he to ascertain such position? The answer is : By examining the books of the company. But he does not discharge his duty by doing this without inquiry and without taking any trouble to see that the books of the company themselves show the company's true position. He must take jreasonable care to ascertain that they do. Unless he does this, his duty will be worse than a farce. Assuming the books to be so kept as to show the true position of the com- pany, the Auditor has to frame a Balance Sheet showing that position according to the books, and to certify that the Balance Sheet presented is correct in that sense. But his first duty is to examine the books, not merely for the purpose of ascertaining what they do show, but also for the purpose of satisfying himself that they show the true financial position of the company. This is quite in accordance with the decision of Mr. Justice Stirling in The Leeds Estate Company v. Shephard, in 36 Chancer}' Division, page 802. An Auditor, however, is not bound to do more than exercise reasonable care and skill in making inquiries and 7IO AUDITING. investigations. He is not an insurer ; he does not guarantee that the books do correctly show the true position of the company's affairs ; he does not guarantee that his Balance Sheet is accurate according to the books of the company. If he did he would be responsible for an error on his part, even if he were himself deceived, without anj' want of reasonable care on his part — say, by the fraudulent concealment of a book from him. His obligation is not so onerous as this. Such I take to be the duty of the Auditor ; he must be honest — that is, he must not certify what he does not believe to be true, and he must take reasonable care and skill before he believes that what he certifies is true. What is reasonable care in any particular case must depend upon the circumstances of that case. Where there is nothing to excite suspicion, ver}' little inquiry will be reasonable and sufficient; and in practice, I believe, business men select a few cases haphazard, see that the}' are I ■ right, and assume that others like them are correct also. Where suspicion is aroused more care is obviously necessar}', but still an Auditor is not bound to exercise more than reasonable care and skill even in a case of suspicion ; and he is perfectly justified in acting on the opinion of an expert where special knowledge is required. j\Ir. Theobald's evidence satisfies me that he took the same view as myself of his duty in investigating the company's books and preparing his Balance Sheet. He did not content himself with making his Balance Sheet from the books without troubling himself about the truth of what they showed. He checked the cash, examined vouchers for pa3'ments, saw that the bills and securities entered in the books were correct, took reasonable care to ascertain their value, and in one case obtained a solicitor's opinion on the validity of an equitable charge. I see no trace whatever of any failure by him in the performance of this part of his duty. It is satisfactory to find that the legal standard of duty is not too high for business purposes, and is recognised as correct by business men. The Balance Sheet and certificate of Februar}' 1S92, that is, for the year 1891, was accompanied by a report to the directors of the bank. Taking the Balance Sheet, the certificate, and report together, Mr. Theobald stated to the directors the true financial position of the bank, and if this report had been laid before the shareholders, Mr. Theobald would have completely discharged his duty to them. Unfortunately, however, this report was not laid before the shareholders, and it becomes necessary to consider the legal consequences to Mr. Theobald of this circumstance. i RE LONDON AND GENERAL BANK, LIM. 711 A person whose duty it is to convey information to others does not discharge that duty by simply giving them so much information as is calculated to induce them, or some of them, to ask for more. Informa- tion and means of information are by no means equivalent terms. Still, there may be circumstances under vsrhich information given in the shape of a printed document circulated amongst a large body of share- holders would by its consequent publicity be very injurious to their interests, and in such a case I am not prepared to say that an Auditor would fail to discharge his duty if, instead of publishing his report in such a way as to ensure publicity, he made a confidential report to the shareholders, and invited their attention to it, and told them where they could see it. The Auditor is to make a report to the shareholders, but the mode of doing so, and the form of the report, are not pre- scribed. If, therefore, Mr. Theobald had laid before the shareholders the Balance Sheet and the Profit and Loss Account accompanied by a certificate in the form in which he had prepared it, he would perhaps have done enough, under the peculiar circumstances of the case. I feel, however, the great danger of acting on such a principle, and in order not to be misunderstood, I will add that an Auditor who gives shareholders means of information instead of information in respect of a company's financial position does so at his peril, and runs the very serious risk of being held, judicially, to have failed to discharge his duty. In this case I have no hesitation in saying that Mr. Theobald did fail to discharge his duty to the shareholders in certifying and laying before them the Balance Sheet of February 1892, without any reference to the report which he laid before the directors, and with no other warning than is conveyed by the words " The value of the assets as shown on the Balance Sheet is dependent upon realisation." The most important asset on that Balance Sheet is put down as " Loans to customers and other securities, ^^346,975," and on those a full and detailed report was made to the directors, showing the very unsatisfactory state of these loans and seciirities, and it is impossible to read the oral evidence, the report of Mr. Balfour and Mr. Brock, dated the 22nd of December 1891, and the report of the Auditor to the directors of the 3rd of February 1892, without coming to the conclusion that the entry of that large sum as a good asset without explanation was unjustifiable. It is a mere truism to say that the value of loans and securities depends upon their realisation. We are told that a statement to that effect is so unusual that the mere presence of those words is enough to excite suspicion. But, as already stated, the duty of an Auditor is to convey information, not to arouse inquiry, and although an Auditor might infer from an unusual statement that something was seriously wrong, it by no means 7 I 2 AUDITING. follows that ordinary people would have their suspicions aroused by a similar statement if, as in this case, its language expresses no more than any ordinary person would infer without it. But Mr. Theobald relies on the fact that he was induced to omit from his certificate all reference to the report which he made to the directors because Mr. Balfour, the chairman, promised to mention such report in his speech to the shareholders, and he did so. lUit although Mr. Balfour twice alluded to the report, he did so in such a way as to avoid attracting attention to it. The second time he mentioned it was after a dividend had been declared, and when a motion to re-appoint the Auditors was before the meeting. The truth is that not a word was said to conve}^ to the shareholders the substance of the information contained in the report, or to induce them to ask an}' question about it. The Balance Sheet and the Profit and Loss Account were true and correct in this sense, that they were in accordance with the books. But thev were, nevertheless, entirely misleading, and misrepresented the real position of the company. Under these circumstances, I am com- pelled to hold that Mr. Theobald failed to discharge his duty to the shareholders with respect to the Balance Sheet and certificate of February 1892. Possibly he did not realise the extent of his duty to the shareholders as distinguished from the directors, and he, unfortunately, consented to leave the chairman to explain the true state of the company to the shareholders instead of doing so himself. The fact, however, remains, and cannot be got over, that the Balance Sheet and certificate of February 1892 did not show the true position of the company at the end of 1891, and that this was owing to the omission by the Auditor to lay before the shareholders material information which he had obtained in the course of his employment as Auditor of the company, and to which he called the attention of the directors. But then it is contended" that, even if this be so, there was, after all, no payment of a dividend out of capital ; and further that, even if there was, still that such payment was not the natural or immediate result of Mr. Theobald's certificate, and of the accounts which he prepared. Whether the payment was made out of capital or not is a question of fact. It was professedly made out of profits made by the bank by charging its customers with interest and commission on loans and discounts. The books showed such profit, but the question is, where did the money come from with which the dividends were paid? The money came from cash at the bankers or in hand, but this cash could not be properly treated as profit, and the directors and Auditors knew this perfectly well. This part of the case has been most carefully i RE LONDON AND GENERAL BANK,. LIM. 713 investigated b}- the learned Judge whose decision we are reviewing, and after attending most attentively to the observations of counsel on the reasonings and conclusions contained in the "judgment appealed from, I see no reason whatever for dissenting from them. On the contrary, I entirely agree with him in saying that the profits for the j^ear 1S91 never reall}' existed except on paper — that, to use his words, " What- ever may be the right line to draw as to when profit not received may be carried to profit for the purpose of the annual Revenue Account, it is plain that there was no justification for so doing in the present case." The real truth is that the assets of the bank were put down in the Balance Sheet at far too high a figure, and this entry, though not mis- leading if explained (as it was to the directors), was seriously mislead- ing in the absence of explanation. Mr. Theobald says that he regarded the assets of the bank as only locked up, but his rejiort and the schedule to it go far beyond this. The value of the principal asset depended on the probability of the Balfour group of companies and some of the other large borrowers repaying their loans. They were financing each other, their indebtedness to the bank increased largely during the 3"ear, the securities held by the bank for these loans were, to say the least, of very doubtful character, and yet the total amount due to the bank in respect of these loans is inserted in the Balance Sheet as a good asset without any deduction, and without a word of explanation to the shareholders. We now know that these assets have realised a comparativelv small sum, and we were very properlj- warned against the danger of doing injustice by being wise after the event. But disregarding the result of realisation and attending only to what was known to the Auditors in February 1892, the entry in the Balance Sheet of the sum of ^^346, 975 as a good asset was whollj' unjustifiable unless explained. We are now in a position to understand the true meaning of a passage contained in the Auditors' report to the directors of the 3rd February 1892, and which runs thus : " We cannot conclude without expressing our opinion unhesitatingljr that no dividend should be paid this year." I find it impossible to treat this as a statement by the Auditors that there are profits divisible among the shareholders, but that the Auditors cannot recommend a dividend. I can only regard the passage as mean- ing that there are no funds out of which the dividend can properly be paid, and, therefore, no dividend ought to be paid this year. A divi- dend of 7 per cent, was, nevertheless, recommended by the directors, and was resolved upon by the shareholders at a meeting furnished with the Balance Sheet and Profit and Loss Account certified by the Auditors, and at which meeting the Auditors were present, but silent. Not a word was said to inform the shareholders of the true state of affairs. It is idle to say that these accounts are so remotely connected 714 AUDITING. with the payment of the dividend as to render the Auditors legally irresponsible for such payment. The Balance Sheet and account certified by the Auditors as showing a profit available for dividend were, in my judgment, not the remote, but the real operating cause of the motion for the payment of the dividend which the directors impro- perly recommended. The Auditors' account and certificate gave weight to such a recommendation and rendered it acceptable to the meeting. It was wholl}' unnecessary for the Official Receiver to call a share- holder to say that he was induced by the Auditors' certificate to concur in the resolution to pay a dividend. As to this part of the case, res ipsa loquitur. The point was made that the form of the order was wrong. But there was nothing in this. Mr. Theobald could obviously be sued alone in an action at law for breach of his statutory dut}^ as Auditor, and the measure of damages would be the sum which he has been ordered to pay. Whether a similar action at law could be maintained against him and the directors jointly is more open to question. I am by no means satisfied that it could not, seeing that the wrongful payment of the dividend was caused by his improper certificate and accounts, and • by the use made of them by the directors. But, be this as it may, there was a clear breach of trust by the directors, facilitated, and, indeed, cnly rendered possible by the Auditor, who failed in discharging his own duty to the shareholders ; and I have no doubt that in equity both he and they could be held jointly and severally liable for the misappli- cation of the company's moneys, which constituted a breach of trust. In respect, therefore, to the sum of £S,/[?>6 iis. wrongfully paid as dividend in 1892 in respect of the alleged profits made in 1891, the appeal in my opinion fails. I pass now to the accounts and Balance Sheet prepared by the Auditors in February 1891, and showing the state of affairs in 1890. A profit for that year was shown, and a dividend of ^5,946 12s. was declared and paid, and Mr. Theobald has been held liable for this sum also. I agree with Mr. Justice Vaughan Williams in holding that the dividend for 1890 was in fact improperly declared and paid. But the evidence that Mr. Theobald was guilty of any breach of duty in certify- ing the accounts in February 1891 is far less cogent than that which presses so heavily against him with reference to the accounts of February 1892. The truth is that the conviction that the bank's affairs were every .year getting worse and worse grew upon him year by year. This state of things was shown by the decrease of its reserve capital, and the increase of its loans to customers. But the loans to customers were, speaking roughly, _^ioo,ooo less at the end of the year 1890 than at the end of 1801, and seeing that the accounts prepared by the Auditors RE LONDON AND GENERAL BANK, LIM. 715 did accurately represent the position of the company as shown b}' the books, and that it is not proved that Mr. Theobald really knew, or ought then to have known, that the position of the bank was not correctly shown by the books, I think Mr. Justice Vaughan Williams has gone too far in holding Mr. Theobald liable for this sum. The reasons which induced the learned Judge to decide that Mr. Theobald was not liable for the dividends paid in 1889 and 1890 appear to me to appl}- also to the dividends paid in 1891 in respect of the profits of 1890. Xo doubt the change made by the Auditors in 1886 in the form of the certificate they gave is really significant, and, unexplained, leads to the inference that the Auditors did not believe that the books of the com- panv and the Balance Sheet prepared from them correctly showed the position of the bank. But Mr. Theobald's evidence does, in my opinion, show that in February 1891 matters were not known or believed to be so bad as to lead him to the conclusion that there were then no profits out of which a dividend could properly be paid. It is true that the position of the bank was very unsatisfactory in 1890, and the Auditors knew it to be so. This, however, appeared from the Balance Sheet and accounts which they laid before the shareholders. It is known now that the assets were put down at too high a figure ; but it is not proved that the Auditors knew- it or ought to have known it. The Balfour group of companies, though dependent upon each other, were by no means in so tottering a state as they were a year later. Mr. Wilkinson's debt was still treated by the directors as bearing interest and as a good, or at all events not a bad, debt. Mr. Benham's debt was unsatisfac- tory, but the Auditors can hardly be blamed for treating it as good, having regard to the solicitor's statement as to the security held for it. This part of the case is very near the line, but having carefully con- sidered it, I do not think that the evidence is sufficiently strong to establish a case of misfeasance on the part of Mr. Theobald in February' 1891. I am not satisfied that he was then guilty of more than an excusable error of judgment; although now that all the facts are known the error is seen to have been very serious in its conse- quences. As to the sum of ^^5,946 12s. od., therefore, the appeal must be allowed. As regards costs, Mr. Theobald's appeal has resulted in reducing the sum for which he has been held liable ; but, in other respects, and as regards his main contention, it has failed. Under these circumstances he ought not to receive or pay any costs of the appeal, and the only order as to costs will be that the Official Receiver be paid his costs out of the assets of the company. Lord Justice Lopes has read and considered this judgment, and concurs in it. 7l6 AUDITING. Lord Justice Rigby : I have had the advantage of reading and con- sidering the judgment just delivered by Lord Justice Lindley, and I might have confined myself to saying I concur in it, but as I have gone carefully into the evidence as against the appellant, I think that 1 shall do well to show how I have come to the conclusion on which my judgment is founded. I shall not attempt to repeat all that is con- tained in Lord Justice Lindley's judgment. Where no reference is made to a particular topic it must be taken that I have nothing to add, though I do not wish to detract from anything said. The appeal is against that part of the order of the 20th December 1894 of ^Ir. Justice Vaughan Williams, which finds Mr. Theobald liable as one of the Auditors of the London and General Bank, Lim., to make good to the assets of the companj^, jointly with other persons, and severally, the amount with interest from the date of the order of two sums, ;^6,768 6s. gd. and £g,;j2S 17s. 4d., being the dividends with interest thereon down to the date of the order recommended by the directors and declared by meetings of the company in the years 1891 and 1892 for the 3'ears i8qo and 1891. I have not taken the same figures as Lord Justice Lindley did, because there has been added to the dividends the amount of interest down to the date of the order. I think it will be the exact figure. The order was made on a summons taken out b}' the liquidator of the company in the matter of the Companies Acts and in the matter of the bank, asking, so far as is material for the present appeal, for a declara- tion of the joint and several liability of the directors and Auditors of the ccmpany on the ground that the dividends before mentioned were not paid out of profits but out of capital, and so far as the Auditors were concerned on the ground that they certified and reported that the Balance Sheets which were laid before the company at the said meet- ings purported to show profits in excess of the sum paid as dividends. I understand the application to have been in substance an application against the Auditors as officers of the company under the loth Section of the Act of 1890 to compel them to contribute to the assets of the company, by way of compensation for their misfeasance, such sums as the Court may think just. The main issues, therefore, seem to be whether tlie Auditors have been guilty of any misfeasance in relation to the company ; whether the misfeasance has occasioned loss to the compan}' for which compensa- tion ought to be directed to be made. This will involve the question whether the dividends were, in fact, paid not out of profits, but out of capital, and whether such payment was the fault of tlie Auditor. Then there will be the question of the amount of compensation which ought to be directed. To determine the first question, I think it will be RE LONDON AND GENERAL BANK, LIM. 717 necessarv to consider in some detail the position and duties of the Auditors, what the}' ought to have done, and what they have done. Then I refer to Subsection 6 of Section 7 of the Companies Act of 1879, and to those articles of association which have been referred to by Lord Justice Lindley. I do not think it necessary here to read them out. Tlie articles of association cannot absolve the Auditors from any obliga- tion imposed upon them by the statute, and it may be that they do not in this case impose any greater obligations as to the Balance Sheet, though they make it clear that similar obligations extend to all accounts placed before the company, including Profit and Loss Account as well as the Balance Sheet. Under the statute, the members of the company are entitled to have the safeguard of an expression of opinion of the Auditors to the effect, first, that the Balance Sheet is a full and fair Balance Sheet ; and, secondly, that it, the Balance Sheet, is properly drawn up so as to exhibit a true and correct view of the state of the company's affairs. The words " as shown by the books of the com- pany " seem to me to be introduced to relieve the Auditors from any responsibility as to affairs of the company kept out of the books and concealed from them, but not to confine it to a mere statement of the correspondence of the Balance Sheet with the entries in the books. Now, a full and fair Balance Sheet must be such a Balance Sheet as to convey a truthful statement as to the company's position. It must not conceal any known cause of weakness in the financial position, or suggest anything which cannot be supported as fairly correct in a business point of view. The provision as to the Balance Sheet being properly drawn up so as to exhibit a correct view of the state of the company's affairs is taken from, though it does not go quite so far as Article 94, Table A, of the schedule to the Companies Act of 1862. Treated as an addition to the requisition of a full and fair Balance Sheet, it may not be easy to define the full extent of the obligation which it imposes, nor is it necessary to do so in this case, for it certainly requires, as will hereafter appear, a more detailed statement of facts, or a more detailed explanation of the affairs of the bank, than is contained in any of the Balance Sheets of this company. It will be important to see what information the Auditors actually acquired as to the business of the company, and the way in which they reported upon the successive Balance Sheets. Mr. Theobald and Mr. Timms were Auditors of the bank from its incorporation in 1882, and they made the audit for successive years down to and including the audit for 1891. 'I he reports of the Auditors to the members always took the form of a certificate or memorandum written on the Balance Sheet for the year. Their reports on the accounts for the years 1882 and 1883 contained a 7l8 AUDITING. statement to the effect that in their opinion the Balance Sheet exhibited a true and correct view of the position of the bank. In their report on the accounts of 1885 a somewhat less emphatic statement to the same effect appears, but in the subsequent report no such statement is to be found. In a report to the directors dated the nth February 18S6, which refers to the accounts for 18S5, Mr. Theobald, after noticing that the iirst-class investments, kept by bankers for quick realisation in case of need, stood at a considerably reduced sum, and that more than the whole capital of the company was invested in four accounts, viz., the accounts of the Liberator, the Lands Allotment Company, the House and Land Company, and the Building Estates Company, and that these investments could not be easily realised in critical times, proceeds to say — " You are doubtless aware that it is a rule with bankers to have at hand in cash or easily realisable securities an amount equal to at least one-third of the customers' current accounts. Considering the whole amount of uncalled capital, I consider that in this case the proportion is scarcely sufficient." There can be no doubt that even at this time Mr. Theobald was aware that the state of affairs of the bank was unsatisfactory in the important points of lock-up of capital and consequent deficiency of realisable securities. At this date the cash in hand appeared to be ;,^28,ooo — I only give the round figures — and the easily realisable securities were worth _^i 2,600, making together ;/'4i,ooo odd, while the current accounts and deposit accounts of customers together reached ;i^io7,ooo. I have not been able to dis- tinguish the separate amounts of current and deposit accounts at that time. In the Balance Sheet for 1891, more particularly dealt with here- after, the cash had fallen to ^{^25,000, and the easily realisable securities to £-j,^2o, making together ,^32,000 odd ; hardly more than one-sixth of the sum due to customers on current accounts alone, which had increased to ^189,000 odd, the amount due on current and deposit accounts taken together being ;^282,ooo. No other report of the Auditors to the directors is put in evidence until that of 1892 as to the accounts of 1891. The report of the Auditors to the members on the accounts for 1886 to 1890, both inclusive, are simply to the effect that the cash and bills receivable are correct, that securities had been produced for the investments and loans (no information being given as to the securities so produced), and that the Balance Sheet is a correct sum- mary of the accounts recorded in the books. In the last-mentioned report is contained for the first time a statement, " The value of the assets as shown on the Balance Sheet is dependent on realisation." Great stress has been laid on this by counsel for the appellants. They argue that it was sufficient to put members upon inquir}^ and that from the course taken at the trial they were debarred from giving the evi- RE LONDON AND GENERAL BANK, LIM. 719 dence of experts as to the importance and signification of this. I may at once say that it was the duty of the Auditors to convey in direct and express terms to the members any information which they thought proper to be communicated, that the words of the statement are per- fectly clear in their meaning, but also entirely unimportant, amounting to a mere truism, and that no evidence of experts would have been of the slightest use for the purpose of giving them a greater importance or signification than they possessed in themselves, even if such evidence were admissible. To me it appears that all the reports from 1886 onwards were imperfect, and that the Auditors in giving reports in such form failed entirely to fulfil the statutory duties imposed upon them. Counsel for the appellants argued that such a failure would not amount to misfeasance but only to negligence, and that the appellant is not charged by the summons with negligence, but I cannot admit the cogency of this argument. The reports were made in order to fulfil the statutory obligation, and to be read to the meetings in accordance with the statute. Mr. Theobald, with reference to this matter, says at page 74 of the evidence, " My certificate means the same as the Act." Then he is asked, " Do you say you could have given the certificate required by the Act of rSgi ? " (I think that question must have been meant and understood to mean, " Could you have given the certificate for 1891 required by the Act?") "(A) Yes, certainly. (Q) Then wh)- did you not do so? (A) Because I was not aware that it was considered neces- sary for me to give the certificate either in the words of the Act or not at all." Mr. Theobald's interpretation of his own certificate cannot be received either in his favour or against him, and we should not unduly press against him apparent admissions made in the course of a very trying cross-examination. But this evidence of his does, I think, go so far as to show that the certificates were in fact given as reports under the Act, and independent of that evidence I think there can be no doubt that they were intended to be and were received and acted upon as reports under the Act. I consider the giving of the certificates (assuming them to be to the knowledge of the Auditors misleading certificates, a question which I shall deal with separately) to be a misfeasance within the meaning of Section 10 of the Act of 1890, and not a mere act of negligence ; and that this was a fair meaning of the charge contained in the summons I can have no doubt, having regard to the terms of the certificates given and the explanations of Mr. Theobald himself, that there was a strong and growing feeling of dissatisfaction in the mind of Mr. Theobald at the state of the affairs of the bank as shown by the books, and I find no sufficient communication of the facts causing this dissatisfaction in the reports. The Balance Sheets when examined do not in my opinion 720 AUDITING. fulfil the statutory requirements of being full and fair Balance Sheet, and they are not properly drawn up so as to exhibit a true and correct view of the state of the company's affairs, as shown by the books of the compan}-. To establish this, 1 think it necessary to give a short sum- mary of the evidence, as to the years 1889, iSqo, and 1891, the only years as to which we have sufficient evidence to be able to arrive at definite conclusions". From the tables set out at page 7 of the Official Receiver's report it appears that during the years 18S9, iSgo, and 1891 the greater part of the business of the bank consisted in making loans to and discounting bills for a group of companies, nine in number, conveniently referred to as the Balfour group, or the Balfour companies. Loans were also made or discounting facilities afforded to other companies allied to the Balfour companies, to certain directors of the bank, and customers, including Wilkinson and Benham, who are named in the table, by reason of special considerations affecting their accounts. These accounts of allied companies and the persons last mentioned are for convenience hereinafter referred to as " the special accounts." The balances due from the Balfour companies at the end of the years 18S9, 1S90, and 1891 were, for 1889 ^119,000, for 1890 ^^218, 000, and for 1891 ;/."3oS,ooo. Corresponding balances in the " special accounts " were, for 1889 ;/,'77,ooo, for 1890 /.iiajOoo, for 1891 ^121,000, the aggre- gate balances from the Balfour companies and on the special accounts being for i88g ;^ig6,ooo, for 1890 ;^32i,ooo, for 1891 ;^429,ooo. The cor- responding balances due from all other <. ustomers and persons were, for 1889 _:{."i35,ooo, for iStjo /.■io3,ooo, for 1891 ^100,000. Roughly speak- ing, the proportion of what may be called the outside business to that with the Balfour companies and on the special accounts was, at the end of 1889 two-thirds, at the end of 1890 one-third, and at the end of 1891 one-fourth. The paid-up capital increased in iSgo by about ;^76,ooo, and in 1S91 by about /.■43,ooo, or altogether /,'i2o,ooo, but the whole of this, and considerably more than ;^'ioo,ooo in addition, had been absorbed into the accounts of the Balfour companies and the special accounts. It has alreadv been pointed out that the amount of cash and easily realisable securities at the end of 1891 was hardly more than one-sixth of the amount due to customers on current accounts, or about one-half of what Mr. Theobald had in 1886 pointed out to be required according to the. usual practice of bankers. These figures show an alarming absorption during the three years of the available assets of the company in advances to the Balfour com- panies and on the special accounts, and a perilous diminution of easily realisable assets. As is usual with banking companies, profits alleged RE LONDON AND GENERAL BANK, LIM 721 to have been earned by the bank consisted, with unsubstantial excep- tions, of interest on loans, discounting of bills, and commissions. The gross profits entered in the books as having been earned from the Balfour companies, between the incorporation of the bank and the end of 1 89 1, amounted to upwards of ^'84,000. The amount distributed in dividends during the same period was upwards of ^58,000 and the amount carried to reserve fund ^13,000. I include there ^3,000 carried to reserve fund in accordance with the report on the accounts of 1891, making together /.'y 1,000. The reserve fund, however, was not required by the articles of associa- tion to be kept separate, and was not kept separate from the general funds of the bank. It was employed in the bank's business, quite rightly, no doubt. Subject to an argument as to appropriation of payments dealt vi^ith hereafter, the profits supposed to have been earned from the Balfour companies were not actually paid, but they were only debited in the accounts current of the different companies, and, speaking generally, the moneys owing by the different companies went on increasing from year to year. It is evident that, unless these proiits could be fairly treated as not only earned but paj'able within a reasonable time, there would at the end of iSqi be no profits out of which a dividend could be paid, but, on the contrary, a large deficienc}'. The learned Judge, after a careful consideraticn and investigation of the evidence before him, has found, as a fact, that the credits of these companies at the end of each year were generally credits created tempo- rarily for the purpose of audit, and that such credits, in the majority of cases, were created either by the discounting of bills of companies like Ilobbs & Co., which bills constituted a mere paper asset, or by loans direct or indirect from the bank itself, the bulk of which were ill-secured. I see no reason to differ from this conclusion, but it is a conclusion arrived at to an important extent from comparing the books of the bank with the books of other companies of the Balfour group to which the Auditors had no access, and it is only to the extent to which it is founded on entries in the books of the bank itself that it can be used for the purpose of charging the appellant with knowledge of the facts, though it is very important on the question whether the dividends were really paid out of capital or not. The books themselves show that in many instances the accounts were put in credit in the manner described by the learned Judge, but in other cases, and especially with reference to the indirect loans, that is to say, loans made by the bank AAA 72 2 AUDITING. to one of the companies out of which that company made an advance to another of the group for the purpose of putting the accounts of the latter in credit at the end of the year, the Auditors would have no sufl&cient means of tracing the transactions. Having made these general observations I will go on to examine more completely the important case of the accounts for the year 1891. For that purpose, as being more fair to the Auditors, I will assume without at all deciding that, down to the end of 1890, no knowledge that the former Balance Sheets were misleading has been brought home to the Auditors, and will endeavour to ascertain what additional information the Auditors acquired during the audit for 1891. In the year 1891 the indebtedness of the Balfour companies to the bank as appearing by the bank books was increased by the sum of between ;i/"89,ooo and _;^90,ooo without any additional securities of importance being "iven, though, no doubt, to a considerable but unascertained extent money was expended on buildings already charged to the bank, which would make the property charged, though not necessarily the charges in favour of the bank, more valuable. The securities consisted in the main of charges on buildings being constructed under building agreements, on which large sums had already been charged in priority to the bank. The buildings were unfinished, and required further expenditure of very large sums before they could advantageously be disposed of, and in my judgment there Avas abundant evidence to show that these securities of the bank were very insufficient, and not realisable at all without the expenditure of further money, which the bank was unable to advance. The sums due on the special accounts had increased from ;^io2,ooo to ;/!^i2i,ooo, that is to say, between ;^i8,ooo and ;:^i9,ooo. With regard to these special accounts, I do not think it necessary to go in detail through the list, but I find that the Auditors comment very unfavourably on the security for the following debts : — That of William Blewitt for /."7,849 ; that of Blewitt and Balfour for ^^2,148; and tliat of Balfour for /,'i2,ooo. I think, however, that they may have considered the personal security in these cases sufficient, and I do not found anything on those cases. Wilkinson, at the end of 1890, was indebted to the bank in the sura of ;,^"24,ooo practically unsecured. Mr. Theobald complained about interest being debited, on the ground that the directors had then more definite information as to the security. I'his was going through the audit for 1890. The fact is that the security consisted of debentures of a tramway company whose tramway was never built. Interest accord- ingly ceased to be debited to this account in March 1891. W-hen Mr. Theobald was pressed to explain why the full sum was returned as an 1 RE LONDON AND GENERAL BANK, LIM. 723 asset, he replied that it would have to be provided for out of the reseive fund. He further explained that he thought the account wanted watching, but that it was likely to turn out all right. In examination before the Judge with reference to this debt, he said that he had con- ferred with the manager, who knew all about the circumstances. " First of all," says he, " I suggested the whole should be written off, but afterwards, Mr. Brock, I think it was, sent for Mr. Blewitt. We had a very serious conference about it, and they convinced me that the time had not come to do that (write off the whole), and they might yet get the whole of the amount back, but I thought it was not wise to charge interest." This, I think, falls ver}^ far indeed short of showing that the Auditor believed, or could have believed, that the debt was a good debt, though it might have justified the carrying of it to a Suspense Account, instead of writing it off as bad. The importance of the case depends upon the fact that if the debt had not been entered in the Balance Sheet as a good debt, there would have been no profit at all to show for the year 1891. At the end of 1891, Mr. Wilkinson's debt, which had arisen from dis- counting bills, all of which would appear by the dates to have been dishonoured, was reduced to ;i^i6,ooo on account of discount by a loan of ;i^io,ooo, but the indebtedness remained unaffected. With regard to Benham's debt, which increased in the year iSgi from ^^31,635 to j^47,745, it was proved that in 1891 Mr. Theobald refused to pass the security for another year, and, to satisfy him, a letter purporting to ■come from Benham's solicitor, Mr. Waring, containing an undertaking to pay off ,,^1 5,000 within a week, was produced. He had also been told, during the audit for i8go, that there was a security under a sup- posed will which had not been proved, and that they expected to get the will proved very soon. During the audit for 1891 he ascertained that ■the debt had increased from ^31,000 to ^47,000, that the ;,{^i 5,000 promised to be repaid had not been repaid, and that the alleged will had not been proved — indeed, it turned out afterwards that such a will never existed. The explanation of Mr. Theobald, that he trusted to the solicitor seeing that the security was all right, is not, under circum- stances, altogether satisfactory, but I think it is safer to allow Mr. Theobald the benefit of the defence, though his own report sufficiently shows that he was not himself thoroughly satisfied. I wish to make it plain, so far as I can, that I am only relying on matters which Mr. Theobald ought to have known and must be presumed to have known. The debt of ;i{"7,3oo from the Medway Portland Cement Company had, like Wilkinson's, ceased to be charged with interest, and could not properly have been treated as a fund for the payment of dividend. With reference to that of the Public Works Companj^ Lim., amounting to A A A 2 724 AUDITING. ^8,105, the Auditors, in their schedule to their report to the directors, say this — " The reahsation of this is very doubtful." There could^ therefore, be no justification for treating this as a fund for payment of dividend. Whilst Mr. Theobald was engaged upon the audit of the accounts for 1891, or previously, a report of Messrs. Balfour and Brock, dated 22nd of December 1891, was produced to him as to the way of putting ino credil current accounts of Hobbs & Co., Lim., George Newman & Co., Lira., the London, Edinburgh, and Glasgow Insurance Co., and C. H. Wilkinson, by loans from the bank. With reference to Mr. Wilkinson's account, the proposal " that the overdraft should be made in part by a loan and in part by fresh acceptances of both secured as mav be arranged, we think the further loan should be j/^io,ooo on loan and ;,/J'i5,ooo on bills." The loan was made, and, apparentl}', /."i6,ooo was left on security of acceptances, but it does not appear that any security was then arranged for or given, or that Mr. Theobald investigated this matter. Attention was, therefore, called in this particular case to the mode in which the accounts were put in credit as found by the learned Judge. Several facts which appear to me to be most material with reference to the debt of 1891 are to be gathered from the text of the report. I have dealt, to a certain extent, with the schedule in the remarks I have previously made, but as to the text of the report of the Auditors of Februarj^ 1892, almost every sentence is full of serious meaning. In it they state "that they are unable to give a more satisfactory certificate than the one set forth," which is a mere statement that the Balance Sheet is a correct sunnnary of the accounts as recorded in the books, followed by a statement that the value of the assets as shown on the Balance Sheet is dependent upon realisation, which I have already commented upon, an important sentence : " On this subject we have reported specifically to the board." This may mean they have reported as to the value of the assets, or as to their realisation, or (as I think is the true construction) as to both. The Auditors were induced to withdraw this sentence, which, though it would have given no information of the slightest value to the members, yet would have been calculated to put them upon inquir}\ The}' go on : — " We arc not qualified, nor is it the province of the Auditors, to estimate with exactitude the value of the securities." The words " with exactitude " seem to me to be emphatic, and to point out that they had, as appears by the report, made a general estimate of the securities, which was verj^ unfavourable. They say: — "Nevertheless, we feel it our duty to send 3'ou herewith a schedule of the securities amounting to ;i^487,ooo, which we desire should have the special and very serious consideration of the directors." In the ^^487, 000 are included every one of the sums owing by the Balfour companies and on the special accounts, and nearly ^6o,ooa RE LONDON AND GENERAL BANK, LIM. 725 more out of the _^"ioo,ooo owing by other customers of the bank. Auditors who feel it their duty to call the special and very serious consideration of their directors to ^1^487, 000 out of a total of ^530,000 of the debts due to the bank must indeed have arrived at the opinion that the state of affairs of the company was critical and dangerous, but, as will appear, Mr. Theobald does not den}^ this, though he attempts, ui successfully, I think, to explain it away b}^ saying that all his anxiety arose from the fact of the assets being locked up. P'urther on in the report the Auditors say, " The gravity of the situation is enhanced by the fact, as we believe it to be, that the board is in many cases power- less to decline further help because they are powerless to realise." This appears to me to be a very just but a very serious statement. The Balfour companies were indeed so much bound up with one another by a system of inter-financing, and some of them had committed them- selves so deeply in the building schemes of Hobbs & Co., Newman & Co., and others, that they would only be kept going in the future as thev had been in the past b)' continued advances from the funds of the bank. The last quoted extract from the report seems to me to show that the Auditors fully appreciated this view of the state of affairs of the company. They continue as follows : — " We beg also respectfully to point out that the quarters from which the bank obtains b}' far the larger proportion of its business " — meaning, I conclude, the Balfour companies, and some of the special accounts — " are such that the con- stitution of the board must malce it difficult, if not impossible, to obtain a sufficiently independent judgment upon many vital questions which have to be decided in its management." No doubt this refers to the fact that some members of the board of the bank, the financing com- pany, were members also of the board of different Balfour companies requiring advances, and the difficulty arising from this is obvious and serious. Then follows a sentence which forms an appropriate ending to such a report: "We cannot conclude without expressing the opinion unhesitatingly that no dividend should be paid this year." The Auditors were, unfortunatel}', persuaded by Afr. Balfour, assisted by Mr. Brock, to strike out this clause, I believe, before the report reached the hands of the other directors of the bank. Mr. Theobald explains this by saying that he came to the conclusion that it was beyond the province of the Auditors to express an opinion as to the policy of declaring a dividend, and if that were all, I should be disposed to agree with him. It is no part of the Auditor's duty to consider what is good or what is bad policy. The}' have only to examine into facts and see that the members have their opinion as to the Balance Sheet showing the state of affairs of the company. But the context seems to oblige me to read the excised sentence as meaning not that it was impolitic, 726 AUDITING. but that it would be improper, having regard to the state of affairs of the company, to declare a dividend. Having regard to the explanations given by Mr. Theobald in his evidence, I think the postscript to this report very significant. It runs thus : " We do not wish it to be under- stood that we consider all the accounts in the schedule are unsecured, but as a whole the capital therein represented is locked up. That is the defence, that all their alarm arose from the capital being locked up. This is not, I think, the language that would have been used if the Auditors had thought that the only mischief was in the locking-up, and an examination of the schedule to my mind confirms this conclusion. To a great extent the memoranda in the schedule explain themselves, and I have already dealt with many of the items. The accounts of each one of the Balfour companies is referred to in such a way as to show the unsatisfactory state of the securities. Mr. Theobald now says that he had no doubt as to the solvency of any of the Balfour com- panies, and in a certain sense I am ready to believe this ; that is to say, he thought that if they continued to be financed in the future as thej'- had been in the past, and so were enabled to complete the buildings which had been commenced, they might ultimately be able to repay the advances to them with interest and commission. But this is not the meaning of solvenc}' in a legal or business sense, and it is quite plain that Mr. Theobald knew perfectly well that some at least of these companies were, and were likely to remain for an indefinite period, unable to meet their liabilities as they became due. In no other way can the memoranda as to the want of security, or the defective nature of the securities, of the several Balfour companies be explained. Similar observations apply to the memoranda as to the special accounts. Notwithstanding this report, every item of the ;^487,ooo was entered as a good debt in the Balance Sheet for 1891. No valuation was made of any one of the debts, or of the securities for them. If any such valuation had, in fact, been made, I think it plain that there could have been no profit shown for the year. Mr. Theobald gave evidence several times over to the effect that whilst he was engaged in the audit for 1891 he felt that it was a very important crisis in the bank's affairs, and that if they could only get over the next month or so they would save it. His explanation of his withdrawal of the words in the pro- posed report to the members is that on this point he had reported specifically to the board. In explanation he gave, among other care- fully prepared and considered reasons, the following: That "Mr. Balfour was so thoroughly aroused to the necessity for taking the affairs of the bank resolutely in hand as to lead me to believe that he would do so, and, being a man of great financial resource, he would be able to save the bank " ; and that Mr. Balfour also spoke of an amalgama- RE LONDON AND GENERAL BANK, LIM. 727 tion. " Mr. Balfour said that, while doing this, he would confer with me continuousl)', and that no interim dividend should be paid without consultation with me." The first intimation received of payment of the interim dividend was an announcement in the Press of an interim dividend for 1892, for which it is not suggested Mr. Theobald was in any way liable. This would have given twelve months to work, during which time it would have been quite possible for Mr. Balfour to obtain very large repayments from the borrowing companies with which he was connected, and thus for the bank to be saved. That is a very important point to make. In another place he says, " My main point is this, that the bank could be saved if many of these accounts were collected. Mr. Balfour had absolute power over most of these companies, and he was so thoroughly alarmed that I quite believed that if we could only tide over that period he would use his influence over other companies to bring the money into the bank. I quite imagined he would do that, even if it meant that some of the other companies would have to go to the wall." What becomes of his statement that he thought the companies were solvent? He says it is a critical time ; if you can tide over the next month or two — as to which he never expresses an opinion — if you can do that, then the resources of Mr. Balfour are so great, his influence with the other companies so great, that it is quite possible he may collect a number of the accounts, even if the other companies have got to go to the wall. I think it is impossible to avoid the conclusion that Mr. Theobald, when about to make his report on the accounts of 1891, was thoroughly alarmed at the critical position of the bank, as he thought it more than likely the bank would not tide over another month or two, but that if it did, it could only be saved by extraordinary exertions on Mr. Balfour's part, and that in the process some of the other Balfour companies might have to go to the wall. He represents Mr. Balfour as fully sharing his alarm. If we turn to the Balance Sheet to see whether the state of the company's affairs, as apprehended by Mr. Theobald, was in any way indicated therein, we shall, I think, be obliged to answer the question in the negative. The liabilities appear to be sufficiently set forth. It is the statement of the assets which most calls for criticism. The cash at the bank was correctly stated, and so are the bills receivable, though the amount of _^i8o,ooo there appears only to have been arrived at by transferring ;,^'58,ooo, on December 31 1891, from bills receivable to a Loan Account for unpaid expenses. Disregarding the small item for stamps, the only other items on the credit side are as follows : — " Investments including reserve fund" — the reserve fund at that time was ;^io,ooo— " 2| per cent. Consols and Prescott and Arizona Railway bonds, £-j,^2o.'' That 728 AUDITING. could not be the investments which included the reserve fund of ;^io,ooo. " Loans to customers and other securities, ^346,000." In the two items, bills receivable and loans to customers and other securities, are, as above pointed out, included the whole of the sums, amounting to ^^487,000, the subject of the report of the Auditors to the directors, at their full value. This item, loans to customers and other securities, is. of course, altogether inaccurate and maj' be very misleading. What the ;^346,ooo really consists of is " loans to customers partly secured," which is a very different matter. It would be open to any ordinar}^ reader of the Balance Sheet to suppose that there were securities to an indefinite amount apart from loans to customers, and available to meet moneys due on the current accounts of customers. I am at a loss to understand for what purpose this item could have been so entered. It was not through inadvertence, for it was a correction of a still more misleading entry occurring in former Balance Sheets. It was suggested that such an item frequently appears in Balance Sheets. It may be so for anything I know, but it is none the less improper in the particular Balance Sheet which we have to consider. In short, the Balance Sheet, as it stands, would have given no hint to any ordinary reader of the critical position arising either from the locking-up of capital or from the doubtful nature of many of the debts entered at their full value. In reporting this Balance Sheet without explanation, the Auditors were, in my judgment, guilty of a misfeasance within the meaning of the loth Section of the Act of 1890, as charged in the summons, and were in this case, at any rate, thoroughly alive to the unsatisfactory state of the affairs of the bank. They could not but be aware that the Balance Sheet was not properly drawn up so as to show the state of the affairs of the bank as shown by the books. The next question is whether the misfeasance was the cause of loss to the company. On examination of the evidence there set forth, I should be led to the conclrtsioir that the Auditors did know that a dividend could not properly be paid out of profits. See how the figures stand from another point of view. The Profit and Loss Account shows a gross profit of /."24,ooo. After making pro- vision for bad and doubtful debts, and after deduction of ;^6,6oo for expenses of management and other charges, there is carried over to the Balance Sheet a net profit of ;/^i8,ooo odd, out of which there had already been applied ;^6,ooo and more in pa3fment of an interim divi- dend, leaving a balance of between ;i{^i 1,000 and ;i{?i2,ooo and nothing more. ^3,000 of that was to be carried to reserve ; so you have only about between ;,^'8,ooo and ^9,000, according to the books, for dividend. But of the gross profits for the year 1891 shown by the books, ^^16,788 were book entries debited to the Balfour companies, ;/J'2,462 a book entry RE LONDON AND GENERAL BANK, LIM. 729 debited to Benham"s account, and £2-^^ a book entry debited to Wilkinson's account. That, of course, was in the early part of the year, Wilkinson's account being treated as a debit. Assuming all the Balfour companies, and Benham and Wilkinson, to have been able to pay the whole sums due from them, except the amounts debited in 1891 for interest and commission, not only the profits available for dividend would be swept away, but of the reserve fund itself little or nothing would be left. Such an assumption, however, in my judg- ment, would have been extravagantly favourable to the Auditors, and it only required that one of the debts owing by Mr. Wilkinson (I leave out Benham because I do not want to found on Benham any charge against Mr. Theobald), or almost anj^ one of the Balfour companies should turn out to be bad, it would exhaust everything belonging to the bank which was not capital. It turned out that each of the Balfour companies, as well as Wilkinson and Benham, as well as other debtors of the bank, were insolvent. In my judgment it is established that the bank had no funds out of which the dividends could in any point of view be properly paid. I think the Auditors might well be held to have known, but 1 do not rely upon that con- clusion in my judgment ; what I do re\y upon is that the Auditors must have known and did know that the Balance Sheet was not properly drawn up so as to show the state of affairs, and that was a misfeasance. If they were guilty of misfeasance in relation to the company, they must be responsible for the consequences of such mis- feasance, whether they had arrived at the conclusion that the dividend if paid at all would be payable out of capital or not. That dividends were, in fact, paid out of capital cannot, I think, be doubted. It was argued that before the stoppage of the bank the profits entered in the 1S91 Balance Sheet were, in fact, paid by appropriation of mone3^s paid into current accounts. This would not apply to a case like Wilkinson's, where there was no current account, but in my judg- ment the rule in Clayton''s case has no sort of application under the circumstances. If it had, a bank might always pay profits by mere book entries, though the customers against whom interest and commis- sion were charged might all be hopelessly insolvent. Was, then, the loss occasioned by the misfeasance of the Auditors? It has been argued that the payment of the dividend was not the proximate result of the Auditors' report, as the recommendation of the directors and the vote of the meeting had to intervene. This appears to me to misrepresent the true state of things. The report of the Auditors was a continuing repre- sentation, made indeed before, but in law and in good sense to be treated as repeated after, the recommendation of the directors. It was perfectly well known to Mr. Theobald (at any rate at the meeting 730 AUDITING. where he was present and heard the reading of the report recommend- ing a dividend, and the speech of Mr. Balfour) that this report was intended to be reUed upon as justifying the recommendation and as an invitation to vote the dividend. How far the judgment should go against the appellant has given me considerable difficulty. A great deal of the reasoning which has led me to hold that their reporting on the accounts of 1891 is a misfeasance in relation to the company applies only to the case of that report. The learned Judge has held Mr. Theobald liable not only for the 1S91, but also for the 1890, dividend. I am far from saying that he is clearly wrong, but I cannot satisfy myself that he is clearly right. In the case of the 1890 dividend it cannot, on the evidence, be made out to my full satisfaction that the Auditors knew the Balance Sheet to be substantially misleading, and I think it safer to confine the order to the dividend in respect of 1891. Lord Justice Lindley : The order will stand as to one dividend with interest, but not as to the other. {Acct. L.R., 1895, p. 173.) The case of THE KINGSTON COTTON MILL COMPANY, LIM. (Decided by Lindlev, Lopes, and Kav, L.JJ., in the Court of Appeal, on May 19 1896.) Held that in the absence of suspicions circumstances an Auditor is not guilty of Negligence wJio relies upon the statements made by trusted 0~fficers of that Company. This was an appeal by Messrs. Benjamin Pickering and Arthur Edgar Peasegood, the former Auditors of the company, now in liquidation, against an order of Mr. Justice Vaughan Williams under Section 10 of the Companies (Winding-up) Act, 1890, making them liable to make good to the assets of the company moneys of the company improperly applied in payment of dividends on the faith of certain Balance Sheets certified by them. The facts in the case were fully reported in Vol. XII, Accountant Law Reports, p. 225. The appeal was argued on May 6, 7, and 8. Their Lordships now delivered judgment, allowing the appeal. Lord Justice Lindley said : — This is an appeal from an order made by Mr. Justice Vaughan Williams under Section 10 of the Companies (Winding-up) Act, 1890, on Mr. Pickering and Mr. Peasegood, the Auditors of the company, ordering them to pay to the liquidator certain sums of money, being the amounts of dividends improperly declared and paid out of the assets of the companj^ on the faith of certain Balance Sheets prepared and signed by the Auditors. The THE KINGSTON COTTON MILL COMPANY, LIM. 73 1 appeal is based upon two grounds- -(i) that the Auditors have not failed to discharge their duty to the company and are under no liability to make good the money misapplied ; (2) that, even if they have, the proper remedy is by action and not by the summary process to which the liquidator has had recourse. It will be convenient to dispose of the second point first. It has already been decided that the Auditors of this company are "officers" within the meaning of Section 10 of the Companies (Winding-up) Act, 1890 (see 1896, i Ch. 6 ; The Times Law Reports, Vol. XII, p. 60). The object of that section is the same as that of Section 165 of the Companies Act, 1862, which it has replaced. That object was to facilitate the recovery by the liquidator of assets of a company improperly dealt with by its promoters, directors, or other officers. The section applies to breaches of trust and misfeasances by such persons. I agree that the section does not apply to all cases in which actions by the company will lie for the recovery of damages against the persons named ; it is eas}' to imagine cases of breach of contract, trespasses, negligences, or other wrongs to which the section is inapplicable, and some such have been the subject of judicial decision ; but I am not aware of an}^ authority to the effect that the section does not apply to the case of an officer who has committed a breach of his duty to the company, the direct consequence of which has been a misapplication of its assets, for which he could be made responsible bv an action at law or in equity. Such a breach of duty, if established, is a " misfeasance " within the meaning of the section, or, to adopt the language used in C avendish-Bentinck v. Fenn (12 A.C. 652), such a breach of duty is a misfeasance in the nature of a breach of trust. This view of the section was adopted by this Court in In re The London and General Bank (1895, ^ ^^- '^^' ^73 5 ^^^ Times Law Reports, \'ol. XT, pp. 374-573), and is, in my opinion, correct. On this preliminary point, therefore, which, however, does not touch the merits of the case, the appellants are not entitled to succeed. I come now to the real question in this controversy, and that is, whether the appellants have been guilty of any breach of duty to the company. To decide this question it is necessary to consider (i) What their duty was ; (2) How they performed it, and in what respects (if any) they failed to perform it. The duty of an Auditor generally was very carefully con- sidered by this Court in In re The London and General Bank (1895, ^ Ch. 673), and I cannot usefully add anything to what will be found on pages 682-84. It was there pointed out that an Auditor's duty is to examine the books, ascertain that they are right, and to prepare a Balance Sheet showing the true financial position of the company at the time to which the Balance Sheet refers. But it was also pointed out that an Auditor is not an insurer, and that in the discharge of his duty 732 AUDITING. he is only bound to exercise a reasonable amount of care and skill. Tt was further pointed out that what in any particular case is a reason- able amount of care and skill depends on the circumstances of that case ; that if there is nothing which ought to excite suspicion, less care may properly be considered reasonable than could be so considered if suspicion was or ought to have been aroused. These are the general principles which have to be applied to cases of this description. I protest, however, against the notion that an Auditor is bound to be suspicious, as distinguished from being reasonably careful. To sub- stitute the one expression for the other may easily lead to serious error. I pass now to consider the complaint made against the Auditors in this particular case. The complaint is that they failed to detect certain frauds. There is no charge of dishonesty on the part of the Auditors. They did not certify or pass anything which they did not honestly believe to be true. It is said, however, that thej^ were culpably careless. The circumstances are as follows : For several years frauds were committed by the manager, who, in order to bolster up the company and make it appear flourishing when it was the reverse, deliberately exaggerated both the quantities and values of the cotton and 3'arn in the company's mills. He did this at the ends of the years 1890, 1891, 1892, and 1S93. There was no book or account (except the Stock Journal, to which I will refer presently) showing the quantity or value of the cotton or yarn in the mill at any one time. It would not be easy to keep such a book. Nor is it wanted for ordinary purposes. There is considerable waste (20 or 25 per cent, on the average) in the manufacture of yarn from cotton, and the market prices of both cotton and yarn are subject to great fluctuations. The Balance Sheets of each year contained on the asset side entries of the values of the stock-in- trade at the end of the year, and those entries were stated to be " as per manager's certificate." There were also in the Balance Sheets entries on the opposite side of the values of the stock-in-trade at the beginning of the 3'ear. The quantities did not appear in either case. The Auditors took the entr}^ of the stock-in-trade at the beginning of the year from the last preceding Balance Sheet, and they took the values of the stock-iii- trade at the end of the year from the Stock Journal. The book con- tained a series of accounts under various heads purporting to show the quantities and values of the company's stock-in-trade at the end of each year, and a summary of all the accounts showing the total value of such stock-in-trade. The summary was signed by the manager, and the value as shown by it was adopted by the Auditors and was inserted as an asset in the Balance Sheet, but "as per manager's certificate." The summary alwa5''S corresponded with the accounts summarised, and the Auditors ascertained that this was the case. But they did not examine further into the accurac}^ of the accounts summarised. The THE KINGSTON COTTON MILL COMPANY, LIM. 733 Auditors did not profess to guarantee the correctness of this item. They assumed no responsibility for it. They took the item from the manager, and the entry in the Balance Sheet showed that they did so. I confess I cannot see that their omission to check his returns was a breach of their duty to the company. It is no part of an Auditor's duty to take stock. No one contends that it is. He must rely on other people for details of the stock-in-trade in hand. In the case of a cotton mill he must rely on some skilled person for the materials necessary to enable him to enter the stock-in-trade at its proper value in the Balance Sheet. In this case the Auditors relied on the manager. He was a man of high character and of unquestioned competence. He was trusted by ever3^one who knew him. The learned Judge has held that the directors are not to be blamed for trusting him. The Auditors had no suspicion that he was not to be trusted to give accurate information as to the stock-in-trade in hand, and they trusted him accordingly in that inatter. But it is said they ought not to have done so, and for ^ this reason. The Stock Journal showed the quantities — that is, the weight in pounds — of the cotton and yarn at the end of each year. Other books showed the quantities of cotton bought during the A-ear and the quantities of yarn sold during the year. If these books had been compared by the Auditors they would have found that the quantity of cotton and yarn in hand at the end of the j-ear ought to be much less than the quantity shown in the Stock Journal, and so much less that the value of the cotton and yarn entered in the Stock Journal could not be right, or, at all events, was so abnormally large as to excite suspicion and demand further inquiry. This is the view taken by the learned Judge. But, although it is no doubt true that such a process might have been gone through, and that, if gone through, the fraud would have been discovered, can it be truly said that the Auditors were wanting in reasonable care in not thinking it necessary to test the managing director's returns? I cannot bring myself to think they were, nor do I think that any jury of business men would take a different view. It is not sufficient to sa}^ that the frauds must have been detected if the entries in the books had been put together in a way which never occurred to anyone before suspicion was aroused. The question is whether, no suspicion of anything wrong being entertained, there was a want of reasonable care on the part of the Auditors in relj'ing on the returns made by a competent and trusted expert relating to matters on which information from such a person was essential. I cannot think there was. The manager had no apparent conflict between his interest and his duty. His position was not similar to that of a cashier who has to account for the cash which he receives, and whose own account of his receipts and payments could not reasonably be 734 AUDITING. taken by an Auditor without further inquiry. The Auditor's duty is not so onerous as the learned Judge has held it to be. The order appealed from must be discharged with costs. Lopes, L.J., in the course of his judgment, made the following observations upon the duties of Auditors : — It is the duty of an Auditor to bring to bear on the work he has to perform that skill, care, and caution which a reasonably competent, careful, and cautious Auditor would use. What is reasonable skill, care, and caution must depend on the particular circumstances of each case. An Auditor is not bound to be a detective, or, as was said, to approach his work with suspicion or with a foregone conclusion that there is something wrong. He is a watch-dog, but not a bloodhound. He is justified in believing tiied servants of the company in whom confidence is placed by the com- pany. He is entitled to assume that they are honest and to rely upon their representations, provided he takes reasonable care. If there is anything calculated to excite suspicion he should probe it to the bottom, but in the absence of anything of that kind, he is only bound to be reasonably cautious and careful. His Lordship then referred to the circumstances which led to the Auditors being deceived, and came to the conclusion that they were not wanting in skill, care, or caution, in accepting the figures of the manager, and he concluded as follows :• — The duties of Auditors must not be rendered too onerous. Their work is responsible and laborious, and the remuneration moderate. I should be sorry to see the liability of Auditors extended any further than in In re The London and General Bank. Indeed, I only assented to that decision on account of the inconsistency of the statement made to the directors with the Balance Sheet certified by the Auditors and pre- sented to the shareholders. This satisfied my mind that the Auditors deliberately concealed that from the shareholders which they had com- municated to the directors. It would be difficult to say this was not a breach of duty. Auditors must not be made liable for not tracking out ingenious and carefully-laid schemes of fraud, when there is nothing to arouse their suspicion and when those frauds are perpetrated by tried servants of the company and are undetected for years by the directors. So to hold would make the position of an Auditor intolerable. Kay, L.J., concurred. {Acct. L.R. 1896, p. 77.) THE WESTERN COUNTIES STEAM BAKERIES AND 735 MILLING COMPANY, LIM. The case of THE WESTERN COUNTIES STEAM BAKERIES AND MILLING COMPANY, LIM. (Decided by Lindley, Smith, and Rigby, L.J J., in the Court of Appeal, on March 11 1897.) Held that an Accountant who certifies the Accounts of a Company as Auditor, but ivho has never been froferly affointed as Auditor, ts not an Officer of that Company. This was an appeal from a decision of Mr. Justice Stirling. The appellants, Messrs. Parsons & Robjent, had been employed by the directors to prepare a Balance Sheet and audit accounts of the above company for the year 1889; one of their clerks did the actual work, and signed the name of the firm at the foot of the accounts, vouching for their accuracy. The liquidator, in the winding-up, sought to make the two partners in the firm liable in respect of dividends declared on the faith of these accounts, by summary process, under the misfeasances clause (Section 10) of the Companies Act', 1890. Mr. Justice Stirling held that Messrs. Parsons & Robjent was an " officer " of the company within the meaning of that section, and was liable. Mr. Parsons appealed. Their Lordships allowed the appeal with costs. JUDGMENT. Lindley, L.J., read the following judgment : — The question raised by this appeal is whether Messrs. Parsons & Robjent are liable to be pro- ceeded against under that section as an " officer " of the company. To answer this question it is necessary to ascertain who Messrs. Parsons & Robjent are, and what they have done. They were accountants employed by one of the directors to audit the accounts of the company and to prepare a Balance Sheet for the year 18S9, to be laid before the shareholders of the company at their annual general meeting. This they did ; he and his partner signed, per fro., a certificate at the bottom, worded, "We have carefully examined the accounts of the Western Counties Steam Bakeries and Milling Company, and find the same to be in accordance with the above Balance Sheet, which shows the correct financial position of the company." The accounts were, in fact, examined, and the Balance Sheet prepared by a clerk of the firm, and he signed the name of the firm at the bottom of the certificate : but no reliance was placed by the appellants upon this circumstance. They admitted their clerk's authority to act for them, and they admitted their own liability for what their clerk did. Messrs. Parsons & Robjent were 736 AUDITING. paid £\2 I2S. for their services by a cheque of the company. Now, if Section 10 of the Winding-up Act, 1890, contained the word " Auditor," it might well be that Messrs. Parsons & Robjent, having acted as they did, could not be heard to say that they were not Auditors, and Section 10 might well apply to them. But the word " Auditor " is not in the section, and what has to be determined is whether Messrs. Parsons & Robjent are officers of the company, or have so acted that thej^ cannot be heard to say that they were not. If all persons who did Auditor's work for a company were officers of the company the case would be eas}' ; but no decision has y^t gone this length. An Auditor may or may not be an officer of a company. So may an3'bod3f else — e.g., a banker or solicitor. Prima facie such persons are not officers. To be an officer there must be an office, and an office imports a recognised position with rights and duties annexed to it ; and it would be an abuse of words to call a person an officer who fills no position either de jure or de facto, but who happens to do some of the work which he .would have to do if he were an officer in the proper sense of the word. Messrs. Parsons & Robjent performed, the duties which an Auditor would have had to perform ; it appears to me that they were no more de facto than de jure an officer of the company. They were simplv accountants, called in by the directors to do a piece of work, and they never were and never pretended to be, or acted as if they were, anything else. In my opinion the decisions in the cases of The London and General Bank and The Kingston Cotton Mills Com-pany decided two points only — viz., first that Auditors might be officers within Section 10, a proposition which, in the first case, was very stoutly disputed ; and, secondly, that the Auditors in those cases were officers of the companies then in question ; that is, that the persons there had within Section 10 really filled the office of Auditor in those cases respectively. Smith, L.J. : If the appellants were officers of the company upon January 30 1890, when they certified the correctness of the company's Balance Sheet for the year 1889, they may be proceeded against by means of such summons, otherwise they cannot be. It has been held by this Court in the case of Tn re Kingston Cotton Mills Com-pany (1896, I Ch.D. 6), following the case also in this Court of In re Loudon and General Bank (1S95, 2 Ch.D. 166), that where a company having articles of association similar to those in the present case has appointed a person to the office of Auditor of the company, such person is an "officer" within the meaning of Section 10 of the Companies (Winding-up) Act of 1S90. It having thus been held that a person appointed by the company t(5 the office of .Viiditor of the company is an officer within the meaning of the section, we are now asked to take a step further and to hold that a person who has never been appointed to THE WESTERN COUNTIES STEAM BAKERIES AND 737 MILLING COMPANY, LIM. the office of Auditor or to any other office in the company at all is nevertheless an officer of the company if he has performed work which an Auditor if he had been appointed by the company to the office of Auditor would have undertaken and performed. The first case which is relied upon is that of Gibson v. Barton (L.R. 10 Q.B. 329), where it was held that a man who performed the work of a manager of a company became thereby the de facto manager. The learned Judges held that " manager " in the 1S62 Act meant manager de facto, and that a person who performed manager's work becomes thereby manager ; but how does this establish that a person who performs Auditor's work becomes an officer of the company? 1 agree that performing the work of an Auditor shows the person to be a de facto though he may not be a de jure Auditor, but to succeed, the liquidator must show that the person is a de facto "officer." Some Auditors are officers of a company and some are not. Those who are officers are within the section, not those who are not officers. It is no good showing that a person per- forms Auditor's work ; it must be shown that he is a de facto officer of the company. The next case is that of Coventry and Dixon'' s case (14 Ch.D. 660). There, two directors did the work of directors without being qualified to be directors. Sir George Jessel held them to be de facto directors though they were not de jure directors, and as such were liable to be proceeded against summarily by way of a misfeasance summons. When this case was under appeal (it was reversed upon another point) Lord Justice Bramwell said if he (that is, the director) has done an3'thing wrong as a de facto director no doubt he can be got at under the clause. In this I agree, and if Messrs. Parsons & Robjent had done anything wrong as de facto officers they could be got at ; but they have done nothing of the sort, for the simple reason they have never become officers of the company at all. I agree that doing the work of a director may make a person a de facto director, and the section enacts that a director may be proceeded against by summons. Doing the work of a manager may make a person a de facto manager, and the section enacts that a manager may be proceeded against by summons. So in the case of a liquidator. Doing the work of an Auditor may make a person a de facto Auditor, but the section does not make an Auditor liable to be proceeded against ; it is only when he is de facto or de jure an officer of the company that he can be proceeded against by summons under Section 10. In this case Messrs. Parsons iH: Robjent were neither de facto nor de jure officers of the company; then how can they be said with truth to be officers of the company? All that this Court has heretofore held is that an Auditor may be pro- ceeded against by summons if he is de facto an officer of the company. B B B 73^ AUDITING. It has not held that a man may be proceeded against by summons when he is neither de facto nor de jure an officer of the company. The ques- tion is not, were the applicants de facto Auditors? It is, were they de facto officers ? Rigby, L.J., concurred. [Tiiius, 12 March 1897.) The case of CITIZEXS' AUDITOR v. THE CITY COUNCIL, M A N' C H E S T E R C OR P O RAT I O X . (Decided by Cavk and Lawkance, JJ., in the Queen"s Bench Division, on March 18 1897.) Held that Burgesses arc entitled to iusfection of Miutites of Toivn Council and Committees. The action brought by ^Ir. Xorbnry \A'illiams, one of the citizens' Auditors, and Mr. Edward ^"\"oodall, against the Manchester Corpora- tion, to determine the extent of the right given by Section 233 of the Municipal Corporations Act to a burgess of a borough to inspect the minutes of the Council and its Committees, came on for hearing in the Queen's Bench Division on March 18. Cave and Lawrance, J J., sat as a Divisional Court to try special cases. In the statement of the case it was set forth that : The plaintiffs are citizens of the city of Manchester, which has a population of upwards of 529,000, and of which the number of enrolled citizens is 87,627. The defendants are a municipal corporatioir regulated by the Municipal Corporations Act, 1S82, which provides as follows b}- Section 233 : — " The minutes of proceedings of the Council shall be open to the inspec- tion of a burgess on the paA'ment of a fee of one shilling, and a burgess may make a copy theieof or take an extract therefrom. A burgess may make a cop}'' of, or take an extract from, an order of the Council for the payment of monev." Certain standing orders for the management of the business of the Council were made by the Manchester Council. Among them were the following: — " X. (i) No motion or amendment shall be made or proposed or anv discussion allowed upon the con- firmation of the proceedings of the several Committees with reference to any matter within the province of a Committee which does not appear upon the minutes to be confirmed ; but any member may put a question to the chairman of the Committee with reference to any such n»atter."' " XI. (1) An epitome of minutes of the several Committees of the Council .shall be prepared each month under the direction of the town clerk and be submitted to the chairman of each ( "ommittee prior to its being sent to the Council." The Council have appointed no fewer CITIZENS AUDITOR V. THE CITY COUNCIL, 739 MANCHESTER CORPORATION. than twent\'-one Committees, and the ordinary business of the Corpora- tion is regulated and managed by them. The minutes kept by the Council merely refer to the proceedings of the Committees by stating that the proceedings of each ("omimittee have been approved. Minutes of the proceedings of Committees are also recorded in books, which are submitted for the approval of the Council. The acts or proceedings of the Committee which are approved by the Council are not specifically recorded in the minutes of the Council, but are approved by reference to the minutes of the several Committees, and can be ascertained only by inspection of such minutes. The plaintiffs made an application for an inspection of the minutes of the proceedings of the Gas and Rivers Committees, which are referred to in the minutes of the Council as having been read and approved during the past two years, and the}' tendered the fees mentioned in the section. Thev^ were not allowed to see them, but were referred to the Council minutes. The Corporation >i objected to produce the Minute Books so kept by the Gas Committee and Rivers Committee respectively, on the ground that the production of the minutes of the Committees would be inimical to the interests of the citizens of Manchester. The Corporation having regard to the foregoing considerations, were of opinion that it was not consistent with the public interests to permit inspection of the minutes of the Com- mittee in all cases ; and, as they were advised that such inspection could not be claimed as a right under the statute, they declined to permit the inspection claimed by the plaintiffs. On the part of the plaintiffs it is alleged that when the proceedings of any of the Com- mittees have been approved by the Council, and such approval has been recorded, as in the specimen minutes, they are entitled to inspect the minutes of such Committee for the purpose of ascertaining what acts or proceedings of such Committee the Council have approved. Mr. Russell, on behalf of the plaintiffs, said the question which had arisen in the present case was a peculiar one. The minutes of the Town Council of ilanchester were, as the plaintiffs alleged, kept in such a form that it was quite impossible to ascertain what the proceedings actually were. The point to be determined, therefore, was whether the way in which the Corporation had kept the minutes of the Council was such that the plaintiffs were entitled, for the purposes of ascertaining what the proceedings were, to refer to the mmutes of the Committees. The minutes of the Council certainly did not give the details of the work done. For instance, the minutes of the Corporation would read, " The proceedings of the Watch Committee having been read, resolved that the same be approved." This rendered it necessary that one should go to the minutes of the Committee referred to in the minutes oi the Council and search them to enable one to ascertain what it was B B B 2 740 AUDITING. the Council had approved. The plaintiffs, therefore, said they were entitled, on the payment of a shilling, not only to see the minutes of the Council, but to see the minutes of the Committees. Counsel admitted that the Manchester Corporation had adopted a form of minute which most skilfully concealed the details of the work done. Thus, if a sura were recommended by the Parks Committee for build- ing a band-stand, the fact of such sum being allowed ought to appear, which it did not on the minutes as now settled. There was no record of order of payment of money. Section 233 was thus rendered nugatory. Mr. Asquith, for the Corporation, said he appeared for that body to say that they contested this matter in no contentious spirit, but merely to get guidance from the Court as to what was their duty in the matter of the keeping of these minutes. There had been some suggestion of deliberate concealment. !Mr. Russell : Oh no. Cave, J., said it was clear that the Council under the Act should let the burgesses know all the acts of the Corporation. Mr. Asquith said the Corporation had been keeping their minutes in the present form for 60 years, and they had alwa3rs been willing to allow the burgesses to inspect the Committees' minutes when it was consistent with the public interest. In some cases it would be most inexpedient to allow the burgesses to see all the preliminary details. Cave, J. : I think the burgesses are entitled to ask to be shown what has been approved by the Council. Mr. Asquith : The Corporation, as I understand, are willing to con- cede that, but what they object to in the public interest is the looking at the Minute Books of Committees which contain preliminary proceed- ings leading up to the final act. Cave, J. : There I should agree with 3'ou. I do not think they are entitled to do that. But the difficulty is, can you suggest a way in which what they are entitled to see can be reconciled with what they are not entitled to see? !Mr. Asquith : Terhaps a practical solution of the difficulty may be arrived at if the document described as an " epitome," which is sub- mitted to the members of the Council immediately before they meet, and which I am instructed contains a summary of the decisions actually arrived at by the Committees, were treated as part of the minutes of the Council, and allowed to be inspected. But the prayer of this claim is that they may inspect the minutes of proceedings of an}' Committee. citizens' auditor v. the city council, 741 manchester corporation. Cave, J. : That is going rather far, but the difficulty is to see how they should be separated, because the C"orporation make the minutes part of the proceedings. Mr. Russell : All we ask is the right to see the minutes for the pur- pose of ascertaining what acts and proceedings of such ("ommittee have been approved. If the epitome shows us the acts, that will do. Mr. Asquith : So long as it is made clear that the Corporation are not bound to disclose any confidential preliminarjr matters to which I referred, they will have no objection. Cave, J. : I do not see that they are bound to disclose such confidential matters. Mr. Russell : I admit that I do not see anywhere in the Act of Par- liament a right to inspect minutes of Committees as such. I do not think that is what is contended for here. I was referring to the minutes of the Committee so far as they were reported to the Council. Cave, J. : The epitome will answer your purposes. Mr. Asquith does not object to your seeing that, and I think that will do. Mr. Russell : The Council are, of course, the masters of the form in which they keep their minutes. As long as they keep them in the present form I cannot ask for any more. Mr. Asquith : I feel, and the town clerk quite agrees with me, that the form in which the minutes have been traditionally kept does give con- siderable colour to my friend's claim. I repeat that the Council are willing that the acts of the Committee approved shall be inspected by the burgesses, but not the Minute Books. Mr. Russell : We have only had the epitome offered to us now. It has been expressly refused down to the present. All we want is a declara- tion from the Council that the burgesses are entitled to inspect the acts of the Committees approved by the Council. Mr. Asquith : The acts of every Committee approved by the Council are to be open to inspection. Mr. Russell : I must ask for all acts submitted for approval, because seme acts of the Committee may not be approved. Mr. Asquith : Yes ; I agree that the acts of every Committee sub- mitted for approval are to be open to inspection in the future. It was agreed that the declaration should be that the burgesses are entitled to inspect the minutes of acts of the Committees submitted to AUDITING. the Council for approval, and an order was made accordingly. After consultation between counsel it was agreed that the plaintiff's costs in the action should be borne by the Corporation. (jManchcstcr Cily News, 19 ^March 1S97.) The case of WILDE AND OTHERS v. CAPE AND DALGLEISH. (Decided before Lord Russell of KlLLO^VEN, C.J., and a Special Jury, in the Queen's Bench Division, on May 27 1S97.) Held that an Auditor is liable for Losses occasioned by his not iiill'iiliiig his Contract. In this action the plaintiffs, Messrs. \MldL', Burchell & Burchell, a firni of solicitors, claimed damages from the defendant, Mr. Dalgleish, who carries on business as an accountant at S Old Jewry, E.C., under the name of Cape & Dalgleish, for negligence and breach of duty in auditing the plaintiffs' books and in preparing and certifying their Balance Sheets. It appeared that the defendant had been employed to audit the plain- tiffs" books for the years ending September 30 1890 to 1895, and to examine and certify Balance Sheets for each of those years. The negli- gence complained of was that the defendant did not carefully examine the plaintiffs' Pass Books and omitted to discover certain fraudulent entries made in them. By these fraudulent entries the plaintiffs' cashier had defrauded them of /. 1,756 4s. 9d., which sum they now claimed from the defendant. The defendant's case was that all he was bound to do under the terms of his employment was to see that the plaintiffs' books were brought to a correct balance and to raise a Balance Sheet and Profit and Loss Account as between the partners, taking the entries and balances appearing in the books as correct. He denied that he was employed to make a cash audit, or check receipts or payments, or examine the Cash Book or Banlc Book in any way, or to be in any wa}' responsible for the accuracy of the cash transactions. These, the defendant contended, were the conditions of employment arranged with Mr. Cape, the defendant's deceased partner, by the plaintiffs in 1883. In 18S4 Mr. Dalgleish entered into partnership with Mr. Cape, who died in 18S9, and since that date he had audited the plaintiffs' books with the object above stated — i.e., to ascertain the Profit and Loss Account as between the partners, accepting the accuracy of the entries appearing in the books. He repudiated all responsibility for not having discovered the defalcations of the plaintiffs" cashier. After fvidence had been given by the plaintiffs, during the midday adjournment the parties came to terms. MARTIN V. ISITT. 743 Mr. Bighani said that his client was unaware of the terms which had been arranged between the plaintiffs and Mr. Cape, and did not know- that he was to check the accounts in the Pass Book. After hearing the plaintiffs' evidence as to the arrangements made with Mr. Cape, Mr. Dalgleish thought that, with regard to the loss caused by the defalca- tions of the cashier, he ought to meet the plaintiffs half-wa}-, and was prepared to consent to judgment for them for ;/.S5o. JUDGMKNT. The Lord Chief Justice gave judgment for the plaintiffs for this amount, and added that it was only fair to 'Sir. Dalgleish to say that the settlement of the case must not be taken as any reflection on his personal skill or care. The difficulty had arisen solel}^ owing to a mis- understanding on his part as to the terms of his employment by the plaintiffs. {Tinu's, 28 Ma}- 1807.) The case of MARTIX :■. ISITT. (Decided before Lord Russell of Killowex, C.J., and a Special Jury, in the Queen's Bench Division, on 3rd and 4th March 1898.) Monthly Audit — Action against Auditors jo;- alleged Negligence — Defence that the Profer Materials ivere not sufflied to do the Work — Judgment by Consent. This was an action brought by Messrs. James Martin & Sons, milk and grain merchants, against Messrs. Isitt & Co., Chartered Accountants, for negligence in not checking the Cash Book and the Bank Pass Book, whereby a clerk was enabled undiscovered to embezzle £612. 19s. 2d., the property of the plaintiffs. The defendants alleged that the}' were unable to properly proceed with their agreed work owing to the neglect of the plaintiffs to give proper facilities, and in particular they complained that the books were not properly posted up and were full of errors, of which the defendants were unable to get the necessary explanations. It appeared that in 18S7 Mr. Eldrid. now a member of the defendants' firm, agreed with plaintiffs to do certain work which was not material to the present action, and also undertook the " monthly checking of all your books " for an inclusive fee of thirty guineas, afterwards increased to sixty guineas. It was not the defendants' duty to audit, but merely to " check " the books. To enable this to be done clerks were sent down to the plaintiffs' head office at Brockley, and they spent there a very considerable number of hours doing the requisite work. The 744 AUDITING. books were written up and posted by the plaintiffs themselves ; with this the defendants had nothing to do. It further appeared that a man named May, in charge of a branch of the plaintiffs' business, received money, and in a weekly statement sent to the plaintiffs credited himself with payments into a bank, which payments should in ordinary course appear in the London and County Bank Pass Book of the plaintiffs. In fact, from the last week of November 1896 until the end of March 1897 he habitually embezzled the money. The plaintiffs would enter in their Cash Book the amount alleged by May to have been paid into the bank ; the Pass Book, of course, would not agree with the Cash Book, and the plaintiffs complained that this was not discovered until the first days of April 1897. It was admitted that the discovery was made by, and was due to the work of, the defendants ; but it was then alleged against the defendants that the discovery should have been made earlier. The reply of the defendants to this was that the state of the books was such, and the queried items — the explanations of which were constantly delayed — were so numerous, that they were unable to pro- ceed fast enough to keep pace ; and that, in December 1S96, they were still engaged in dealing with the entries relating to the summer months of 1896. Further, they said that they were requested by the plaintiffs not to proceed with the work in January and that the month of February was wasted away to the default of the plaintiffs. The senior member of the plaintiffs' firm was called, and gave evidence supporting his own and negativing the defendants' case, but his cross-examination was not concluded when the Court rose for the da3\ Before resuming the hearing the next morning a consultation took place between counsel, and as a result, Mr. Carson stated that he under- stood that it would not now be contended that the defendants had been negligent or unskilful in the way in which they had done their work, but that the plaintiffs would rest their case on a breach of one term of the contract — viz., the agreement to attend monthly. That being so, and recognising that the plaintiffs had suffered a loss, the defendants were quite willing to share that loss to a certain extent, and consequently terms had been arranged. The Lord Chief Justice said that as he understood the case as placed before him, no allegation of negligence or unskilfulness was now made, but that it was urged that the defendants should have attended some- what earlier than they actually did ; that was a question to be tried, but he thought the action of the parties in arranging the matter to be very proper. {AccL L.R., 1898, p. 41.) cox V. EDINBURGH AND DISTRICT TRAMWAYS CO., LIM. 745 The case of COX v. EDINBURGH AND DISTRICT TRAMWAYS COMPANY, LIM. (Decided bv Lord Kvllachv, in the Scottish Outer House of the Court of Session, on June 16 i8g8.) Held that 7^1ien a Traniwav Coiiifany alters its sy stein from Horse Traction to Cable Traction nothing need be -diritien off Capital Account before paying Dividends out of Current Profits. Lord Kvllachy gave judgment in the suspension and interdict at the instance of Robert Cox of Gorgie, M.P., residing at 34 Drumsheugh Gardens, Edinburgh, against the Edinburgh and District Tramways Compan}', Lim., i South Charlotte Street, Edinburgh. The complainer seeks to have the respondents interdicted from declaring or paying any dividend on any shares of the company out of the capital of the com- pan v ; from paying an}^ dividend except out of the net profits of the whole business of the company ; and from declaring any dividend until due provision has been made out of the net revenue for loss of capital or depreciation of assets on Capital Account ; and, in particular, until the sum of ;/^2o,ooo or other loss arising on the realisation of the existing stock of horses, cars, and plant has been provided for. Lord Kyllachy said : This is an action brought by a shareholder of the Edinburgh Tramways Company b}' which he seeks to restrain the respondents from paying a certain dividend for the first half of the current year 1898 ; or at least from paying that dividend until provision is made for a certain loss, which, it is stated, has arisen, or is about to arise, upon the realisation of the existing stock of horses and cars belonging to the compan}'. The respondents dispute the relevancy of the complainer's statement, and the parties (without renouncing pro- bation) are agreed in asking a judgment on relevancy. They are also agreed that for that purpose a certain minute of admissions shall be taken as forming part of the complainer's statement. The facts upon which the complaint is rested are, shortly, these. The respondents — a limited company — hold (in substance) a lease for a term of years of the Edinburgh tramways. They pay a rent to the Corporation for the heritable subjects, and their business consists in working the tramwa3'S, for which purposes they provide the necessary rolling-stock, including a number of cars and horses. It has lately been arranged that, in con- sideration of an increased rent, the Corporation shall convert the tram- way lines into what is known as cable tramways, and the existing stabling into a station or stations, for the fixed machinery required for working the cables. This conversion, it is said, although not yet completed, will be so in the course of the present year ; and, of course, the result 746 AUDITING. will be to supersede the use of horses for haulage, and also, to a large extent, to supersede the existing cars by cars of a different construction. What the complainer alleges is that, upon the sale which must follow of the horses and cars at present in use, there will be a loss to the company of over ^20,000 — that is to say, a difference of that amount between the prices realised and the cost or value of the horses and cars as at present standing in the company's books. He also alleges that the cost to the compan}- of providing new cars and " grippers " will be about ^45,000,. and that in addition there will be the cost of cables for the entire S5'stem. He does not allege or suggest that the conversion in progress, is not and will not be beneficial to the companj', or that the directors of the company have not fully considered its effect on their financial position, or that anything has been, or is being, done which will leave the company with assets insufficient to pay its debts. His case simply is that the transaction involves an element of a certain sacrifice of exist- ing assets. That is, as I read it, and as I think it must be read, the meaning and substance of his averments, and in particular his state- ment that '"It is believed and averred that there will be a loss or cepreciation upon the assets of the company in respect of such realisa- tion, amounting to not les.> than /.2o,ooo."' I do not go into the question as to the additional alleged loss on temporary stabling; or as. to the sufficiency or insufficiency of certain sums paid out of revenue into Suspense Accounts, to meet that and other alleged losses. For the purposes of the argument it seems enough to take the alleged prospective loss in the realisation of the horses and cars. That is sufficient to raise the complainer's case. For I must at least at this stage assume, what the complainer states, that the sum at the credit of the Suspense Account is quite inadequate to meet the alleged loss or deficiency on the horses and cars. Now I have had a full and very able and interesting argument on a general question which has of late }ears occupied, it is said, the attention of the English Courts — the question, namely, whether and how far loss or depreciation of assets forming the capital stock of a Innited company bars the pa3'ment of di\idend until that loss or depreciation has been recouped. It was, on the one hand, contended that the principles as applied and expounded by the F^nglish Court of .\ppeal in the cases of Lee v. N eiichdtel Asfhaltc Cuiiipanv (41 Ch.D. p. j) and ]'eriu'r v. General Iiivestiiiejit Comfany (2 Ch. (18(14) P- 239) are conclusive against the complainer — establishing,, as it is said the.se cases do, that with respect to fixed or permanent, as distinguished from circulating or floating, capital, there is no rule of law by which such capital must be maintained at its original or any particular value; but that, on the contrary, so long as there is a sur])lus, sufficient fcjr dividend, of annual revenue over annual out- cox V. EDINBURGH AND DISTRICT TRAMWAYS CO.. LIM. 747 goings — that is to say, a surplus arising on a Revenue Account pro- perly kept — the state of the company's Capital Account is, as affecting dividend, a matter of no moment. On the other hand, it vi^as argued for the complainer that the decisions referred to have not yet been considered by the House of Lords ; that they are contrary to previous decisions, and are not well-founded in principle. It was further argued that, even assuming the law to be as there held with respect to fixed capital or assets, the horses and cars here in question are not properly assets of that character. They are, it is said, subject to continuous waste, and to waste requiring to be replaced, and that such waste (or, rather, the cost of its replacement), however large and however caused, must always and necessarily form a charge against revenue. Now, I may not perhaps be bound by these English decisions, although, of course, they are decisions of high authority ; but I may say at once that I have no difficulty in accepting not only their results, but their general doctrine. At the same time, I do not mj-self see that the respondents in this case require to appeal to those decisions or to the principles new or old there expounded. Nor, on the other hand, am I quite clear that if the respondents' defence did require such an appeal, such appeal (I mean as an appeal to those particular authori- ties) would be entirely conclusive. The view I take of the present case is shortly this. It is not at all, in my opinion, a case such as might have presented itself if, for example (the respondents still working the tiamwa3's by horse traction), a fire or other catastrophe had occurred bj' which, say, their horses perished, and their cars were destroyed. In that case there would, of course, have been beyond question a loss of assets in the most real sense, and a loss beyond doubt requiring to be replaced. And that being so, questions, I think, of some difficulty would or might have occurred as to how far the necessary replace- ment could properly or justifiabl}- be charged to capital. It does not, however, appear to mc that (taking the facts of this case as ths}- appear on the complainer's statement and the minute of admissions) we have here to deal with anything which can be considered as in any real sense a loss or depreciation, actual or prospective, of the respondents' assets. The selling oft of their horses and cars is, or will be, a voluntar}' act on the part of the company. It is part of a scheme or transaction on which the company has embarked presumably for the benefit and not for the detriment of their undertaking, and if such scheme or transac- tion involves, by reason of enforced sale or otherwise, a sacrifice in one direction, such sacrifice will at least presumably be compensated b}' a corresponding gain in some other direction. I am, I think, entitled to hold that that is the view of the directors and of the companv. I am also, I think, entitled to hold that they entertain that view on reasonable grounds — grounds, at all events, which are not impeached 748 AUDITING. by the complainer. But if that is so, it is surely a strong suggestion that I should assume without inquiry that the company, as a going concern, will suffer upon the total transaction a loss equal to the loss on its discarded assets, or, on the other liand, that I should allow a proof as to the effect on the company's general assets of the proposed conversion from horse to cable traction. I am certainly not prepared to make such an assumption, nor, on the other hand, am I prepared to allow such a proof except upon averments of a quite different kind from those with which I have here to deal. In saying so I do not proceed on any law or doctrine established or said to be established by recent decisions. I proceed on a principle as old as the beginning of company law — the principle, namel}', that in matters of the kind here in question — matters necessarily of estimate and opinion — a company is presumably the best judge of its own affairs. In such matters the Court will not readilj- interfere with the company's action, and it will not do so at all except on averments which involve practically a case of fraud or dishonesty. The truth is that the coniplainer's argument involved, as it seemed to me, the assumption that capital sunk — that is to say, capital not represented by tangible and available assets — is in all cases to be considered as capital lost. Of course, if that were so, the question or kind of question would here arise which arose in the two English cases of which we have heard so much ; but such a proposition has never, so far as I know, been, as yet at least, advanced. The case suggested b}- Lord Justice Lindley, of expenditure made in starting a newspaper, is a very good illustration of the impracticability of such a doctrine. But, apart from extreme cases, few things are, I should think, miore common in ordinarj- business than operations of the kind with which we are here concerned. A merchant or manufacturer desires to enlarge his premises, satisfied that it will pay him to do so. He accordingly pulls down old buildings which have a certain value and he replaces them by others at perhaps great cost. There is thus, of course, in a sense, the sacrifice of a permanent asset, and it may quite well happen that the new buildings if put into the market would not fetch a sum equal to the value of the old building plus the cost of the new. liut for the purposes of the trader's business the result may be entirely the other wa}', and the presumption is that the trader is satisfied that it is so. If he is so satisfied he will certainly not consider that he has sustained a loss of capital, or feel bound to carry the cost of the old building to the debit of his Profit and Loss Account for the year. Similarly, a manufacturer requires or resolves to discard certain machinery and to replace it with other machinery more effective or more economical. Here, again, the sacrifice in the case of the old machinerj' is simply an item in the cost of the change. So also, when a railway company, as sometimes happens, alters its gauge, or KEGINA V. WILLIAMS. 749- srbstitutes, say, steel for iron rails. The operation necessarily involves a sacrifice of old material. But the assumption always is that the operation as a whole enhances the value of the concern or undertaking. And although it may be a prudent and proper thing to provide for the recurrence of such expenditure, and to set up a renewal fund, that is a question which the trader considers for himself, and one as to which, even in the case of limited companies. Courts of law are not accustomed to interfere. On the whole matter I am of opinion that the complainer has stated no relevant case for interfering with the proposed dividend,, or for granting him interdict in terms of any part of his prayer. His Lordship accordingly refused the note, with expenses. [Glasgozv Herald, ij June 1S9S.) The case of REGIXA v. WILLIAMS. (Decided before Lord Russell uf Killo\yen^ C.J., Beuce^ Kennedy., RiULEV, and Darling, J J., in the (Queen's Bench Division, on 23rd Januar}' 1899.) Falsification of Accounts — Meaning of tJie zvords " Balance in handy This was a case stated for the consideration of the Court for Crown Cases Reserved from the quarter sessions for Cornwall. The prisoner was convicted of falsifying accounts. He was collector of poor rates for the parish of I'erranuthnoe, and had entered in the overseers" accounts with the parish a " balance in hand ^131 los. 5d.," though that money was not forthcoming. The facts sufficiently appear from the judgment, in which the conviction was upheld. JUIKLMEXT. The Lord Chief Justice said in this case the prisoner was indicted under 38 and 39 Vict., c. 24, section i, for falsifj'ing accounts. The facts were that on April 10 1890, the prisoner was appointed collector of poor rates for the parish of Perranuthnoe, in Cornwall, and he remained in that post. It appeared that there were two sets of accounts kept, one of which was referred to in the seventh and eighth counts of the indict- ment. This would appear to have been an account between the prisoner and the overseers ; but no evidence had been offered at the trial on those charges. There was a second account which the prisoner kept for the overseers of the state of accounts between them and the parish. It was in respect of that account that the charges were made. That account was one which showed on the debit side the moneys received from the poor rates and the balance, if any, from the last account, and on the credit side the mone3's paid away by the overseers, as, for 750 AUDITING. instance, to the treasurer of the union, or the parish council, or for salaries, Arc. That being so, what was said to be the falsification? It was this — that the prisoner, with intent to defraud, made an entry thus, " balance in h?aid /.131 los. 5d." Was that entry true or false? So far as could be seen that was perfectly true, for it stated that /.'131 los. 5d. was due from the overseers in respect of that account. If the balance had been stated in an}- other way it would have been -erroneous. But it was stated that it must be taken to mean that the prisoner had that sum in his pocket, whereas he had in reality spent it. It certainly did not mean anything of the kind. If it had been his own .account with the overseers different considerations would have applied ; but, looked at as an account between the parish and the overseers, it \\as literally and exactl)'' true, and the Auditors had found it correct. It was quite true that the defendant had told one of the overseers a lie, for in ansv.'er to a question en the subject he had said that the money was all right when it was really gone, and it might be that the prisoner could have been convicted of embezzlement ; but there was no evidence of falsification of accounts, and the appeal miist be allowed. The other learned Judges concurred. [TiiiieSj 23 January 1899.) The case of THOMAS 7'. Till-: CORPORATION OF DEVONPORT. ^Decided by Lukd Rissell ok Kii.i.owkx, C.J., and A. L. Smith and V.\i:r;iiAX ^^"lI.T.TAMS, L.JJ., in the Tourt of Appeal, on and November 1899.) Held that an Elective Auditor cainiot claim Remuneration out of the Borough Fund, but is entitled to reasonable Remuneration as Auditor of Urban Sanitary AutJiority. In this case the plaintiff is the Elective Auditor of the defendant •corporation, and is also designated by statute as the Auditor of the urban sanitary authority. He claimed remuneration as Elective .-Vuditor out of the borough fund, and he also claimed remuneration for twent^'-three and a-half days' work as urban sanitary Auditor during a number of years past at the rate of two guineas a day. Rhilli- niore, J., who tried the action, held that the plaintiff was not entitled to any remuneration as Elective Auditor, and with regard to his work as the Auditor of the urban sanitar}' authority said the plaintiff was barred by the Statute of Limitations with respect to some of the days claimed for, and he had taken longer than was necessary to do the work in the later period for which he claimed. The learned Judge held that fi,.] paid into (^ourt by the defendants in respect of sixteen THOMAS V. THE CORPORATION OF DEVONPORT. 75 1 "da3's' work during the past two years was sufficient remuneration for ihe plaintiff's services as Auditor of the urban sanitar}' authority, and therefore gave judgment for the defendant corporation on both issues. Hence the plaintiff's appeal. ]UI)(,MF,NT. The Lord Chief Justice, in giving judgment, said this was one of those cases under the statute in which the corporation was also the urban sanitary authority. The case reall}^ would have been unarguable on the part of the plaintiff if it had not been for some •observations made b}' Phillimore, J., in delivering judgment. As regarded the claim in respect of auditing the corporation accounts as such it was quite clear that there was not a shadow of ground for saying that the plaintiff as Elective Auditor had anj' claim at all. The receipts •of the corporation as such were brought into and formed part of the horough fund, and pa3'ments of all accounts legalh- made by the ■corporation must be paid out of that borough fund. Parliament had in clear and distinct terms laid down the appropriations which might be made out of the borough fund in the statute regulating the matter. If the plaintiff had been a servant of the corporation there was ample power given to the corporation to pa}- him out of the borough fund in respect of anj^ services which he rendered. But he was not a servant •of the corporation. He was elected b^' the burgesses of the borough •under a statute giving the burgesses power to elect an Auditor. There was no claim in respect of such services. As regarded his services as Auditor of the urban sanitary authority, he was entitled to be com- pensated at a rate of not less than two guineas for every day on which he was properl}^ employed on the work. If the matter had simply rested there, there would have been an end of it, and it would not have been possible for this Court to have reviewed the judgment of the learned Judge of the Court below, because he found as a fact that four days in each half-3'ear — or eight legal days in each year — was ample for the work which the plaintiff did. Unfortunately, as he ■(the Lord Chief Justice) thought, Phillimore, J., had used some language w^hich suggested too narrow a judgment of what the proper •duties of the Auditor of the urban sanitary authority were. He (the Lord Chief Justice) did not subscribe to the doctrine that the Auditor's sole duty was to see whether there were vouchers, formal and regular, justifying each of the items in respect of which the authorit}- sought to get credit upon the accounts. That was an incomplete and imperfect view of the duties of such an Auditor. Such an Auditor was not onl}'^ entitled, but justified and bound, to go further than that. He should juake a fair and reasonable examination of the accounts, and see whether there might not be, amongst the payments made, payments 752 AUDITING. which were not authorised or which were illegally made, and if he so discovered such payments it would be his duty certainly to make them public, certainly to report them to the authority itself, and certainly to report them to the burgesses, who had created that authority. But granting all that, he (the Lord Chief Justice) saw no reason for believing that eight days would not be adequate in which to do the work, and he saw no reason for disturbing the judgment of the Court below. Smith and Vaughan Williams, L.J J., said they entirelj- concurred, and the appeal was accordingly dismissed with costs. (Tivies, 3 November 1S99.) The case of MOXHAM AXU OTHERS v. GRANT. (Decided by A. L. Smith, Collins, and Vaughan Williams, L.J J., in the Court of Appeal, on the 15th November 1S99.) Meld that Shareholders of a Comfany -who have received Dividends ojit of C afital with knowledge of the fact, vuist refund to the Directors. This was an appeal from the judgment of the Divisional Court (Lawrance and Channell, JJ.), reported in 15 The Times L.R. 180; (1899) I Q.B. 480. The plaintiffs were directors of a compan}- named Cory's Steamers, Lim. The company owned a steamship named the Primrose, which was lost in 1894. The underwriters paid ;^7i9 2s. 6d. in respect of the loss. That sum represented capital, as it represented the steamship. In April 1S94 the directors sent a circular to the share- holders in the following form : — " We have a sum of money in hand from insurance received on account of the loss of the Primrose. We propose remitting los. per share. If you see no objection, we will send you £ , being los. on 3'our shares, on your sending a receipt on enclosed form, and provided all the shareholders consent. There will be a considerable sum more to receive for insurance of Primrose.''^ The form of receipt was as follows : — " Received of Cory's Steamers, Lim., the sum of £ , being a reduction of los. per share on the shares held by me." In reply to the circular the defendant sent the following letter: — "I quite agree with the proposition of your letter of April 10, and enclose my receipt for £12,, being los. on my 26 shares." Other similar payments were made to the defendant, the total amount being ^^35 15s. Upon December 29 1896 a winding-up order was made against the company, and on December 22 1897 the liquidator of the company obtained an order under Section 10 of the Companies (Winding-up) Act, 1890, declaring that the pa3'ment to the defendant and other shareholders of the various sums, amounting in the whole to ;!^7i9 2s. 6d., was a payment of part of the capital of the MOXHAM AND OTHERS V. GRANT. 753 company and was unlawfully and improperly paid in reduction of the capital of the company, and it was further ordered that the directors should pay to the ofl&cial liquidator the sum of ;^7i9 2s. 6d. The order was expressly made without prejudice to the right of the directors to be recouped by the shareholders the amounts paid by the directors to them. The directors, the plaintiffs, then brought an action against the defendant to recover the ^35 15s. they had paid to him. The County Court Judge gave judgment for the plaintiffs, and the Divisional Court affirmed the decision. The defendant appealed. JUDGMENT. The Court dismissed the appeal. Smith, L.J., said that it was admitted that the £']ig 2s. 6d., which was paid by the underwriters on the loss of the Primrose, was part of the capital of the company. The directors and shareholders agreed that they did not want this money as capital and resolved to divide it. Therefore the shareholders knew that it was part of the capital of the company. It was not a case where shareholders received money of the compan}' in ignorance that they had no right to receive it. There was no order of the Court obtained for the reduction of the capital of the company. When the company was wound up the liquidator discovered what had been done, and, in his Lordship's opinion, the liquidator might have taken proceedings against everyone who had received por- tions of the ^719 2s. 6d. Instead of doing that, the liquidator, as the most convenient course, took proceedings against the directors who had received the money and who had distributed it among the shareholders, and he recovered the whole amount from them. The directors there- upon brought an action against the defendant to recover from him the amount which he had received, and which the directors had been com- pelled to pay to the liquidator. What was the position of a shareholder who had received money of the company with notice that it formed part of the company's capital? It seemed to his Lordship that the position of the shareholder in such a case was, as laid down by Sir George Jessel in Russell v. Wakefield Waterworks Company (L.R. 20 Eq. 474, at p. 479), that of a constructive trustee. That being so, the rule of equity as between two trustees had been explained in many cases, and in Chillingiuorth v. Chambers (1S96, i Ch. 685) the matter was fully discussed by Lindley and Kay, L.J J., and himself, and he would only refer to one passage in his own judgment (at p. 707) : — "As between two trustees who are in -pari delicto, the one who has made good a loss occasioned by a breach of trust for which the two are jointly and severally liable may obtain contribution to that loss from the other." The case cited in support of the proposition was Lingard v. Bromley (i V. and B. 114) (see p. 710 of the report). In the present case the c c c 754 AUDITING. defendant took his portion of the £"1^ 2s. 6d. with notice that it formed part of the capital of the company. He became a constructive trustee, and must recoup his co-trustees, who had been compelled to pay it back, the amount so received by him. Upon that ground the judgment of the Divisional Court was right. His Lordship also thought that the doctrine laid down in Bonner v. Tottenham Building Socieiv (1899, ^ Q-B. 161) applied. He desired to add that the passage in " Lindley on Companies," 5th ed., pp. 389, 390) did not apply where the shareholders took the money with notice, as here, nor where one person had been compelled by process of law to pay in relief of another. Collins, L.J., concurred. When the circumstances of the case were understood, it was clear that the liquidator could have enforced against each shareholder repayment of the moneys received by each. That he could enforce repayment against the directors to whom the whole fund had originally passed lay at the root of the matter. Therefore they began the discussion with these facts. The directors, being the persons who had collected and distributed the fund, were liable to repay it to the liquidator, and the persons to whom it was distributed were also liable to the liquidator, and the directors were compelled to pa}^ the whole sum distributed. Further, that payment had necessarily gone in relief of the shareholders. Upon those facts — namely, a payment by compulsion by one of a sum for which another was liable to the same person — there arose by implication a law of right in the person paying to be recouped by the person relieved. Having got those facts, which entitled a person so paying to indemnity or contribution, what was the answer attempted to be set up? The only possible answer was that these persons were joint tort feasors, and that there was no right of indemnity or contribution. Lord Denham, in Betts v. Gihbins (2 A. and E. 57, at p. 74), in dealing with Merryzueather v. Nixon (8 T.R.186), said that that case " seems to me to have been strained beyond what the decision will bear. The present case is an exception to the general rule. The general rule is that between wrongdoers there is neither indemnity nor contribution : the exception is where the act is not clearly illegal in itself." He (the Lord Justice) did not suppose that any of those who dealt with this money thought that there was any illegality in doing what was done. The only illegality was a technical one ; it was an ultra vires act. It had been held over and over again that, money paid in breach of trust to persons who took it knowing the payment to be a breach of trust did not constitute those persons joint tort feasors. Channell, J., dealt with that point and with the line of authorities relating to it ; and Vice-Chancellor Bacon, in Flitcroffs case (21 Ch.D. 519, at p. 527), also so held. That disposed of the case. THE IRISH WOOLLEN CO., LIM. V. TYSON AND OTHERS. 755 But he (the Lord Justice) would deal with the argument whether or not there was a trust. The only bearing this had lay in establishing that the person who received the money received it in such circum- stances as made it capable of being recovered back. If the money was paid to the shareholder unearmarked, so that the liquidator could not claim it as money had and received to his use, the chain of con- secution out of which the right to indemnity arose was broken. Unless the payment was made in relief of the person against whom the indemnit}- was claimed, the claim for indemnity was gone. Therefore, it must be shown that the liquidator would be entitled to sue the share- holder. That was established if the liquidator could follow the money, and that was so in the present case, because the shareholder received it with notice, from which, if he knew his law, he must have known that the directors had no right to paj^ it to him. The whole claim, therefore, was established. The payment by the directors to the liquidator was in relief of an existing liability of the shareholders, and was a payment which they were compelled to make. Therefore there arose upon common law principles a right of indemnity. There was also the same right on the general rules of equity, and this right was not affected by any question of the parties being joint tort feasors. Vaughan Williams, L.J., delivered judgment to the same effect. (Times, 16 November 1899.) The case of THE IRISH WOOLLEN COMPANY, LIM. v. TYSON AND OTHERS. (Decided by the Lord Chanxellor, and Holmes and Fitzgibbon, L.JJ., in the Irish Court of Appeal, on the 20th January 1900.) Held that -ivlien the Accounts of a Comfany have been falsified, and Dividends iinfro-perly faid out of Capital in consequence, the Auditor is liable if the Falsifications might have been discovered by the exercise of reasonable Care and Skill. On Friday, in the Court of Appeal, judgment was delivered on the appeal by Mr. Edward Kevans, Chartered Accountant, 22 Dame Street, Dublin (one of the defendants), against the decision given by the Master of the Rolls, reported in 25 Accountant Law Reports, p. 89. The ques- tion before the Court was simply whether Mr. Kevans was, or was not, responsible for the non-detection of the frauds. Lord Justice Holmes, in delivering his judgment, referred to the career of the company, which, he said, was formed in June 18S7, for the purpose of promoting the woollen industry in Ireland, the original C C C 2 756 AUDITING. capital being _^6,ooo. For some time at the commencement the busi- ness was almost entirely confined to the purchase of woollen goods from Irish manufacturers. In the year 18S9 the directors resolved to develop their undertaking by seeking to establish their home trade, and for this purpose they increased their capital. The prospectus announcing this resolution alluded to the success that had attended the operations of the company up to that time, and held out more brilliant prospects for the future. The whole of the additional capital, how- ever, was required to pay off debts previously incurred, and could hardly be used for the purpose of opening up new business. Between the years 1888 to 1895 nine Balance Sheets were presented to the share- holders, each showing considerable net profits ; and during all this period dividends were paid which never once fell as low as 5 per cent., amounting to /14,64c). There is not the slightest evidence of the sound- ness of the financial position of the company until its operations were suspended, when ]\lr. Carnegie — the Auditor's representative, who was examining the accounts — noticed a double entry. The mistake was a trifling one, and he was satisfied with the explanation given by Mr. Crawford, who had been for some time the accountant of the company. Crawford and Johnston abandoned their positions, and the Balance Sheet for the last period (1895) showed a deficiency of £ii,ioy. The company, by order of the Court, was directed to be wound up compulsorily, and Mr. Garde — who was himself formerly in the employ- ment of the defendant Auditor — found that, although the company was just solvent as regards its creditors, its capital had entirely disappeared, and I presume it was his report that led to the bringing of the present action. It appears that Crawford, acting either by himself or with Johnston, the warehouseman, was a defaulter to a very large extent. Mr. Kevans says, in his letters of the 22nd and 24th of January 1896, " that although the whole of the items that made up Crawford's deficiency were apparently received within the three months ending 31st December 1895, it is highly improbable that he could have abstracted all that money in so short a period of time, but that it was impossible to say how far back exactly the defalcations extended." The defendant was held guilty in connection with Crawford's fraud, and I therefore pass away from this portion of the case, which relates to only a small part of the losses sustained by the company. To account for the rest it is necessary to go more fully into the way the business was carried on. The directors, who were paid no fees for the first two or three years, were originally selected by lot ; and Mr. Peter White was appointed managing director ; Mr. Tyson was appointed secretary at ,^250 per annum ; and the rest of the staff — examiner and packer — at /^i^o and ;,/'75 per annum respectively. Mr. Tyson did not long remain secretary, and was succeeded by Mr. McDonough, and subsequently by THE IRISH WOOLLEN CO., LIM. V. TYSON AND OTHERS. 757 Crawford. Mr. White, in one of his letters, referred in a somewhat gloomy manner to the large annual amount of money paid to the officers in the shape of salaries, and recommended such a change being made as would reduce the annual expenses to ;^6oo. White's recommenda- tion was accepted, and from that date Crawford was appointed secre- tary, lie only received 35s. per week, and his income from the company never seemed to come up to £1^0 a year. I presume that Johnston did not receive more. Mr. Kevans was the first Auditor of the company, and he provided the books which, in his judgment, were necessary for keeping the accounts. They consisted of : — (i) Cash Book; (2) Customers' Ledger; (3) Creditors' Ledger; (4) Day Book; (5) Invoice Guard Book ; (6) Petty Cash Book. It cannot be denied that these were sufficient to show the true financial position of the business of the company, if they had been honestly kept. The MacDermot com- mented upon the absence of one book, but I attach no importance to this. The multiplication of books, if written up by different parties, may be a check upon fraud, but in this case all the bookkeeping was done by a single officer who, if dishonest, would take care to make the books appear perfectly straight. There was another book, referred to in the evidence, kept for the private use of the directors, but whatever its significance may be it could not affect Mr. Kevans. In February 1891 there occurred a circumstance materially bearing upon the case. After that time the Auditor's fee was increased to ^,'40, the considera- tion being a " monthv audit." It was not understood by this that a Balance Sheet or Profit and Loss Account, was to be prepared for each month, or that a monthly statement was to be submitted to the directors. It was a monthl}' investigation for the purpose of checking fraud or error. It was, as Mr. Kevans himself says, "a system of monthly checking with a view to the half-yearly audit." Mr. Kevans seems to have done little of the actual work himself, and the evidence varies as to the nature of the supervision which he gave to it ; the investigation of the books he deputed to his assistants — namely, Mr. Roche, Mr. Garde, and Mr. Carnegie, and it must be on the faith of their repre- sentations that he certified the Balance Sheets. I presume this course is not unusual, and that an accountant with a large business is not supposed to do everything himself. The Auditor is bound to give reasonable care and skill, but this can also be exercised by his deputy. I do not think there i_s anything to be gained by considering in the abstract the duties of an Auditor of a joint-stock company. He is entitled to see the company's books and the materials for their books, and also to ask for explanations. But he is not called on to seek for knowledge outside the company, or to communicate with customers or creditors. He is not an insurer against fraud or error ; and if fraud is alleged it must be shown with precision the acts of negligence for 758 AUPITING. which he is said to be responsible. Nine Balance Sheets were prepared, and the figures on some represent the aggregate amount of many items, but I propose to deal only with matters that have been referred to during the hearing. There are three sets of figures with which I will deal: — (i) Stock-in-trade; (2) sundry debtors; (3) sundry creditors on the liability side of the Balance Sheet. Taking these in order, I find that Mr. Garde, in his evidence, drew a distinction between the home stock and the stock in America, which was never mentioned in this Court. I do not fully understand this, as Mr. Kevans can only be held responsible from the 4th of January 1S92, and at that date the American trade had been abandoned. The Master of the Rolls expressed a doubt, with which I agree, as to whether it was the duty of the directors to take stock with their own hands. It was taken by Mr. O'Callaghan, and I agree with the Master of the Rolls that he (Mr. O'Callaghan) did quite as much as he could be expected to do. There was certainl}' no duty cast on the Auditor to take stock. What he did was to have the calculations checked in his office, and this was done with proper care. ^Ir. Kevans said he was pai'ticularly careful as to the deduction for discount, and, as far as I could gather, the universal rate of 10 per cent, seems reasonable. Moreover, an Auditor has nothing to do with the terms upon which the company, or a trader, buys or sells. As to No. 2, the charge in this is that the allowance made for the trade discount of 2h per cent, was omitted. This is a purely technical question. Mr. Kevans says that the proper method of deal- ing with these debts was to return them as they stood in the books, and to bring the discount, when it was allowed, to the Profit and Loss Account. Mr. Pixley said it would not be scientifically correct to deduct these discounts. This seems to be in accordance with common sense, and it is to be noted that although Mr. Garde, as liquidator, corrected the Balance Sheets by marking off these discounts, he never thought of doing so when conducting the audit. As to the provision for the " bad debts," if there is any one thing upon which an Auditor is dependent upon the officers it is the writing off, or the making of a prospective allowance for, bad debts. He has no personal knowledge of the customers, and Mr. Kevans seems to have taken particular attention in reference to this. (See questions 2,125 to 2,127 ^^ ^^^ evidence.) He said " he had some special knowledge on the subject, that he saw all ascertained bad debts duly written off, and that there was a fund amounting to ^500 as a provision therefor." For the fore- going reasons there is no ground for alleging negligence against Mr. Kevans on the "assets side" of the Balance Sheet. As far as this portion is concerned, I think the Balance Sheets were properly and carefully prepared, and there was nothing dishonest or negligent on the part of anyone ; but if there was, it was not on the part of Mr. THE IRISH WOOLLEN CO., LIM. V. TYSON AND OTHERS. 759 Kevans or of his representative. Now dealing with "sundry creditors" ; here evidently there is a fraud, and a curious thing is that no one seemed to have derived any benefit from the fraud. Dealing with the invoices, the learned Judge detailed the practice in connection with the statements of accounts being laid before the meeting, and s'aid the Ledger was used for the purchases made and for the payments on account thereof. If, then, all this were rightly done it would be easy for the Auditor to ascertain the amounts due to the creditors, but unfortunatel}^ the books were not correctly kept. The creditors' accounts in the Ledger did not show all the goods purchased up to the time of the audit, nor could the Auditor discover the omissions on account of many of the invoices being either " suppressed " or not put into the book until a later date — a process described as " carrying over." There is some doubt as to whether the deficiency arose from the suppression or the carrying over, but my impression is that the whole of it comes within the last-mentioned class, for at the end of 1894 we find they amounted to ;,^4,o95. j\Ir. Peter \^'hite is now dead, and he should not be condemned unheard, but it is difficult to believe that this S3'stem was not within his own knowledge. As chief promoter he was no doubt anxious to see that the company was successful ; Crawford, who was the secretary, appears to have continued the process. It seems strange that a system of fraud so long continued, and for so extensive a period, was never detected by the Auditor. Once or twice he noticed something, and the explanation that was given was " that the goods were not taken into stock." The question is, was it negligent not to have seen this? There is no doubt that both the suppression and carrying over of invoices would have been detected if the Auditor had called for the creditors' statements of accounts upon which payment was ordered, and compared them with the Ledger. I should have thought this was part of the Auditor's duty for many reasons ; but all the accountants examined, except Mr. Southworth, stated that this course is never taken unless there is something to arouse suspicion. Mr. Pixley, the eminent London accountant, says it could not well be done except in the case of a very small concern. In the face of such evidence I should not leave myself at liberty to hold that Mr. Kevans' assistants were guilty of negligence in not looking at these statements of account if they were engaged in an ordinary audit. Little time is allowed for doing so; but in this case there was this system of monthly checking. From the time that Crawford was accountant in 1S90 the accounts of the company were completely in his hands. Now, White for the two years following may have given general directions, but he was often away in America for months at a time, and it is clear that the monthly audit was instituted for the purpose of seeing that he (Crawford) would do his work regularly and 760 AUPITING. honestly. I am unable to conceive how, if there was nothing wrong about this monthly checking, it did not lead at an early period to the detection of the frauds in this Ledger. Mr. Kevans ought to have found out, by the accounts, the payments that were made — and no better means could be adopted than that of a comparison with the statements of accounts. It ought to have been done in some way, and, if it had, detection would have been certain. I do not base my decision on this alone ; apart altogether from the statements of account and the monthly check, I do not imderstand how the carrying over of the invoices could have escaped detection by the accountant, who should j have used due care and skill and who was not a mere machine. The invoices carried over were ultimately posted to the Ledger. If they were posted to their true dates, it would be at once apparent that they were not entered in at the proper time. If they were posted under false dates, why was this not detected when the Ledger Accounts were checked with the invoices? and when no invoices came into the books, I it is admitted that this ought to have excited suspicion. For these reasons I am of opinion that if due care and skill had been exercised, the carrying over and the suppression of invoices would have been dis- covered, and the Auditor is liable for any damage the company has sustained from the understatement of liabilities in the Balance Sheet ( due to this cause since January 4 1892. I consider that not only are ^ Mr. Kevans and his assistants not free from blame for this, but also ■ for the mechanical way the audit was carried out. I desire to say that, although I have carefully read the evidence, I have not attempted ; to examine the books of the company out of Court. I, at one time, X thought of doing so, but, on consideration, feared that they might J lead me into error. That some damage has been sustained b}^ the y company is clear ; and it will be observed that I have said nothing }i about the measure of the damages. Theoretically, damage resulting '* from negligence has been assessed in money, but it would be premature to consider it now. Lord Justice Fitzgibbon : I entirely concur with the judgment that Lord Justice Holmes has delivered, and there are a few matters on which I desire to offer some independent observations : — First. — What is the measure of the defendant Auditor's duty in a case such as this? Second. — What is the evidence of the particular case of the breach of that duty? Third. — A few words upon the question of damages. As regards the measure of the duty of a gentleman employed, as Mr. Kevans was in this case, the result is the same, as it occurs to me, in ,3 THE IRISH WOOLLEN CO., LIM. V. TYSON AND OTHERS. 76 1 all cases in which professional skill is employed, except one, the peculiar instance of a barrister. The measure of duty is the bringing of reasonable care and skill to the performance of the business directed to be done, having regard, first to the contract of employment, then to the character of the business itself, to the remuneration of the defendant, and to all the other circumstances of the case. In strict rule, however, the measure of the duty is to be ascertained by applying to all the circumstances of the case the best consideration, so as to ascertain what ought to have been done under the circumstances. Now, in all the three English cases, and also in this case, the Auditor was bound by the articles of association of the company. In one English case it was put forward for the Auditor that he had never seen the articles of association, and it was admitted that he had never read them, but, nevertheless, it was held that if he did not see them, he was at least bound to do all that was required just as if he had seen them. In this case Rules 150 and 157 of the articles of association_ prescribe the duties of the Auditor, and it is not suggested that Mr. Kevans did not see them. " Once at least in every year the accounts of the company shall be examined, and the correctness of the statement and Balance Sheet ascertained b}^ one or more Auditor or Auditors." Now, it appears that half-yearly statements were submitted to the directors, and I gather that Mr. Kevans discharged his duties half-yearly, but I shall deal with the case entirely on the assumption that he did it onl}^ once a year, because his half-yearly examination probably would not be as complete as the one completed at the end of the j^ear. The 157th rule of the article provides — " That the Auditor shall be supplied with copies of the statements of accounts seven da3's before the intended meeting, and it shall be his duty to examine the same with the accounts and vouchers relating thereto, and to report to the company in general meeting thereon." These are the two rules that define his duty. Rule 158 is, however, important, as showing the materials that were to be placed at his disposal. "The Auditor shall have a list delivered to him by the directors of all the books kept b}' the company, and shall have reasonable access to the books and accounts of the company, and may in relation thereto examine the directors, or other officers of the com- pany." Now, there are two specific things that Mr. Kevans was charged with. In the first place, it was practically left to him to say what books the company ought to keep, and therefore he, in the position of a skilled accountant, was really made an adviser as to what the set of books were that he was to examine, and I take it for granted that the books recommended were sutficient. Another matter was, that in the course of the business they had to some extent ascertained by actual experience what was necessary for their protection. They (the 762 AUDITING. directors) made an arrangement with the Auditor that there should be a monthly checking, and therefore he was bound, dealing with the set of books that he himself provided, to check these books once a month and to audit them once a year. Now, I am not going to minimise the distinction between checking and auditing. I do not agree at all with a great deal of what has been presented to us that Mr. Kevans was to have done in the monthly checking, but the monthly checking was a " checking at the time," a preparation for the future, and a security that the books were carried forward from month to month in the state in which they should be audited. His remuneration was not very large, but it must not be taken to have been inadequate. He also must be taken to have had a knowledge of the business. It was not a business to which any of the directors could have been expected to devote anything like their whole time ; and it was a business where, to Mr. Kevans' own knowledge, the clerical staff was cut down to a very low point. Therefore, he must have known that there was more reliance placed upon him, upon his checking, and upon the audit, than might be expected in the case of an ordinary company. That being the measure of his duty — it is the same rule that applies to all, with the exception I have mentioned — what is the nature of the breach of that duty? It is curious that in one English case the breach of duty for which the Auditor was said to be held liable was exactU^ as here — a breach of duty in not detecting the case of misfeasance on the part of others, which was not for the purpose of putting mone}^ into their own pockets, but for the purpose of giving a fictitious appearance of prosperity to a company that really was not prosperous. I shall have to say more about that when I come to the question of damages. I think the fairest way to deal with Mr. Kevans in this case is to treat him as being charged with having failed to find just cause of suspicion on the face of these books, which, if found, would have imposed on him the duty of pursuing his suspicion until he found whether it was or was not well founded ; and in that I am only following the example of Lord Justice Keane, who, in his judgment, took as an example one particular instance of one particular year, and applied all the rest of the case to that. I am fortunate in the present case to have an instance which was discussed as a fair example of the mode in which the fraiid in question was carried out ; as an example of the grounds of suspicion — that there were grounds of suspicion — appearing on the face of the books, -themselves ; and also the means that these books would have supplied (had the suspicion been entertained), in order to detect the frauds. Now, I must entirely disclaim from myself the intention of going to do anything more than what any ordinary intelligent juror would be bound to do if he was trying Mr. Kevans on his indictment THE IRISH WOOLLEN CO.. LIM. V. TYSON AND OTHERS. 763 for having failed to discover what appears on the face of the books themselves. This is not a question of technical knowledge, nor a question in which it could be capable of misleading anyone. The English cases have established that the Auditor is entitled, in the absence of the elements of suspicion, to assume that the books are honestly kept, and that, therefore, unless on the face of a presumably honest book something appears to excite his suspicion, he is not guilty of negligence, whatever other people might be in their departments, if he does not discover that something was wrong. Now, the one example is the case of Hill & Sons, for the period where the balance was struck as of the 31st December 1S92 and the 31st of December 1893. In that year there was an increase, as now appears, in the suppressed invoices and in the carried over invoices, and this account is one of those in which that increase took place, and it has been taken and discussed as an instance and as an example of others in the book (Creditors' Ledger), presumably dealt with in the same way. At page 108 of the Ledger the account of Hill & Sons — if I use a technical word wrongly I hope I may be forgiven — is ruled on the 31st of December 1S92. The figures immediately below the ruling indicate to my mind that, vv'hen it was ruled, all the items for that year were then written up. From the 12th of August to the 20th of December 1892 there were, altogether, items that amount only to ^,"57 3s. gd., and all of these items are on the one date, December 20th. There were no transac- tions with Hill & Sons between the 12th of August and the 31st of December, except whatever is covered by the entries of the 20th of December. Therefore, if there was anything written in it could only be the ^,57 3s. gd. ; but I think it is admitted that these were not written afterwards, because after that, and the very last item above the ruling, is the correction of an error of ;i^5oo, which is taken from the contra side of the account ; and there is a ruling on the top of ;^736 4s. gd., and there the account ends for the year 1892. On the face of the book there is no subsequent entry in Hill & Sons' account at all going back into 1892. It is a perfectly legible account for 1892, closed on the 31st of December, balanced by the correction of an error, and, as I call it, closed in every sense. I will assume that all the transac- tions of 1892 were included in the accounts of 1892, and that there was nothing carried forward. Now, there is also a ruling on the 31st of December 1893 — there is on the face of the book, as it stands, an undoubted ruling as of the 31st of December 1893. But what is the case? It is conceded that in striking a Trial Balance for the purpose of statements of account for the year 1893, three items that only appear on the right side of page 150 were in the book at the time. In the book now, before we come to the ruling, there were inserted below these and 764 AUDITING. after them a half column of items totting to no less than ^698 19s. iid., and the whole of that is included in the amount of these " kept-back invoices " for the year 1893. Well, I will admit that it is not the business of an Auditor, when he comes to strike his Trial Balance on the 31st of December for the purpose of a meeting, to have every account closed and balanced, but he must strike a Trial Balance, and he did so; but at a figure, 15th of December. I do not agree with the monthty check that was taken. Some of these items now introduced must have been there, and therefore within a month of the 31st of December 1893, if the monthl}' check had been carried out, the repre- sentative of Mr. Kevans would have found that after the figure which he had taken for ascertaining the financial position of this company, a string of figures had been put in, all in December, and all within a day or two of the 15th, the day at which the financial position of the company had been ascertained. I think that was something ; but it is nothing to Avhat follows, because between that time and whatever time this book was ruled there then follows a further string of items — nearly ;^6oo in amount — that go up to the 3rd of November and go down as far as the 14th of December. I cannot conceive any more clear or glaring grounds of suspicion than to discover in the account of a single customer items amounting to such a sum having got into the books after the Trial Balance is struck under dates going back two months prior to the period of the ascertaining of the Trial Balance. There appears to be a further thing — a monthly check was to be adopted, and that would have put an Auditor on inquiry. It appears to me that the moment I come to the conclusion that that was on the face of it a suspicious mode of dealing with Ilill & Son's figures, I am bound to show how it would be corrected. I can add nothing to the judgment of Lord Justice Holmes — viz., that it would then have been necessary to call tor the creditors' statements of account, and at that moment they would have disclosed on the face of them not merel}' those post-dated items, but the suppressed invoices also ; and at the instant that this discovery was made there is an absolute conviction of something wrong forced upon the mind of the Auditor. It, there- fore, occurs to me that, upon those two branches, all that is required, both to show the negligence, to arouse suspicion, and to supply the means of putting a stop to the frauds, is to be found on the face of the book, and for all I have said I have no foundation except what is upon the face of that book (Creditors' Ledger). I now take the three English cases, in order to make a few observations on each. In 36 Ch.D., in the Leeds Estate Building Investment Co., Mr. Justice Stirling held that the manager and Auditor were liable. It is right to say that the procedure in the other cases was different from this Leeds case; and it THE IRISH WOOLLEN CO., LIM. V. TYSON AND OTHERS. 765 is important to bear in mind that the other two were under the loth Section of the Winding-up Act. In this case the Auditor was held liable, and Mr. Justice Stirling held him liable, saying that it was his duty to see that no part of the capital was applied to any other than the proper purpose, and, in particular, that no part of the capital was returned to the creditors — that is, in dividends — except in the cases in which a reduction of capital was permitted by various Acts of Parlia- ment. The next case, and the most important one, is the London and General Bank (2 Ch.D. 1895, 6S1). That was a procedure under this loth Section. Mr. Justice Lindley says, " An Auditor has nothing to do with the prudence or imprudence of the way in which the business has been carried on ; nothing to say as to whether it was properly, improperly, profitably, or unprofitably carried on, provided he dis- charges his own duties to the shareholders. His business is to ascer- tain and state the true financial position of the company at the time of the audit, and his duty is confined to that." But then comes the question, " How is he to ascertain that? " The answer is by examining the books of the company. But he does not discharge his duty by doing this without inquiry and without taking the common trouble to see that the books show the company's true position. He must take reasonable care to see that this is done (page 682), otherwise the audit reduces itself to an " idle farce." I have endeavoured to keep myself within that, and think that that principle is the very lowest upon which we can define the duties of an Auditor. In the Kingston Cotton Mills case (i Ch.D. 96, 279), Mr. Justice Vaughan Williams held, "that it was the duty of the Auditor to have made a calculation outside the books which, if made, would have shown that the amount of the stock was overstated on the books." In this case of the stock-taking and the over-valuing, &c., Mr. Kevans, is exonerated. Now, time after time, this passage about the "watch dog and the bloodhound" has been made use of, and I would wish to say a word regarding it, too. His Lordship then read from Lord Justice Lindley's judgment the passages dealing with the duties of Auditors, in one of which it was laid down that " an Auditor was a watch dog, but not a bloodhound." This, Lord Justice Fitzgibbon remarked, was very unfair to the bloodhound, who was just as little likely to have his sense of suspicion aroused as the watch dog. Applying this instance of the dogs to the present case, was not the watch dog bound to bark? and if, when sniffing round, you hit upon a trail of something wrong, surely you must follow it up, and there is just as much obligation on the Auditor, who is bound to keep his eyes open, and his nose, too. As in the case of the hound, the Auditor will follow up this trail to the end, and the first things he will " root up " are those statements of account, and then the fraud is 766 AUDITING. discovered. On the question of damages — the damage here — and I guard myself against expressing any individual opinion upon any- thing more than is necessar}' — is sufficiently supplied for the purpose of shovi^ing the existence of pecuniary losses. In the first place, there has been a paying away of a large amount of money in dividends to the shareholders that had not been earned, and therefore at the time that that was stopped the company ought to have been in possession of a money capital, which they had parted with by paying it away to their shareholders. It would be premature to discuss the pecuniary damage until the financial position of the company is finally ascertained. Then, again, had this system of the suppression — the carrying forward — of invoices been detected sooner, it would have been open to the directors to have done something to stop it. TRey had several ways, either to increase their percentages or diminish their dealings— in the latter case thereby producing a less loss; or they could have stopped the business and wound it up. On the question of the amount of the damages, that depends on the amount of the losses the plaintiff has suffered, taking all the circumstances of the case into consideration. We have not all these circumstances before us, and it is, I say, pre- mature to discuss damages at all bej^ond the point I have discussed them. I have come with much reluctance to the conclusion that a professional man has failed in his duty, and I am glad to be able to think that the worst that could be said of the case is this : — That, in what is so small a company, Mr. Kevans and his representative, who went there to do this audit (for which Mr. Kevans received a very small fee), were deceived not by any glaring or probable fraud such as they would be on the watch against, but by a thing that was done more for the purpose of giving an appearance of fictitious prosperity to a com- pany which did not exist than that of putting money into the pockets of shareholders. That, however, cannot alter the legal liability if it is based, as I am satisfied it is, upon the failure to have suspicion aroused. The Lord Chancellor also concurred, and the appeal was accordingly dismissed. [Acct. L.R., 1900, p. 13.) The case of MAYNARDS, LIM. v. MAYNARDS AND OTHERS. (Decided by Farwell^ J., in the Chancery Division, on the i6th January 1900.) Company Prosfectus — Alleged False Statements — Accountants'' ^''Certifi- cate " of Pro-fits — Certificate merely an Estimate — Action against Promoters and Accountants for return of Money and Shares [or for Damages) — Promoters and Secret Profits. In this case the plaintiff company, which was incorporated on March 19th 1896, for the purpose of carrying on a wholesale and retail con- fectionery business, alleges that certain of the defendants, who were promoters of the company, are liable to return mone}' and shares to MAYNARDS, LIM. V. MAYNARDS AND OTHERS. 767 the compan}', on the ground that they made secret profits out of its formation, and that certain others of the defendants are also liable to return money and shares (or in damages) for having knowingly made false statements as to the profits, &c., of the businesses taken over by the compan}^ ; which statements were embodied in the prospectus. Sir E. Clarke, in opening the case for the plaintiffs, said that before the incorporation of the company the defendant, Mr. T. Maynard, was carrying on business as a confectioner in sixteen shops in London. He put himself in communication with the defendant Mr. F. C. Rhys, and through him with the defendants Messrs. Edwards, Etherington & Willmott, and Mr. George Plumbley, with the view of promoting a company ; and all these defendants subsequently acted as promoters of the plaintiff company. Mr. Rhys concealed his identity under a company called the Home, Foreign, and Colonial Contract Company, which had onl}' seven subscribers. The promoters decided to acquire a number of other businesses besides those of Mr. Thomas Maynard, and entered into contracts giving the option to purchase thirty-five other businesses carried on in different parts of England. At a later period Mr. Charles Riley Maynard, who was originally a defendant in the action, but with whom a settlement had been effected, agreed to sell his six businesses in London to the intended company. On March 4th 1896, the defendants Messrs. Edridge, Hatcher & Jackson, who were trade valuers, made a repott addressed to the directors of Maynards, Lim., although the company was not then in existence, in which they valued the businesses to be acquired by the company as a going concern (including goodwill, but exclusive of stock) at ;^72,5oo, and reported that they were satisfied that the net profits were then ^15,000 per annum. This report appeared in the subsequent pro- spectus. On the same day the defendants Messrs. Oscar Berry & Carr, Chartered Accountants, furnished the following leport to the promoters, but addressed to Maynards, Lim : — " We have examined the accounts of the forty-six retail businesses proposed to be acquired by your com- pany, the majority of which have been established for several 5'ears. The accounts show that the businesses have been steadily increasing, the sales now being at the rate of £39,^42 7s. 5d. per annum. We have also examined the accounts of the wholesale businesses carried on in connection with these retail shops, and find that the sales are at the rate of £17,793 ^^s. yd. per annum, of which by far the greater portion is for goods supplied to customers other than the retail businesses, the total sales of the combined retail and wholesale businesses above referred to being at the rate of ;f 57,337 19s. per annum. Owing to the absence of figures showing the expenses of some of the businesses, we are unable to ascertain the exact net profit of the whole of them, but 768 AUDITING. from our knowledge of the extremely profitable nature of the confec- tionery trade and from the facts disclosed during our investigation we are satisfied that the profits of the businesses are large, and that after payment of the interest on the preference shares there will remain a profit sufficient to pay a substantial dividend upon the ordinary shares." This report also appeared in the prospectus. As to these two reports, the plaintiffs would contend that Messrs. Edridge, Hatcher tV Jackson never surveyed the premises in such a way as to enable them to form any opinion as to their value, and never, as the promoters knew, properly investigated the trading and were not satisfied that the net profits were ;,^i 5,000 per annum ; and that Messrs. Oscar Berry & Carr never had any materials before them, for they did not exist, for forming an estimate of the net profits. On March qth 1896 an agree- ment was signed between Mr. Thomas Maynard and a Mr. Goodman, who was a nominee of the promoters, for the sale by ?tfr. Thomas IMaj'nard to the company of his own business and thirty-five other busi- nesses for £7$'°°° exclusive of the stock. Mr. ]\laynard appeared as the vendor of all the businesses in order that they might all have the benefit of his name and might appear to have been carried on by him. The capital of the company was ^140,000, divided into 60,000 prefer- ence and 80,000 ordinary shares. On March 13 1896 the promoters issued a prospectus offering 52,500 preference and 60,000 ordinary shares to the public, and stating thai the purchase-price was ,^115,000, which included ;,/'40,ooo for Mr. C. R. Maynard's business, but no reference was made to the fact that any part of the purchase-price was to be paid to any of the promoters other than the ostensible vendors. The public subscribed largely for the shares. As a matter of fact _;^'29,ooo in cash and shares was paid to Mr. C. R. ]\faynard, ;;^i2,ooo in cash and shares to Islr. T. Maynard, ^'33,200 in cash and shares to other vendors, and ^1^44, 484 i8s. 3d. to or among the promoters and their nominees. The promoters also paid Messrs. Edridge, Hatcher & Jackson ^^350 in cash and £js° i" shares. The price of Mr. C. R. Mavnard's business was increased to and fixed at ^40,000 in order that ;,/"ii,ooo might be secretly divided among the promoters. The profits of the company for the first year amounted to ;i^2,7i4. A com- mittee of shareholders was appointed, and after an accountant had investigated the various businesses which had been acquired, the present proceedings were instituted. ]\lr. \\'. B. Keen, examined b}' Sir E. Clarke, said that he was a Chartered Accountant, and in September 1897 he was employed to examine the books of the various businesses taken over by the plain- tiff company. There were fifty-one businesses in all, and the books varied greatly in character, and in no case was he shown a complete MAYNARDS, LIM. V. MAYNARDS AND OTHERS. 769 set. With regard to the profits of the businesses of C. R. Maynard, the certificate in the prospectus was correct. Sixteen of the businesses taken over belonged to Thomas Maynard, and with regard to these the books covered only a period of nine months, during which time there had been no stocktaking. The net profit for that period was ^165 odd, and in his report he put the outside net profits at ;,^365 per annum, without charging managerial services. For the first year of the com- pany's existence the net profit from these sixteen businesses was ;i^6o odd. The purchase-price was ^15,000. The other businesses taken over belonged to different persons. In some cases no books were pro- duced ; in no case were they complete. In his report he put the total profits at ;^5,620, without allowing for managerial expenses, head office expenses, or depreciation. It was not correct to say, as was done in the prospectus, that the businesses were steadily increasing. In those cases where three years' books were produced to him the totals for the third year were less than for the first year. The method adopted by Messrs. Oscar Berry & Carr in estimating the net profits was, in his opinion incorrect. The expenses of the different businesses varied greatly, and no fixed percentage could be realised. Cross-examined by Mr. Hughes : I am aware that Messrs. Oscar Berry & Carr declined to certif}^ as to net profits. Witness was also cross-examined by Mr. Ashton Cross, ^Ir. Younger, and Mr. Parikh. To Mr. Justice Farwell : Mr. J. J. Clark, of Brighton, was the only vendor who kept proper books, but in no case were books produced to me from which an accountant could arrive at a correct conclusion as to net profits. Mr. Francis William Pixley, examined by Sir E. Clarke, said he was a member of the Council of the Institute of Chartered Accountants. There had been submitted to him certain documents which, he under- stood, had been supplied by Messrs. Oscar Berry &: Carr to the last witness (Mr. Keen) for the purpose of showing how their figures had been arrived at when they reported that the accounts of the businesses showed inci easing profits, sufficient to pay a substantial dividend on the ordinary capital after paying the dividend on the preference shares. It was not the fact that those accounts showed that the businesses had been steadily increasing. There was only one document dealing with Ma3^nard"s businesses at Brighton, and it covered only one single year, so it could not show whether the businesses had been progres- sive ; but the books appeared in this case to have been correctly kept. In other cases the figures were only for one year ; so that thev did not show whether there had been an increase or decrease. Figures for 1893, 1S94, and 1895 were given in other cases. In Stewart's case the takings D D D 7 70 AUDITING. in the first 3'ear were £^,6y6 17s. 3d., in the second year £4,122 6s., and in the third year £3,8^0 iis. lod., showing a decrease in each j-ear. In Vose's case the figures were £S'^^3 9^-'> /'6?28o os. 6d., and ;if6,28o 4s. -d. respectively, being an increase each year. In Jarvis's case the figures were ^[.2,423, ^2,490, and _;^2,325 respectively. Having regard to the whole of the figures shown to him, there was no justifica- tion for saying that these were progressive businesses. There was nothing in the documents produced to him to justify the statement by the trade valuers, Messrs. Edridge, Hatcher &• Jackson, that they were " satisfied that the net profits were upwards of _j{^"i 5,000 per annum." Cross-examined by Mr. Swinfen Eady : A person knowing the trade could form an idea, from the turnover, of what profit ought to be made. If a large number of shops were amalgamated, and conducted under a central management, the profits would be greater than if the businesses were carried on separately. The fee of 700 guineas to Oscar Berry &: Carr was, he would say, a full fee, but not excessive for the work. Mr. Frederick Whinney, examined by Sir E. Clarke, said he was an accountant in the City, and had practised for forty 3'ears. He had seen the certificates of the valuers and the accountants in the pro- spectus, and had had the papers submitted to him which had been shown to the previous witness. They suggested a profit of between £,14,000 to ;,{^i5,ooo a year ; but he did not think they could be depended upon, because they were not based on accounts. They were estimates. He did not believe in estimates at all, and if one was giving a certifi- cate, if he could not get real information, he ought to state that he had been obliged to estimate so-and-so. — Was there anything in the docu- ments which would entitle a person to say he was satisfied that the net profits amounted to ;,;Ci5,ooo? — Witness: I would not have said so, and I do not think anyone else ought to have said so. By Mr. Hughes: He did not know that Oscar Berry & Carr declined to certify the net profits. — Mr. Hughes : They said they were unable to ascertain the exact net profit, but that from their knowledge they anticipated, besides the 6 per cent, on the preference shares, a sub- stantial dividend for the ordinary shares. There is no mention of ;^i5,ooo, or any sum, by Oscar Berry & Carr? — Witness: But you find it inferentially. Mr. Herbert Furber, examined by Mr. Kirby, said he had examined n'ost of the shops scheduled in the prospectus. Some of these were held on yearly tenancy, others on leases averaging twelve and a half years. He did not value the goodwill of those held for a year or less, and his valuation of the goodwill of the others was £4,ob^. MAYNARDS, LIM. V. MAYNARDS AND OTHERS. 77 1 Mr. William Izard, auctioneer and trade valuer, in answer to Mr. Kirby, said that he had had special experience in the valuation of con- fectionery businesses. Apart from factories, he had inspected over forty of the shops of this company in London, Brighton, and elsewhere, and he valued the leaseholds at /.3,75o and ^700 for a shop in New- castle. In his opinion, there was nothing to be added to those figures for goodwill. — By Mr. Ashton Cross : He had put no value at all on any of the company's shops that had been shut up. It was his experience that confectioners commonly bought and sold without proper books, and businesses were bought and sold often only upon estimates. Mr. John Jackson Clark, examined by Sir E. Clarke, said he carried on confectionery businesses at Brighton under the name of Ma3'nard, and he had lately joined the board of directors of the plaintiff com- pany. Mr. Rhys communicated with him as to the purchase of his businesses. He gave j\Ir. Rhys no accounts regarding the factory, as he told him it was no good, and he gave Oscar Berry & Carr the same information. He had said all along that he was only selling the good- will of the retail businesses ; there was no goodwill of the others. Rhys only had witness's statement, but a clerk of Oscar Berry & Carr came and examined the books for the year 1894. The books went back to 188S, but he did not know whether the clerk examined beyond the year 1894. Mr. C. R. Maynard, examined by Sir E. Clarke, said that he wa? managing director of the plaintiff company. Early in 1896 he came into communication with Mr. F. C. Rhys, and on March 14 of that year signed an agreement with Mr. Goodman on behalf of the company to sell his business to the company. The consideration was ^,'40,000, ^'25,000 to be in cash and _j{^i5,ooo in shares. He received ;!^"i4,ooo in cash out of the ;/^'25,ooo, and was allotted 15,000 shares, half prefer- ence and half ordinary. Messrs. Edwards, Etherington & Willmott, and Mr. G. Plumbley received ;,^io,ooo of the nominal consideration money in accordance with an understanding he had entered into with them. He obtained an indemnity in exchange for them; ;^i,ooo of the consideration money went to Mr. Rhys, but he did not know under what circumstances. In April 1897, he valued plant, machiner}'-, and fixtures acquired by the company. He thought the valuation was between ;^i6,ooo and ^^17,000. That included businesses acquired after the promotion of the company. Cross-examined by Mr. Swinfen Eady : The directors issued a circular criticising Mr. Keen's report, and he believed those criticisms to be well founded. He visited all the shops before completion of the D D D 2 772 AUDITING. purchases and reported on them, and he understood that two of the directors had also done so. Cross-examined by Mr. Parikh : Air. Rhys might have settled the costs of witness's solicitors and the accountants' costs out of the ^i,ooo that went to him. Mr. E. R. Polden, chairman of the plaintiff company, said, in answer to Sir E. Clarke, that he was a director of a printing business, and had done a good deal of printing in connection with companies promoted by Messrs. Edwards, Etherington & Willmott. Mr. Edwards first introduced this business to him, and he agreed to underwrite 2,000 shares. Mr. Edwards afterwards suggested that he should become a director, and he agreed to this. About March 1896, Mr. Edwards gave him ^"100, but he considered that it was given as a present for the personal trouble he had taken in looking after the printing for Mr. Edwards's firm. It was about the same time that he applied for 100 shares in the company to qualify him as a director. He never saw Mr. Rhys nor heard of Mr. Plumbley till afterwards. He did not know that Messrs. Edwards, Etherington & Willmott, and Mr. Plumbley were to receive ^'21,000 out of the sum paid to Mr. T. Maynard. He did remember a conversation with Mr. Edwards, in which _2{."3o,ooo was mentioned as the profits and costs of the promotion of the company. Had he not believed the statements in the prospectus he would not have become a director. Cross-examined by Mr. Isaacs : He knew before completion that Mr. T. Maynard w-as not the real vendor of all the businesses. Cross-examined by Mr. Swinfen-Eady : The directors did not act in accordance with the directions of the promoters. Re-examined by Sir E. Clarke : He paid £100 to the committee of investigation, but without any admissions, in order that action against him might be stayed. Mr. Bramwell Davis summed up the evidence for the plaintiffs, and said that the plaintiffs claimed that the defendants were liable to return to the company the difference between the actual value of the busi- nesses sold to the company, which was between ;^"i6,ooo and ^'17,000, and the price paid for them, ^^"75,000. Mr. Rufus Isaacs, on behalf of Mr. T. Maynard, contended that the directors knew from the beginning that Mr. Maynard was not the real owner of all the businesses acquired by the company. His client had done nothing which was not disclosed to the directors and, through them, to the company. There was no evidence of complicity against MAYNARDS, LIM. V. MAYNARDS AND OTHERS. 773 him with regard to the prospectus, and as he had nothing to do with the promotion he did not stand in any fiduciary position towards the compan}^ All that was suggested against Mr. Maynard was that, owning only sixteen shops, he purported to be the vendor of the rest. Mr. Swinfen-Eady said that the charge against his clients, Messrs. Oscar Berry & Carr, who held a high position in their profession, was either fraud or nothing. There was no question of contract with the directors, because their report was furnished before the company was formed. The allegations made against his clients were wholly false, and the fullest evidence would be given to prove that. For the purposes of the report Alessrs. Oscar Berry & Carr examined fifty-one businesses in all, and their fee was to be 700 guineas. It was subsequently arranged that part of the fee should be paid in shares of the company. Mr. Brarawell Davis had said that the plaintiffs' claim against the defendants was for ^60,000, the difference between the value of the businesses, as assessed by the plaintiffs, and the price paid. But while the action was pending, the plaintiffs' solicitors had written a letter to his clients' solicitors saying that their claim was not for fraudu- lent misrepresentation of the value of the businesses acquired by the company, and on that ground they refused discovery of certain docu- ments. Therefore, so far as his clients were concerned, the plaintiffs' claim for ,2^60,000 must fall to the ground. Mr. Justice Farwell : In face of that letter, Mr. Bramwell Davis, I do not quite see how I can give you leave to amend your claim. However, perhaps it will be better to hear the evidence. Mr. Swinfen-Eady : The evidence would prove that Messrs. Oscar Berry & Carr had acted solely as accountants in the matter, and had no motives for acting otherwise. They were asked to investigate certain businesses and certifj^ as to profits. As the materials were not sufficient they declined to certify as to profits. They were then instructed to ascertain the amount of the takings, which could be done with fair accurac3^ Given the takings, a person of experience could then com- pute what the profits w^ere likely to be — substantial or otherwise. It was true that when the company took over the businesses the net profits fell off, though the takings increased. He hoped, however, that his evidence would show where the leakage took place. Mr. W. R. T. Carr said, in answer to Mr. Swinfen-Eady, that he was partner in Messrs. Oscar Berry & Carr and had had a long experience as an accountant. The investigations into the businesses acquired by the plaintiff compan}^ were conducted under his personal supervision. He was told the fee was to be 700 guineas. Before the certificate was given he had never heard that part of the fee was to be paid in shares, 774 AUDITING. or that payment was conditional on the company being successfully floated. They examined fifty-one businesses in all — forty-six retail and five wholesale. They went through the accounts of ninety-five years. They were instructed at first to certify as to net profits, but the net profits could be ascertained from the books of only twenty of the busi- nesses. This was told to Mr. Rhys, and they were then instructed to ascertain the sales, which they did. Mr. Gold, one of the original directors, was also informed that they could not certify as to net profits. In a great many of the businesses their investigations covered a period of three years. Witness then went at great length into the details of the accounts taken by his firm with a view to proving the accuracy of their report. In answer to Mr. Swinfen-Eady, witness said that he still retained the shares in the plaintiff company which were given in part payment of the fee of 700 guineas, though he had been twice approached to sell them. The shares went to a premium. Under the company the turn- over of the businesses largely increased, but the net profits fell off. Cross-examined by Sir E. Clarke : He should not like to say that the accounts he examined would support the statement in the prospectus that the profits were sufficient to pay 15 per cent, on the ordinary shares. He did not consider his report as a certificate of net profits. When he saw the prospectus he did not remonstrate with the directors as to any statements in it. It was by Mr. Rhys's instructions that he addressed the certificate to the directors. Out of the forty-six retail businesses thirty-five had accounts sufficient to enable him to give the profits approximately. Witness was then cross-examined at great length on the accounts of the various businesses acquired by the company, with a view to proving the allegations of the plaintiffs that the businesses were not increasing at the date of the certificate, and that there were no materials sufficient to allow profits to be estimated. Mr. Edridge, examined by Mr. Ashton Cross, said that he was a member of the firm of Edridge & Jackson, which at the date of their certificate was Edridge, Hatcher & Jackson, and had had a long experience as a trade valuer in the confectionery and allied trades. Together with his partner, Mr. Jackson, he inspected the various lease- hold premises in London, Bristol, Bath, and Brighton acquired by the company, and valued the fixtures and fittings. Mr. Jackson inspected the businesses in the North of England. The values were entered in books on the spot, and all the valuations were honestly made. Confec- tioners seldom kept complete sets of books, and in such cases it was usual for valuers to inspect the shop, ascertain rates and taxes and MAVNARDS, LIM. V. MAYNARDS AND OTHERS. 775 other details, such as the number of assistants, class of trade, competi- tion, and character of management. A valuer of experience could then form a prett}' good estimate of the amount of trading, and by that process the net profits could be approximately arrived at. They had gone through that process in the present case, and honestly satisfied themselves as to the amount of the net profits. Cross-examined by Sir E. Clarke : They depended on Messrs. Oscar Berry & Carr for the correctness of the takings. He still believed that the net profits were ;/.'i5,ooo per annum at the date of his report. !Mr. S. P. Jackson, examined by Mr. Duka, confirmed the evidence of the previous witness. It was notified that the case against Mr. Thomas Maynard had been settled. }*Ir. F. C. Rhys, examined by Mr. Parikh, said that he held in 1895 contracts for the purchase of certain confectionery businesses, and entered into negotiations with the Home, Foreign, and Colonial Con- tract Company for the transfer of the contracts to that company. He had no other connection with the Contract Company. Ultimately he emplo}'ed that company as his agents to dispose of his contracts, which the}' did. He had taken no part in the formation of the plaintiff com- pany. The directors knew that certain cash and shares were given to him, his name being on the nomination. After Mr. Younger and Mr. Parikh had addressed the Court on behalf of their respective clients. Sir E. Clarke said that the plaintiffs did not ask for judgment against Mr. Rhys, and that it had been settled that judgment should be entered against ilessrs. Edwards, Etherington & Willmott for moneys received from the company and not accounted for. He wished it to be under- stood that all charges of fraud against Messrs. Edwards, Etherington & Willmott were withdrawn. Mr. Ford, on behalf of Mr. George Plumble}', contended that all his client received was a fair remuneration for the trouble and risk of pro- moting the company. The directors knew he was receiving monej', so that his profits could not be called secret. JUDGMEXT. Mr. Justice Farwell : I am convinced that Messrs. Oscar Berry & Carr and Messrs. Edridge, Hatcher & Jackson acted quite honestly, and were honestly satisfied of the correctness of their reports. Nor am I satisfied, though that is not the issue I have to try, that their reports 776 AUDITING. were not substantially correct. The plaintiffs have brought charges of fraud against these defendants, and those charges having failed I see no reason to depart from the usual rule as to costs. The action as against Messrs. Oscar Berry & Carr, Messrs.' Edridge & Jackson, and Mr. Hatcher must consequently be dismissed with costs. The case had been disposed of as against all the defendants except Mr. Plumbley. He had already stated that the charges of fraud against Messrs. Oscar Berry (^ Carr and Messrs. Edridge, Hatcher & Jackson had broken down, and he would now reiterate his belief that those gentlemen had acted in the matter with honesty and integrity. As to Mr. Plumbley, he was admittedly a promoter. It had been argued that as the directors knew of the payment to him that amounted to notice to the company, and the company, consequent!}', could not sue. In his opinion, how- ever, in a matter of this nature notice to the directors did not bind the company. The directors were not agents of the company to pay money beyond the purchase-money. Mr. Plumble}- must, therefore, be held liable, and, as Sir E. Clarke had intimated that what the plaintiffs now claimed was ;:^i6,ooo, there must be judgment against iSIr. Plumbley for that amount, with liberty for him to set off whatever sums were recovered, in accordance with the various settlements of the case, from the other defendants. That judgment would not, however, carry costs, as the charge of fraud against Mr. Plumbley had broken down. [Acct. L.R., 1900, p. 24.) The case of JOSEPH HARGREAVES, LIM. (Decided by Cozens-H.\kd\\, J., in the Chancery Division, on 15th February 1900.) Held that an Auditor -who refuses to Certify the Accounts oj a Company cannot he held liable because no correct Accounts were submitted to the Shareholders, In this case a summons was taken out by the voluntary liquidator of Joseph Hargreaves, Lim., asking the Court to hold three directors and the Auditor of the company liable for misfeasance in having declared dividends, amounting to ^2,602, out of capital. The directors who were respondents to the summons were Messrs. Pullen, Hollowav, and Brown; and the Aiiditor was Mr. Theodore Brook Jones, Chartered Accountant, of Albion Street, Leeds. The compan}' carried on business as spinners at Shipley and Bradford, and the allegation against the respondents was that in 1894 and the two following years dividends were declared when the company had really made no profit. The com- pany had passed resolutions for voluntary winding-up in August 1897. RE JOSEPH HARGREAVES, LIJM. 777 The affidavit of Mr. Jones was read by Mr. Eve. The deponent stated that he had never received any remuneration from the company, and he had not acted as Auditor after the 22nd of June 1S95. A valua- tion of the machinery had been made by Mr. Marshall in 1894, and that gentleman had arrived at a figure of ^^i6,iig, with an addition of 10 per cent, owing to the marked improvement in the textile trade. & Mr. Jones was cross-examined by Mr. Hughes. He said he saw to the preparation of the memorandum and articles of association, and he gave all the information he could to the shareholders at their first meeting. He knew that certain sums were paid to the shareholders as dividend, but when he found no profit had been made he refused to sign the Balance .Sheet. He several times spoke to Mr. Holloway on the subject, but nothing was done. He denied that he concurred in any resolution that any sum should be carried forward. Witness was not re-appointed Auditor in December 1895, but his firm acted as Auditors more through friendly feeling towards the directors than any- thing else. He never received a penny as remuneration, and had never sent in an account, though one of his clerks, contrary to instructions, had sent in an account to the liquidator. He acted as much in the shareholders' interest as in the directors', but he did not report to the company in general meeting. He more than once protested to Mr. Holloway that dividends were paid before the accounts were audited. He could swear positive^ that there were no Balance Sheets signed by him or on his behalf. Dividends had been paid to him in respect of the shares he held in the compan)'. Re-examined : I told the directors that thej' were liable for the dividends which had been paid out of capital. Mr. Stewart Smith read the affidavit of Mr. Pullen, to the effect that that gentleman up to the formation of the com,pany had been general manager of Mr. George Hargreaves' mills, Holloway was cashier, and Brown salesman. After the company was formed they continued to work in their own departments. He never had brought to his notice the objections to the accounts which the Auditor made to Mr. Hollo- way. He did not, however, dispute his liability in respect of such dividends as had been paid out of capital. The learned counsel desired to say that Mr. Pullen was the holder of only 250 ordinary shares in the company, on which there had never been any dividend paid, and he had never received a shilling out of the company in which he had sunk all his money. His Lordship asked if the liquidator would be content with an order for the payment of the 1896 dividend only. 778 AUDITING. Mr. Hughes desired to be moderate, and said he would take an order that the directors were jointly and severally liable in respect of ;^i,i77. As regarded the Auditor, he argued that it was a plain case of neglect of duty against him, as he should either have brought the matter to the knowledge of the shareholders or he should have resigned. Jl DGMENT. Cozens-llardy, J. : In this case I have made up my mind — so far as the directors are concerned I need not say any more as to them. The question remains as between the liquidator on the one hand and the Auditor on the other. It is sought to make the Auditor liable for three dividends paid out of capital, and it is sought to make him liable under circumstances the like of which, so far as I am aware, have never occurred before. Mr. Jones has never signed any Balance Sheet ; no resolution of the company or of the directors has ever been passed for the payment of a dividend ; nothing has ever been done by the directors, or by anybody, on the footing of any inaccurate statement, insufficient statement, or dishonest statement, by Mr. Jones. j\Ir. Jones told the directors that, in his opinion, the payment of the dividend which had been made before the first audit was improper, because that was only justified bj- reason of an appreciation of the value of the machinery, which appreciation, assuming it to be proper, ought not in Mr. Jones's \iew to have been carried to the credit of Profit and Loss, but ought to have been carried to a Suspense Account, unless and until the shareholders' general meeting otherwise resolved. Mr. Jones for that reason deliberately refused to sign the Balance Sheet. No general m.eeting was called after that. That is the result of the evidence which is before me, and there is not a particle of evidence that anj'^ such general meeting ever was called ; and Mr. Jones's duties, as defined by the articles of association, are first of all to examine and ascertain the accuracy of the Profit and Loss Account and Balance Sheet, and to report to the company in general meeting upon it. He could not, and would not, certify the correctness of this Balance Sheet, and I think he was perfectly right in refusing to do so. He did not report upon it to the general meeting for the best possible reason — that there was no general .meeting to which he could report ; and it is sought really, I think, when one gets to the bottom of the case, to render the Auditor liable because he did not require a general meeting of the shareholders to be summoned, to which he could make a statement as to the improper conduct of the directors. Well, how could he ha^•e svnnmoned a meet- ing? He had no more power to summon a meeting than I have. I think, in Table A, five shareholders, I think it is — but never mind what the number is — can call a general meeting. But he could not call a RE JOSEPH HARGREAVES, LIM. 779 general meeting. He did remonstrate with the directors and suggest that they should call a general meeting, but they did not do so. Now, these dividends in each of the years were paid out of the bank of the company without anv resolution of the shareholders in general meeting, without even any resolution of the board of directors at a board meeting, and in each and every year the payments which are said to be, and which for the present purposes are assumed to be, improper were actually made before the audit of the accounts was completed. It would be startling, I think, to say that an Auditor who knows that dividends have been improperly paid out of capital is to be rendered liable because he does not commence an action on behalf of himself and all the other shareholders, I suppose, against the directors who have improperly paid these dividends, or does not do that which he really had no power to do — get the general meeting together and inform them of the facts. I think the duties of an Auditor are accurately, and, I might almost say, exhaustively, defined by Lord Justice Lindley in the London- and General Bank case : he must be honest; he must not certify what he does not believe to be true ; he must take reasonable care and skill before he believes that which he certifies is true. I think Mr. Jones has fully come up to that definition. Certainly, as far as I am concerned, I am not prepared to extend the liabilities and responsi- bilities of Auditors to the enormous extent to which I should be obliged to extend them if I agreed with the present application. I think, therefore, the summons must be dismissed with costs as against Mr. Jones. The order will go with costs against the three directors. For the last year, the 1896 dividend. Mr. Wheeler : And interest as asked by the summons from the date of payment? Cozens-Hardv, J. : Yes; that would be a matter of course, I suppose. ]Mr. Wheeler : That is asked by the summons. Cozens-Hard)-, J. : Of course, your costs and what you pay will come out of the assets of the compan3^ It was quite a proper case to bring before the Court. [Leeds Mercury, 16 February 1900.) 780 AUDITING. The case of FOSTER v. THE NEW TRINIDAD LAKE ASPHALTE CO., LIM. (Decided by Byrne, J., in the Chancery Division, on 28th November 1900.) Held that an unexpected appreciation in the value of Assets taken over by a Company at its formation is not Profit available for Dividend, even though the Asset in question be a Book Debt. This application raised an interesting question of company lav^^ as to the proper method of dealing with an unexpected appreciation of assets. The facts and the nature of the arguments are sufficiently stated in the judgment. JUDGMENT. Byrne, J., said : This is a motion on behalf of debenture-holders and of a shareholder in the defendant company to restrain the appli- cation in or towards payment of a dividend of the principal of a certain debt recently paid to the defendant company by another com- pany called the New York and Bermudez Company. I treat this as a motion on behalf of a shareholder seeking to restrain an ultra vires payment. In the year 1894, an American company (referred to in the affidavits as the old Trinidad Asphalte Company) acquired the stock and bonds of the New York and Bermudez Company, and also a debt of $100,000, due from the latter company, secured by promissory' notes. In 1897 the defendant company, which is an English company, pur- chased the property and assets of the old Trinidad Asphalte Company, including the debt due from the New York and Bermudez Company, and on December 31 1899 the New York and Bermudez Company gave to the defendant company new promissory notes for $127,000, being the amount of the debt of $100,000 with accrued interest then due. This $127,000 has recently been paid off, and the defendant compan}', through their directors, are proposing, without reference to the other business or assets of the defendant company, to treat the whole of that sum, amounting to ^26,258 16s. in English currency, as assets available for dividend, and to distribute the same accordingly. This is the statement in the plaintiff's affidavit, and it is not denied by the defendants, so that, although some discussion took place in argument upon the point, I have not now to consider whether or not the amount in question may properly be brought into the next Profit and Eoss Account, but simply whether or not the amount may be divided as profit with regard to the present value of the total capital assets, and whatever the result of the year's trading may be. No question is raised as to so much of the sum as represents interest, the point at issue being as to the amount representing principal of the debt. There is no doubt "^ FOSTER V. THE NEW TRINIDAD LAKE ASPHALTE CO.. LIM. 78 1 that the debt formed part of the assets originally purchased by the defendant company, and as such part of its original capital assets, but it is argued that as the debt was not regarded or treated as an asset of any value upon the purchase, and as it has not appeared in the former Balance Sheet as part of the assets of the company, and as the only entry in relation to it in the books of the company is a Journal entry carrying the notes to a Profit and Loss Account, it ought to be regarded as a windfall in the nature of an unexpected profit, and as divisible accordingly amongst the shareholders. I cannot accept this view. Although the agreement for sale does not enumerate the debt or notes in question in the schedule which purports, according to its heading, to be a statement of assets and liabilities of the old Trinidad Asphalte Company, that schedule is, as appears by Clause i of the agreement, an enumeration of matters and things which the vendor warranted to be included in the property sold, or the equivalent in value thereof. Some of the items mentioned in the schedule may have been overvalued, some undervalued, and no doubt fluctuations in value of the assets have supervened, but the amount of this debt is a distinct item of the pro- perty purchased which has since been realised by payment. It appears to me that the amount in question is frimd facie capital, and that I have no evidence which would justify me in saying that it has changed its character because it has turned out to be of greater value than had been expected. It was urged for the defendants that the amount applied in payment of the debt was money earned by the Bermudez Compan}^ by favour of the defendant company, and represents a profit which would otherwise have been earned by the defendant company, and, furthermore, that such money might have been applied by the Bermudez Company in payment of a dividend on the shares in that company, in which case the defendant company, as owning 9,842 shares out of a total of 10,000 in that company, would have received the greater portion as income. I am unable to follow this argument, as I do not see how for the purposes of the present motion I can have regard to the fact that some other course of dealing by the debtor company would have left the debt still outstanding and would have produced more income for the defendant company. I think that I ought to grant an injunction until judgment or further order to restrain the defendants from distributing the $100,000 as dividend without reference to the other business or assets of the defendant company. I must not, however, be understood as determining that this sum or a portion of it may not properly be brought into Profit and Loss Account or be taken into account in ascertaining the amount available for divi- dend. That appears to me to depend upon the result of the whole account for the year. It is clear, I think, that an appreciation in total 782 AUDITING. value of capital assets, if duly realised by sale or getting in of some portion of such assets, may in a proper case be treated as available for purposes of dividend. This, I think, is involved in the decision in the case of Lubbock v. British Bank of South America (1892, 2 Ch. 19S), cited with approval by Lord Lindley in Verner v. General and Com- mercial Investment Trust (1894, 2 Ch. 2y), at page 265), where he says : — " Moreover, when it is said, and said truly, that dividends are not to be paid out of capital the word ' capital ' means the money subscribed pursuant to the memorandum cf association, or what is represented by that money. Accretions to that capital may be realised and turned into money, which may be divided amongst the share- holders, as was decided in Lubbock v. British Bank of South Arnericay If I rightly appreciate the true effect of the decisions, the question of what is profit available for dividend depends upon the result of the whole accounts fairly taken for the year, capital, as well as profit and loss, and although dividends may be paid out of earned profits in proper cases, although there has been a depreciation of capital, I do not think that a realised accretion to the estimated value of one item of the capital assets can be deemed to be profit divisible amongst the share- holders without reference to the result of the whole accounts fairly taken. [Times, 29 November 1900.) The case in re EBENEZER ROBERTS & SONS, LIM. (Decided by Cozexs-Hardt^ J., in the Chancery Division, on 28th January 1901.) Comfany Liquidation — Claim for Misfeasance against Directors and Auditors — Alleged Wilful Negligence — Payjnent of Dividends out of Capital — Respondents^ Right of Contribution inter se. This was a misfeasance summons taken out by the liquidator of Ebenezer Roberts & Sons, Lim., against the directors and Auditors of that company. Two of the directors and the Auditors had com- pounded the claims against them before the hearing of the summons, while as regards the third director (Mr. Hadley Roberts) no answer had been put in to the claim, and his Lordship accordingly held him responsible for the whole sum claimed, the figures, if in doubt, to be settled by the Registrar. As regards the remaining respondent (Mr. Baxter), it was alleged that he was not liable, as he had acted in good faith throughout, and had been deceived by his co-directors. The precise facts may be sufficiently gathered from his Lordship's judgment, reproduced below. RE EBENEZER ROBERTS AND SONS, LIM. 783 JUDGMENT. Cozens-Hardy, J. : This is a summons by the liquidator, seeking to make Mr. Baxter liable in respect of certain alleged misfeasances while a director. Relief is sought by the summons against the Auditors and the other directors, but as against them the case has been disposed of. The company was formed in the beginning of 1897. Mr. Baxter was not one of the original directors, but he became a director and chairman of the board on the 31st March 1897. The company was formed to purchase an old-established business of the Roberts family, the pur- chase-price being ^,^25,000 in cash and certain preference and ordinary shares. The terms of purchase were stated in an agreement dated the 18th of January 1897, referred to in the original prospectus. On the I St of February there was a supplemental agreement, modifjdng the terms by providing that the company should take the property subject to an existing mortgage of /,"3,ooo, and that the then balance of ;if9,ooo should be taken to some extent in shares, and there was a second sup- plemental agreement of the loth of February. On the loth of February the assignments were executed. On the 14th of April 1897, at a board meeting at which Mr. Baxter was present, it was resolved that a cheque be drawn for ;,^6,9oo, the balance of the purchase-money. This was done, and the cheque v/as paid. This payment was correct, if the agreement of the iSth of January had not been modified, but it was not correct having regard to the supplemental agreements of the ist and loth of February. I find, however, as a fact that Mr. Baxter was not aware of the existence of the supplemental agreements, and I cannot hold him liable in respect of this sum. The summons seeks also to make Mr. Baxter liable in respect of a sum of ^1,000 paid to Mr. Hadley Roberts for his invention for ice- powder, called " frigerite." This purported to be a secret chemical process. Such a purchase was authorised by the memorandum of association, clause 3;/?. The recipe was placed in a sealed envelope, which has been opened by the liquidator, and it is alleged that there is nothing new in it, the process being well known. I cannot, how- ever, hold Mr. Baxter liable for this. He acted in good faith. It is of the essence of a purchase of a secret process that the purchaser should not be able to examine it beforehand. The powder did produce t!ie results claimed. The transaction may have been a fraud on the part of the vendor, but I think Mr. Baxter is free from liability. The summons also seeks to make Mr. Baxter liable for a sum of about ;^5oo, paid in respect of the promotion of a company called Bovo Gravy, Lim. Now, the promotion of a company was intra vires this company. I am satisfied from the minutes that the company did 784 AUDITING. promote Bovo Gravy, Lim., and did render itself liable to certain persons in respect of the costs of promotion, and I cannot hold this payment to have been improper, even though it be true that it was contemplated that other persons, who in the event proved unable to discharge their obligations, should bear the liability. I do not pause to consider a loan of ^^500 made to a company, without any security. It may have been imprudent, but it was not ultra vires ; nor do I think there was any want of good faith on the part of Mr. Baxter. It only remains to consider one other matter raised b}- the summons, which presents considerable difficulty. It is alleged that a sum of £^,ojj 13s. 8d. was paid in respect of the year 1897 as dividend, though there were no profits applicable for the purpose, the dividend being paid out of capital. The material facts are these. On the 25th June 1897 the following resolution was passed: — " \Vith reference to the payment of half-yearly dividend on preference shares, it was resolved, on having gone into the calculation of profits made on the sale of patent freezers and imperial ice-cream powders, as under, and finding ample profit would have been made to declare an interim dividend of 6 per cent, per annum on amount of paid-up preference shares allotted, interest to be calculated as from date of payment of instalments — Resolved to close the list of shareholders from the 30th of June to the eighth day of July, and that the same be advertised. The managing director reported that patent freezers and imperial ice-cream powders had been sold to date." These blanks in the minutes were never filled up, and Mr. Baxter says he declined to sign the minutes on the very ground that the blanks were not filled up. Nevertheless, an interim dividend, amounting to ;i^i,o39 6s. 6d. was paid on the preference shares. The accounts for the year 1897 were sent to the shareholders with the directors' report on the 24th of February 1898. They purported to show a net profit of £S'°^7 ^^^- ^2'^-> from the balance of which, after deducting the interim dividend, the directors recommended a dividend of £6 per cent, on all the shares, both preference and ordinary. This account is certified by the Auditors in the following terms : — " We have examined the books of the above company for the year ending 31st December 1897, and the vouchers connected therewith, and hereby certify the above figures to be in accordance with the same." This certificate was not such as was required by Articles 161 and 166, which are as foUow.s : — 161. — " Once at least in every year the accounts of the company shall be examined, and the correctness of the Profit and Loss RE EBENEZER ROBERTS AND SONS, LIM. 785 Account, and Balance Sheet, ascertained by an Auditor or Auditors." 166. — " The Auditors shall make a report to the members upon the Balance Sheet and Accounts, and in every such report shall state whether in their opinion the Balance Sheet is a full and fair Balance Sheet, and properly drawn up so as to exhibit a true and correct view of the state of the company's affairs, and such report shall be read, together with the report of the directors, at the meeting at which the Balance Sheet is submitted." It is proved to my satisfaction that there were no profits available for this dividend. It is plain that gross frauds were committed bj' one or other of the two managing directors, although I exempt Mr. Baxter from any imputation of fraud. In particular, two sums of x^54o 12s. and £2,2i/[ iis. gd., entered as assets, were fraudu- lent items inserted in the books without anything representing them. I cannot, however, having regard to the Kingston Cotton Mills case, hold j\lr. Baxter liable for not having discovered these frauds. He did not suspect, and, so far as I can see, he had no reasonable grounds for suspecting, the integrity of his colleagues on the board. With respect to an item of £'^^^ 4s. 8d., which represents the nominal amount of the book debts of the vendors in excess of the nominal amount of their liabilities, this sum, if it had any existence, was purchased and paid for b}' the company under the agreement of January 1897. It was capital, and not in any way part of the profits of the company, or available for dividend. In fact, it had no existence, for these debts were, to a very large extent, bad, and the liabilities were far greater than the books showed. There was, I think, no justification for dealing with this item in the manner in which it was dealt with. Moreover, a glance at the books of the vendors would have shown that the greater part, if not all, of the debts represented by the ;i^566 4s. Sd. were bad. Another item in the Balance Sheet is an assumed profit of ;i{J'i,25o in respect of Numan &: Stove, Lira. This was a company registered in June 1897. Mr. Baxter was one of its directors. It was promoted by the International Securities Trust Corporation, Lim. On the 29th of June 1S97 the following resolution was passed: — "It was resolved that ^500 be advanced as a temporary loan towards the formation of a syndicate for the issue of Numan & Stove, Lim., as per agreement, and for reasons and considerations given^namely, in consideration of this company advancing as a temporary loan the sum of ^^500 to the Inter- national Securities Trust Corporation, Lim., towards the formation of Numan & Stove, Lim., whose managing director undertook to keep stock and push sales in every possible way amongst the various steam- ship companies, wherein their business lies, of the company's patent freezers and imperial ice-cream powders, and the undertaking entered into by the managing director of the International Securities Trust E E E 786 AUDITING. Corporation, Lim., for his compaii}' to be personally responsible for the return of the said ;,^5oo, they lodging with the company scrip for 1,000 ordinary ;,^i shares in Ebenezer Roberts & Sons. Lim., together with a bonus of ;!^5oo in cash or preference shares, and 1,000 fully-paid ordinary shares in Numan & Stove, Lim." And on the same day the following letter was written by the International Securities Trust Cor- poration, Lim. : — " In consideration of your advancing the sum of ;^5oo towards the expenses of forming Numan & Stove, Lim., and issuing the prospectus offering 7,500 preference shares of ^f, each and 750 founders' shares of ;,{^i each for subscription, we hereby guarantee the return to you of the said sum by the vendor, Mr. A. E. Stove, out of the first moneys payable by him under his agreement of sale, after ;^i,ooo to pay off mortgages and _j^2,ooo for the company's working capital. In the event of his not receiving suflBcient from the subscriptions to repay you the said sum, we undertake to make up any deficienc}', and as security for the present engagement we herewith lodge with 3^ou ^1,000 of ordinary shares of your compan)" as collateral security. In addition to the above, in the event of the company proceeding to allot- ment, you are to receive as bonus ^500, either in cash or in preference shares, whichever is available as the result of the subscriptions, and /^i,50o in ordinary shares of Numan & Stove, Lim. These latter pay- ments, though we will do our best to see carried out, are not guaranteed by us." The £s°° ^^^ advanced. In the result it has been a total loss. On the 8th of October 1897 the secretary of the International Securities Trust Corporation, Lim., wrote to this company, informing it that " the subscriptions were not sufficient to allow Mr. Stove to receive cash to enable us to return you the amount in cash. We therefore enclose you 100 preference shares of ;^5 each for the amount. We also send you 100 preference shares of ;i^5 each and 1,500 ordinary shares of ^^i each as agreed bonus." This letter showed that Numan & Stove, Lim., had not been a success. The company in the Balance Sheet treated the ;!^"5oo as a good loan, amply secured, and they treated the shares, which were the agreed bonus, as worth ,^1,250. In other words, they treated the preference shares as of par value, and the ordinary shares as worth 50 per cent, of their face value. These shares had no market value. Mr. Baxter says that he objected to the value put upon the shares unless a statement could be obtained from the secretary as to their value, but no such statement was obtained until shortly before the ist of April 1S98, and the letter then obtained, which asserted that the shares were at present of par value, was ante-dated the 23rd of December 1897. The resolution for payment of the dividend was long before this letter was received. Mr. Baxter was a director of Numan & Stove, Lim., until November 1897, when he resigned his seat because he was not satisfied RE EBENEZER ROBERTS AND SONS, LIM. 787 with the conduct of his colleagues. In mj' opinion there was no justification for treating this transaction as one resulting in a profit of £i,2z,o. In truth, the shares have proved wholly worthless, the company being wound up in 1S9S. In addition to the four items above-mentioned, the liquidator points out that under the item £2„i~2 2s. ^d.. By new machinery, which is a capital item, there are included items amounting to ^^bj i8s. 3d., which clearly ought to be placed to the debit of profit and loss, and that, in like manner, in the item ^Establishment Account ^^'580 15s. id., there are included items amounting to ;^'443 is. 6d., which are plainly not capital charges. I may add that, in order to provide for the first divi- dend, naoney had to be borrowed from the company's bankers. Under these circumstances it is contended by the liquidator that 'Six. Baxter, although not guilty of fraud, has been so careless and negligent in the discharge of his duty as director that he should be held liable for the total amount of the dividend paid, or at least for so much as could not have been paid if the items above referred to, other than the two fraudu- lent items, had been struck out ; and it is argued that he cannot rely upon any protection which might have been afforded by the certificate of the Auditors, inasmuch as they did not in fact, nor did the}' even profess to, do their duty — namely, ascertain the correctness of the Profit and Loss Account and Balance .Sheet, or state whether it exhibited a true and correct \iew of the state of the company's affairs. On the other hand, it is contended by Mr. Baxter that he was not bound to go through the books, that he was entitled to rely upon the managing directors who in the first instance had prepared the Balance Sheet, and upon the Auditors who certified it, and that he, not unreasonably, attached no importance to the omission of the Auditors to give the full form of the certificate prescribed by the articles. Xow, with regard to the dividend, I think I ought not, in the present state of the authorities, to hold Mr. Baxter responsible [a) in respect of the two fraudulent items of ^'540 12s. and /.'2,2i4 iis. gd., or [b) in respect of the ^'556 4s. 8d. book debts, or {c) in respect of items wrongly included in New Machinery and Establishment Accounts. These last items were passed by the Auditors, and I regret that I must hold that Mr. Baxter was not boimd to look at the books which would have dis- c losed the true fact. Although the Auditors were, in my judgment, culpably negligent, not only in treating item [b] as a good asset, but also in failing to distinguish between capital and income in items (b) and (r), and although Mr. Baxter omitted to require the Auditors to give the prescribed certificate, this does not suffice to render him pecuniarily responsible. See the observations of Vaughan Williams, J., in the Kingston Cotton Mills case (1896, 1 Ch. 348). E E E 2 788 AUDITING. But there are two matters in respect of which I cannot hold Mr. Baxter free from responsibility. He was a party to the pa3-ment of the interim dividend, recklessly and without obtaining the information which he knew was necessar_v to justify it. The blanks in the minute of the 25th January were never filled up. There was no such calcula- tion of profits made as there stated. In the result, it is shown that no profits were in fact made, and I must, therefore, hold j\Ir. Baxter liable for /.'i,o39 6s. 6d., the amount of the interim dividend. With respect to the final dividend, amounting to ^3,038 7s. 2d., it is admitted that this depends upon the Numan & Stove item, ^^'1,250. Now, it is clear that Mr. Baxter was well acquainted with the affairs of that company. He knew that it was not flourishing. He retired from the board in November 1S97, as he says, because he did not trust his co- directors. He knew that some evidence of value was required to justify the figures, and yet he sanctioned the dividend without obtaining any such evidence. I decline to accept his statements in the box that he believed then that the shares were worth /,'i,25o, and that he himself would have given that sum for the shares. He acted recklessly, although his attention was expressely drawn to this item. The accounts purported to show £s>°'^7 ^^^- ^'k'^- profits for the year. From this must be deducted the interim dividend, ^1,030 6s. 6d., and also the ^'1,250. This leaves only £2,-2^ 4s. 7d. available for the final dividend. But the dividend paid amounted to ;[^3,o3S 7s. 2d., an excess of £j,io 2s. 7d. I must hold Mr. Baxter liable for this sum of /.310 2s. 7d., in addition to the ^"1,039 ^^- ^^-i ma-king in all ;i^i,349 0'^. id., and he must pay interest at 4 per cent, on each sum from the date of payment b_v the company. He must pay the costs of the summons. I have not had an opportunity of looking at the order sanctioning the compromise with the directors and the auditors. I do not think that that will be in any war material to this. Mr. Eve : Are not we entitled to credit for anything received, my Lord? Cozens-Hardy, J. : Xo ; I think not. Mr. Eve : It is not a very large amount. Your Lordship's judgment will be for ;^i,349 9s. id., with 4 per cent, interest on the one sum from the date of the interim dividend when declared, and also on this latter sum, with costs. Cozens-Hardy, J. : I did not go into the sum. You can work it out. Mr. Eve : If your Lordship pleases. Cozens-Hardy, J. : The interest will be inserted in the order. RE EBENEZER ROBERTS AND SONS. LIM. 789 jNIr. Eve : Yes, my Lord, the amount will be calculated and inserted in the order. Cozens-Hard}-, J. : You do not appear for Roberts. I understand, Mr. !Martelli, the order was taken there? Mr. Eve : Yes, my Lord, the order was taken. Cozens-Hardy, J. : The summons asks in the alternative; it did not prescribe which alternative. I do not suppose it matters. Mr. Martelli : ^Yhen mj' learned friend was opening this case I think ■vve thought the larger sum — that is, the amount paid altogether in e.\cess — but that was probabl}' more than your Lordship would give us, and then we put an intermediate sum. Cozens-Hardy, J. : The excess of the purchase-money is plainly what they are liable for. The first item I dealt with in mj- judgment was j/J6,c)oo — was not that the amount of the cheque paid ? Mr. Martelli : Yes, my Lord, /^6,CjCO. Cozens-Hardy, J. : I do not know the amount by which it was in excess, but it was in e.xcess to a considerable extent, having regard to the modified agreement. Mr. }^Iartelli : Your Lordship remembers that the total amount was ^3,336; that was paid on the 5th cf May, but under the agreement the view was that thev were entitled to credit for all the shares allotted up to the 31st of January, which was something less than that. The figures I gave 3'our Lordship were /.2,383, that is allowing them the benefit of shares allotted between the 5th of May and the 31st of January. That is rather a less sum than is claimed by the summons, but rather more than the second alternative. The second alternative gave them credit for all shares alhjtted at any time. Cozens-Hardy, J. : That cannot be right. Mr. Eve : Your Lordship dtt ided that. I was arguing it as ji::icits iiiria. Cozens-Hardy, J. : Yes, I decided that. Mr. Martelli : The proper amount will be giving them credit for all shares allotted up to the 31st of January, which they were entitled to under the agreement. Cozens-Hardy, J. : Have 1 got the materials before me to insert the figure for that ? 79° AUDITING. Mr. Martelli : Yes; your Lordship sees it is strictly proved in the affidavit which I gave your Lordship. The figure will be /^.z,^^^. Cozens-Hard}-, J. : Very well ; put that in the order. Mr. Martelli : That is /"i,ooo less than we claim. Cozens-Hardy, J. : That will be with interest, of course. Mr. ^lartelli : That will be with interest from the 31st of Januar\', anyhow, giving them the benefit up to then. Cozens-Hardy, J. : Yes; take it most favourabh' to them. Mr. Martelli : That is the most favourable view we can take in their favour, ;f 2,383. Then will your Lordship allow the dividend? Cozens-Hardy, J. : They are liable for the fraudulent items. What does ^Ir. Eve say as a/in'cus ciin'cc? Mr. Eve : Yes ; I think so. The whole dividend, as far as they are concerned. Mr. Martelli : I do not think we can ask for anything more. Mr. Eve : Yes; that e.xhausts it. Cozens-Hardy, J. : I do not suppose it matters what judgment I give against them ? Mr. Eve : I do not want to reply on your Lordship's judgment, but may I ask your Lordship, in arriving at the ^310 2s. jd., ought not my clients to have had credit for the /. 1,000, the interim dividend, which under this judgment we replace? The supposition is that under the judgment we replace that ;/. 1,039 i^ ^^^ company's coffers. If that was so, ought that to have been deducted from the profits ascertained at the end of the 3'ear ? Cozens-Hardy, J. : The interim dividend is one thing, and the final dividend is another. There was no justification at all for the interim dividend. Mr. Eve : If it is replaced in the companj^'s coffers there would be ;^'i,03g, which, assuming the judgment is complied with, goes to our credit. However, if your Lordship has taken that into consideration Cozens-Hardy, J. : I have let you off very easily. {AccL L.R., 1901, p. 43.) BURLEIGH V. INGRAM CLARK. LIM. 791 The case of HEKHERT ALFRED BURLEIGH 7'. INGRAM CLARK, LIM. (Decided b}' Joyce, J., in the Chancery Division, on April 2nd 1901.) HeUr that an Accountant has a Lien on Account Books for Professional Charges. Mr. Lawrance said he had a motion in the case of Herbert Alfred Burleigh, of Park Row, Bristol v. Ingram Clark, Lim., booksellers and stationers, of Bristol, against the Auditor of the defendant company for an order upon him to hand over the account books of the company to the receiver appointed in a debenture-holder's action. The motion raised a very nice point, and one as to which, as far as he knew, there was no authority whatever — namely, whether the Auditor of a company had a lien on the books of the company for his fees. The receiver (Mr. Frederick Jenkins, F.C.A.) was appointed on the 8th of Februar\- last in the action by Mr. Burleigh on behalf of himself and other first debenture-holders for /.'7,ooo, and Mr. W. Grimes, A.C.A., the Auditor, was requested to go into the accounts. He now took the view that he had a lien on the books of the company for work done, and he refused to deliver up the books except on payment by the receiver of his account, £.'i--,~- The way in which he got possession of the books was this. He asked leave of the directors and the secretar\" to take away the books to his own oihce, as he said the compan3-'s office was small and inconvenient for him, and he could do the work better in his own office. Mr. Christopher Jones, for the accountant, said if the money was brought into Court he would hand over the books at once. ]SIr. Lawrance said that was just what he contended the Auditor was not entitled to. ^Ir. James pointed out that Mr. Cirimes had done accountant's work to the books, as well as Auditor's work. Mr. Lawrance admitted that some work had been done on the books, as distinguished from work done in respect of the books, and there might be a distinction. He did not think his Lordship at present had got the materials for saying how much was actually done on the books, and how much done in the books. He contended that the Auditor had no lien for any part of the work. If he had, then there must be some inquiry. He thought if there was such a thing as an Auditor's lien on the books he worked upon, it must have been tried on before, but he ct'uld not find any record. Joyce, J., said he had no evidence here as to the terms upon which the Auditor was employed. There might be some resolution of the board, and it was very material to know cju what terms he was 79^ AUDITING. employed. He might have been employed as accountant, as well as Auditor. Mr. James said there was the evidence of Mr. Grimes himself that he was asked by the board of directors to do this accountant's work. Mr. Lawrance contended that the company, by allowing the Auditor to take away the books for his own convenience, conferred on him no right to retain them. He was appointed Auditor in the usual way, yearly. He admitted Mr. Grimes had bought a Shareholders' Register, an important book, for the company, and that the receiver had not yet paid him the price, 31s., but the receiver would see that that was paid. Mr. James, in opposing the application, said it might be that work done as an accountant and work done as an Auditor stood on different footings, but he contended, in any event, the Auditor had a lien. The bulk of the work was done as an accountant, and so far as that branch of the work went he clearly had a lien on the authorities. The right of an Auditor was, no doubt, somewhat different, but even in that case he submitted there was a lien. Joyce, J., said, apart from other matters, it was clear the Auditor had no right to keep the Shareholders' Register, as that was a book which the company must keep for public inspection, and he must therefore give it up. That was not an account book. As to the articles of asso- ciation, he could not see that the article relating to the Auditor gave him any lien whatever on the books. At present he was of opinion that no book of the company ought to leave the company's office. Mr. James said if these books had to be re-bound the binder would have a lien on them for his work. Joyce, J., said he did not know, but he thought if a parish register had to be re-bound it could not be retained. Joyce, J., asked Mr. Lawrance whether, if the Auditor would return the books at once, the receiver would be willing to give the Auditor a personal undertaking to pay whatever it might be found he was entitled to. (J)f course, he did not say that the Auditor was entitled to a lien. Mr. Lawrance consulted his clients, and said they were willing to give that undertaking. Joyce, J., said : Very well ! This was obviously an urgent matter, because the company must have its books, and this arrangement would ' settle the matter temporarily. If the books were handed over and the undertaking given, he would postpone his decision as to the law until the first day of next sittings, because he wished to look at the documents, as this was a novel point. DOVEY AiXD OTHERS V. CORY (NATIONAL BANK OF 793 WALES CASE). JUDGMENT. His Lordship delivered judgment on the iSth inst. He said that the affidavits filed showed that the respondent claimed a lien, not as Auditor, but as accountant. In his opinion, the question of an Auditor's lien did not arise, and, had it done so, he considered that an Auditor had no such lien; but that point he did not now decide. In respect of the Share Register, the accountant had no possible lien on that, but he held that he was entitled to a lien on such books only as he had actually worked upon, in respect of his proper remuneration for work upon those books only. H the parties did not agree upon the sum, there must be an inquiry. Each side would pay its own costs. {AccL L.R., 1901, p. 65.) The case of DOVEY AND OTHERS v. CORY (NATIONAL BANI^ OF WALES CASE). (Decided by the House of- Lords, before the Lord Ciiaxceu.ok, Lord Machxaghten, Lord Shaxo, Lord Davev, and Lord Brampton, ist Aiigust 1901.) Held that a Director, if he acts hand fide, is entitled to rely on the Oificers of the Company to prepare true and honest Accounts. This was an appeal from a decision of the Court of Appeal (the Master of the Rolls, now Lord Lindley, Sir F. H. Jeune, and Lord Justice Romer), dated August 2 1899, which reversed a judgment of Mr. Justice Wright, dated Februar_v 27 1S99. The hearing before the Court of Appeal is reported in XXV A.cct. Law Reports, 127; 1=; The Times Law Reports, 517 ; L.R. (1899), 2 Ch. 627 ; and 68 L.J. Ch. 634. The appellant is the liquidator of this bank, and the Metropolitan Bank (of England and Wales) have purchased and taken over its assets and liabilities. The respondent, John Cor\'-, vras for some years a director of the National Bank. In the liquidation of the latter a sum- mons was taken out to render the respondent liable — not to creditors, all of whose claims had been satisfied, but to the contributories, in respect of alleged misfeasance (i) in paying dividends out of capital; (2) in making improper advances to directors; and (3) in making improper advances to customers who were, or were reputed to be, insolvent, and the summons asked that the respondent should be ordered to repay the full amount of all losses caused bv such acts of alleged misfeasance with interest and costs. Mr. Cory became a director on November 22, 1883, and resigned on December 18 1890. The 794 AUDITING. summons asked that the respondent should be deprived of the benefit of the Trustee Act, 1888, and of the Statutes of Limitation, on the ground that the losses arose from the respondent's wrongful acts and fraudu- lent concealment of the true state of affairs. The appellant's counsel, however, disclaimed the imputation of any moral obliquitj- on the part of the respondent, but argued the question on the basis of negligence and failure to discharge the duties of a fiduciary position. The trans- actions complained of were voluminous, and ranged over a series of years, and related to the aftairs not only of the head office, but of the branches, which in 1890 were 33. It was, however, found possible by the parties to condense the story within the limits of four volumes and about 1,500 pages. In Februar}- 1S93 an agreement was entered into between the National Bank of Wales and the Metropolitan, Birming- ham, and South Wales Bank, now the Metropolitan Bank (of England and Wales), Lim., whereby the latter bought the assets and goodwill and undertook the liabilities and contracts of the former, the value of the assets and goodwill being taken at not less than ^/.'i 10,000. \'oluntarj^ resolutions were passed for winding-up the National Bank, and Thomas Cory, its former chairman, and the appellant were appointed liqui- dators. Mr. Thomas Cory subsequent!}- resigned and the appellant became sole liquidator. The alleged amount of improper payments of dividends was ;^52,9S6 ; of loss on advances and credits to directors to December 31 1890, /.37,73i ; and of loss on improper advances to customers, ,,^43,087. The whole of the assets were realised or valued, and the appellant Dovey alleged that after discharging the liabilities of the National Bank and crediting it with the value of its assets and /.1 10,000 as its goodwill, there remained a deficiency of assets amount- ing to ^"84,392. Calls were made of £.2. los. per share each in July 1S96 and September 1899. Mr. Justice Wright ordered the respondent to pay /.54,787, being /.'37,ooo, the aggregate amount of dividends paid to the shareholders in 1887, 18S8, 1889, and 1S90 (except a part of the last dividend), and as to the balance, interest at 5 per cent, on each of the dividends. The learned Judge held that all these dividends were in fact paid out of capital ; but he declined to make the respondent liable for improper advances to directors or customers. The Court of Appeal, in an elaborate judgment, delivered by the Master of the Rolls, exonerated the respondent from liabiht}-. This decision was affirmed by the noble and learned Lords. JUD(;.MEXT. The Lord Chancellor: In this case the liquidator of the National liank of Wales, Liin., appeals against a judgment of the Court of Appeal, whereby Mr. John Cory, the respondent, was discharged from the liability which Mr. Justice Wright's judgment had imposed upon DOVEY AND OTHERS V. CORY (NATIONAL BANK OF 795 WALES case). him to pay ;i{^37,ooo for the benefit of the shareholders of the com- pany in respect of dividends already distributed, and a further sum for interest. Mr. John Cory was a director of the company, and it is for his supposed misconduct in the management of the affairs of the compan}^ that this liability was imposed upon him. It is alleged and proved that certain losses have been sustained b}^ the compan}^, and the ground upon vv'hich Mr. John Cory is sought to be made liable is- the very short and intelligible ground that he was a party to false and fiauduleiit statements as to the position of the company, and had had a share in causing these losses. The Court of Appeal have acquitted him of any knowledge of what was falsely stated, and Sir Robert Reid,. in opening this appeal, stated to your Lordships that he did not intend,, in arguing for ^Ir. John Cory's liability, to impute to him any moral obliquity. Now, there is no doubt that there were Balance Sheets laid before meetings of the shareholders which, to use the language of the articles of association, were not proper, and which did not truly report as to the state and condition of the company, and did not comply with the requirements of the articles in question in respect of the particular sum which the directors recommended as dividend, that it should be paid out of the profits, but a greater sum was paid out as dividend than would have been paid if certain things had been taken into considera- tion, and therefore larger than should have been paid. A great part of the judgment, both of Mr. Justice Wright and of the Court of Appeal, is occupied by discussing matters which are not now before your Lord- ships as matters in debate. It is now admitted that Mr. John Cory ceased to be a director in December 1890. My Lords, I am very clearly of opinion that the judgment of the Court of Appeal is right and ought to be affirmed ; but my opinion is entirel}' ba.sed upon the question of fact that he was guilty of no breach whatever, and for reasons which I will refer to hereafter I am very an.Kious not to deal with some reasons given for their judgment by the Court of Appeal, which, in the view of the facts that I take, do not arise here ; and in what I say I desire to be understood as only dealing with the facts of this particular case. Now, in the first instance, I will assume that the company has sus- tained loss by the issue of fraudulent Balance Sheets, by the improper advance of money to the customers of the bank, and that it has also sustained loss by the lending of money to directors without security. With respect to the default involving liability, if Mr. John Cory was conscious of the falsehood it is not necessary to go any further. Like an3'0ne else who is a party to a false statement acted upon to the prejudice of the person to whom it is made, he would be liable to the extent to which his falsehood has inflicted loss on his victims, but after the admission that has been made it is unnecessary to pursue this 796 AUDITING. head of inquir}' ; he certainly could not be acquitted of moral obliquity if party to a fraudulent statement ; but it is said he has so grossly neglected his duty as a director that, though he may not have known the true state of the facts, he ought to have known them, and his breach of dutv in that respect renders him liable. In order to see how far this obligation is made out it is necessary to consider what the business of. the company was, and what was the position of Mr. John Cory in relation to it. My Lords, I think it is idle to talk in general terms of the duty of a director to look after the concerns of the company of which he is one of the managers without seeing what in the ordinar}' course of business he ought to do or to have done. Now, there are some things which, of course, must be, or at all events ought to be, apparent to anyone responsible for the conduct of a commercial business, and to apply that observation to the business of which we are speaking — namely, a banking business ; but I do not understand that anyone has suggested that there was neglect or default by reason of the absence of some system under which, if honestly carried out, the interests of the bank would have been in that respect secured. It is admitted that (extract from judgment of the Court of Appeal) " the company's prin- cipal bank and its head office were at Carv-n, where the directors met and the general manager was in daily attendance. The company had also many branch banks, each with its own manager. The course of business was this. Each branch manager sent weekly to the head office Avhat is called a weekly state — i.e., an account showing how the assets and liabilities of the branch stood, what advances or overdrafts had been made or allowed and to whom, what securities the bank held, and other matters. Every quarter each branch manager made a more formal return to the head office showing the position of the branch and the business dene during the past quarter. It was the dutv of the general manager to examine these documents, and to report to the board anything disclosed by them which required their attention. The weekl}' states or quarterly returns were in the board room for reference in case of need, but unless attention was called to them the directors did not think it necessary to examine them. The chairman of the directors was Wr. Thomas Cory, a brother of Mr. John Cory. The chairman and the general manager (Mr. Collins) visited each branch bank every year; and, in addition, two skilled inspectors frequently went round and inspected the accounts and reported to the general manager. The accounts of the branch banks appear, however, not to have been separately audited by professional accountants. The Auditors employed to examine the company's accounts and to certify the annual Balance Sheets and accounts laid before the shareholders only saw the head office books and the returns from the branch offices DOVEY AND OTHERS V. CORY (nATIOXAL BANK OF 797 WALES CASE). certified bv their respective managers to the head office. These certified returns formed part of the weekly states, bat omitt ed much that they ^onlaiUiid. The minutes of the directors' meetings show that, speaking generally, they attended with reasonable regularity and transacted a large amount of business. Xo director, unless it was the chairman, attended to any details not brought before the board either by the chairman or b_v the general manager. ]\Ir. John Cory stated in his affidavit the general course of business at board meetings, and his cross-examination does not substantially differ from the account he there gives." But it is suggested that Mr. Cory is responsible because this and other portions of the system were not faithfully adhered to. And, indeed, what is really made the test of his responsibility is that he did not find out what was fraudulently withheld from his knowledge. So the warning letters of the Auditor, which were never suffered to roach him, are suggested as warnings to him which he ought not to have neglected. Again, the insufficient striking out of bad and doubtful debts, by which it is alleged that the amounts paid in di\idends to himself and other directors, as well as shareholders, are b}' a process of reasoning and calculation assumed to be payments out of capital. These things are all assumed to have been done as though done with knowledge and intention, while at the same time the admission is made that there was no evil mind or conscious fraud. Xov,- I think such things, if done with evil mind and intention, would be fraud, and it comes back again to the proposition that the responsibility must be based upon the assumption that Mr. C"ory is responsible because he did not find out the fraudulent knaves bv whom he was surrounded. One was his own brother, another was the general manager, and, once I arrive at the conclusion that there were those about him whose interest and object it was to deceive him, I certainly do not think that the things which were designedly concealed from him are things which ought to be relied upon as matters for which he was responsible. In the view I take the whole of the evidence which is relevant and important to the question " Did ilr. Cory knowingly permit the things to be done which w-ere done? " becomes to mj' mind entirely immaterial if one is to start with the assumption that he knew nothing about them. Dealing with the several heads of charge as they have been formulated in the judgment of Mr. Justice Wright — viz., negligence, breaches of trust in respect of advances made contrary to said articles of associa- tion, and payment of dividends and of capital — I think each and all of them may be disposed of by the proposition that Mr. Cory was not himself conscious of any one of these things being done, and that unless he can be made responsible for not knowing these things — or, as Mr. Justice Wright put it, he is shown to have exhibited a complete neglect 798 AUDITING. of the duties he had undertaken — the charges are not made out. The charge of neglect appears to rest on the assertion that Mr. Cory, like the other directors, did not attend to any details of business not brought before them by the general manager or the chairman, and the argument raises a serious question as to the responsibility of all persons holding positions like that of directors — how far they are called upon to distrust and be on their guard against the possibility of fraud being committed by their subordinates of every degree. It is obvious if there is such a duty it must render anything like an intelligent devolu- tion of labour impossible. Was Mr. Cory to turn himself into an Auditor, a managing director, a chairman, and find out whether Auditors, managing directors, and chairmen were all alike deceiving him ? That the letters of the Auditors were kept from him is clear. That he was assured that provision had been made for bad debts and that he believed such assurances is involved in the admission that he was guilty of no moral fraud ; so that it comes to this — that he ought to have discovered a network of conspiracy and fraud by which he was surrounded, and found out that his own brother and the managing director (who have since been made criminally responsible for frauds connected with their respective offices) were inducing him to make representations as to the prospects of the concern and the dividends properly payable which have turned out to be improper and false. I cannot think that it can be expected of a director that he should be watching either the inferior officers of the bank or verifying the calcu- lations of the Auditors themselves. The business of life could not go on if people could not trust those who are put into a position of trust for the express purpose of attending to details of management. If Mr. Cory was deceived by his own officers — and the theory of his being free from moral fraud assumes under the circumstances that he was — there appears to me to be no case against him at all. The provision made for bad debts, it is well said, was inadequate, but those who assured him that it was adequate were the very persons who were to attend to that part of the business — and so of the rest. If the state and con- dition of the bank were what was represented, then no one will say that the sum paid in dividends was excessive. If I assume, as I do, that Mr. Cory acted upon representations made to him which he believed and which as coming from the officers of the bank to whom he was, in my judgment, justified in giviaig credit, the discussion of whether the dividends actually paid were or were not properly divisible, has no bearing on 'Six. Cory's liability, and I am very reluctant to give any opinion upon it, inasmuch as the question may arise when it may be necessary to decide it. I deprecate any premature judgment. My Lords, I am, as I have said, very reluctant to enter into a question DOVEV AND OTHERS V. CORY (NATIONAL BANK CF 799 WALES case). which for the reasons I have given does not arise here, and into which the Court of Appeal has entered at some length. The only reason why I refer to it at all is lest by silence I should be supposed to adopt a course of reasoning as to which I am not satisfied that it is correct. I doubt very much whether such questions can ever be treated in the abstract at all. The mode and manner in which a business is carried on, and what is usual or the reverse, may have a considerable influence in determining the question what maj'' be treated as profits and what is capital. Even the distinction between fixed and floating capital, v\rhich in an abstract treatise like Adam Smith's " Wealth of Nations " is appropriate enough, may with reference to a concrete case be quite inappropriate. It is easy to laj^ down as an abstract proposition that you must not pay dividends out of capital, but the application of that vary plain proposition may raise qiiestions of the utmost difficulty in their solution. 1 desire, as I have said, not to express anj^ opinion, but as an illustration of what difficulties may arise the example given by the learned counsel in one ship being lost out of a considerable number, and the question whether all dividends must be stopped until the value of that lost ship is made good out of the further earnings of the company or partnership, is one which one would have to deal with. On the one hand, people put their money into a trading concern to give them an income, and the sudden stoppage of all dividends would send down the value of their shares to zero, and possiby involve its ruin. On the other hand companies cannot at their will and without the precautions enforced by the statute reduce their capital ; but what aie profits and what is capital may be a difficult and sometimes an almost impossible problem to solve. When the time comes that these questions come before us in a concrete case we must deal with them, but until they do, I for one, decline to express on opinion not called for by the particular facts before us, and I am the more averse to doing so because I foresee that many matters will have to be considered by men of business which are not altogether familiar to a Court of law. I move that this judgment be affirmed, and this appeal dismissed with costs. Lord ^lacnaghten : I have had an opportunity of reading in print the judgment of my noble and learned friend on the V.'oolsack, and I desire to express my concurrence in it, and at the same time to guard myself from being understood to assent to all the propositions sup- posed to have been laid down by the Court of Appeal in this case I say no more, because it seems to me that when Sir Robert Reid withdrew all charges involving moral obliquity against ilr. Cory, the case was at an end. And I do not tliink it desirable for anv tribunal 8oo AUDITING. to do that which Parliament has abstained from doing — that is, to formulate precise rules for the guidance or embarrassment of business men in the conduct of business affairs. There never has been, and I think there never will be, much difficulty in dealing with any particular case on its own facts and circumstances, and, speaking for myself, I rather doubt the wisdom of attempting to do more. I understand from my noble and learned friend Lord Shand that he also takes this view. Lord Davey : I agree with your Lordships in thinking that the appellant has not succeeded in making out a case for the relief which he asks against the respondent. The appellant seeks to make the respondent liable under three heads — (i) in respect of losses incurred by advances of money which he alleges that the respondent and the other directors of the bank negligently made to irresponsible persons, and without sufficient securit}' ; (2) in respect of advances to the directors themselves, which he alleges were made contrar}' to the express provisions of the articles of association ; (3) in respect of sums paid to the shareholders (including the respondent himself) by way of dividend on their shares, which he alleges were paid out of the capital of the baiik, and not out of profits. In fact he alleges that there were no profits out of which such dividends could properly be paid, and that an apparent profit was created only by including as assets debts known to be bad and irrecoverable. As regards the first two heads of claim, Mr. Justice Wright, as well as the Court of Appeal, has held that the claims cannot be sustained, and as I agree with the reasons which have been assigned for so holding I need not trouble 3'our Lord- ships by repeating them. As regards the third head of claim, the case as presented at your Lordships' bar has been very much narrowed by the admission of the appellant's counsel that the respondent ceased to be a director in December 1890, and his acceptance of the decision of the Court of Appeal that the Statute of Limitations applies so as to bar the recovery of any sums paid away prior to six years before the commencement of the proceedings. The claim is thus confined to the three dividends paid in July 1SS9, December 1SS9, and July 1S90. My Lords, I think it appears from the evidence that in the Balance Sheets upon which these dividends were recommended by the directors bad and irrecoverable debts were in fact included amongst the assets of the company, and that if those debts had been written off (as the\- ought to have been) the Balance Sheets would not have shown any profit out of which the dividends could have been paid. But before proceeding to discuss the evidence upon which it is sought to fix the respondent with responsibility, 1 will say a few words with regard to the law upon the subject with a view to ascertain exactly what it is the appellant must DOVEY AND OTHERS V. CORY (NATIONAL BANK OF 8oi WALES case). establish. After analysing and discussing several authorities, his Lord- ship proceeded : — The respondent, in his affidavit, states generally that he was from first to last under the honest and genuine belief that the affairs of the company were in a sound and solvent condition, and that its business was being carried on at a profit, and that its net profits for the time being were amply sufficient to justify the dividends which were from time to time during his directorship paid to the shareholders. And he adds that the general manager and branch managers were, so far as he knew, men of unquestioned competence and integrity, and that he and his co-directors were compelled by the magnitude of the business and the exigencies of the case generally to rely upon (and he did rely upon) these officials in all ordinary matters relating to the accounts of customers and other questions of detail. And he deals specifically with the various matters alleged in the liquidator's evidence on the same lines. The respondent was cross- examined on his affidavit at great, but not unnecessary, length. I am not, I think, doing injustice to the appellant's case when I say that reliance was chiefly placed on the " weekly states " and " quarterly returns " made by the branch managers, or that, if he cannot succeed in fixing the respondent with liability on these documents, his case fails. These returns wete laid on the table in the board room at each meeting of the directors. The comparative analysis of them, made by the skilled accountant who advises the appellant, does, I think, show that certain accounts which were treated as good by the general manager in the preparation of the Balance Sheets submitted by him to the directors, were, in fact, irretrievably bad, and it is difficult to acquit the general manager of improper conduct in including them as assets. The respondent says in his affidavit that the " weekly states " consisted each week of a very large and voluminous pile of sheets, which it would have taken the directors a couple of days to go through, and that it was the duty of the general manager to go through the weekly states, with the letters of the branch managers accompanying them, and to place upon the agenda any points arising upon them which he considered ought to be brought to the attention of the directors ; and upon the discussion of such points the documents were, when necessary, referred to ; but, except in such cases, the weekly states were not con- sulted by the directors, but they relied on the general manager going carefully through them and drawing their attention to any matter requiring their consideration. On cross-examination he adhered to this statement. He added thatthe chairman also went through them often individually, and he did so for the board. He admitted that before recommending a dividend he did not look at all the accounts or look at the books themselves, but he said that the directors looked at F F F 8o2 AUDITING. the documents which were put before them b}' the manager — the amount which he considered was doubtful and bad — and they made a reserve for it. He also said that it was never brought before him that amounts due from bankrupt debtors were included in the Balance Sheet of each 3'ear, and he never heard of any single case of that kind. It further appeared from the evidence of other witnesses that the branches of the bank were regularly visited and their books examined by the chairman and two inspectors. In this state of the evidence, I ask whether the course of business at the board meetings as described by the respondent was a reasonable course to be pursued by the respondent and other directors, or whether the knowledge which might have been derived from a careful and comparative examination of the weekly states and quarterly returns from the different branches of the bank ought to be imputed to the respondent, or, alternatively, whether he was guilty of such neglect of his duty as a director as would render him liable to damages? I do not think that it is made out that either of the two latter questions should be answered in the affirmative. I think the respondent was bound to give his attention to and exercise his judgment as a man of business on the matters which were brought before the board at the meetings which he attended, and it is not proved that he did not do so. But I think he was entitled to rely upon the judgment, information, and advice of the chairman and general manager, as to whose integrity, skill, and competence he had no reason for suspicion. I agree with what was said by Sir George Jessel in Hallmark'' s case (9 Ch.D. 320), and by Mr. Justice Chitt}' in In re Denhain &^ Co. (25 Ch.D. 752), that directors are not bound to examine entries in the company's book. It was the duty of the general manager and, possibly, the chairman to go carefully through the returns from the branches, and to bring before the board any matter requiring their consideration, but the respondent was not, in my opinion, guilty of negligence in not examining them for himself, notwithstanding that they were laid on the table of the board for reference. The case is, no doubt, one of some difficulty, but the appellant has not made out to my satis- faction that the respondent wilfully (as that term is explained in the cases I have referred to) misappropriated the compan3''s funds in payment of dividends. My Lords, what I have said is sufficient for the decision of this appeal. But I desire to express my dissent from some propositions of law which were laid down in the Court of Appeal, and upon which your Lordships thought it right to hear the respondent's counsel. The learned Judges seem to have thought that a joint stock company, incorporated under the Companies Acts, may write off to capital losses incurred in previous years, and may in any subsequent year, if the receipts for that year exceed the outgoings, pay dividends BOND V. THE BARROW HiEMATITE STEEL COMPANY, LIM. 803 out of such excess without making up the Capital Account. If this proposition be well founded it appears to me that a company whose capital is not represented by available assets need never trouble itself to reduce its capital, with the leave of the Court and subject to the other conditions imposed by the Act of 1S77, in order to enable itself to pay dividends out of current receipts. My Lords, it may be that I have misapprehended the statement of law intended to be made by learned Judges in the Court of Appeal. I think that is possible, because I find that in Verner v. General and Commercial Investment Trust (1894, 2 Ch. 124, at page 266). " Perhaps," Lord Lindley says, " the shortest way of expressing the distinction Avhich I am endeavour- to explain is to say that fixed capital may be sunk or lost, and yet that the excess of current receipts over current payments may be divided, but that floating or circulating capital must be kept up, as otherwise it will enter into and form part of such excess, in which case to divide such excess without deducting the capital which forms part of it will be contrary to law." I reserve my opinion as to the effect of an actual and ascertained loss of part of the company's fixed capital, as in the case put by Mr. Swinfen-Eady of a loss of a ship uninsured. But, subject to this observation, I think that the statement of law in the passage I have quoted is not open to objection, and it is only because the learned Judge appears to me to have departed from it in his judgment in the present case that I have troubled your Lordships with these remarks. I agree that the appeal should be dismissed. Lord Brampton concurred. {Times, 2 August 1901.) The case of BOND v. THE BARROW H/EMATITE STEEL COMPANY, LIM. (Decided by Farwell, J., in the Chancery Division, on 18th January 1902.) Held that Preference Shareholders cannot claim to receive Dividends out of Current Profits as a matter of right, and without regard to such -provision for Reserves as the Directors may think needful. Judgment was delivered in this important action, which was before the Court last sittings. The facts and arguments sufficiently appear from the judgment. JUDGMENT. Mr. Justice Farwell : The defendant company were incorporated in the year 1864 with a capital of ^'150,000, which has since been first increased and subsequently reduced and now stands at ^1,528,275, divided into 150,000 ordinary shares of £■] los. each, 377 8 per cent, preference shares of £'^ each, and 50,000 preference shares of £■; los. F F F 2 8o4 AUDITING. each. The plaintiffs are holders of some of each of these classes of preference shares, and they claim, on behalf of themselves and all others holders of preference shares, to be paid the dividends and an ears of dividends on their shares out of the profits which they allege that the company has made in the years 1898, 1899, and 1900. No dividend has been paid on the 8 per cent, preference shares since 1898, or on the 6 per cent, preference shares since 1896. The prefer- ence shareholders have no vote in respect of these shares. The Profit and Loss Account for the year 189S shows a balance described as "net profits for the year 1898" of ^^65,803 7s. 3d., and of this ;^20,ooo was carried to Reserve Account, making it ;^4o,ooo, and ^'10,418 los. was carried forward. The Profit and Loss Account for the 3'ear 1899 shows a balance described as " net profit for the j-ear 1899," of ^89,018 17s. 6d., and this was carried forward pending the decision of the Court on an application for the reduction of the capital of the company, to which I will refer presently. The Profit and Loss Account for the year 1900 shows a balance of ;,^i57,6o5 I2S. I id., which is provisionally brought forward. The report for the year 1S98 contains the following statement : — " The shareholders are aware, both from the Balance Sheets themselves and the Auditors' certificates which have accompanied them, that for some years past no depreciation has been written off the amounts at debit of Land, Buildings, Works, Fixed Plant, and Mining Leases. The directors have carefully considered the matter, and, having regard to the fact that many of these assets are more or less of a wasting character, they are of opinion that the time has arrived when a careful revision of their value should be mad^*^ It is, however, a subject which in all its bearings requires most mature consideration, and the deliberations of the directors are not sufficiently advanced at the present time for them to submit any recommendation to the share- holders." Accordingly, in the year 1899 special resolutions were passed for the reduction of the capital of the company. The petition for the confirmation of these resolutions came before the Court in August 1900 (2 Ch. 846), and was opposed by some of the preference shareholders, and the petition was dismissed by Mr. Justice Cozens- Hardy, and his order was confirmed by the Court of Appeal (1901, 2 Ch. 746). Some, but not all, of the present plaintiffs appeared and opposed this petition, and the petition was dismissed on the ground that the alleged loss had not been proved to the satisfaction of the Court, and also by Mr. Justice Cozens-Hardy on the ground that the amount standing to the credit of the reserve fund and the ^^89,018 17s. 6d. profit for the year 1899 were applicable to make good loss of capital £0 far as they would extend. The plaintiffs in the present action are now claiming that these sums and the balance to the credit of Profit BOND V. THE BARROW HEMATITE STEEL COMPANY, LIM. 805 and Loss Account in igoo are not so applicable, but belong to them by contract, and it is argued on behalf of the defendants that Mr. Justice Cozens-Hardy's order creates an estoppel, and this may possibly be correct so far as regards any of the plaintiffs who appeared and opposed the petition. But this is not pleaded, and as there are other plaintiffs who did not appear on the petition, and who could sue on behalf of themselves and all other preference shareholders who did not oppose the petition, I do not think it necessary to express any conclusive opinion on this point. Nor can I regard Mr. Justice Cozens-Hardy's decision as a precedent disposing of this case, for the points argued before me were not before him and that by no fault of the plaintiffs, because the contentions that they now raise could not have been put forward by them in support of their opposition to the petition, but were adverse to such opposition, and should, if urged at all, have been urged by the company. The contention of the plaintiffs in this action is that they are entitled by contract to be paid a preferential dividend out of the balance to the credit of the Profit and Loss Account in each year, and that the company cannot appropriate any part of such balance to reserve, or carry over one shilling until they have been paid in full. There is no suggestion of want of bona fides on the part of the directors or of the company. The defendants contend that this is not the true construction of the special resolutions creating the prefer- ence shares, and that, if it is, the balance to the credit of profit and loss for any year is not necessarily such profits of the company as are properly applicable to dividend, but that if the Court is satisfied by the evidence that there have been ascertained losses and depreciations of capital assets exceeding the amount of the balances, these losses must be made good before any dividend can be paid. The first point depends on the construction of the original articles and the special resolutions creating the preference shares, for it is not contended that if the preference shareholders have such contractual rights as they claim, the company can by subsequent special resolutions deprive them of such rights or of any part thereof. Article 43 provides as follows : "Any capital raised by the creation of new shares shall be considered as part of the original capital, and shall be subject to the same provisions with reference to the payment of calls, the forfeiture of shares on non-payment of calls or otherwise, as if it had been part of the original capital, except that it shall be lawful for the company in general meeting, by special resolution as aforesaid, to direct that the new shares shall have such priority in respect of dividends as it shall deem expedient." This article, in my opinion, provides that all new shares shall be subject in all respects to all the provisions of the articles, except only that dividends payable on new shares may rank in priority to, instead of -pari fassii with, ordinary shares. For this 8o6 AUDITING. purpose it is necessary only to introduce modifying words in Article 95, and then the whole fasciculus of clauses relating to dividends (95 to loi) appl}'. It is argued that the provisions as to the declaration of a dividend do not apply to shares on which a fixed preferential dividend is payable. In my opinion, this is not so. The necessity for the declaration of a dividend as a condition precedent to an action to recover is stated in general terms in Lindley on "Companies" (5th edition, p. 437), and, where the reserve fund article applies, it is obvious that such a declaration is essential, for the shareholder has no right to any payment until the corporate body has determined that the money can properly be paid away. It is urged that this puts the preference shareholders at the mercy of the company, but the prefer- ence shareholders came in on these terms and this argument does not carry much weight in an action such as this where bona fides is con- ceded. The opposite conclusion might enable the preference share- holders to ruin the compan}', and would certainly lead to great incon- venience in enabling them to compel the paj'ment out of the last penny without carrying forward any balance. Granted that it is a hardship to go without dividends for a time, this hardship presses more heavily on the ordinary shareholders, who have to wait until the preference shareholders have received all arrears before they can get anything. It was urged that Article 97 providing for the reserve fund cannot apply to preference shares, because one of its objects is to equalise dividends, but I cannot see that the mention of one object which is not applicable is any reason for excluding those objects which are appli- cable, and which are really for the benefit of all the shareholders. On the articles as they stand, I have no doubt that the true construction is that which I have stated. But it is contended that the special resolutions have created larger rights, and it was, in my opinion, com- petent to the company by such resolution to alter Article 43. Now the 8 per cent, preference shares are created by resolutions of 1872 in these terms : — " (i) This company will agree to purchase from the Barrow Rolling Mills Company, Lim., the two furnaces erected by that com- pany, and the land purchased by them, and any other property of which the Rolling Mills Company may be possessed. (2) The considera- tion for the purchase shall be the sum of £2,7,700 in preference shares of this company, bearing interest at 8 per cent, per annum from the ist of January last, such preference shares to be issued to the present shareholders in the Rolling Mills Compan}' in proportion to their holdings. (3) The directors are authorised to issue preference shares to the amount of £27,700, bearing interest at 8 per cent, per annum in perpetuity, for the purpose of carrj'ing out the above arrangement. (4) The holders of the above-mentioned preference shares shall be entitled to attend the general meetings of this company, but they shall BOND V. THE BARROW HEMATITE STEEL COMPANY, LIM. 807 not be entitled in virtue of such shares to vote, or to interfere in any- way in the company's proceedings, nor shall they, in virtue of such shares, be eligible as directors of the company." In my opinion there is nothing whatever in this to alter any of the articles as I have construed them. Stress has been laid on the word " interest " ; but in my opinion that word has slipped in fer incuriam, and should be read as '■ dividend," as indeed is done when this resolution is referred to in the special resolutions of 1876, to which I shall have to refer presently. Interest is not an apt word to express the return to which a shareholder is entitled in respect of shares paid up in due course and not b}' way of advance. Interest is compensation for delay in pay- ment, and is not accuratel}' applied to the share of profits of trading, although it may be used as an inaccurate mode of expressing the measure of the share of such profits. It is impossible, in my opinion, to give to the word used as it is in this case so pregnant a meaning as the plaintiffs derive, reading it as equivalent to an alteration of the articles and as creating a right overriding the valuable and possibly essential article providing for reserve funds. The 6 per cent, prefer- ence shares present more difficulty. The}' were created b}' resolutions of 1876 as follows : — " (i) The capital of the company shall be and is hereby increased by the addition thereto of 50,000 preference shares of ^10 each, entitling the holder to a fixed dividend at the rate of £(i per centum per annum on the amount for the time being paid up in respect of such shares. (3) The holders of the said new preference shares shall be entitled to a dividend thereon only after paj'ment of the interest from time to time payable in respect of the mortgage and bond or debenture debts of the company, and after payment of a dividend at the rate of /'8 per centum per annum on the preference shares of the company, amounting to /.'375700 created by special resolutions passed and confirmed at extraordinary general meetings of the company in the year 1872 ; and in case in any year the net profits of the company shall not be sufficient for the payment in full of the dividends on such new preference shares, the net profits of any subsequent year shall (after payment thereout of interest on the mortgage bond or debenture debts of the company, and of dividends of the said £% per cent, pre- ference shares) be applied in payment to the holders of the said new preference shares of the amount by which the dividends of any previous 3'ear or years ma}' have fallen short of the fixed rate of £(i per cent." The third resolution is not very happily worded, but I have come to the conclusion that this and the first resolution read together are merely a verbose statement of a bargain that the holders of the 6 per cent, shares are to have' a fixed 6 per cent, cumulative preferential dividend, subject to the rights of the debenture-holders and the 8 per cent, preference shareholders. I think that the words " only after payment. 8o8 AUDITING. &€.,'' in No. (3) are restrictive words, equivalent to " subject to," and do not create new rights by rescinding the articles relating to declara- tion of dividends, creation of reserve fund, and the like. The only difficulty that I have felt has been created by the latter pai't of No. (3), beginning "the net profits of any such year." I feel the difficulty of limiting the generality of the term " net profits," but, on the other hand, it is only the arrears to which this provision applies, and it would be strange that the preference shareholders should have to allow a reserve fund to be formed so far as their current year's dividend was concerned, but should be entitled to sweep up everything in respect of past arrears. I have come to the conclusion that the use of the words " net profits " is not sufficient to rescind the articles to which I have referred, but that the resolution must be read as subject to the provisions of those articles. For the reasons that I have stated the plaintiffs' case fails. But another point has been taken by the defendants, and, as evidence has been adduced and considerable argu- ment has been addressed to it, I feel bound to state the conclusion at which I have arrived with respect to it. The construction is that, even if the plaintiffs were right in their constiuction of the articles, the company could not legally pay them the dividends that they claim because there are no profits properly so called out of which they can be paid, and that any such payment, if made, would be made out of capital. It has been proved to my satisfaction (and, indeed, Mr. Jenkins very properly admitted that he could not dispute that the result of the evidence was) that the company has sustained an actual ascer- tained and realised loss of capital to an amount exceeding ;,^2oo,ooo, and has also lost capital by estimate and valuation to an amount exceeding ;;{.5o,ooo. The various sums claimed by the plaintiffs as aviilable to pay their dividends amount to about ^,^240, 000. If, there- fore, these ascertained and estimated losses have to be made good before any dividend can properly be paid, there are obviously no funds out of which to pa}' dividends. The defendants allege and the plaintiffs deny that the company are bound to make good these losses before paying any dividend. The question is one of ver)' considerable difficulty on the authorities, but the result of these authorities is, in my opinion, that there is no hard and fast rule b}- which the Court can determine what is capital and what is profit. " The mode and manner in which a business is carried on and what is usual or the reverse majf have a considerable influence in determining the question." (Per the Q.C. in Dovcy v. Cory, 1901, A.C. 486.) " It may be safely said that what losses can be properly charged to capital and what to income is a matter for business men to determine, and it is often a matter on which the opinion of honest and competent men will differ. There is no hard and fast legal rule on the subject." (Per Lord BOND V. THE BARROW HEMATITE STEEL COMPANY, LIM. 809 Justice Lindley, 1S99, 2 Ch. 670.) It is, however, necessary to bear in mind that the two propositions — (i) that dividends must not be paid out of capital, and (2) that dividends may only be paid out of profits^ — are not identical but diverse. The first is the requirement of the statutes, and cannot be dispensed with ; the latter is in Table A in the articles of the particular compan)', and is one of the regulations of the company which has to be construed. A company which has a balance to the credit of its Profit and Loss Account is not bound at once to apply that sum in making good an estimated deficiency in value of its capital assets. It maj^ carry it to a Suspense Account or to Reserve, and if the assets subsequently increase in value the amount neither has been nor will be part of the capital. If, therefore, a part of such balance is used in paj'ing dividends, such dividend is not paid out of capital, because the sum has never become capital, although it still remains a question whether it has been paid out of profits or not. It has been pointed out by Lord Justice Lindley in Lee v. Neuchdtel Asphalte Company {41 Ch.D. i), that there is nothing in the statutes requiring the company to keep up the value of its capital assets to the level of its nominal capital. The requirement is merely negative, that dividends shall not be paid out of capital, and the balance to the credit of Profit and Loss Account does not automatically become part of the capital assets because the value of the actual capital assets has depreciated to an amount equal to or exceeding such balance. The real question for determination, therefore, is whether there are profits available for distribution, and this is to be answered according to the circumstances of each particular case, the nature of the company, and the evidence of competent witnesses. There is no single definition of the word " profits " which will fit all cases. Take, for instance. Pro- fessor Marshall's definition (" Economics," Edn. of 1SS3, p. 142) : — " The excess of the receipts from the biasiness during the year over the outlay for the business, the difference between the value of the stock and plant at the end and at the beginning of the year being taken as part of the receipts or as part of the outlay according as there has been an increase or decrease of value." I am precluded from adopting this in its entirety by authorities which are binding on me, because in the definition "stock and plant" obviously include both fixed and circulating capital as defined at p. 134 of the same treatise. See, for instance. Lord Lindley's judgment in Verncr's case (1894, 2 Ch., at p. 266), where he sa5'S : — "Perhaps the shortest way of expressing the distinction which I am endeavouring to explain is to say that fixed capital may be sunk and lost, and yet that the excess of current receipts over current paA-ments may be divided, but that floating or circulating capital must be kept up." I do not understand his Lordship to be laying down a general and universal rule that in every company fixed 8lO AUDITING. capital may be sunk and lost, but that there are companies in which that may be the case. All the authorities, however, agree, I think, that circulating capital must be kept up. Now in the present case the _^2oo,ooo realised loss arises by the surrender of the leases of certain mines, b}' tlie pulling down of certain furnaces, and on the sale of certain cottages. The company is a smelting company on a very large scale, and for the convenience of its works and by wa}'^ of economy they acquired the leases of the surrendered mines in order to supply themselves. with their own ore instead of buying it as required. The ore was used exclusively for the purposes of the company's works. The mines were drowned out and the cost of pumping them out was pro- hibitive. The company, therefore, surrendered the leases, pulled down the blast furnaces, and sold the cottages connected therewith. Now the evidence before me is all on one side. The plaintiffs called none, and Sir David Dale and the defendants' other witnesses all agree that in a company of this nature these items ought to come into the account before any profit can be said to be earned, and my own opinion coincides with theirs, inasmuch as I think that the money invested in those items is properly regarded in this company as circulating capital. Suppose the company had bought enormous stocks of ore sufficient to last for ten years, if could hardly be said that the true value of so much of this as remained from time to time ought not to be brought into the Balance Sheet, and I can see no difference for the purpose of the account between ore in situ and ore so bought in advance. The blast fui'naces and cottages are mere accessories to the ore, and resemble a building for burning the stores bought in advance already mentioned. There is more difficulty about the remaining ^'50,000. I think that the onus is en the plaintiff to show that it is fixed capital and that in a company of this nature such fixed capital may be sunk or lost. They have not done this, and the evidence, so far as it goes, is the other way. But this is not an actual loss, but depreciation by estimate. The plaintiffs really relied on Lee v. Neuchdtel Asphalte Company as an authority for this proposition as a universal negative- -viz., "that no company owning wasting property need ever create a depreciation fund." In my opinion that is not the true result of the decision. It must be remembered that in that case there had been no loss of assets. The company's assets were larger than at its formation (see p. 15), and the Court decided nothing more than the particular proposition that some companies with wasting assets need have no depreciation fund. For instance, I cannot think that it would be right for the defendant company to purchase out of capital the last two or three years of a valuable patent and distribute the whole of the receipts in respect thereof as profits without replacing the capital expended in purchase. It is for the Court to determine in each case on evidence whether the BELLERBY V. ROWLAND AND MARWOOd's STEAMSHIP 8ll COMPANY, LIM. particular company ought, or ought not, to have such a fund. There is no doubt as to the opinion of the witnesses in this case, and, further, the opinion of the directors cannot be altogether disregarded. The Courts have, no doubt in many cases, overruled directors v/ho pro- posed to pay dividends, but I am not aware of any case in which the Court has compelled them to pay when they have expressed their opinion that the state of the accounts do not admit of anj^ such pa}^- ment. In a matter depending on evidence and expert opinion it would be a very strong measure for the Court to override the directors in such a manner. I have made no distinction between the realised loss and the estimated loss, because the witnesses declined to recognise any such distinction, and also because the decided cases deal only with the distinction between floating and fixed capital, and do not dis- tinguish between realised and estimated loss, and it would serve no useful purpose for me to express any opinion on the subject. The result is that the action fails, and must be dismissed with costs. [Times, i-j January 1902.) The case of BELLERBY v. ROWLAND AND MARWOOD'S STEAMSHIP COMPANY, LIM. (Decided by Collins, M.R., Stikling, and Cozens-Haruv, L.JJ., in the Court of Appeal, on 6th May 1902.) Held that a Surrender of partly paid-up Shares to a Company, to cover Losses incurred, is invalid. This was an appeal against the decision of Mr. Justice Kekewich, reported 27 Acct. L.R. 90. A question of general importance was raised as to the power of a company to accept a surrender of shares. The action was brought to test the validity of a surrender of 415 shares in the defendant compan}' made in the year 1893 in favour of the company by the then directors — viz., Messrs. Bellerb}', Moss, Mar- wood, Wright, and Rowland. The action was brought by the three first-named directors and the executors of the two others, who had since died. The company was incorporated in the 3'ear 1890 under the Companies Acts with a capital of ;!^275,ooo, divided into 25,000 shares of ;^ii each, for the purpose of carrying on the business of shipowners. By Article 37 of the company's articles of association it was provided that " the directors may accept from any member, on such terms and conditions as shall be agreed, the surrender of his shares or stock, or any part thereof." The circumstances which led to the surrender were as follows : — In 1893 the company gave an order to certain contractors for a new steamship called the " Golden Cross." Owing to the depressed condition of the shipping trade at that time 8l2 AUDITING. it was difficult to provide the necessary funds for the payment of the contractors, and the ship was sold by the company to the International Line Steamship Company during her first voyage in order to pay the contractors. The result of the sale was that the company incurred a loss of ;!^4,ooo in respect of the contract. The directors, with a view to relieving the company from loss, but without admitting any liability in respect of the loss, agreed that each should surrender to the company 83 shares, which were then paid up to the extent of ^10 only; and by a deed poll executed in July 1893 they formally surrendered the shares in question, their object being (as therein stated) to make good to the company all losses sustained by it in relation to the steamship " Golden Cross " recently sold by them as such directors to the Inter- national Line Steamship Company. Since 1893 the company had prospered, and it was suggested that some special remuneration should be made to the directors, and that this should take the form of a return to them of the shares which they had surrendered. At a meet- ing of the shareholders held on October loth 1900 this course was unanimously approved, and it was resolved that a friendly action should be brought for the purpose of obtaining the opinion of the Court as to the validity of the surrender, having regard to the fact that the directors were advised that the only way in which a return of the shares could be effectually made to them was by having the pur- ported surrender set aside. The plaintiffs accordingly brought this action, claiming a declaration that the surrender was ultra vires and inoperative, and to have their names restored to the register in respect of the 415 shares. Mr. Justice Kekewich held that the surrender of the shares was really a purchase of them by the company, the price given being the release of the directors from the liability of £,\ per share. The transaction was therefore void, it being conclusively settled by the decision of the House of Lords in Trevor v. Whitworfh (12 App. Cas., 409) that a company cannot purchase its own shares. But, after the length of time which had elapsed since the transaction took place, his Lordship was of opinion that it would not be equitable to admit the claim of the plaintiffs to be restored to the register merely because the company had now become much more prosperous. His Lordship accordingly dismissed the action. The plaintiffs appealed. The appeal was heard on April iSth 1902, when the judgment of the Court was reserved. JUDGMENT. The Court allowed the appeal. The Master of the Rolls, after stating the facts, read his judgment as follows : — Since the case of Trevor v. Whiiworth (12 App. Cas. 409) it is clear law that a limited company incorporated under the Joint Stock BELLERBY V. ROWLAND AND MARWOOd's STEAMSHIP 813 COMPANY, LIM. Companies Acts cannot purchase its own shares unless it does so by way of reduction of capital with the sanction of the Court under the provisions of the Companies Acts of 1867 and 1877. See British and American, (s^c, Corforaiion v. Cowfer {1894, A.C. 399). Cases dealing with the acquisition by companies of their own shares before Trevor v. Whitworth was decided are now of little assistance. Is, then, the transaction in this case a purchase by the company of its own shares? It was certainly intended by the parties who carried it out to involve the release by the company to the surrenderors of the right to call up the unpaid balance of ^i on each share, and was therefore not a gratuitous surrender. There was an exchange of real consideration between the parties, and therefore it ought to be described perhaps more accurately as a sale and purchase than as a surrender. But assuming it can be properly described as a surrender, although it involves a consideration given out of the assets of the company to the party surrendering, it remains to consider whether there is any legal ground upon which it can be taken out of the principle of Trevor v. Whiiworth. It seems to me that there is not. An argument was addressed to us by Mr. Warrington based on a minute criticism of some passages in the speeches of the learned Lords in which they deal with the argument that to hold a sale bad would be to forbid forfeitures and surrenders, and point out that these differ from the case actually before them, which involved a present parting by the company with the amount actually paid-up on the shares. But, whether this distinction is conclusive or not, it seems to me that when closely criticised these dicta as to surrenders deal with them as a species of forfeiture, which, as the learned Lords point out, is recognised by the Act itself, and cannot be extended to cover a transaction having none of the elements of a forfeiture. [His Lordship then read passages from the speeches of Lord Herschell in Trevor v. Whitworth (12 App. Cas., at p. 417), of Lord Watson in the same case (at p. 429), and of Lord Macnaghten in the same case (at p. 438), as showing that " a surrender of shares in return for money paid by the company is a sale, and open to the same objections as a sale." His Lordship also referred to a passage in the speech of Lord Macnaghten in British and American Corporation V. Cowfer (1894 App. Cas., at p. 414) to a similar effect.] I can see no distinction in principle between returning to a shareholder a part of the paid up capital in exchange for his shares and wiping out his liability for the uncalled-up sum payable thereon. Both methods involve a reduction of the capital which, as Lord Watson points out in Trevor v. Whitworth (at p. 423), persons dealing with the company are entitled to rely upon as existing either as paid up or as still to be called up, and such a reduction, therefore, can only hold good if sanctioned under 8l4 AUDITING. the conditions prescribed. If it be objected that the shares may, in the language of Lord ^Yatson, be " reissued," and that though the liability of the surrenderor to pay the amount still at call is extinguished, the liability will remain good against anyone to whom the company disposes of the share, the answer in this case is the same as that suggested by Lord Watson in the case where the money paid up on the share is returned to the shareholder. He says, at p. 424, " In the event of the company continuing to hold the shares (as in the present case) the amount paid up is permanently withdrawn from its trading capital." But further, and apart from the question of sale or trafficking in a company's own shares, I think the reasoning in Ooregum Gold Mining Comfany of India v. Rofer (1892, A.C. 125) establishes that to release a shareholder from any part of his obligation to pay the uncalled-up balance on his share is an ultra vires act on the part of the company. " It seems to me," says Lord Halsbury (at p. 133), " that the system thus created by which the shareholder's liability is to be limited by the amount unpaid upon his shares renders it impossible for the company to depart from that requirement, and by any expedient to arrange with their shareholders that they shall not be liable for the amount unpaid on the shares, although the amount of those shares has been, in accordance with the Act of Parliament, fixed at a certain sum of mone3^ It is manifest that if the company could do so the provision in question would operate nothing. I observe m the argument it has been sought to draw a distinction between the nominal capital and the capital which is assumed to be the real capital. I can find no authority for such a distinction. The capital is fixed and certain, and every creditor of the company is entitled to look to that capital as his security " ; and the opinions of the other learned Lords are to the same effect. The justification of forfeitures rests upon the statute itself, and I think that since Trevor v. WJiiiworth no authority can be relied on as justifying a surrender having the effect of reducing capital which cannot be supported as a form of forfeiture. It is not necessary to refer to Eichbanm v. City of Chicago, &=c., Company (1891, 3 Ch. 459), decided by my brother Stirling on the authority of Ex -parte Teasdale (L.R. 9 Ch. 54), as he will deal with those cases himself. In In re Denver Hotel Company (1893, i Ch. 495), Lord Justice Lindley, in supporting a surrender, relied on the fact, pressed by counsel in argument, that " the shares being fully paid up, their surrender involved no release by the company of any of its rights against the surrenderor," indicating thereby the possible importance of a release It is not, however, necessary to consider in this case whether a surrender, even of fully paid-up shares, could be supported. I am of opinion, therefore, that Mr. Justice Kekewich was right in his BELLERBY V. ROWLAND AND MARWOOD's STEAMSHIP 815 COMPANY, LIM. decision on the principal question in the case. Upon the second point, however, Mr. Justice Kekewich has held that, notwithstanding that the surrender of the shares was void as being an act ultra vires, still the application to restore the plaintiffs to the register must- be treated as being made under Section 35 of the Act of 1862, and that he was not satisfied of the justice of the case within that section, and he therefore refused to make the order. The learned Judge relied on the fact that so much time had elapsed since the surrender, and that it was conceivable that some persons might have altered their position on the footing that the capital of the company had been reduced, and, relying upon SichelV s case and the dicta of Lord Macnaghten in Trevor V. Whitworth, he held that the plaintiffs showed no equity in their favour to disturb the existing state of things, and therefore refused to rectify the register at their instance. The application in this case is not in fact made under Section 35 (if anything turns upon that), but is an action, asserting the legal right in the plaintiffs to be on the register, on the ground that the act whereby they were removed from it was ultra vires, and therefore a nullity. Sichells^ case did not relate to an act ultra vires of the company, and in Lord Macnaghten's observations in Trevor v. Whitworth on In re Dronfield Silkstone Coal Comfany he treated the application as made by one who had no equity to set the Court in motion. Here it seems to me that in point of law the plain- tiffs never ceased to be the legal owners of the shares, and therefore are not obliged to rely upon an equity to have the register rectified. Nor, on the other hand, can the company set up lapse of time or acquiescence as validating that which was in its essence incapable of being made valid, being, as Sir G. Jessel, Master of the Rolls, pointed out in the Dronfield case, void and not voidable only. The Scotch case, General Property Investment Comfany and Matheson'' s Trustees (Court of Session Cases, 4th Series, Vol. 16, p. 282), is an authority directly in point on this part of the case, unless the fact of liquida- tion makes a difference. An action was there brought by the liquidator to place on the register a shareholder who had sold his share to the company at their instance many years before, and Lord Shand, in dealing with an argument based on Section 35, said (at p. 291), " If the legal right of the company be clear, then it follows that the justice of the case requires that effect shall be given to that right." It seems to me, therefore, that the learned Judge's decision on this part of the case cannot be supported, and that the appeal nuist be allowed. Lord Justice Stirling read a judgment, in which he said that he had arrived at the same conclusion on both points, though not without some doubt upon the first. Lord Justice Cozens-Hardy read a judgment to the same effect. {Times, 5 May 1902.) 8l6 AUDITING. The case of BOALER v. THE WATCHMAKERS' ALLIANCE AND ERNEST GOODE'S STORES, LIM., AND OTHERS. (Decided by Swixfex-Eady, J., in the Chancery Division, on January 28 1903.) Held that the resfonsihility of Directors for Dividends im-pro-perly ■paid out of Capital ceases -when the deficit has been made good out of sithsequent Profits. This was an action brought by the plaintiff, Bernard Boaler, suing on behalf of himself and all other holders of ordinary shares in the com- pany, against the company and its directors. There were various other cioss-actions and motions which were heard by his Lordship at the same time. The general nature of the case, and of the facts upon which it was based, ma}- be gathered from the following JUDGMENT. His Lordship said the first case was that of Boaler v. The Watch- makers'' Alliance and others. In this action Bernard Boaler was the plaintiff, and sued on behalf of himself and the other shareholders of the company, other than the defendants Cochrane, David, Rooker, Miller, and Oldfield. Plaintiff sought to establish that the allotment end issue of a block of shares was ultra vires, and asked for a rectifica- tion of the register. In the claim 27,500 were mentioned ; but in the opening of the case the immber was reduced to 13,208. Plaintiff also sought a declaration with regard to two sums of ;!^42,ooo and ;,^i5,ooo; but this was treated as struck out. Plaintiff also sought a declaration that dividends paid in 1897 and 1898 were improperly paid out of capital, and that the defendants should repay the amount to the com- panjr, and for a general injunction to restrain further dividends out of capital. The action was really divisible into two branches — one a claim in respect to the issue of 13,000 odd shares, alleged to be ultra vires ; and the other with regard to alleged improper payment of divi- dend out of capital. The plaintiff, Boaler, acquired 20 preference shares and 40 ordinary shares in the companj' on May 27 1902, and the writ was issued in the action on June 23. He acquired the shares from Leslie Morse, against whom Cochrane had obtained judgment. Therefore, within four weeks of plaintiff acquiring the shares the writ in the action was issued, and a claim made in respect of matters which occurred long anterior to the plaintiff becoming a shareholder. Plain- tiff had not given any evidence himself, though making allegations against the other defendants, and specially against Cochrane, alleging vociferously that Cochrane was afraid to go into the box. But in the result Cochrane had been examined, and the plaintiff had not gone into the box. He (the Judge) was quite satisfied that plaintiff Boaler had BOALER V. THE WATCHMAKERS' ALLIANCE AND ERNEST 817 GOODE's STORES, LIM., AND OTHERS. no merits whatever. It was a purely technical case. The transaction on which plaintiff based his claim was recorded in the minutes as follows: — "Cochrane reported that a friend of his had purchased 27,500 ordinary shares, and as the cheque for the amount was large he had brought it personally. The shares were allotted to E. Lyons. Cochrane then said he would be glad of some ready money as part payment of the business, and asked that this cheque should be paid to his credit, to which the directors agreed." Plaintiff's allegation was that with regard to 13,000 of the shares, plaintiff said they were unpaid, and that the issue of them by the directors was ultra vires. He tried to make it out by calling Mr. Lyons, who produced the cheque in question, and said it was never presented for payment and never cashed. Lyons said he was approached by letter b}' Cochrane, who said he wanted to take up 27,500 shares in the company, but did not want his name to appear, and asked if Lyons would appl}^ for them, Cochrane promising to indemnify Lyons for the cost. Lj'ons said he bought the shares, and transferred some of them at Cochrane's request, leaving a balance of some 12,373. Those he transferred to Cochrane, which concluded the transaction. Lyons said he also accounted for the dividend to the persons interested. He said: "I refused to become a shareholder except on Mr. Cochrane's indemnity." That was all the evidence called by plaintiff. Defendant called Colonel Haddon and Mr. J. David. They said they knew Mr. Lj'ons as Mr. O. — a firm which had large dealings in the trade — and they looked on the cheque as a bond 'fide one, and that it was a good transaction for the company, as they had to pay 6 per cent, on the unpaid purchase-money. Colonel Haddon said he had no reason to doubt that Lyons' cheque was cashed, and that he was not in the least suspicious that it was not a bond fide transaction. He also said the agreement between Cochrane and the company was sealed on June 29. The result of that was that there was an agreement for the sale of the business of the company duly entered into and sealed. It was, no doubt, in existence, though it seemed to have been mislaid. At the date of the allotment to Lyons of the shares (July 8) there was a sub- sisting contract between the vendor and the company, under which the company were liable to pay the purchase-money for the business. There was also an application for 27,500 shares, which the directors bond fide believed to be in order, and at the same time the vendor offered to take the cheque for the shares in part payment of the purchase-money. That was to the relief of the company, as it saved them 6 per cent, interest. He entirely accepted what Colonel Haddon and Mr. David had said, and on that footing he was of opinion that the shares allotted to Lyons were to be treated, and must be accepted, as fully paid. It was wholly G G G 8l8 AUDITING. inaccurate to say that the company received no value for the 27,500 shares, and it was idle to suggest that. That was sufficient to show that the plaintiff, endeavouring to question a transaction which took place years before he joined the company, on a technical ground, failed on the technicality, and that alone would be sufficient to dispose of the action on that ground. Therefore the plaintiff's claim that the shares allotted to Lyons were allotted ultra vires was misconceived, and wholly failed. He next claimed that dividend was paid out of capital. The Profit and Loss Accounts had been regularly made out by qualified persons, and plaintiff had adduced no evidence to show the accounts were irregular or improper ; but he sought to make out his case by reference to two sums of £,1,000 and ^10,000. In the first year of working there was an interim dividend paid out of net profits, and there was a reserve of ;i{^7,ooo, which was obtained by considering the business as worth _;i^92,ooo, when only ;;/"85,ooo was paid for it. He was of opinion that ' \ this was improper, and ought not to have been done, and if dividend had been paid out of it and had not been restored, the plaintiff would have been right in his action. But plaintiff had ignored the material fact that Mr. Dicksee (one of the auditors) required this money to be written back and the amount used for dividend restored, and this had been done. He was therefore of opinion that plaintiff had shown no ground for saying that dividends had been improperly paid out of capital. The other question was with regard to 10,000 shares trans- ferred from Cochrane to three other directors, and plaintiff contended that was an irregular arrangement. But that was a fallacy- The purchase-price standing at ^,^85,000, Cochrane was willing to assist the directors by reducing it ;/.'iq,ooo, and he did this by surrendering 10,000 shares to the directors, which stood for the time in the directors' names. Mr. Boaler suggested, without a tittle of evidence, that this _;^io,ooo was not represented b}^ available assets. That was an idle suggestion, and so far as the evidence was concerned it was the other way, the business being fully worth the price paid for it. Plaintiff further suggested there was no net profit, as no allowance had been made for depreciation ; but he did not prove there was any deprecia- tion to provide for. The evidence was, in fact, the other wa)'. The result was that in so far as plaintiff claimed a declaration that the divi- dends had been paid out of capital, it had been established before the Court that the dividends were paid out of profits, and that the ^^7,000 item, on which the claim was based, had been written back. There was nothing in the item of _;i^io,ooo. The plaintiff therefore wholly failed, and the only order that he would make would be to dismiss the action, with costs. il REX V. WHITAKER WRIGHT. 819 In the case of Boalcr v. Cochrane, plaintiff sought a declaration that defendant vacated his office as director in 1S97, as on that day he accepted a place of profit under the company. If he failed on that point, he sought a declaration that Cochrane ought to have retired in igoi, and that, as he was not re-elected on that date, he was no longer a director, and also that he could not vote in regard to certain shares, as there was money due and payable on them. The plaintiff's action in this case also wholly failed, and must be dismissed, with costs. In the case of Old field v. Cochrane and Cochrane v. Old field the questions raised were questions of internal management, and could be dealt with by the company in general. Both these actions would stand over a sufficient interval to allow a meeting of shareholders to be held. The motion in re the Companies Acts, he understood, was to be treated as abandoned. Mr. Boaler now asked his Lordship to impound all the documents in the case. There would be a prosecution, and, that being so, he asked his Lordship to impound the documents. His Lordship said he saw no reason whatever to impound the docu- ments. They were produced quite readily, and he thought the proper course would be to give them back to the parties who produced them. [Acct. L.R., 1903, p. 23.) The case of REX v. ^YHITAKER WRIGHT. (Decided before Bigham, J., and a Special Jury, in the King's Bench Division, on January n 1904.) Prosecution of a Comfany Director under the Larceny Act, 1861, ss. 83 dr= 84. — Falsification of Accounts. The main facts of this lengthy case will be gathered from the Judge's summing up, which is reproduced below. His Lordship, after congratulating the jury on the ending of the case, and counsel on both sides for the careful way they had dealt with the masses of evidence, said the charge against the defendant was in sub- stance one of having issued in connection with the Globe Company two false and fraudulent Balance Sheets. The charge, however, was divided into no fewer than twenty-six different heads, and before they could find the defendant guilty they must be satisfied that the prosecu- tion had brought home to him one or more or all those separate charges. To these counts it would be his duty to call their special attention, because he was going to ask them to find a general verdict of " guilty " G G G 2 820 AUDITING. or " not guilty." If they found a verdict of guilty, they would tell him whether in their opinion the evidence was not sufficient to support the charge of any particular count. It was a serious charge — a very serious charge — against the defendant, and they ought not to find him guilty unless they were satisfied beyond all reasonable doubt of his guilt. There was one thing more. It had been said by Mr. Walton that a verdict of guilty against the defendant would involve in some sense a similar verdict against two eminent gentlemen — Lord Loch and Lord Dufferin — who were dead and gone. It would not do anything of the kind. They had not heard what these gentlemen had to say, or what could be said on their behalf. Their conduct, so far as they knew this case, was consistent with their having honestly made mistakes or with their having been simply negligent in matters with which possibly they were not so conversant as was Mr. Whitaker Wright. Let them not be deterred from finding the verdict which they thought they ought to find simply because it was suggested that by so doing they might cast a slur upon people who were dead. They had to decide the question of Mr. Whitaker Wright's guilt or innocence only with reference to the evidence before them. There was another observation. It was said as a reproach, he understood, that the prosecution had not called in support of their case some witnesses — particularly Mr. Lehmann, Mr. Macleay, and General Calthorpe — all of whom were alive. The least thought would show them at once that this complaint was one which was not borne out. Had they been able to throw any light on the case favourable to the defendant, Mr. Whitaker Wright was the person to have called them, and not the prosecution. They were available, they could have been called, and Mr. Whitaker Wright had not thought fit to call them. It was said again that the charge was a stale charge. Mr. Walton reproached our legal system, which included no provision similar to that under the civil law, that after a certain period a man could not be vexed b}' actions. Our criminal law allowed, and in his opinion properly so, no lapse of time to shield a man from the con- sequences of his crime. It would be a lamentable thing if it were otherwise. It was the object and interest of a criminal always to conceal his crime, and if he could successfully conceal it for a few years, as many could, he could then say that the time had gone by when he could be prosecuted, and he would escape. However long a man's crimes might be hidden from view, when they came to light, according to our criminal law, as he thought properly, the man was responsible to that law. He had disposed of these few topics, which were topics of prejudice that probably might influence their mind, and he begged the jury to discard them, and address themselves entirely to the evidence, so far as it touched Mr. Whitaker Wright, with the object of seeing REX V. WHITAKER WRIGHT. 82 1 whether the charges were successfully and clearly brought home. The offences with which Mr. Whitaker Wright was charged were contained in the 84th and 83rd Sections of the Larceny Act of 1861. He put the sections in inverse order, because the first eighteen counts of the indict- ment were under Section 84, which made it a misdemeanour on the part of a director, manager, or officer of a public company to circulate or publish, or concur in making or circulating or publishing, an}' false statement of account with intent to deceive and defraud. Section 83 referred to falsifying the books and making entries in them, knowing them to be false. Of the eighteen counts under Section 84 nine related to the events of 1899, and nine to the events of 1900. Of the nine relating to 1899, four referred to the Balance Sheet and report of that year. The question they had to consider with reference to the 1S99 Balance Sheet was whether it was false in the particulars mentioned in the counts of the indictment ; were those particulars material ; did the defendant know them to be false ; and did he publish the document with intent to receive and defraud. The Judge, referring to the formation by the London and Globe of the British America Corporation and the Standard Exploration Com- pany, pointed out that in little less than twelve months ;;^4oo,ooo on paper had become ;^5, 000,000 on paper. This struck him as a most singular state of things. Mr. Walton explained that the Standard and British America were new properties. Mr. Justice Bigham said he was now told that these were new pro- perties, but the jury had not previously heard that they were new ptoperties, nor had they heard of any value put upon these properties which would stand at the back of this enormous increase of capital. But there it was. The jury must exercise their wisdom and discretion, and ask themselves what sort of a business was this which developed in this way? It was said that the cash position of the London and Globe, as shown in the Balance Sheet of 1899, was due to "the aim of the directors, extending over twelve months, to strengthen and maintain the position of the company during the past year." It was said by the prosecution that the statement as to the cash balance was untrue — that the transactions had not extended over the whole year, but that this vast sum of money had been brought together as the result of transac- tions hurriedly gathered together in two days, and had really nothing to do with " the aim of the directors, extending over twelve months, to strengthen and maintain the position of the company during the past year." The jury must use their common sense in dealing with this 82 2 AUDITING, matter. Was it the result of hurried schemes and transactions rushed in at the last moment before the Balance Sheet came into existence, and entered into for the mere purpose of enabling them to make a statement such as that laid before the shareholders ? That was the representa- tion relied upon in regard to this particular Balance Sheet. The jury must ask themselves whether the statement was really true, or whether it was a lie covered with the garb of truth. It would be necessary to draw the jury's attention to the way in which the money was got together. On September 29th the London and Globe had at its bankers about ;,{^8o,ooo. It called in a loan of ;/.'84,ooo, which was quite legiti- mate, and also got /.'i7o,ooo by a legitimate transaction in Nickel shares. The}^ did not want to borrow, because the debt incurred would have to go into the liabilities. The money was raised by sales of property, for which a liquid asset, or cash, was gained. On Septem- ber 29th Mr. Wright, managing director of the Standard Company, signed a cheque in favour of the London and Globe for ^^i 73,000, and that was paid into the bank, and formed part of the ;,^534,ooo in the Balance Sheet. The Globe sold 11,000 Lake View shares on the market, while the Standard Company bought 4,328. Then the Globe came to the conclusion to make the Standard Company their buyers, instead of the outside market. The Standard Company did not get all the shares, but they got a good many. All the Globe apparently had at that time was 3,048. Mr. Wright, however, came to the rescue by lending 2,938 of his own shares. With that assistance the number was made up, and the Standard Company gave a cheque for ;,^i5S,ooo. That transaction was undone in a few days when the Balance Sheet was made up. Was it honestly a business transaction? Could it be justified by any code of " window-dressing " or any other code? The jurj?- must decide whether all that was done for the mere purpose of swelling the cash balance in the Balance Sheet and so deceive the shareholders. That was what took place in September and was discussed at the meeting in October. Within a month they were told that that great flourishing institution, paying 10 per cent, upon two millions of capital, showing ;^5oo,ooo placed to the Suspense Account, and a profit something like a quarter of a million in twelve months, was in such a state that if Mr. Wright had not come to its help by lending it ^300,000 it would have come to the ground. In i'ebruary 1900 it came out that the Globe had lost three-quarters of a million of money, and its allied company, the Standard, had lost another quarter of a million. Those gambling con- cerns, for they were nothing else, had squandered those sums — lost them, if they liked. Perhaps the indignation he felt when he thought of those transactions induced him to use language that was too strong. The Globe was in that state at the end of the financial year, September REX V. WHITAKER WRIGHT. 825, 30th 1900. Another gamble was started — another ring was formed by the creation of a syndicate. Had the unfortunate shareholders any notion of this ring? It was carefully concealed from them, and Mr. Wright said it was perfectly right to conceal the fact, not only from the public, but from the shareholders. How it could be said, with reason, that when September 30th came, and the company was insolvent, it was the duty of Mr. Wright, or of anybody, to go on, and, in vain, attempt to retrieve the position of the company by speculating in Lake View shares, and to delay the publication of the Balance Sheet until that transaction had been made, he could not conceive. He entirely dis- agreed with the suggestion that it was his duty to the shareholders tO' delay the publication of that Balance Sheet. What was the extra- ordinary result of the transactions between September 30th and December i^th--two months? If the jury looked at the Balance Sheet, the}^ would find that the company, which Mr. Wright himself said was insolvent on September 30th, had to the credit of its Profit and Loss Account ;^463,670. Let the jury observe the extraordinary state of things — a company admitted to be insolvent on September 30th, two months afterwards was not only solvent, but had a surplus of ^,^463, 000 T Was it credible ? And that Balance Sheet was produced at the meeting of December 17th, and put forward then as representing the position of the company. In ten days the company was hopelessly bankrupt, and it had since failed to pay its creditors. Those were the salient facts relating to the 1900 Balance Sheet. Let the jury consider' how the position had been changed in two months, October and November 190P — how had it changed so that the company which was insolvent on September 30th had on December 5th nearly ^,^500, 000 to its credit? It arose out of a number of transactions, the like of which he, in a long experience, had never heard. On November 23rd 1900 the Globe had agreed to form a compan}'- called the Loddon Valley Gold Estates. The Globe guaranteed to find ^1^50,000 of the capital of the new company, and in return got from the Victoria Company a property which had been referred to as the Option Block. It was not said what the pro- perty was really worth, but they were told that it had been sold for ;fio,ooo. On December 4th the Globe found a purchaser for ;^i 00,000 — the Standard Exploration Company. They knew nothing of any report being before the Standard Company to show that the pro- perty was worth 100,000 pence. This Option Block came to the Globe when it was, so to speak, in extremis, and the ^^100,000 went into its Balance Sheet. Was that honest ? Could it be justified? The common sense of the jury would decide, ^^'hat was the next item? On November 6th the British America Corporation had formed a company called the Columbia Proprietary, with a capital of ;ir35o,ooo, and had 824 AUDITING. received from the Columbia Proprietary ;^3oo,ooo of its shares. These shares, like the " Option Block," were taken at once, and put into the Balance Sheet of the Globe. So far as they knew, there was nothing to show that the shares were worth any substantial sum. It was on December 4th — the day before the Balance Sheet was issued — that the ;,^i5o,ooo shares were allotted to the Globe. Next there was the com- pany called the Victoria Gold Estates Company, from which the Option Block came. In November 1S99 the property of the Victoria was divided into halves, and two companies were formed, each with a capital of _2{^75o,ooo or ^1,500,000 in all. A property still in a state of development suddenly became represented by shares of the face value of _,^i,5oo,ooo. What then? By a series of operations the Globe got hold of the Standard's ;!f35,ooo of shares, and of the British America shares at par, and so got into its hands /^2oo,goo of shares, becoming entitled to the whole of the four-sevenths. It then carried all these shares into its Profit and Loss Account at their par value, and so created a profit of ;^56o,ooo odd. There was a good deal of delay, which did not astonish him, Mr. Justice Bigham went on, in getting all the facts. The Attorney-General had declined to authorise a prosecution at the public expense ; but he took his line of action on facts less com- plete than those which had been brought before the Court. Further- more, the Attorney-General's view was that the shareholders who complained were the people who should prosecute, and not the public general^. What happened when the matter was before the Attorney- General the jury ought to dismiss from their minds altogether. After going to America, when the prosecution had been authorised, Mr. Whitaker Wright resi'sted extradition proceedings in America, thoi5gh as soon as he landed he telegraphed to the Official Receiver expressing his willingness to return at once if he could be permitted to do so as a free man. On the whole, the Judge suggested, the jury might strike out the whole of the controversy as to whether Mr. Whitaker Wright did or did not " run away." VERDICT. The jury found the defendant guilty on all counts. Mr. Walton then addressed the Court in mitigation of punishment, pointing out that previously to the present charges no imputation of any sort had ever been made against the defendant's integrit}' of character. The Judge, in passing sentence, said : — In my opinion, the jurj* could arrive at no other conclusion than that which they have expressed in their verdict. I confess that I see nothing that in any way excuses the crime of which you have been found guilty, and I cannot conceive of a worse case than yours under these sections of the Act of Parliament. TOWERS V. AFRICAN TUG CO., LIJM. 825 In these circumstances I do not think I have any option except to visit you with the severest punishment which the Act permits, and that is that vou go to penal servitude for seven years. (AccL L.R., 1904, p. 13.) The case of TOWERS v. AFRICAN TUG CO., LIM. (Decided by Vaughan Williams, Stirling, and Cozens-Hardv, L.JJ., in the Court of Appeal on March i 1904.) Held that Shareholders who have received Dividends iuifroferly -paid otit of Capital cannot maintain an Action against the Directors who caused such Dividends to be -paid. This was an appeal by the defendants against the decision of Mr. Justice Byrne, which was delivered on the 6th November 1903. The plaintiffs in this action were Mr. W. H. Towers, formerly secretary of the company, and Mr. P. Wedlake, a director of the company, and the plaintiffs sued on behalf of themselves and all other the share- holders of the company, except such of them as were defendants, join- ing as defendants the company, and the other two directors, named Alexander and Wood, and claiming payment by the defendant directors to the company (i) of £27 S which it was alleged that the defendants ought to have recovered against an ex-director, instead of compromising with him; {2) /.127 10s. alleged to have been wrongh' paid as a divi- dend out of capital. All the other shareholders afterwards obtained an order joining them as defendants, and alleging that they acquiesced in both the compromise and the dividend. There was a counterclaim against the plaintiffs, in case they succeeded on the dividend point, to recover from them the shares of the dividend received by them, and they did not dispute their liability to refund these amounts. At an early stage of the hearing the learned Judge held that the first claim could not be sustained. The facts relating to the payment of dividend out of capital were thus stated by the learned Judge. The company was incorporated in i8q6, and the plaintiffs' claim was for payment into the company's coffers by the defendants Alexander and Wood, as the com- pan3''s directors and its trustees, of the sum of ;!fi27 los., the amount of an interim dividend paid to the shareholders but never earned. The company had carried on business from 1896, and there were three directors, the defendants Alexander and Wood and the plaintiff Wedlake. Two directors were a quorum, and the plaintiff Towers was secretary to the company. In March 1900 the circumstances were as follows : — On the Balance Sheet for 1899, made up to July 31 1S99 (the end of the company's financial year) there was a debit balance of 826 AUDITING. ^{^756 los. lid. In certain correspondence in March 1900, between Alexander and Towers, the secretary, Towers recognised that from August I to December 31 1899 the company had made a profit of ;^3oo, but contended that until the debit balance was wiped out payment of the interim dividend then proposed would be paying it out of capital, and that this would be illegal. Alexander and Wood took the other view, and the dividend was shortly afterwards paid on the faith of a resolution signed by them, Wedlake taking no part in this. On the assets side of the Balance Sheet, up to July 31 1900, there was an item of " Dividends not earned, ^127 los.," and to make this side of the account balance with the other side (liabilities) there was an item, " Profit and Loss Accgunt, as at July 31 1899, ^756 los. iid., less profit for 3'ear, ;/?245 iSs. 4d. = ;^5io 12s. 7d." The Balance Sheet, with these entries, was approved by a meeting of the directors, and also by a meet- ing of shareholders in September 1900. The meetings had also before them a report of the Auditor, explaining the insertion of these items, and stating that the interim dividend was unearned, and it was illegal to pay dividends unless they were earned, and that directors were liable in such a case, as it amounted to paying dividends out of capital. The entries in the Balance Sheet were in accordance with the mode in which the company's accounts had hitherto been kept. Mr. Justice Byrne held that the defendant directors must replace the ^^"127 los., with interest at 4 per cent. His Lordship said that the plaintiffs had allowed a con- siderable time to elapse before complaining of these matters, but they now asked that the defendant directors might be ordered to pay the company the amount of the interim dividend. The act complained of was ultra vires and the directors concerned in it were liable to the com- pan}- in respect of it, and the fact that one of the plaintiffs was party to what was done did not stand in the way ; and this seemed to be the case, although shareholders who received their shares of the dividend knew of the illegality. Towers, of course, would have to repay the divi- dend received by him. Article 36 authorised dividends to be paid to "the members according to their rights and interests in the profits," and Article 37 empowered the directors from time to time to " pay to the members such interim dividends as in their judgment the position of the company justifies." There was no question as to the dividend having been paid honestly or bond fide, but his Lordship said he must accept Mr. Norton's argument on this point. The directors knew from the books that there was no profit available for the interim dividend. They knew that for some months profits had been made, but that did not justify the payment. The plaintiffs came here insisting on the legal rights of the compan}' to have the amount replaced. His Lordship could not say that Wedlake, suing on behalf of the shareholders, was TOWERS V. AFRICAN TUG CO., LIM. 827 not entitled to complain, and there must be an order on the defendant directors to replace the ^127 los., with interest at 4 per cent. But his Lordship understood that the compan}' had lately had a windfall which at the end of the 3^ear would enable the whole of the deficit to be made up, and he thought that the accounts might be put in a form which would render it unnecessary to have the ^^127 los. actualh^ repaid. The order must not, therefore, be acted on until after the next general meeting. The defendants were entitled to judgment on their counter- claim for the portions of dividend received by the plaintiffs, but this order would be stayed in like manner. The defendant directors appealed. Jl'DGMEXT. Their Lordships allowed the appeal. Lord Justice Vaughan Williams upon the whole did not think that the plaintiffs were entitled to relief. It was perfectly clear that they were aware of all the facts when they took the dividend. What, then, ought to be done with this action ? There was no doubt that the payment of this interim dividend was ultra vires. One must start with the assump- tion that, if an act was done by a company which was ultra vires, no acquiescence in or ratification of that act by the shareholders could convert that which was ultra vires into that which was intra vires; it must be ultra vires. Now, if it was the fact that the plaintiffs knew of all that had been done, and had received dividends with full know- ledge of all the circumstances, and then brought this action, ought they to be allowed to maintain the action? His Lordship thought not. He thought that an action could not be brought by an individual share- holder complaining of a matter which was ultra vires if he himself had in his pocket at the time he brought the action the proceeds of the act which was ultra vires ; and in the same way it did not alter matters if he was suing for himself and other shareholders. Now, this dividend was in the pockets of the plaintiffs when the action came to be brought, and his Lordship felt bound to say that in this particular case there was a strong inclination in his mind not to give the plaintiffs the relief they asked. The fact of the payment of the dividend out of capital appeared on the face of the Balance Sheet, and the directors were minded to replace that capital, and had every prospect of doing so, even out of that very year's profits. This action was wholly unnecessary and wholly uncalled for ; and his Lordship was of opinion, under the circumstances, that the Court was not bound, when it saw that the act ultra vires was in course of being put right, and would be put right, to accede to the plaintiffs' contention. This appeal should, therefore, succeed. 828 AUDITING. Lord Justice Stirling also thought that the appeal should succeed. This was a case in which no one suggested that there had been any fraud or dishonesty on the part of the directors or anyone else. The directors had, in paying the dividend out of capital, made a mistake, and no one charged anything against them but mistake. The facts were perfectly open upon the Balance Sheet, and of course they there appeared. And further, the subsequent dealings seemed to show that the companjr did not intend to overlook the fact that this dividend had been improperly paid, and that there was no intention on the part of anyone but to do what was right and to pay back to the company what had been improperly paid. Such, in his Lordship's opinion, was the result of the Balance Sheet. Moreover, it appeared that the plaintiffs themselves had acquiesced from September 14 1900, when the com- pany knew the facts, down to March 1903, when this action was brought. His Lordship thought that the proper inference was that the company was to go on and wipe out year by year parts of the deficiency, and that they intended when this improper dividend had been replaced to go on paying a proper dividend. There was no ground on which the Court ought to compel payment of this small sum ; and, in truth, Mr. Justice Bj^rne, although he gave judgment in favour of the plaintiffs, so far from directing immediate payment, ordered that it should not be enforced, in order to see the result of future trading, and whether the sum would not be wiped out. That, it seemed, would have been done even if the action had been dismissed. Lord Justice Cozens-Hardy was of the same opinion. It was clear that a payment by the directors of a company of a dividend out of capital could not be ratified by the shareholders. An action arising out of an act ultra vires ought properly to be brought by the company ; but it had long been well established that there were cases in which such an action could be maintained by a shareholder on behalf of himself and other shareholders against the company as defendant. His Lord- ship would not pause to consider under what circumstances such an action could be maintained, but he thought that the present was such an action as could be maintained in point of form. But an action of this kind must be brought by a person who was reall}' interested ; and it had been clearly proved here, and indeed admitted, that the plaintiffs took this dividend with full notice of all the facts. It was also clear that this dividend, which they took with full notice that it had been paid out of capital, they had in their pockets at the time the action was commenced. Now, could a shareholder who had the money in his pocket maintain an action against the directors for repayment of the dividend on the ground that it had been paid ultra vires? His Lord- ship thought he could not. It might be that there was no direct SHORT AND COMPTON V. BRACKETT. 829 authority upon the point, but the dictmn of Lord Justice Brett in Tlitcroffs case (21 Ch.D. 519) was, though only a dictutn, very nearl)' in point. The Lord Justice said this (p. 534) : — " I think that there was no ratification at all, because the assent of the shareholders was procured by improper accounts, the untruthfulness of which the share- holders did not know. But suppose they had known it, I think that what was done was a breach of trust which they could not ratify. If the}' had with full knowledge assumed to ratify what was done, they could not individually have complained, but the shareholders are not the corporation." Lord Justice Brett assumed that a shareholder who had ratified could not individually have complained ; and it was equally true that a shareholder vv^ho had the money in his pocket could not have any greater right merely because his action was hy himself and on behalf of all other shareholders. In fact, he must succeed if at all b}' his own merits and not bj- the merits of others. Plis Lordship thought that the judgment of Mr. Justice Byrne in the action must be set aside, and that there should be judgment for the defendants upon their counterclaim, with costs. (20 Times Law Reforts, 292.) The case of SHORT & COMPTON v. BRACKETT. (Decided by His Honour Judge Tindal Atkinson, in the Colchester County Court, on 6th May 1904.) Held that an Accountant making an Investigation of Accounts for an Incoming Partner is entitled to assume that the books are correct. Messrs. Short & Compton, Chartered Accountants, of Colchester, sued Mr. Brackett, of the Hythe ironworks, to recover 30 guineas for services rendered in the preparation of certain accounts, and there was a counter- claim for ;^"i39 damages for alleged negligence on the part of the plaintiffs. Mr. Jones said !Mr. Brackett was proposing to take a partner, and employed the plaintiffs to prepare accounts from his books, which would show the amount of the profits and the goodwill. The return furnished by Messrs. Short & Compton showed that the profits during a period of three years and two months had been £g2(^. Nine months afterwards Messrs. Short li: Compton sent in their bill, when Mr. Brackett wrote stating that he had recently discovered that, during the period covered by their investigation, a certain clerk of his was deficient in his account to the extent of ^^nij and alleging that, owing to plaintiffs' failure to detect this he had lost in the same way another 830 AUDITING. _p^i28. He added that, under the circumstances, he declined to pay plaintiffs' account. Mr. Jones added that the clerk mentioned, " who appeared to have since been allowed to abscond," seemed each week to have made out the wages bill for a larger amount than was due to the men, and had himself kept the balance. This, Mr. Jones urged, could not have occurred but for the slipshod wa}' in which Mr. Brackett kept his accounts. Messrs. Short & Compton, replying to Mr. Brackett's letter, stated that they were in no sense responsible for the entries in the books — their responsibility began and ended in putting before Mr. Brackett the result of his trading. Mr. Compton said he was not instructed to audit, but merety to make up the accounts required from the books. Mr. \V. M. Blake corroborated. Mr. C. W. Cornish, Fellow of the Institute of Chartered Accountants, said that in the case of preparation ot a Balance Sheet from books the totals in the books would be assumed to be correct without investiga- tion, and it would not be the duty of an accountant to examine vouchers, in which term he included Wages Books. Mr. Macklin urged that one of the primary duties of an accountant was to ascertain that accounts were accurately kept. Mr. Brackett placed before plaintiffs all his books, and asked them to make a thorough investigation. With regard to the disappearance of the clerk alluded to, defendant said he sent him off on the day he discovered the deficiency. Called for the defendant, j\Ir. Ernest H. Frith, a member of the Institute of Chartered Accountants, of London, said he considered that it was the duty of an accountant, when making up accounts in connec- tion with the admission of a new partner, to investigate vouchers and the ^^'ages Book. He agreed that the Wages Book was of the nature of a voucher and in the present case could not be treated as a book of account. Cross-examined : The fact that the principal of the business himself drew the wages cheques would make no difference to his desire to see the Wages Book. JUDGMENT. His Honour Judge Tindal Atkinson held that, having regard to the object for which they were employed, the plaintiffs were entitled to assume that the figures appearing in the defendant's books as paid for wages were correct, and in view of the fact that at the time there was THE LONDON OIL STORAGE COMPANY, LIM. V. SEEAR, 83 1 HASLUCK AND CO. no suspicion of any defalcations by the defendant's clerk alluded to, he thought there was no negligence on their part. Therefore judgment would be for plaintiffs on the claim with costs, and the counter-claim would be dismissed with costs. {Acct. L.R., 1904, p. 85.) The case of the LONDON OIL STORAGE COMPANY, LIM. 7'. SEEAR, HASLUCK & CO. (Decided before Lord Alverstone, C.J., and a Special Jury, in the King's Bench Division, on ist June 1904.) Held thai it is the ditty of the Auditor of a Com-paiiy to take f roper steps to verify the existence of Assets stated in the Balance Sheet. This was an action for damages for alleged negligence in auditing the plaintiff company's accounts. The defendant firm denied that they had been guilty of negligence, and said that the alleged loss of £-](iO had been caused by negligence on the part of the directors of the plain- tiff company in entrusting so much money to their cashier. Mr. Bankes stated that the defendant firm consisted of a Mr. Hasluck, who for many 3-ears had been the Auditor of the plaintiff company, which was incorporated in 1885 to take over a business, till then carried on by Ingall, Phillips & Co., consisting in the storage and lighterage of oil. The plaintiff company had three wharves on the river Thames — • Palmer's, Melhuish's, and Dudgeon's. The defendant had been the Auditor of the company from the first, and it was his duty under the articles to audit the accounts and " to certify the correctness of the financial statement " for the purpose of the yearly Balance Sheet, in which there appeared a sum representing cash in hand, and it was in reference to that sum that the plaintiffs alleged that Mr. Hasluck, through his clerks, had been guilty of negligence. One of the officials of the company had been a Mr. Frederick R. Clarke, who had been taken over from Messrs. Ingall when the company was formed, and who had at first been bookkeeper and cashier, but was later also appointed secretar}' at the city office. At that office a Petty Cash Book was kept, in which the cash balance appeared, and Mr. Hasluck's clerks entered in the Balance Sheet the amount of petty cash that appeared in the Petty Cash Book, but they never troubled to find out whether Mr. Clarke had that balance in hand or not. Till 1902 nothing was suspected, but Mr. Clarke was then seized with a paralytic stroke and had ever since been in a pitiable state and could not be called as a witness. His duties were taken over by Mr. Hubble, who found in the cash box about ^ys, though the Petty Cash Book showed a balance 832 AUDITING. of £-g6, the balance having gradually increased from ;/'2i in 1897 to £~g(> in 1902. Mr. Hasluck's attention was called to the matter and he said that some people never saw further than their noses. Counsel sub- mitted that the circumstances were suspicious and ought to have put the Auditor on inquiry. Mr. Thomas George Redgrove, the plaintiffs' manager, gave evidence in support of counsel's opening. In cross-examination he said that Mr. Clarke had always been a trusted servant of Messrs. Ingall. Mr. Henry Thomas Hubble, who had been Mr. Clarke's assistant, and who succeeded him, stated that the Petty Cash Book was kept in a safe of which Mr. Clarke kept the key. When Mr. Clarke was there witness had no access to it. The only occasion when Mr. Clarke was absent for more than a day or two was in 1900. Mr. George B. Gane, a director of the plaintiff company, said that he had had complete confidence in Mr. Clarke. Witness never asked him how much cash he had in hand, nor did he look at the entries in the Petty Cash Book. Mr. Isaacs, for the defence, said that Mr. Hasluck had acted as Auditor at 35 guineas per annum, and this involved the attendance of his clerks at the office for six or eight weeks. In considering what his duties were, the amount of his renmneration ought to be taken into consideration. It was extraordinary that the directors never took the trouble to ask Mr. Clarke how much he had in hand. There was nothing to excite Mr. Hasluck's suspicions. 'I he directors were not suspicious, and yet they said that Mr. Hasluck ought to have been. An Auditor was entitled to act upon the representation of a trusted servant of the company. The plaintiffs had not proved that the money was not taken after the last audit. If it was, the Auditor could not have found out the deficit. Mr. Lawrence Hasluck said that he had no reason to doubt Mr. Clarke. Witness knew the confidence reposed in him by the directors. Witness having ascertained the creation of an asset by vouching items on both sides did not ascertain the actual existence of it. The amounts shown by the books to be in hand never excited his suspicion. Wit- ness's remark about people not seeing further than their noses referred to the directors, and not to his own clerk. Mr. Bankes : You audit the books of a good many companies? — Yes. I suppose your fees vary? — Yes. THE LONDON OIL STORAGE COMPANY, LIM. V. SEEAR. 833 HASLUCK AND CO. You get as much as you can? — Xo. I get as much as they will give me. (Laughter.) You do not suggest that your duties depend on the amount of 3'our remuneration? — No, but the Court of Appeal have suggested it. \Yitness considered that his duties ended when he had seen that the entries in the books created an asset. But if there was any ground for suspicion he should report the matter to the directors. The Lord Chief Justice, in summing up to the jury, said : Gentlemen of the jury, this is an important case, and the law on the matter you will be good enough to take from me. If I direct you wrongly I can be put right afterwards. It is your duty to take the law from me, but the facts will be entirely for you ; and if I, in the course of my address to you, indicate any opinion on the facts, do not think it is meant to dictate to 3'ou, but onl}^ to direct your attention to the points for your consideration as they occur to one having had some experience of accounts of this kind. The case is of importance, in the first place, to the parties themselves, because the claim made against a professional gentleman is for a con- siderable sum, some hundreds of pounds, and it is important for the reason Mr. Bankes points out, that it raises an important question as to the duty of Auditors. The best thing I think I can do to make it clear is to direct you as best I can as to the law of this case, and then go through the facts bearing upon the question of law, so that we may be able, if we possibly can, to keep our heads clear in considering how the case has to be dealt with. Now, there are two or three matters which I think you should dismiss from your minds altogether. You have not to consider for a moment whether Mr. Hasluck has been sufficiently remunerated or not. ^Yhat Mr. Bankes said is perfectly right. He has accepted the position and duties of an Auditor, and you have not to consider, aye or no, if he has had a sufficient amount, you have also not to consider as a substantive matter whether or not the directors have been negligent. I entirely agree with the view of the law as e.xplained to you by Mr. Bankes, that the Auditor cannot shelter himself for any breach of duty under the neglect of the directors ; he is there to do his duty to the company ; the ■only point on which the conduct of the directors may become material is upon the subordinate question as to whether there is anything to arouse the suspicion of the Auditor, and whether or not the loss has really been occasioned by the Auditor's conduct. H H H Sj-I AUDITING. Xdw, dismissing those two points, except so far as I may have to refer to one later on, let me tell you the duty of the Auditor. The Auditor is an officer contemplated by law to protect the interests of the company and its shareholders as such ; he is there having certain duties pre- scribed by Act of Parliament, certain powers prescribed by Act of Par- liament, and certain powers prescribed by the articles of association of this company. They may vary, but not very materially, in the case of different companies. We have simply to do with this company. The Auditor most undoubtedly does undertake very considerable responsi- bilities, and is liable for the proper discharge of his duties, and if by the neglect of his duties, or by want of reasonable care, he neglects his dut^•, and damage is caused to the company as such, he is responsible for that damage. I will not adopt any fanciful expression which may be quoted from any particular judgment, but he has got to bring to bear upon those duties reasonable and watchful care, he has got to dis- charge those duties remembering that the company look to him to protect their interests. He is not, however, supposed to be a man con- stantly going about suspecting other people of doing wrong, and that is the only respect in which, I think, Mr. Bankes in his most able speech pressed the matter a little too high. While Mr. Hasluck has by the exercise of due and reasonable care to see that all the officials of the company are doing their duty properly in so far as the accounts are concerned, he is not bound to assume when he comes to do his duty that he is dealing with fraudulent and dishonest people ; and there comes in the most important consideration from one point of view — perhaps more important than the other, though I do not think of such substantial weight in this matter — if circumstances of suspicion arise, it is the duty of the Auditor, in so far as those circumstances relate to the financial position of the company, to probe them to the bottom. Now, I have stated, I hope clearly, the general position of the Auditor, and I do not think it necessary to elaborate it at verv great length, beyond reminding you of certain specific articles, which in this particular case do prescribe the duty of the Auditor. I thought when Mr. Bankes opened the case, and I still think, he did not in any way overstate the duty that falls upon an Auditor in connection with such articles of association as these. Whether or not he has applied the rule correctly to the facts is a matter that you will have to consider later on. The articles provide : — '" Once in every year — namely, preparatory to each ordinary general meeting — the accounts of the company shall be examined, and the correctness of the financial statement ascertained by one or more Auditor or Auditors." The}- further provide that "every Auditor shall be supplied with a copy of the financial statement THE LONDON OIL STORAGE COMPANY, LIM. V. SEEAR, 835 HASLUCK AND CO. intended to be laid before the next ordinary meeting, and it shall be his duty to examine the same with the accounts and vouchers relating thereto." And further : " He may, at the expense of the company, employ accountants or other persons to assist him in investigating such accounts, and he may in relation to such accounts examine the directors or any officer of the company." Although this is written down in writing in these articles of association, which I gather were dated somewhere about the year 1885, they really do not do much more than put in plain and simple language that which would be the duty of an Auditor almost derived from his position, but it is of importance to remember that in order to strengthen in one sense the hands of Auditors, and at the same time to make it clear that their duties were not those of guarantors for the honesty of servants, were not an under- taking to the company that there had been no fraud or crime com- mitted upon them. Section 23 of the Act of igoo also specifies the duty of the Auditor in such plain language that I will venture to detain you for a moment by reading it to you : — " Every Auditor of a company shall have a right of access at all times to the books and accounts and vouchers of the company, and shall be entitled to require from the directors and officers of the company such information and explana- tion as may be necessary for the performance of the duties of the Auditors, and the Auditors shall sign a certificate at the foot of the Balance Sheet stating whether or not all their requirements as Auditors have been complied with, and shall make a report to the shareholders on the accounts examined by them, and on every Balance Sheet laid before the company in general meeting during their tenure of office ; and in every such report shall state whether, in their opinion, the Balance Sheet referred to in the report is properly drawn up so as to exhibit a true and correct view of the state of the company's affairs as shown by the books of the company." Now, you must not think that those words "as shown by the books of the company" excuse the Auditor from making proper inquiries into any particular entry in the books. The question always becomes, what, under the circumstances of the case, is a proper inquiry to make in every particular case ; and that is why, although it is quite easy for me to lay down to you in general terms what the duty of an Auditor is, it is very much more difficult for you, or for anybody else — for me or for you either — to apply that duty to the particular case. That is why I wish for a very few moments to consider with you the application of this duty to the facts of this particular case. In the same way, Mr. Isaacs is quite right in saying to you, as I have already indi- cated, that the Auditor is not bound to assume that people are dis- honest. On the contrary, he is entitled to think that they are honest, H H H 2 836 AUDITING. and I only read to j^ou for the purpose of an observation I wish to make the passage in which that is put in the Court of Appeal : — " He is justified in believing tried servants of the company in whom confidence is placed by the company. He is entitled to assume that they are honest, and to rely upon their representations, provided he takes reason- able care. If there is anything calculated to excite suspicion he should probe it to the bottom, but in the absence of anything of that kind he is only bound to be reasonably cautious and careful." Now, I think the best concluding direction I can give to you for which I am responsible is, that he must exercise such reasonable care as would satisfy a man that the accounts are genuine, assuming that there is nothing to arouse his suspicion of honesty, and if he does that he fulfils his duty; if his suspicion is aroused, his duty is to " probe the thing to the bottom," and tell the directors of it, and get what informa- tion he can. And apart from the circumstances of this case, I think Mr. Hasluck made an answer which shows that he appreciated his duty when he said, " Had I any reason to think that the amount of cash retained at the city office was too much, I should have gone to the directors and asked for an explanation ; that would have been my duty," and so far as I may express an opinion, I think that is a true view of what his duty would have been under the statute and the articles. He ought, if his suspicion was aroused by anything that was called to his attention, to have gone to the directors and asked for an explanation. Now, gentlemen, I am bound to say that I feel that the plaintiff has a perfect right to press upon you that the defendant's clerk (who, I think, was called Percy Clark) was not called before you, because I am bound to tell you that the defendant is responsible for want of reasonable care by his clerks. This is a part of the work which cannot be done by the defendant only himself. Some of the work must be done by his clerk. He has said and gave his evidence most fairly, I think, whatever the consequence may be, " looking back at it I can see nothing to blame my clerk for." But you have to consider if either the defendant or his clerks through whom he was doing the work have failed to discharge their duty properly, or have been guilty of want of reasonable care; you must not press it too hard. I do not think Mr. Bankes used it at all unfairly, or pressed you too much upon it; for myself, it would have been more satisfactory if one had had some explanation as to what came to the knowledge of the clerk as to the cash in hand at the time. It is entirely for you, when you have con- sidered what are the facts of this particular case, to exercise your own judgment as to that and take it into consideration, because if you come THE LONDON OIL STORAGE COMPANY. LIM. V. SEEAR, 837 HASLUCK AND CO. to the conclusion that, prima facie not sufficient inquiry having been made, the defendant has not put all the information he might before you, you are entitled to draw inferences from that from the absence of the clerk. Beyond that you ought not to go. Now, gentlemen, Mr. Bankes, on the part of the plaintiffs, shapes his case in two ways. The first of them is that it is the duty of an Auditor to check an asset such as is called and known as "cash in hand." Secondly, he says it is admitted that if circumstances of suspicion arise, the Auditor ought to " probe the thing to the bottom," and he sa3's " I (Mr. Bankes) suggest to you on behalf of the plaintiffs that there were grave circumstances of suspicion in this case." It is entirely for you and not for me, but it seems to me in this case the first branch of Mr. Bankes' argument is the most important. Aye or no, were proper or sufficient steps taken to verify the cash in this instance? And, subject to your better judgment when I come to dis- i^ cuss the evidence as to the second branch of the case, I should have thought, if it was necessary to rely upon what Mr. Bankes called circumstances of suspicion, you would have much greater difficulty in dealing with the case. I now, for the purpose of the first question, will consider the evidence as to what may be called the prima facie duty of an Auditor to verify an important asset, and I shall ask you presently as business men to be good enough, as this is a very important case, to take the documents, and not simply accept my comments — to take the books — and you can find your way quite easity through them as business men. Now, I should have thought that is why this is the important proposition — That it could be scarcely dis- puted that it was the duty of an Auditor to verify the cash in hand. How it ought to be done in a particular case is more difficult, but prima facie when a Balance Sheet is presented to an Auditor it does not inatter if the Trial Balance Sheet should come to him or not, but I will take the Trial Balance Sheet which undoubtedly did come to him. When the Trial Balance Sheet of 1898 came to him, and he found among the items an item of ^i"^^ cash, and he found that it did mean cash somewhere that should have been vouched in some sort of way. Please understand, when you come to consider this case, if you think that is putting it too high it is for you, and not for me ; I only tell you how it strikes me as to the evidence. I think that may be made plain by taking the case of auditing the accounts of a large shop with several branches. Suppose in the interests of the shareholders it was necessary to know the cash in the till. Suppose there was a large establishment with branches at half-a-dozen places, the Auditor audit- ing on various days, and there was said to be ^^500 in the various tills, made up of ;^5o in one place and ;,^ioo in another, and so on. I do 838 AUDITING. not think anybody would dispute he ought to ascertain that the cash was there, and that is a way of stating the proposition which makes it plain on one side. On the other hand, when dealing with a busi- ness where money is being used by a particular branch, and one branch owes another so much money, it might be that the report upon a certificate of a qualified manager or secretary, or voucher of some sort of that kind, would be amply sufficient justification to the Auditor for passing the item. 'I'he real difficulty in this case, as I think you will see on looking at the accounts, and upon which I do not wish to express the slightest opinion, is, aye or no, has Mr. Hasluck satisfied you in that respect he has discharged his duty? I put it rather upon him, because I think it ought to be taken, and he does not really dispute it, that he has got to Vouch and be satisfied with the correctness of the items in the Balance Sheet. That being so, has he done it sufficiently? Now, here comes the difficulty. It has been suggested as though the preparation of these things depended in the first instance on Mr. Hasluck. That is why I tliink Mr. Bankes may have pressed too much the question of the mere amount of cash supposed to be out. Now, the first that he gets is a Trial Balance Sheet of 1898, and that contains the five items at which you ought to look : the cash at Melhuish's, that is one of the wharves — I have marked them, gentlemen, in blue, so that you will see them in each year — ^^14 one wharf, ;^8 another wharf, ;,^i5 another wharf, and ;i^'i33 the city office. Now, it is very difficult to express any view upon this without apparently indicating more to a jury than one ought, but take the question of the small item of cash supposed to be at the three separate wharves — ^^14, /^S, and ^15. In order to test that being there the man ought to have gone to the wharves and seen the money, or had it brought to him, or, it may be, some voucher given to him. Mr. Bankes does not complain in this action directly of those three amounts which form part of the total sum in hand, which in that year was £171 los. ; he does not complain of those three items not being examined ; what he does complain of is that there is no evidence before you of ;,^i33, which is the balance, ascertained by taking the petty cash and subtracting the credit side from the debit side, that the city office owed to the business. I shall ask 3'ou to look at that account, and to see whether you come to the conclusion that under all the circumstances of this case it did show a want of reasonable care on the part of Mr. Hasluck and his clerk not to have investigated whether that ;^i33 was really there. I postpone speaking of that particular year, and saying that it ought to have attracted suspicion, because it had gone from ^^^21 to ;,^i33, as that relates to the part of the case dealing with the question of there being circumstances of suspicion. THE LONDON OIL STORAGE COMPANY. LIM. Y. SZEAR. 839 HASLUCK AND CO. ■Jhen you come to 1899. In the same way j'ou will find there are four items there, the total amount being altogether somewhere about ^500, or very nearly ^500. I think £.\~^ of that is due to the cit}- office — that is to say, it is item 748. If you turn back to the item 748 you will find there the city office received so many hundreds or thousands of pounds, and ;^479 was due to the office. You have to ask yourselves, under the circumstances of this particular case, was the Auditor whose duty it is to be satisfied that that is a trae asset entitled to do no more than this gentleman admits that he did — namely, verify that the secre- tary' had acknowledged the receipt from the company of, we will say, ;^2,ooo or ;^3,ooo, which represented the gross receipt in that twelve months' expenditure — /'i.qoo, or whatever it was on the other side? and admitting that the office owed the business that amount, if you think he did enough there would be no question of breach of duty as to that. If you think that, looking at this quite apart from the question of there being big and small items, a reasonably prudent accountant would not have let that item pass without sa^^ing the ^^479 was somewhere, and where it was, you will have to express your opinion whether there was a breach of duty on the part of the defendant in that respect or not. I need not take you through the other ietms. I have marked them in blue, and I ask you to look at them in the trial sheets, because you have to make up your minds and be satisfied that the defendant discharged his duty in ascertaining that the cash balance was somewhere available, upon such evidence before him that }ou — as reasonable men — think he did enough. I do not want to repeat it. I am sure you understand me. He had before bira original and genuine entries not challenged, showing the office had received in one twelve months ;^2.6oo, that they had spent a sum of f 2.000. and that the head office therefore owed the business £^)00. He does not allege that he asked for more than seeing and checking that those were truthful business entries. If you think that in such a business so conducted it was his duty to ascertain that the cash was there, quite apart from circumstances of suspicion, of course j^ou will not hesitate to say so. Now, gentlemen, that is the part of the case so far as it depends upon the prima facie duty of the Auditor to verifv the asset. It cannot be disputed that when an Auditor returns to the shareholders an entry of cash in hand he must have taken reasonable steps to ascertain that the cash was in hand. That does not enable you 10 answer the question without considering what he has done, because there may be cases in which he would be justified in acting on the representation of a cashier, or a servant whom he had no reason to distrust ; and, on the other hand, there may be cases when he ought to go further and examine. 840 AUDITING. You will have to say, when you come to consider the matter, within which of those categories this case falls. Now I come to the question of the circumstances of suspicion, and, though I express an opinion with the greatest diffidence, it seems to me that the case for the plaintiffs is not so strong as it may be put with reference to the non-verifj'ing. It is said " You, the Auditor, ought to have Known that for a man to have these increasing balances due from the city office to the business was something suspicious." Now, on the mere question of amount, there was one fact mentioned that I think ought to be mentioned in the defendant's favour. Mr. Bankes says when it jumped in 1898 from £2.1 to ;^i33 that ought to have aroused suspicion. It had been up to ;/"i36 three years before, and the mere question of amount therefore would not seem to me to be of importance, but you have to consider for yourselves, is the fact it had got to ;[^i33, and the next year went to J^^l^, to be considered or called by the Auditor and his clerks a suspicious circumstance? Now, gentlemen, here I do not think it is at all unfair to the plaintiffs to say it may be pressed too hardly against the Auditor. I think to this extent he is within the authorities and the ruling laid down by the Court of Appeal that he is not bound to criticise the policy of the directors, and if he finds for a series of years larger amounts have been left in the hands of the cashier than at first sight would seem to be required I do not think there is any prima facie duty upon him to inquire into that. It is a matter of policy and not of audit. If it becomes suspicious, then you will understand that different considerations arise. But I confess, on the mere question of holding a larger amount, that that seems to me to have been pressed rather too far. Mr. Bankes called it, you know, " Petty Cash," but that is not quite the way I think you as city men will regard it. The items were arrived at by including the lighterage wages and the petty cash m the cheque. It is perfecly true that the smaller portion of this cheque was made up by the petty cash, but the lighterage charges went through this same head office account, and they did amount to as much as ;^5o or £6, because that is the total amount of the loss ; indeed, it cannot be as much as that, because I point out the Auditor does not guarantee the honesty of the emploj'ees. He could not do it, and, as Mr. Bankes properly put to you, if he ought to have found this out in 1S98, as Mr. Bankes suggests, £i23 ^■'■' M'fothesi would then have gone, and that is the amount he suggested to j-ou was not then forthcoming. If you take the view that that is not enough to show any want of reasonable care, the next year it had risen to ^^479, and if that ^"479 (I will take care that you have all these figures before you) had been by that time practically lost, !Mr. Hasluck is not responsible for that. He is respon- sible for whatever damage you think has been occasioned by his not properly auditing the books. Xow to come to the reall}' difficult question whether or not this money had substantially disappeared by the end of 1900. The onl}' evidence we have got is the evidence of Mr. Hubble, and I quite agree with Mr. Bankes that he gave his evidence extremely fairly, as I think all the 844 AUDITING. people in this case have done, notwithstanding the difference of position cf some of them. Mr. Hubble does not say that he examined that cash box. There is a great deal that has been said on both sides, and I do not want to repeat what has been said by counsel on one side and the other most ably, but I think Mr. Isaacs gave you reasons for thinking that he asked for the amount without looking at it, and, remembering that Frederick Clarke was a secretive character, it may be that that cash box was not examined; but Mr. Hubble does say, "I certainly should not have made a requisition without seeing what cash I had in hand, because, though I knew what I wanted from the lighterman's estimate and from the wharf's estimate, there was something still I wanted — namely, ^20 or £2^, as the case may be, and I should not have asked for it without knowing what it was." He asked for three cheques — ;^85, £ji„ and ^80. Gentlemen, you have to look, and I shall ask you to look, at that particular month, because I think, in justice to Mr. Hasluck, it ought to have been put. It is perfectly true that Mr. Hubble said he does not think all the credit entries in that year were entered up ; he thinks some were, but naturally he cannot say what were entered up. If you look through that book there were very large balances indeed standing to the credit of this account all through that period from April 1900 to December 1900. If the book was at all made up at that time I can scarcely imagine Mr. Hubble's attention not being called to it— that there was no less than ;/:8o2 on the debit side and only ^161 on the credit side, and at that time there was a balance due of something like between ;^5oo and ;!^6oo. If the book was not made up, and he had only to enter, as he did enter, the expenses as he paid them out, it would not conve}' the same indication to him as it does to us now. This is the difficulty of judging a case after the event. It is fair to IMr. Hasluck to say the condition of the book, whether it was at that time either not entered up, or, if entered up, showing a large balance in the hands of the cashier, does not appear to have excited the suspicion of Mr. Hubble at all. He makes no representation to his directors ; he makes a request for very large cheques. It is a requisition on the 14th of December, ;[^2i5; on the 21st December, £2A7 ; ^nd on the 2Sth December, ;,f 200. Therefore he makes very large requisitions, and it is only fair to sa}-, if the book was made up, that must have shown a very large balance in the hands of Mr. Frederick Clarke ; and if the book was not made up, it would be a circumstance that Mr. Hubble would have called the attention of the directors to, but it does not appear to have excited his suspicions. You have this difficulty : Mr. Bankes suggests to you that practically the greater part of the money had gone by 1900, and that therefore, at any rate after that time /'400 or ;^5oo would have gone, there would not have been '* THE LONDON OIL STORAGE COMPANY, LIM. V. SEEAR. 845 HASLUCK AND CO. the further loss of ;i^2oo or ^250 ; and I think you are entitled to take this view if he ought to have found out that there was this large sum supposed to be standing to the credit, which would have called the directors' attention to it if the Auditor remarked upon it ; then, though they would have lost that ^400, they would not have lost the further sum, and the damages recoverable from this defendant would be some- thing like ^^250. You have to consider, aye or no, did this failure of the Auditor to disclose it really cause the damage or not? You have to be satisfied that it was the result of the breach of duty. We do not know, unfortunately, what this man's condition was ; whether he was in money at one time of the year, and whether speculating or possessed of money we know nothing about. The plaintiffs must satisfy you that the damage has been occasioned, to whatever extent you think it was occasioned, by the breach of duty on the part of the Auditor. If, although it was a breach of duty, this loss would have been sustained unless the man had stolen the money after the breach of duty was com- mitted, of course 3'ou will find there was no substantial damage by this breach of duty. The action is for breach of duty, and the damage is nominal damages. I cannot give you much more assistance. I wish I could. On the one hand, it is said that ^450 had gone by the end of 1900. If so, the damage would be somewhere about ;^3oo. If Mr. Isaacs is right in suggesting to you that the money may have been there on the 30th April 1902 — not a very likely suggestion in view of what we know about the man, and the speculation was that the loss was due to improper conduct by this man, who was trusted and receiving large sums of money — whatever your views may be of the conduct of the defendant, you ought not to make him pay the damages, if he is not responsible. The conduct of the directors is no answer to any breach of duty by the defendant, but it is a circumstance you must take into con- sideration, because if you are of opinion that the loss was occasioned by a man stealing the money in consequence of there being a want of proper control over him, then the fact of there being a breach of duty by the Auditor is what we lawyers call a causa causans, which con- tributed to, but would not be the cause of, the loss. I do not know that I ever remember a question the solution of which was more difficult in the concrete. It is easy to put it in general terms : Was he guilty of breach of duty, and, if so, what loss was occasioned to this company by that breach of duty ? You must not put upon him the loss by reason of theft occurring afterwards or before, but )^ou must put upon him such damages as you consider in your opinion were really caused by his not having fulfilled his duty as Auditor of the company. 846 AUDITING. ■"t * Now, gentlemen, I have endeavoured to put these questions clearly, and I will give you the papers in such a way that you can follow them, and then ask \-ou to answer the questions. That is the list of balances ; there are the Trial Balance Sheets ; that is the actual Balance Sheet ; and this is the demand that is made for the money each time. You will find the index number against each item, and will have no difficulty in tracing them. The jury retired at 2.53. The Lord Chief Justice : I do not refer to these conversations — the question about looking bej'ond one's nose and so on, because I thought they were so unimportant — but if you wish me to direct the jury upon them I will. The other is much more important. Mr. Bankes : I am quite content, my Lord. The jurv returned into Court at 3,55. The foreman having handed up a paper to his Lordship, h The Associate : Gentlemen, are you all agreed? The Foreman : Yes. The Lord Chief Justice : As to the first, the jury say that there was a breach of duty in 1899, 1900, 1901, and 1902, and that there was damage to the extent of £^ 5s. od. The jury add that they consider the directors have been guilty of gross negligence. The jury was then discharged. The Lord Chief Justice : I think this had better be mentioned to me to-morrow morning by Mr. Bankes and Mr. Isaacs. I think it is better that it should be, as they may have something to say — that is, men- tioned either to-morrow morning or at an}' time convenient to Mr. Isaacs or Mr. Bankes. Mr. Wallace : If your Lordship pleases. JUDGMENT. The Lord Chief Justice : As this case ma}^ go further, and I think it is a very important case, 1 should like to say in a few sentences why I cannot enter judgment for the defendant, and then I will deal with the question of costs. There were two grave issues raised in this case. First, had there been a breach of duty or not? By " breach of duty " I mean a breach of contract. Had there been a breach of contract by the Auditor or his clerks? Mr. Hasluck, who is obviously a most honourable and straight- forward man, elected to fight the case upon the basis that there had been no breach of duty. I was asked at the end of the plaintiffs' case THE LONDON OIL STORAGE COMPANY. LIM. V. SEEAR. 847 HASLUCK AND CO. to stop the case, but I felt that there was some evidence, especially as Mr. Bankes raised the point of there being circumstances which should have aroused the Auditor's suspicions, as to which I think there was no substantial evidence of any sort or kind, but still there was some evidence, and I could not stop the case. The defendant, in the course of his case, did not call the clerk by whom the audit had been con- ducted, and it seems to me under the circumstances, if my ruling was- right as to the duty of the Auditor, it was quite open to the jury tO' find that they were not satisfied that there had been sufficient inquiry with regard to that particular asset in those four years, and I would call attention to the fact that the jury have, I think rightly, limited their finding to the years 1899, 1900, 1901, and 1902, when the asset was a substantial sum of money not less than £i\'jo in the first year. I think that there was a very substantial question of principle to be fought. It was not a case in which !Mr. Hasluck had said (as he might have said quite honourably, I think) : " My clerk was careless, but the directors so acted that it caused the company no damage." If that had been the way the case had been fought, I think Mr. Isaacs' contention, would have been unanswerable, and that the action ought not to have- been brought. I am bound to say I think that there was a very grave and substantial question to be fought and tried, which the jury have answered, in my opinion, absolutely rightly, that there was not a sufficient fulfilment of his duty in ascertaining whether that asset really existed. I particularly desire to avoid using the words " counting the- cash." I do not think it is the true statement of the duty of an Auditor, although it is one way of putting it. Anything may be " counting cash," if you ascertain it is there; but, as I tried to point out to the jury, there may be cases in which the actual counting of the sovereigns is not even the best way of vouching or ascertaining' the amount. Therefore I think the jury did take the view properly that there was not a proper discharge of his duty by his clerk — nothing morally wrong in the least, but not a sufficiently careful supervision, by Mr. Hasluck's clerk of the asset which was believed to exist, and v/hich was shown by the books to e.xist, because that the audit was. most carefully performed I have not a shadow of doubt apart from this. I think there was a substantial issue properly raised by the plaintiff, and properly defended by Mr. Hasluck, if he determined to fight the battle on the ground that he did fight it, that there was no duty on an Auditor to ascertain the existence of an asset, assuming the books showed that that asset ought to have been in existence. Therefore I think a substantial question had to be tried, and that entirely makes it impossible for me to say that there was not an issue before the jury as to breach of duty, and, if it was a breach of duty, at any rate there must be nominal damages. 848 AUDITING. Then Mr. Isaacs says because the jury have said the large damages found in the claim of the plairitiffs were not the result of that breach of duty (in which I absolutely and entirely agree) he ought to have judg- ment for the defendant. I only point out that that would have been a perfectly good argument had the defendant come into Court and said, "I do think my clerk was not sufficiently careful and did not sufficiently perform his duty, but no damage was caused to the plain- tiffs." I do not think the defendant is entitled to have that issue tried and fought (and I need hardly say it was most ably fought) for the best part of two days at the plaintiffs' expense. Then as to the costs, I confess I have very great doubt. In an ordinary case I do not think the rule Mr. Isaacs indicated of letting the law take its course is a very good one in actions of tort and libel, and cases of that kind. I think there was a substantial question to be fought here, and that the finding of the jury that the directors have been guilty of gross negligence, though a perfectly proper finding in order to show why they come to the conclusion that it was not the breach of duty which they had previously found that caused this large loss, ought not to affect the question of costs with regard to the trial of an issue of such very great importance to the parties, and in one sense probably important to the public, though I do not think that is important here, but it is a case in which Mr. Hasluck represents a great profession, and I therefore think that I ought to say this is a proper case to have been brought in the High Court, or whatever the form is. "b' :Mr. Bankes : That there was sufficient reason for bringing the action in the High Court, my Lord. The Lord Chief Justice : Yes. I give that certificate. Mr. Bankes : And I ask for a certificate for a special jury. The Lord Chief Justice: Certainly. Mr. Rufus Isaacs : It is only a small question of costs left, but if I pay over those costs on the usual undertaking may I have a stay, my Lord? The Lord Chief Justice : Yes ; it is clearly a case in which you are entitled to carefully consider what I said to the jury. Mr. Rufus Isaacs : I do not say I shall want to, but I want to consider it before we go further, my Lord. The Lord (Tiief Justice : I know the difficulties, and the extreme possibility that one may not go right, especially at Nisi Prius, and 1 SMITH V. SHEARD. 849 am sure in a case of this kind you might pay over with the usual undertaking, if necessar}'. Mr. Rufus Isaacs : I understand that my learned friend prefers the costs should be paid into Court. The Lord Chief Justice : So be it. Mr. Rufus Isaacs : Then there will be a stay till taxation. The Lord Chief Justice : For a fortnight. I suppose if it is brought into Court you do not want a sta3^ Mr. Rufus Isaacs : Yes, because we cannot bring it in until taxation. It is only a question of the form of the order. The Lord Chief Justice : There will be no difficulty with the plaintiff compan}^, I am sure, as to that. {AccL L.R., XXXI. , p. I.) The case of SMITH v. SHEARD. (Decided before Bray, J., and a Special Jury, at the Liverpool Assizes, on May 9, 10, and 11, 1906.) Liability of Accountant — Audit at reijKest of Creditors — Defalcation by Employee — Claim for Damages — Partial Audit. An action was brought by ^lar}' Ann Smith, married womaij, carry- ing on business as a manufacturing stationer in Liverpool under the style of Dickinson & Co., for damages for neglect in the audit of her books, against Theodore S. Sheard, accountant. Mr. Rutledge stated that the plaintiff claimed damages for neglect and carelessness in the audit of her books, by means of which she incurred heavy losses consequent on frauds. The defendant denied that he was the Auditor of her books, and that she sustained any loss through neglect on his part, and also that, if there was neglect, the plaintiff was guilty of contributory negligence; while further, the defendant counter-claimed for certain sums for work done, which plaintiff denied. Mr. Shee, in his opening, stated that the allegation of neglect was that in consequence of the inefficient auditing of the books by the defendant, the late cashier of the plaintiff embezzled certain sums of money, amounting in all to about /.700. Plaintiff had been in partner- ship with Mr. Dickinson, but on account of the latter overdrawing I I I 850 AUDITING. more than he was entitled to this partnership was dissolved in 1902, and a consultation with the creditors was decided upon. Mrs. Smith then found that Mr. Sheard had been acting as Auditor to the firm, and she intimated that his services would be continued in this capacity. As a matter of fact, it was alleged that he not only undertook the auditing, but her affairs in regard to the creditors and the collection of debts. In December 1902 the plaintiff's cashier, who had since been pro- secuted and who was now dead, began to make fictitious entries in the books and appropriate money from the business. When defendant audited the books and prepared a Balance Sheet in 1904 he made a charge of forty guineas, to which plaintiff demurred, remarking that she did not think the work had been done properl3\ Mr. Sheard replied that the consequence of such a statement would be very serious for one of them. The defalcations of the cashier were not discovered until April 1905, and it was contended that if the audit had been an efficient and proper one the misappropriations would have been found out much earlier, and the losses thus prevented. m Evidence was given in support of counsel's statement by the plaintiff. Cross-examined by Mr. Horridge, witness stated that in order to save expense, and because of the confidence she reposed in the cashier, she did not instruct the defendant to audit her books in the way he had done in the time of Mr. Dickinson, and that consequentl}^ the Bank Book, Cash Book, and vouchers were not examined for eighteen months. Miss Amery, in explaining the system of bookkeeping at the plaintiff's office, stated that the defaulting cashier collected accounts outside and gave receipts from a counterfoil Receipt Book, which she was unable to say was asked for by the defendant's representatives. Cross-examined, witness said that everything was left by Mrs. Smith to the cashier. As far as she knew, Mr. Sheard never had the Counter- foil Book, the rough Cash Book, or the vouchers. Walter Appleton, of London, representing a firm of creditors, stated that at a meeting of the creditors when Mrs. Smith took over the busi- ness it was agreed to give the plaintiff time to pay the debts on con- dition that Mr. Fosbrooke, the defendant's partner, took entire control of the books. Arthur Whittaker, Chartered Accountant, Manchester, deposed as to the state of plaintiff's account books and the evidences of the partial audit which they bore. The question of v/hat an audit was was a difficult one, but a generally accepted opinion was that it meant a com- prehensive investigation of the books for the verification of the entries SMITH V. SHEARD. 85 I in order to arrive at a proper statement of the position of the client. He did not think there was any difference between an audit and a " complete audit," and without some understanding to the contrary an Auditor must audit all the books. He maintained that the entries from the rough Cash Book into the general Cash Book, and from the original carbon counterfoils to the Summary Book, had not been checked as they should have been. Vouchers also should be asked for by an Auditor. Mr. Horridge said he did not dispute witness's evidence as to non- checking, the whole point being as to what were the terms of defendant's employment. The question of amount, it was agreed between the parties, should be reserved for the present. Witness, proceeding, stated that if vouchers had been asked for fictitious entries would have been discovered in the Cash and Purchase Invoice Books. Cross-examined by Mr. Horridge, witness stated that his evidence had been given on the assumption that the defendant was employed to give an audit in the strict sense of the term. It was apparent in this case from the books that the defendant had not purported to audit in such a manner as to check the honesty of the servants. It was usual for an Auditor to certify the accounts as " audited and found correct." Mr. Sheard had not done this. There was no necessity to ask for the counterfoils of receipts for the purpose of posting the books and pre- paring a Balance Sheet only. Two other witnesses were called for the plaintiff, whose case was then concluded. Mr. Horridge, for the defence, argued that from the very first Mr. Sheard had taken up the position that he was never engaged to audit, and that he had never for one moment pretended to do so. He had only done the work of checking the books and making out a Balance Sheet in a way that was the custom amongst private iirms. It was not intended to audit the books to check the accuracy of the entries or the honesty of the servants, but simply to take out a Balance Sheet which correctly represented the books. That was shown by the very fact that the defendant had never asked for vouchers and counterfoils. The arrangement when the partnership between Mrs. Smith and Mr. Dickinson was dissolved was that the books should be put on a proper sj'stem of double-entry, and balanced half-yearly. Mrs. Smith did not want her cashier checked, as she reposed the fullest confidence in him. I I I 2 852 AUDITING. He maintained that if the word " audit " had not crept loosely into a bill that action would never have been heard of. Mrs. Smith had con- stantly stated that she wished to save expense, and she intimated that it was only necessary to do sufficient to satisfy the creditors by putting the books on a better system and furnishing a Balance Sheet. Counsel proceeded to quote letters bearing on Mr. Sheard's engagement, and submitted that every document and inference was in favour of the defendant. The secret of that case was that Mrs. Smith had lost her money through her late cashier, and that she never made a bargain with Sheard to audit at all. The Balance Sheets were not signed or certified for the simple reason that an audit had not been made or had been intended to be made. Mr. T. S. Sheard, the defendant, gave evidence. He said he had carried on business in Liverpool as a Chartered Accountant for twenty years. He emphatically denied that he had ever agreed to make a complete audit of the plaintiff's books or anything to that effect. If he audited accounts or Balance Sheets he usually gave a special certificate stating what he had done. If he was only instructed to take out a Balance Sheet he took the figures as stated in the books, and did not sign it. Cross-e.xamined, witness disputed that there was any discussion between himself and Mrs. Smith about it being a serious thing for her if her statement about his work were false. He was astonished when he was blamed for the non-discovery of the defalcations. John D. Fosbrooke, defendant's partner, stated that in consequence of Mrs. Smith's anxiet}' to save expense until the creditors had been paid off, the arrangement was that he should only check the posting in order to enable him to balance. Fie denied that he had told Mrs. Smith that he had made a " complete audit " of her books. The word " audit " had been put into the bill of charges by a clerk, and it should have been " auditing of posting." He did not ask for vouchers, because he was not making a thorough audit of the books. Cross-examined by Mr. Shee, witness stated that it might have been less trouble if he had let the cashier do the posting, and if he (witness) had applied himself to checking the cashier's honesty, but witness was stopped by Mrs. Smith from doing that. Mr. Sidney S. Dawson and ^Ir. ^V. C. Spencer, Chartered Account- ants, deposed that it was the practice after making a thorough audit to sign the Balance Sheet or give a certificate. In this case, Mr. Spencer said, there was no evidence of vouchers, &c., having been checked. The work done by the defendant was not valueless, but was necessary for SMITH V. SHEARD. 855 balancing purposes, and in the absence of fraud would have shown the assets, liabilities, capital, profits, and drawings of the partners. In answer to Mr. Shee, witness said that the defendant's audit would be valueless for the purpose of detecting fraud. Counsel having addressed the jury, Mr. Justice Bray, in summing up, said : Gentlemen of the jury, I may have to occupy your time for a little in going into this matter, which is a very important matter. It is important for both parties ; it is important for the plaintiff because she saj^s that Mr. Shand has defrauded her of some ^700, and that if the defendants had done their duty Mr. Shand would have been detected long before all that money was lost and she never would have lost the money. ;!f7oo, of course, is an important sum. On the other hand, it is equally important for the defendant — not more important, but equally important for the defendant — not only because the sum is a very considerable sum, but because he is charged with having entered into a contract which he never performed or attempted to perform — that is the charge against him. It is a serious charge against professional men, and when Mr. Shee talks to you about disregarding the question of onus of proof, and asks you to look upon it as a matter of common sense, I ask you to look upon it as a matter of common sense. First of all, at law common sense and law usually agree, but it is law that the plaintiff must make out a contract, and a breach of that contract before she can succeed. But it is common sense too. One of you gentlemen some day might be sued by somebody setting up some verbal contract which vou have never entered into, and you would think if an action were being brought against you — would not you think it was fair that when there are no documents proving what the contract was, if there are no documents it is a case that should be proved against you fully? Now the law says that, and common sense tells you the same. Now, gentlemen, as I have told 3'ou, this is an action for breach of contract, and it is admitted that the whole question turns upon what was the contract, and therefore the simple question that I am going to leave to you is this : Did the defendants agree with the plaintiff to make her a complete audit? Is that what they agreed to do? That is what the plaintiff has got to prove to you, because it is common ground that if that was their contract they never performed it or attempted to perform it ; because it is common ground again that a complete audit means having every item vouched for and every entry — every book brought up and every item vouched for— -and, of course, it is common ground again that if every item h^d been asked to be vouched for and every book had been examined the defalcations would have been discovered ; they must have been discovered. Therefore that is 854 AUDITING. the question that you have got to try. Has the plaintiff proved to your satisfaction that the defendants agreed to make a complete audit? Now it is purel}^ a question for you ; it is not for me, it is for you ; and any observations that I ma}' make, except when I am dealing with a question of law, are observations which you can give just as much or as little weight to as you choose. Now I am bound to say that the first observation which occurs to me is this : It does seem to me a remarkable thing that if these people really did agree to make a com- plete audit that they should not have done it. It was to their interest to do it. There was no bargain as to price, and the more time they had to spend upon these books the more remuneration they would get, and 3'ou, gentlemen, know, of course, there is a profit upon every hour's charge that they make, and it was to their interest — to their profit — that the}' should make as complete an audit as possible, because that would take more hours and would mean more profit, and it does occur to me that that wants explanation, why the defendants if they had agreed to make this complete audit never did so. Now, gentle- men, that is an observation on the law ; it is simply an observation that you will take notice of. Now, as I told you, the plaintiff has got to prove her contract. The contract, whatever it was, was clearly made about the beginning of 1903 ; that is common ground. Whether it was in December or January does not much matter ; the defendants put it in January ; the plaintiff does not give any actual time herself, except that it was about that time. Now first of all you have got to see what did the plaintiff say herself, and you have got to ask your- selves, is that true? If it is true, what does it mean? Or if it is not true, what was the contract? Now this is what she said: " Fosbrooke was Sheard's general manager, and he asked me what I was going to do about the audit. I told him I was going to make no change in anything." Now that is her own story, mind you, the story that she repeated more than once, which means, if one can understand it, it means you are to go on doing the work which you did before. Then she says : " I told him I was not going to make any change in anything, and knowing I had no knowledge of books I expected them to do all my books. I am not sure of the words I used. I said I hoped they would take special care, knowing that I knew nothing about books, and I was making no change at all. Fosbrooke told me he was going to take special care about the books, and he should want to make a few alterations. Mr. Shand was my head man ; he was called in, and I told him to give every assistance to Mr. Fosbrooke." Now she is cross-examined, and Mr. Horridge wanted to see whether he was quite clear that he understood the contract — that according to her version they were to do what they had been doing before. The employment SMITH V. SHEARD. 855 was the same, but they were to take more care. What I do not under- stand — the employment was continuous — they were to audit the books in Dickinson's time, but they told me they could not get at them. Now, gentlemen, of course that is her story. Now let us see what the contract was that was made. You have got to look at what had happened before, and therefore it is most vital to see what was the work they had been emploj^ed to do before. Now I must go right through that with you, but there, cannot be a shadow of doubt, although it is for you to say that they were never employed to audit the books before and never did so. Now you will see. You know bills were sent in. According to Mr. Fosbrooke these bills were brought to the plain- tiff — to Mrs. Smith — when she was making the arrangements for going on with the work at the time this contract was made in January 1903. Now the correspondence shows this, that the first time these defendants were employed by the firm of Dickinson & Co. was about March 1900, and they were employed for this reason. Mr. Dickin- son — I suppose their position perhaps was a little critical — Mr. Dickinson wanted to know first of all what were the total annual sales ; he wanted, secondly, the Balance Sheet made up to the end of the 31st of January 1898, so as to show what was the position between them as to capital. Apparently their arrangements were more or less vague as to capital, and they wanted to commence and see how much capital Mr. Dickinson had got in the business, and how much Mrs. Smith had got in it. That was the object with which they were employed. Now you get from the documents and from Mr. Sheard's evidence — not denied by Mrs. Smith — the common question. Now Mrs. Smith tells you, " Oh, I knew nothing of what was going on in Dickin- son's time." Now we shall see that is not quite correct. She knew; she wanted to know as much as Mr. Dickinson where they were as to capital. Now we will see from the bills that were sent in what they were doing. Now, gentlemen, I will hand in the bills to you, so that you may follow them. I think the first of them — it is not here — gentle- men, 3^ou take those (bills handed to the juryK The first one is not here. I will give it you presently. "28th May 1901. For services ren- dered preparing schedule showing the total sales of your business from April 1898 to April 1900." You won't find that one here ; I will hand it to you. "Preparing Balance Sheets at 31st December 1898 and 31st March 1900, and Profit and Loss Account for the eighteen months end- ing 31st March 1900, £'\2." Now you take that. Now I have read it to you it is perfectly clear from that that there was no audit ; there is no pretence for saying that there was anything in the nature of an audit. Now the next is this. You have got the next one yourselves. It is No. 2. You will find these later ones are all misleading — the 31st 856 AUDITING. January 1903 — because they were not delivered until that time. " 31st January 1903. — For services examining and balancing your Cash Book for the 3'ear ended 31st March 1901." Now again it is agreed that is not audit. Mr. Shee does not suggest that is audit. " Checking Ledger balances and preparing Balance Sheet at that date. Attending numerous interviews with Mr. Dickinson and !Mrs. Smith, discussing affairs, and reporting as to cash drawings monthly, fifteen guineas." Vou know Mr. Sheard sa3's it is quite plain from the correspondence that they discovered when the}^ got out these Balance Sheets that Mr. Dickinson was apparentl}^ overdrawing, or drawing more than he should do, and was making the capital too small, and the result of what took place appears from a letter of Ma}' the ist 1901, and that is a letter from Mr. Sheard after he had seen Mr. Dickinson and Mrs. Smith. " In confirmation of my interview with Mr. Dickinson and Mrs. Smith on Monday morning, I beg to recapitulate the arrangements that were then come to." Now 3'^ou know Mrs. Smith talks a little about her knowing nothing of what was going on. She and Mr. Dickinson had met and had arranged what should be done. " (i) The Balance Sheet as at 31st December 1898 is to be taken as a basis of the partnership agreement, in accordance with which the capital therein shown is to be apportioned two-thirds to Mr. Dickinson and one-third to Mrs. Smith." Then Mr. .Sheard had written some five days before that pointing out quite clearly that that Balance Sheet did not profess to be an audited Balance .Sheet. The parties agreed that that should be so. " (2) Balance Sheet made out as at 31st March 1900, and the profit thereby shown for the previous fifteen months is also to be taken as correct. I am to pro- ceed." Now this is what he had to do : " As quickly as possible to pre- pare a Balance Sheet as at 31st March 1901, and on the completion of same a further meeting will be held, when it will be decided whether such Balance Sheet should be adopted as correct. (4) From the 31st March 1901 the books are to be placed upon a proper system of double entry and balanced half-yearl}'. In future a rough Cash Book is to be kept, into which are to be entered full particulars of all pa^-ments and receipts, and the balance in hand is to be paid into the bank daily. With a view to carr3'ing out the foregoing arrangements ^Ir. Fosbrooke yesterday interviewed Mr. Shand and discussed the future bookkeeping. I find several alterations in the system of bookkeeping will be necessary, as many of the present methods might be improved upon." There is something about Purchases, about Sales, about Allowances and Returns, and about Ledgers, and so on. I need not read that all to you. It points out the alterations that Mr. Sheard is going to instruct Mr. Shand to carry out so that the books may be properly entered up with double entr}', so that he ma3' be able to make Balance Sheets. Now the SMITH V. SHEARD. 857 next thing that happens is this : There was a number of accounts owing, it being found that Mr. Dickinson was drawing all the money from Mrs. Smith's balance. There was sent an account of the drawings — the monthly drawings — and this is the form of that : " Dear Sir, — I beg to report that I have examined j'our Cash Book for the months of June and July, and that I find the drawings are as follows : — j\Ir. Dickinson so much, Mrs. Smith so much. I have also to report that the following cheques appear in the Bank ]5ook, but are not entered in the Cash Book, and that a corresponding number of counterfoils in the Cheque Book are blank." Then follows a list of these items, and " Please let me know to what account these are to be debited, and oblige." Xow that was the usual form, and that went on until September — about the middle of September 1902 — when !Mr. Dickinson left the office, and then the question arose. What was to be done? Mrs. Smith took the advice of a solicitor. She took advice, and the advice was to get rid of Mr. Dickinson, and accordingly that was done. Then, unfortunately, there were creditors who were pressing. What was to be done? The creditors had to be asked for time. The principal creditors were asked for time, and the proposal was that they should take bills for four, eight, and twelve months, so as to give Airs. Smith time to turn round. Now we follow the accounts. The accounts say what work was done with refer- ence to that. The next one we have got is 1901 to 1902. That is No. 3, I think, '■ For services examining and balancing 3'our Cash Book for the 3-ear ended 31st March 1901, checking Ledger balances, and prepar- ing Balance Sheet at that date. Attending numerous interviews with Mr. Dickinson, Mrs. Smith, and Mr. Wilson " — Mr. Wilson was Mrs. Smith's solicitor — " discussing affairs, and reporting monthly as to cash drawings, fifteen guineas." The next one is headed 1902, " For services examining and balancing your Cash Book for the nine months ended 31st December 1902, extracting Ledger balances, and preparing Balance Sheet at that date. Attending numerous interviews with Mr. Dickinson, Mrs. Smith, Mr. Wilson, and Mr. Duncan ; discussing affairs and reporting as to cash drawings, fifteen guineas." Now it is quite clear that up to that time their work did not consist of auditing ; it consisted of examining and balancing the Cash Book, and ascertaining the cash drawings of the different partners, and preparing Balance Sheets, and I think in some cases the Profit and Loss — no, I think there was no Profit and Loss — preparing Balance Sheets, so that up to that time it is common ground, and it really cannot be disputed, and up to that time nothing had been done in the way of auditing. >iOw let me read again. That being so I ought perhaps to follow these up a little more. Vou know there was to be a meeting of creditors, and there was a meeting of creditors on the 22nd December. Now what took place at that time 858 AUDITING. appears from the letter of the 24th of December, which was Mr. Fos- brooke's letter : " In reply to your letter of the 23rd I am pleased to hear " Oh, this is a sort of circular letter sent, or at all events sent to one of the creditors, it may be to more. " In reply to your letter of the 23rd I am pleased to hear that you will agree to the agreement," and so on. " Mrs. Smith wishes me to thank you on her behalf. Mrs. Smith regrets that she cannot send you cash for the dishonoured bill (^133 4s. od.), as she must treat all creditors alike. I may also inform you that Messrs. Fenner Appleton & Co.'s account is not only for a larger amount than yours, but it dates back three months earlier. Mrs. Smith proposes to take stock during the holidays, and I will then pre- pare a Balance Sheet made up to date, and submit it to you and the other creditors at another meeting in London early in the new year, when final arrangements can be made. In the meantime Mrs. Smith will pay you cash for any goods she may require." So that it is quite clear that at the meeting of the 7th there was no final arrangement. The creditors wanted, before they had a final arrangement, to see a Balance Sheet which Mr. Sheard was to prepare. He did prepare that Balance Sheet, and the meeting was held on the 21st January, and attended by Mr. Sheard, not by Mr. Fosbrooke, because Mr. Fosbrooke was ill. Now then we will see what happened then, because there are letters which are relied upon by both parties. Now on the 23rd January Mr. Sheard sent round to these four principal creditors a circular letter. Now this is what is relied upon by Mr. Shee. " Since I had the pleasure of meeting you in London on the 21st instant I have seen Mrs. Smith, and she agrees to your suggestion that she should give you bills at four, eight, and twelve months from the ist January instant for three equal instalments of your debt. She is also prepared to give an undertaking not to draw more than £2 los. od. per week for herself until all these bills are met. She further agrees that I shall at the end of June next audit her books and report the result of my investigations direct to you. Will you draw upon her as above, or do you wish me to draw out the bills ? Your kind reply will oblige." Now Mr. Sheard undoubtedly uses the word there, "Audit her books." Now what did that mean? There is an answer to that letter. The creditors, or one person on behalf of the creditors, Messrs. Fenner Appleton and Co. — that is the gentleman you saw — he answers that, and you will see how he construes it. " In reply to your favour we enclose bills at four, eight, and twelve months for the amount due to us up to December 31st last, which please get accepted and return to us. We agree to take a settlement of our account by means of these bills, solely upon the following conditions, and on the understanding that if they are not all fulfilled, or if there is a failure on the part of Messrs. Dickinson & Co. SMITH V. SHEARD. 859 to meet any of these bills at maturity, then the whole of the unpaid poition of the debt becomes immediate]}' due. The conditions are that Messrs. A. Cowan & Sons, Lim., Dickinson & Co., Lim., and Spicer Uros., J.im., agree to accept payment of their accounts on the same Ijasis, and that Mrs. Smith does not draw for her own use more than /."2 IDS. od. per week until the bills are paid, and that you furnish us with a fJalance Sheet every six months until the bills are paid." Now you see lie does not use the word " audit," but says " furnish us with a IJalance Sheet." That is his interpretation of the condition which was made. He said in his evidence that what was said was that Mr. Sheard sliould have full control over all the books. Well, I do not see how that can mean an audit — " complete control over all the books." It means they should have the direction of how the books should be kept. At all events, there is no word of an audit in that. Now that is how the matter stood, and, as I say, it is common ground that up to that date there liad never been an audit by Mr. Sheard in the strict sense of the word, and all they had done was to go into the cash balance for the purpose of the drawings and to make out Balance Sheets. Now, that being so, you have to ask yourselves. What does this mean? and I am taking the plaintiff's version as true. You know the defendant and Mr. Fosbrooke deny it, but I am taking the plaintiff's version: "He asked me what I was going to do about the audit. I told him I was going to make no change in anything. I said, ' They know I have no knowledge of books; I expect them to do all m}' books.' I cannot be sure of the words I used. I said I hoped they would take special care, knowing tliat I knew nothing about the books, and I was going to make no change at all." Now you know Mr. Shee has put it to you. He says that is all very well, but this was a poor woman, and it was the duty of the Auditors to make it plain to the poor woman, but that is not so. If the Auditors diiectly deceived her that would be one thing. It is not their duty. She was telling them — instructing them — what they should do. It is her duty to make it plain to them what they were to do, not his duty, and I must tell you that Mr. Shee's suggestion that it viras the duty of the Auditors to make it perfectly plain what they were going to do, and what they were not going to do, was not good law ; and it is not good sense, gentlemen. Mr. Shee talks about a poor woman, but j-ou must recollect that this is a lady who has been carrying on this business and managing part of it, and if women go into business they must be treated as business people ; many of them are more capable than men to understand business matters, but they cannot come before you being business people in this way and say, "Oh, I knew nothing; it was the duty of the Auditors to make it plain to me." She was giving them instructions what to do; it is for 86o AUDITING. her to show what she instructed them to do and what they agreed to do. Xovv you must take that from me, and you must take it from me that ^[r. Shee's observations on that point are not good law. She has got to make out what the contract was. Of course, if they intentionally mislead her that would be another matter altogether, but now look what it was. They were Auditors. They wanted to be employed. Naturally their wish would be to be employed to do as much work as possible, but they have no right to do more work than their contract instructed them to do, and if they come here and ask to be paid for a complete audit Mrs. Smith would say, "I never asked 3'ou to make a complete audit. I asked you to take special care of the books." That is quite true. They were to give very careful instructions how the books were to be kept, and Mr. Shand was sent in for that very purpose. Now 3'ou have to take the contract as alleged bj' Mr. Fosbrooke, because he was the person who attended the interview, and it is he whose evidence 3'ou have to consider rather than Mr. Sheard's. Mr. Fosbrooke said, " We had done no auditing up to that point at all. I had not attended myself the January meeting, but I went there with these accounts, and then the question arose what was to be done. There were no instruc- tions to me to do anything more than this Balance Sheet which I had been instructed to do, and the creditors required me to do, but it was discussed what should be done and what postings I should check and what I should not. To begin with, I said ' There are a number of old accounts due. They ought to be collected by Mr. Shand. It will take a great deal of his time ; 3'ou had better get him an assistant book- keeper,' and accordingly Mr. Fosbrooke arranged what Mr. Shand should do in the way of checking and posting, and what this lady — she was not called in until some time afterwards — what she should do, and not a word was said about auditing at all.'' Xow as I sa3', 3'ou have got to ask 3'ourselves first of all, does the plaintiff make an3' case upon her statement? If she does, is she telling the truth, or is Mr. Fosbrooke telling the truth ? You know what happened afterwards. We know that from that time right up to August 1904 they did not attempt to make a complete audit. How is that to be accounted for? If they were instructed — Mr. Shand was there— -Mr. Shand was present at this conversation apparently, or the early part of it — how was it that no remonstrance was ever made to them for not having done the audit? Of course, it may be said that Mr. Shand was going to swindle Mrs. Smith, and therefore it was not to his interest to do so, but certain it is that the3' have never attempted to do the work of auditing. Mr. Whittaker pointed out a number of things that they did not do. They never asked for the counterfoil Receipt Book, or for the rough Cash Book, to compare it with the Cash Book, or that a single item should be vouched Irom beginning to end, which is important. Of course, you SMITH V. SHEARD. 86t have to consider the question of the honesty or dishonesty of Mr. Shand. Now, again, you have to look, according to Mr. Fosbrooke, who said Mrs. Smith pointed out again and again to him that she wanted the expense brought down as much as possible. Could not Mr. Shand do this, and could not Air. Shand do that, and it was arranged that Mr. Shand should do this and that — certain things to save time and money. Does that seem reasonable, to say that Mrs. Smith was a reasonable woman? The}' never dreamt of Mr. Shand being dishonest. He had been in their service some time, and it was never dreamt of. All that she wanted was such a Balance Sheet as woiild satisfy the creditors, and they were not going to be satisfied with Shand's Balance Sheet, and they got an accountant's Balance Sheet. That was the object of the employment. That went on apparently without much important happen- ing until July 1904. Now apparently they had no instructions to go be}'ond the second Balance Sheet. The creditors were paid off by the end of Alarch 1904. The creditors were paid off, and therefore there was no necessity, as far as the creditors go, to have the expense of any further Balance .Sheet, and now come some very important matters about this month. Now the first thing is letters that have passed of July 1904. Now it is exceedingly difficult to understand what these letters were. One must remember that at this time Mr. Shand — the writer of these letters — had commenced his defalcations, and they had been going on for some months — they had begun, I think, about a year before this, and apparenth' it is common ground. Mr. Fosbrooke had told Mrs. Smith that he had noticed that Shand smelt of drink, and therefore there might have been a little friction, and apparently there was some accountant whom Mr. Shand rather wanted to be brought in. Now this is written by Mr. Shand : " We must ask you to push on with our Balance Sheet to March 31st 1904. The original arrangement with you was that the Cash and Bank Books were to be balanced and audited monthly. We should be pleased if you will see that this arrangement is carried out in the future." Now that is not an audit at all. It was the Cash Book and the Bank Books that were to be compared. " The original arrangement with you was that the Cash and Bank Books were to be balanced and audited monthly. We should be pleased if you will see that this arrangement is carried out in the future." Now that arrangement had been made in Dickinson's time, and was utterly absurd now — utterly absurd. Now this is Mr. Sheard's answer : " In reply to your letter of the 15th inst., I am proceeding with the Balance Sheet to March 31st, and hope to hand you the result shortly. I should have completed my work before now if there had not been so many errors, discrepancies, and omissions in the books, and in any case I am informed that the stock will not be ready until next Wednesday, 862 AUDITING. SO that it would have been impossible to complete the Balance Sheet earlier. I note that you wish the Cash and Bank Books to be audited and balanced monthly, which shall have attention, but this is the first intimation I have had that you wished the arrangement which was made in Mr. Dickinson's time to be carried out after his retirement. OI course, to do this it will be necessary for the Cash Book to be written up and balanced monthly, which has not been done in the past." Now there was no answer to that. The defendants rely upon that as showing that this was an intimation that there was no complete audit going on. Well, it is very difficult to see whether what they were complaining of was that they had not been done monthly, or that they had not been done at all. It is very difiicult to understand those words. The next is August i6th : " Dear Sirs, — I beg to advise you that I have got out a Trial Balance to 31st March of your books, and that the}' do not balance by the sum of £ig 15s. 6d." That is a Trial Balance Sheet. I daresay, gentlemen, you know it is the first attempt at a Balance Sheet that is given. " As the books have not been kept in the manner I instructed, and as I have had to make a number of entries to balance accounts ruled off in error as settled, it appears to me that it will take a considerable time to find the errors and balance the books. I have already discovered nearly 100 single entries and mistakes amounting to ;/?7o. I shall be glad of instructions as to whether you wish me to balance the books or to write the amounts off." Now what Mr. Fos- brooke says to that is, " If I had been an Auditor that would have been a perfectly ridiculous letter for me to write, because if I was an Auditor I would have to go through every figure. If, on the other hand, my object was to make a Balance Sheet, why first it was for my employer to say whether I ought to clear up this discrepancy of ^19 15s. 6d." Now what do they say? Of course, it might be said they ought to have said : Why, you have got to audit, and if you have got to audit there cannot be any letters of credit. You must audit and find the actual figures. Then the next letter is : "We are in receipt of your letter of the 16th inst., and note that you are unable to balance our books by the sum of ji^ig 15s. 6d., and to save further expense you had better write the amount off." Now that is relied upon very strongly by the defendants as showing Mrs. Smith's object was at that time to save expense as much as possible. She wanted to have a Balance Sheet which would show her position, but it did not matter to her whether it was- ^50 one way or the other. Well, then, the letter goes and dis- putes the suggestion of Mr. Sheard that they had been making errors and mistakes in their books. They say they have not. They say they have been doing nothing of the sort. " We believe there is a balance due to j'ou, and will feel obliged if you will send in a statement of par- SMITH V. SHEARD. 863 ticulars to enable us to arrive at a settlement, after which we can go into the matter of fresh terms." That means the fresh terms will settle up for the old. We will then consider whether we shall employ you or not to go into the accounts of the 31st March 1905. Now on the 19th, and before the Balance Sheet comes, there is an interview, and at that interview there is a conversation, as to which the parties do not differ very much. It is quite clear it did take place. On the 19th, before the accounts had been sent out, in which Mrs. Smith asked, " What is the amount; what are you going to charge me?" and he said, "Well, if I charge according to the hours employed it will come to something like 60 guineas." " Oh," said she, " that is a great deal too much," and he said " Perhaps it is too much. I shall charge you 40 guineas." " Oh," she said, " that is too much," and he said, " Oh, well, I cannot reduce it to less without seeing Mr. Sheard." They both agree that that took place about that time, and it is fairly common ground that that took place. And, further, this took place : Mrs. Smith says herself, " I have asked him the terms for a perfect audit." Now the letter goes on : " As stated in our interview yesterday, I shall be pleased to undertake the complete audit of your books, and to furnish you with a Profit and Loss Account and Balance Sheet annually for the future at the follow- ing fees, provided the bookkeeping is carried out under my supervision and according to my instructions : If one set of books is kept, 30 guineas per annum ; if two sets of books are kept, 40 guineas per annum. These amounts would also cover the cost of checking the Cash Book and Bank Book monthly, if you wish it done." Now, gentlemen, there was no answer to that, or the only answer was Yes, there was an answer : " We are in receipt of our Balance Sheet to March 31st 1904, together with your letter, which will have our attention in the course of a few days. Your bill of costs for periods ended 30th June 1903 and 31st March 1904 we consider excessive, and our Mr. Shand will see you on this matter, after which we can go into the matter of future charges." Now, gentlemen, it is a remarkable fact that the defendants never were employed after that to go into the matter. Now that seems of import- ance. You know if Mrs. Smith was so anxious to see whether her servants were being honest or dishonest there was exactly the same necessity for a full and complete audit then as at any time. Instead of that she never makes any reply to that letter, and never employs the defendants again until after Shand's defalcations are discovered, so that Mrs. Smith— who was so eager, as suggested, to have everything and a complete audit made — had no audit, no Balance Sheet, or any- thing during that time until Shand's defalactions were discovered. Of course, she had had a Balance Sheet up to a certain time because of the creditors. As soon as that was removed she does not seem to have 864 AUDITING. wanted anything at all. You must ask yourselves how does that bear upon the case. Does that look as if she wanted to spend as much money, or to spend a considerable amount of money, in Balance Sheets and auditing and complete auditing or not? Now the next thing that happens after these orders is a suggested interview, at which Mr. Sheard is present and not Mr. Fosbrooke, when Mr. Sheard presented his accounts and required payment. The accounts, by-the-by, were sent on the 2oth August, and were acknowledged on the 22nd, when Mr. Sheard was present. Now it does not seem to me that that is an interview of much importance. It took place afterwards. It took place after all the work had been done, and now they have no effect one way or the other upon it. Mrs. Smith's version, corroborated by the bookkeeper, is this, that she said, " Mr. Shand tells me you have not done your work pro- perly," and that Mr. Sheard said, " That is a very serious thing. If it is true, it is a serious thing for my clerks. If it is false, it is a serious thing for you. Be good enough to put your complaint in writing." " Yes, I will," says Mrs. Smith. Those are Mrs. Smith's own words, " And I told Shand to do it." But it is quite clear that Shand never did do it. It was upon that that Mr. Shea put in letters of August i6th and August 17th, as if that would affect it, but that will not do. The accounts had not been delivered at that time, and it is quite clear that that interview must have taken place a great deal later than August, when they were pressing for payment. Now these accounts were sent in. Now we must come to these accounts, because it is on these accounts that the plaintiff lays the greatest reliance, and there is no doubt that that account uses the word " audit." There is no doubt about it. Now it is said that the word was used in a loose sense, and they must have known perfectly well. They said : " ^Ve have never been pretending to audit in the full sense of the word " ; but there it is, and it is a fact in favour of the plaintiff as against the defendants. It is a great point made by Mr. Shee, and you must form your own opinion upon it. Is it an admission that they had agreed to make a complete audit of the books, and had not done so, or is it a loose expression just saying what they have done? "For services opening books at ist January 1903 ; auditing same for six months ended 30th June 1903; preparing Profit and Loss Account and Balance Sheet at that date, and writing up Private Ledger, /.21." That is for the first six months. The next is, "Auditing the books for the nine months ended 31st March 1904 ; preparing Profit and Loss Account at that date and Balance Sheet at that date, and writing up Private Ledger, /.'21." Now, what j\Ir. Horridge says as to that is that they used a loose expression, and that is the whole origin of this action. She consulted accountants and other people, and they said, " You have got a case, SMITH V. SHEARD. 865 because in their own bill the}' put down ' audit.' " Now you have to decide. You have heard Mr. Horridge upon it, and you have heard Mr. Shee. That is the matter. It is not the contract; it does not pretend to be the contract. You have to see what the contract was that was made in January 1903, and by looking properly at all the corre- spondence, and certainly at these accounts, you see what they agreed to do. Well, they squabbled for some time about these accounts, and so on. There are several letters about mistakes on one side and the other, and so on. Apparently Mrs. Smith was dissatisfied, and it was quite plain she was dissatisfied with these bills, and that they were too much ; and observe that at this time Mrs. Smith, according to her stor}', knew that the defendants had not done their dutj'. Now what does she do? She gives bills in Januarv 1905 — gives two bills, one payable in May and the other payable, I think, in September, and when the May bill becomes due she asks that it may be renewed. It is renewed, and she pays it, and it is only when proceedings are threatened upon the second, which became due in September, that then she formulated, so to speak, the counterclaim which she has brought. Now the discrepancies were found out. The defalcations were found out in April 1905. Now Mrs. Smith, according to herself, then knew how badly she had been treated apparently by the defendants, and what does she do ? Who does she employ — who does she employ to make out the accounts to show these defalcations ? She employs the defendants again for that purpose, and you have to ask yourselves what light that throws upon it. According to her she knew that her audit had not been properly done, and that she had suffered by it, and she employed the very people again, and she never formulated a claim against them by any writing so far as we have got. If she is right and she has got a good cause of action against them, she never does that until they press her for the £21 in October, several months afterwards. She said, " Oh, the reason is I did not want to go to law; I had not money to spend in law," and she seemed to be advised by her solici- tors and accountants, and did not take any steps. But when this claim is made she does, and that is how the matter rests. There are a number of matters you have heard them discuss by counsel on either side again and again. I will only remind you what you have to say. You have to say whether or not it is proved to your satisfaction that the plaintiff instructed the defendants and the defendants agreed to make a com- plete audit. Well, I think there is only one other matter that I omitted, and that is an important one. These BalaiTce Sheets and Profit and Loss Accounts that were sent in do not contain any signature, or any certificate by the accountants such as usually appears — "Audited and found correct." Now you heard evidence about that. Mr. Whittaker K K K 866 AUDITING. v.-ent so far as to say that because there was no such certificate it must be presumed there was not a complete audit. That, I think, is going a little too far. The other witnesses said — the plaintiff's witnesses as well as the defendants' — that when we have audited that is a certificate that we put on, and the inference, if an inference is to be drawn — as they were not put on — is that there was not a complete audit. Gentle- men, you must judge for yourselves. It is an observation in favour of the defendants that they never put it on, and they would have put it on had the}- been emplo3'ed to audit. Therefore it all comes back to this question. You have got to consider — j'ou have to look at the plain- tiff's account and what her instructions were — whether the instructions were for a complete audit or not : and if they were, do 3''ou accept her account or Fosbrooke's account? According to his account it is quite clear that the instructions were for something different. Now you tell me upon this point whether you find for the plaintiff or for the defendant. If you are satisfied that the agreement was for a complete audit, you will find for the plaintiff; but if you find that has not been proved, then you will find for the defendant. We may have to consider hereafter, either you or me, the question of damages, but we will not consider that at present. I will ask you to give your finding first upon the question 1 have put to you. Mr. Shee : My Lord, ma}' they have the reference to the Ledger with regard to these accounts? Mr. Justice Bray : ^\llat reference? Mr. Shee : Hodgson and Hill. yir. Justice Bray : Mr. Shee, I asked you before, and you said " No." Mr. Shee : All right, my Lord. I agree. The jury retired to consider their verdict. The jury having returned. The Associate : Now, gentlemen, have you agreed? The Foreman : We have. The Associate : How do }-(>u find — for the plaintiff or the defendant? The P'oreman : We find that at the creditors" meeting in London there was a distinct understanding that there was to be a complete audit. Mr. Justice Bray : You know, you have used the words, gentlemen, that there was a distinct understanding. You know, that looks to me a distiiK t under.standing is not an agreement. Do you find that there was an agreement for a ( oniplete audit? SMITH V. SHEARD. 867 The Foreman : That is so. Mr. Justice Bra}' : You find that there was an agreement for a complete audit ? The Foreman : Yes ; that is so, my Lord. Mr. Justice Bray (to counsel) : What do you sa}- about damages? Mr. Lindon Riley : What I should have liked was an answer to the ■question as to whether there was a contract between the plaintiff and the defendant for a complete audit. Mr. Justice Bray (to the jury) : That is what you find? The Foreman : Yes, my Lord. Mr. Justice Bray : Just let me have the words — what you have got down, you know, because, you see, I want to be sure. (Examined paper which was handed to him.) Oh, that will not do. The f^Dreman : Well, we will retire again, my Lord. Mr. Justice Bray : Xo ; that will not do, gentlemen. What I must ask 3"ou — you m.ust be really careful about this, that contract at the credi- tors' meeting in London — well, I must tell you that is not the contract ; the contract relied upon is the contract made between the plaintiff and Mr. Fosbrooke. I read 3'ou the evidence about it. A contract at the creditors' meeting would be a contract between somebody else; that is what 3-ou have got to find, you know. I read 3'ou the words, you know, and you must go back please, and find, one way or the other, whether that contract is made. That is all I am leaving to you. I am not leaving to you any question of the creditors' meeting at all. The Foreman : It is very diificult to go past the London meeting, my Lord. ^Ir. Justice Bray : But you have got to find it one wa}' or the other ; the plaintiff has got to satisf}' you that the contract was made. Let me have what you have written down. Mr. Shee : I understand that the jury do first answer the question as to whether there was an agreement or not. ^Ir. Justice Bray : ^^'ell, Mr. Shee, you shall look at it, and you shall have a copy of it, and you can see what 3-ou think of it. The jury again retired, and upon their returfl The Associate: Now, gentlemen, have 3'ou agreed? The Foreman : We have. The Associate : Well, how do 3'ou find? The Foreman : For the plaintiff. K K K 2 868 AUDITING. Mr. Justice Bray : You find that there was a contract made on that occasion ? The Foreman : Yes, my Lord. ;Mr. Justice Bray : Very well. For a complete audit? The Foreman : Yes, my Lord. Mr. Justice Bray : Xow then, Mr. Rile3s what about the question of damages? INIr. Horridge : My Lord, I should think the best way to do would be to refer that to one of our friends to deal with, because questions may arise which are difficult with regard to it, because, if your Lordship understands, it will take up time. ^Ir. Justice Bray : ^Vell, Mr. .Shee, what do you suggest. Of course, strictly speaking, you are entitled to have it decided by the jur}-, if _vou desire. Mr. Shee : Xo, my Lord. I think that is a reasonable suggestion. We might agree upon somebody and mention him to your Lordship. IMr. Justice Bray : Very well then, I will discharge the jur}'. You are content that the jury be discharged, Mr. Horridge? Mr. Horridge : 'Sly Lord, I think there is no other question for them. The Associate : Then I will formally discharge them. Mr. Justice Bray : Then, gentlemen, you are discharged from further attendance at these assizes. Mr. Horridge : \Vell, I should think that probably the best plan would be for whoever goes into the question of damages to report to your Lordship. Mr'. Justice Bray : ^Vell, then, you know 3"ou had better agree who is to act, or, if you cannot agree anything, that I should tr}- it — that will be the best way. You see, you have discharged the jur}-. Mr. Horridge : Certainly, my Lord. Sir. Justice Bray : Well, somebody will have to try it. li you do not agree — what do you say, Mr. Shee? Will }(/u agree? Mr. Shee : I should prefer that we refer it to one of our brother barristers. Mr. Justice Bra}' : Well, if you do not agree, what is to happen? Mr. Shee : I d(j not think we shall disagree. The question is there are so many. Aery well, we can arrange that. Mr. Justice Bray : Very well. (34 Acci. L.R. 1906, p. 65.) STEVENSON V. BEXHILL CORPORATION. 869 The case of STEVENSON v. BEXHILL CORPORATION. (Decided by His Honour Judge Scllly, in the Hastings County Court on Jul}' 9 and 30 1906.) Elective Auditor'' s Duties. This was an action brought by Mr. Joseph Henry Stevenson, one of the elective Auditors for the borough of Bexhill, against the Mayor and Corporation of Bexhill, to recover certain fees he stated he had earned in his capacity as Auditor. Mr. Willett, in opening the case, said the action was brought b}- one of the elective Auditors of the borough of Bexhill to recover the surn. of /■19 8s. 6d., his fees as elective Auditor for the auditing of the accounts of the Corporation for the half-year ended September 30 last, at the rate of two guineas per day for 9^ da}-s. He (Mr. Willett) said he hoped his Honour would regard the case not so much as a matter as to whether a private individual was going to receive his salary of a number of guineas for work done honestly and to the best of his abilit}', but rather as a question of great importance. Because it was a question as to whether the accounts of the Corporation were to be properly audited by the representatives of the ratepa3'ers, or to be simply glanced over by an}' needy men who were content to accept any pittance the Corpora- tion were prepared to offer them. Elective Auditors were appointed under the provisions of Section 25 of the Municipal Corporations Act, 1SS2, which set forth that there should be two elective Auditors elected from among the burgesses. They must be elected by the ratepayers, and must not be members of the Council. Section 26 of the Municipal Corporations Act said the Treasurer should make up his accounts half- yearly on such days as the Council with the approval of the Local Government Board appointed. Section 27 said the necessary vouchers should be submitted to the Auditors, by whom they must be audited. Schedule 5 of the Municipal Corporations Act did say that the Council had power to remunerate their officers out of the Borough Fund, but • there was no specific arrangement in the Act as to the remuneration they were to pay. But the Public Health Act, 1875, Section 246, enacted that Auditors in respect of such audit should be paid such reasonable remuneration not being less than two guineas for every day of the audit. The Bexhill Council seem to have taken a very peculiar view of the meaning of that section. They seemed to have thought that they had the power to appoint the number of days the auditors should take in auditing the accounts, but he contended that if the Council had the power to appoint the number of days of each audit, the whole object of the Legislature would be nullified. Thus, the Council would be able to oust the representatives of the ratejjayers, and prevent them going 870 AUDITING. properly through the accounts. It seemed to him that it was quite clear that what the section meant was that the Council had the power to appoint the remuneration, but it was limited there, because it must not be less than two guineas a day. The Council could not appoint the remuneration to be one guinea a day. On September 25 1905 the Council passed a resolution to the effect that in view of the proposed engagement of a Chartered Accountant to audit the accounts of the Council, that so long as the professional audit was conducted, the Council appoint reasonable remuneration to each Auditor, the same not to exceed five guineas for each audit. That resolution, said Mr. Willett, was quite ultra vires, because the Council had no power to appoint the amount of the remuneration at a sum lower than two guineas a day, and they had no power to appoint the number of days the Auditors should take in the audit. He did not suggest that the Auditors should take any number of days they liked, but that was a matter for his Honour to decide. The Council contended on the case of Thomas v. Devonfort, reported in the 1900 Law Reports, that the Audit' rs were onl}' entitled to be remunerated for that part of the accounts of the Council which related to their finances as an urban sanitary authority under the Public Health Act. In the first place, the plaintiff's claim in the present case was in contract. Mr. Stevenson had been elective Auditor for the borough of Bexhill ever since the borough was incorporated in 1902. He was first elected in March i 1903. On every occasion since then he had always had placed before him, with the other Auditors, the whole of the accounts of the Corporation. Every book and every voucher had been placed before him regardless of whether it was necessary under the Public Health Act or not. When he had completed the audit, he had always received two guineas for exery day in whi^h he had been engaged auditing the whole of the accounts. This was done at Hastings and other towns, and Mr. Steven- son was actually paid two guineas per day ever since his election. I'pon this the claim was founded. He was elected on March i 1905, and he aitdited the accounts up till March 31 1905, and he was paid at • the rate of two guineas per day for that. It was onh' on September 25 1905, a long time after his election, that an}' suggestion was made that the Council could pa}^ less than the amount it was understood was to be the amount payable to the elective Auditors at the time he was elected. It was like engaging a servant for a year. He did the work for half-a- yeav and was paid for that, and his employer then said he would pay him less for the remainder of the year. Mr. Stevenson could not resign. His duty to the ratepayers was to do the work he had been elected to do, and therefore he considered that in contract he was entitled to claim the whole amount. STEVENSON V. BEXHILL CORPORATION. 87I The Judge : He is dealing with the corporation of a borough. They cannot deal with him as a private individual. Their power is rather limited. Mr. Willett said the Council had power to pay the money out of another fund. Schedule 5 of Section 19 of the Municipal Corporations Act said that the Council had power to appoint such other officers as were usually appointed in the borough or as the Council thought necessary. Mr. Rodgers : Are you going to prove the appointment? Mr. Willett : Do I understand the Town Clerk contends that ^Ir. Stevenson has never been appointed elective Auditor for the Borough of Bexhill? The Judge : What is the section you are referring to ? Mr. Willett: I grant that it does say "officers appointed by the Council," but surely The Judge : This gentleman was not appointed by the Council. He is not an officer of the Council. He is the representative of the rate- payers as distinguished from an officer of the Council. His Honour then read an extract from the judgment of Lord Russell in the case of Thomas v. Devon-port. Lord Russell said the plaintiff was not a servant of the Corporation. He was elected by the burgesses of the borough, and therefore he had no claim against the Corporation in respect of his services as elective Auditor. Mr. Rodgers (to Mr. Willett) : Do I understand that you abandon the case of contract? Mr. Willett : If his Honour is against me The Judge : It is my opinion, but it does not conclude you. (Laughter.) ]\Ir. Willett : I prefer the case to be decided under the Public Health Act. Continuing, Mr: Willett said that in all towns there was a Borough Fund. In Devonport the rents of the corporate property went to the Borough Fund. In a modern borough like Bexhill, however, there was no Borough Fund. They had no corporate property excepting the Town Hall and the Electric Light Works. Accordingly, the amount repre- sented by " the Borough Fund " was the minutest, and he said that any man could audit the accounts of a corporation, so far as they related to the duties of a corporation as distinct from the duties of an urban sanitary authority, in a couple of hours. The Bank Pass Books, the Treasurer's books, and the Borough Fund books, took up two pages, while the other Pass Books of the Corporation took up just 50 pages. The General District Fund Loan Account took 30 pages, the Treasurer's 872 AUDITING. Borough Fund Account a paltry five pages, and the General Account 36 pages. He was not touching the Sanitary, Electric Light, and a number of other accounts. Mr. Rodgers said he admitted that two hours was sufficient for the Borough Fund, &c., if that would help his friend. Mr. Willett, continuing, said that the whole of the other accounts of the Corporation were, within the meaning of this section of the Public Health Act, accounts of the receipts and expenditure under this Act, and that was what they were entitled to remuneration for auditing. Mr. Willett then took the accounts of the various Committees, whose works were carried out under the Public Health Act. He referred to the Cemetery, and Parks and Pleasure Grounds Committee, to the allotments of the Corporation, and the electric lighting. The Judge asked for a table of the various heads of the audit. Mr. Willett said he had a list of the books submitted to the elective Auditors, and supplied by the Town Clerk. The Town Clerk and he were agreed that the only part of the audit for which they were not entitled to remuneration was the Borough Fund. Mr. Rodgers : Quite so. Mr. Willett : And also that it would only take two hours. Mr. Rodgers : Yes. The Judge : Is the real dispute as to time? Mr. Rodgers : That is it entirely. It is a simple issue. The Judge : It may be a simple issue as regards words, but it is not to decide. (Laughter.) Mr. Willett said the audit had always taken three Auditors between j&ve or seven days. Mr. Rodgers said he gathered from his friend's opening that there was this difference between them. Mr. Willett regarded this audit as a full and ample audit of all the books of the Corporation. But the Devonport case showed that the audit was strictly limited. The issue was as to whether tTie auditors were entitled to audit more than the Borough Treasurer's accounts. The judgment of Lord Justice Russell said the audit was a strictly limited one, and was not an audit of the doings of the various Committees, but simply an audit of their Borough Treasurer as an accounting officer. Lord Justice Russell did not approve of all the language used by Mr. Justice Phillimore, but he did not in any waj' qualify the language which had just been read. He himself referred to the audit as an audit only of the Borough Treasurer, STEVENSON V. BEXHILL CORPORATION. 873 who was an official distinctly apart from the Corporation, and whose books were a set of books altogether outside the books of the Corporation. Mr. Willett contended that Lord Russell's judgment did qualify this part of Justice Phillimore's remarks, when the former said the audit was incomplete and imperfect. Mr. Rodgers : That does not in way qualif}^ the language. The Judge said that did not enlarge the scope of the audit as defined by Mr. Justice Phillimore. Lord Russell simply said it was within the competence of the Auditor to satisfy himself that the pa^-ments were legal and regular. He did not go beyond auditing the accounts of the Borough Treasurer. Mr. Willett argued that that enormously extended the scope of the audit. The Judge said of course the auditor had the right to call foi evidence, but that did not enlarge the scope of the audit. It did not turn the audit from an audit of the Treasurer's books to an audit of all the books of the Corporation. Mr. Rodgers : That is my point. Mr. Willett : I do submit we are bound to audit all the books of the Corporation. Mr. Rodgers said he thought time would be saved if at that stage they decided what was the extent of the audit. Section 246 of the Piiblic Health Act stated that where the authority was a Corporation the accounts should be audited by the borough Auditors, and the Auditors should have like duties, as if they were auditing municipal accounts. As to the type of the audit, they were referred to the Municipal Corpora- tions Act of 1882. In Section 18 of that Act they had scarcely any reference to the accounts of the Corporation. They got nothing else beyond the accounts of an official outside the Corporation who was called a Treasurer. The Act said that every Council should appoint a Treasurer, and to show that he must be an outside official, it said the Town Clerk must not be the Treasurer. Section 25 said there must be two elective Auditors, but no reference was made as to their duties. It was Section 26 which said that the Treasurer must make \ip his accounts half-yearly. Section 27 said the Treasurer must submit his accounts with vouchers and papers, and the elective Auditors must audit them. So far, no reference was made to anything beyond the Treasurer's accounts. The only duty of the elective Auditors, according to an 874 AUDITING. ordinar\- rendering of these sections, was that the audit was of the Treasurer's accounts. -\Ir. Rodgers proceeded to refer to the Devon-port case, of which, he said, he had a private report which set out the case ver}' clearly. It was sent him by the Town Clerk of Devonport. Mr. ^\■illett : Why not take the-Law Reports? Mr. Rodgers said the report he had simply put in plain language just the references to the sections he had given. Justice Phillimore, in the report before his Honour, said the audit was strictly limited. It was simply an audit of the accounts of the Borough Treasurer as an account- ing authority. Justice Phillimore said he agreed that the Treasurer could not shut his eyes in the face of a bill which was obviously not a bill which could be passed by the Corporation. The Borough Treasurer could not shelter himself behind the three signatures. Lord Justice Russell did not agree with that sentence. The Auditor, he said, must not only look for a voucher and see that the voucher was within the province of the Council or not, but he must go a little further where there was doubt, and Lord Russell just amplified this. But it must not be suggested, argued Mr. Rodgers, from this, that Lord Russell amplified the audit as regarded the books that were to be audited. Mr. Willett said it was his contention that the whole of the books of the Corporation were the Treasurer's accounts; they could not dis- tinguish between them. They could take the Postage Book, for instance. The Judge : Surel\' vou are dealing with the Treasurer as an account- ing official. Mr. Rodgers put in certain books which he said were the Treasurer's accounts. Mr. Willett remarked that the books put in were practically Pass Books. The Treasurer uf the borough of Bexhill was manager of a bank at Lewes. To all intents and purposes the books before his Honour were nothing more or less than Bank Pass Books. They would not find any detail in them whate\-er. Surely the Treasurer was responsible for the accounts of the Corporation 1 ]Mr. Rodgers might as well say he was not responsible f(jr what went on in his office. The Judge said that, as far as the authorities read to him went, the only audit which was to be made was the audit of the Treasurer's accounts, whatever they might be. Mr. Willett : The Treasurer is responsible for the whole of the accounts. \ STEVENSON V. BEXHILL CORPORATION. 875 The Judge : He is responsible for everything he receives. Mr. Willett : Supposing the Treasurer draws a cheque for £2.0 for stamps, and pa}-s that to the P'inance Clerk, who pays it to the Stamp Distribution Clerk, £.t^ goes here, and £'^ there to the various offices. It is our duty to trace the whole of those amounts. The Judge : To see that everv stamp is duly licked and applied to the envelope. It would be absurd. His Honour added that Lord Russell only said there should be a fair and reasonable examination of the vouchers. Mr. Willett agreed. He said they had to make a fair and reasonable examination of the payments of postage stamps. He did not say they should see every letter that was charged a penny. That was going too far. The Judge : Can't you give me a sample instance to show how it would apply? Mr. Willett, answering, said that in going through the Stamp Dis- tribution Account and comparing it with the Rate Collector's account, they found a difference of £^2, which had to be put right. Surely they had to trace that. If they had not done so, that £1 would never have been discovered. The Judge asked what were the other items in the Treasurer's accounts, and ^Ir. Willett said that one book on the table was the Treasurer's General Account. Mr. Rodgers said the book was a General Cash Book belonging to the Corporation. The Treasurer had never seen it. Mr. Willett : Then he ought to have. Mr. Rodgers : It is a Cash Journal. The Judge: Who keeps it? Mr. Rodgers : The Accountant. It has never been in the Treasurer's hands. It is only a book we have to keep for Corporation purposes, and is apart altogether from there being such an office as Treasurer. Mr. Willett : The Treasurer does not see anything of the accounts. He is only a bank manager. Reading the section of the Act quoted by Mr. Rodgers, the Judge said it seemed that the Auditors had to audit the accounts of the Council or the Borough under the Act. 8/6 ArDn:i.\-G. Mr. Rodgers said the section continued to the effect that the Auditors should proceed with the audit in a like manner, and have like powers and authority, and perform like duties as in the case of the audit of municipal accounts. The Judge : I don"t see how that alters the initial words of the section. ;Mr. Rodgers : The audit is the audit of the Treasurer's accounts, and this fuller judgment 1 have here shows that. Mr. Willett : I can't look at a judgment that is not reported in the Law Reports. The Judge : 1 cannot accept notes which are not by a barrister or a solicitor. Mr. Rodgers said that unfortunately this was a passage which bore out what he was saying. The Judge : I cannot gather from this report whether Lord Justice Russell agrees with Justice Phillimore in saying that the accounts of the audit are simply the accounts of the Treasurer as distinct from the accounts of the Count il. He differs from Justice Phillimore as to the nature of the evidence which ought to be gone into, but I cannot see that he limits in one way or another as to the scope of the audit. Mr. Rodgers replied that Lord Russell said that but for certain words of Justice Phillimore the case would not have gone on. Mr. Willett : Lord Russell took the view that the Borough Treasurer is responsible for the whole of the accounts. I do not know what is the distinction between the Treasurer's books, and what are not the Treasurer's books. Mr. Rodgers : The Treasurer's books are the books the Treasurer keeps. The Judge : The Treasurer here is simply a banker. Mr. Rodgers : It is the practice of a number of corporations. The Judge : How the audit could be said to be an audit of the accounts of the Council I cannot understand. Mr. Rodgers : Our case entirely is that it is an audit of the accounts of the lUjrough Treasurer. After reading Section 246 of the Act, the Judge said that how the auditor of the liank Pass l^ooks could be the auditor of receipts and expenditure he could not sa}'. STEVENSON V. BEXHILL CORPORATION. 877 Mr. Rodgcis : 1 have here a full judgment, but your Honour does not wi^h it. The Judge : I should like your judgment if I could be satisfied of the correctness of the report. ;\Ir. Rodgers : It comes from a litigating party. The Judge : That makes it all the more suspicious. (Laughter.) Mr. Kodgers then read in detail the sections of the Municipal Cor- porations Act which had reference to elective Auditors. Subsequentl}- he said he agreed that if the .Vuditors had to do more than the Treasurer's accounts nine days was not unreasonable, but to show the absurdity of such a contention an elective Auditor would take five or six years to audit the accounts of Liverpool, or an}- town of importance. Also the Auditor who carried out the Devonport audit, instead of taking what Lord Justice Russell said, four days, as being ample, would have taken more than ten times that time. Mr. Willett said they all knev,- that in big towns, where it was impossible for the elective Auditors to carry out the audit, they had professional Auditors. There was only one town that had turned out the elective Auditors and relied on the professionals, and that was Huddersfield. The Judge asked where the duties of the Treasurer were defined. i\lr. \\'iUett : Only in Sections 26 and 27. Mr. Rodgers : Xo, sir. I have got something else. Section 141 sa3-s that orders of the Council for payments of monej's shall be signed by three members of the Council, the Town Clerk, and the Treasurer. The Judge : Is there an}' provision in the Act which requires that all accounts must go to the hands of the Treasurer? Mr. Rodgers : Section 21 covers all the accounts which officials of the Corporation receive. The Judge : Under the Municipal Corporations Act. They could not recover anything under the Public Health Act. Argument ensued as to what were the Treasurer's books. The General District Fund Account, the Electric Light Account, &c., were taken, and Mr. Rodgers said the Treasurer had never seen them. The Judge : The question is, are they properly described as Treasurer's accounts? He is responsible for all receipts. All receipts of the Corporation ought to come in the hands of the Treasurer. 878 AUDITING. ^Ir. Rodgers : And as soon as the\' come there his responsibility begins. When the question of the fuller judgment possessed by Mr. Rodgers came on again at a later stage, the Town Clerk said he did not mind having the case adjourned for the attendance of the shorthand writer who took the notes. The Judge said he could not go outside the report he had. The case must be adjourned, or else he must reserve judgment. Mr. ^^'illett said the whole of the trouble had arisen through the Town Council appointing an Auditor cf their own and attempting to oust the Auditors appointed by the ratepayers. The Judge : If you make provoking statements you will be answered. Mr. Willett : I am going to prove that the professional Auditor appointed by the Corporation came down here and took ten days to audit these very accounts. ' Mr. Willett added that it was the most con- clusive evidence possible that an amateur had onl}^ taken nine days. The Judge : Did the plaintiff work by himself? Mr. \\ illett : The }*Iayor's Auditor did not come at all, because the Corporation had appointed their own professional Auditor. The two elective Auditors worked four and a-half days, and then a discussion took place between them and the Town Clerk. The result was that one of the Auditors said he was not coining again if he could not see all the books. He did not return, and the other Auditor adjourned the audit. A suggestion came from the Town Council that the audit should be resumed, and it took altogether nine days. Practicall}^ half that time Mr. -Stevenson was by himself. Continuing, Mr. Willett said it would take a great deal longer for one to undertake the audit than two, and another thing which made the audit of the accounts of the borough of Bexhill take such a great deal of time was the very meagre nature of the accounts kept. Mr. Rodgers : Vour own client says he finds the accounts in order. Mr. Willett : I don't say they are not in order. Irregularities were ■discovered which were afterwards put right. ^Ir. Willett then read out the totals of several accounts which had nothing to show what they were for. He submitted that the consideration on account of which payment was made should have been put down. Mr. Rodgers : The vouchers show it. Mr. Willett : I say it is not the prcjper way to keep accounts. It takes .a great deal longer to audit them. STEVEXSON V. BKXHILL CORPORATION. 879 The plaintiff, Mr. Joseph irienr}' Stevenson, was then examined. He said he lived at Brockley House, Endwell Road, and was first appointed elective Auditor in March 1903. He had been appointed ever since. Before the present audit three Auditors did the work — the Mayor's Auditor and the two elective Auditors. They all worked, and the first two audits took five days each, and the other ones six days. Mr. Willett : Wh\' have you taken more since then? — The books have increased since the incorporation of the town to almost double. How long did it take the first year you audited with Mr. Thomas?— Seven days; JNIr. Thomas about five, and the Mayor's Auditor six. You were paid two guineas for all those occasions without objec- tion? — Yes. What books did they produce to you? — The whole of the books of the Corporation up to date. Could you do the work in less time ? — Certainly not. ^^'hat do 3'ou sa}- about the professional Auditor? — The Town Clerk wrote me a letter to ask me to go and see the professional Auditor. I refused to go. I contended the professional Auditor was the servant of the ("orporation, and I was the servant of the ratepayers. And when did you start auditing the accounts for the year ending September last? — On the 6th, 7th, 8th, gth, and loth of Februar}-, and 12th and 13th of February, and Sth and gth of March up to the adjournment. How long were you there on the 10th? — Up till about 7.30 in the e\ening. I had no assistance whatever. ^Vhat time did you start ? — At 9.30. Mr. \\'illett : That is the additional two hours which are going to be knocked off, your Honour. My friend and T are agreed that two hours are sufficient for the Borough Fund. Mr. Rodgers : The Treasurer's accounts. The Judge : The accounts relating to the Borough Fund, I understood. Mr. Rodgers : On my .system two hours would be quite sufficient for the accounts of the Treasurer. Plaintiff, in further examination, said the relative size of the Borough Fund Accounts to the remainder was two pages to fifty. 88o AUDITING. In the aggregate Balance Sheet produced by Mr. Willett the liabilities of the Corporation District Fund Account were put at /l^jtO^j, and those cf the Borough Fund at only _^'4,2oo. The Judge : The Borough Fund might be regarded as one-tenth of the whole. Plaintiff, continuing, said Mr. Thomas was with him four and a-half da\"s — two and a-half days before the adjournment and the remainder afterwards. Mr. Rodgers : Assume for the moment that these are the books j'ou have to audit. — It would not take many minutes to audit them. I am calling them the Treasurer's accounts. How long would it take to audit the books? — I don't call them the Treasurer's accounts. How would you audit? This is the book which contains the largest amount of work, the District Fund Revenue Account. — That is the amount ijf money paid to the Treasurer and the amount paid out. The Judge : The question is, how long would it take to audit them? ?ilr. Rodgers took the plaintiff through one page of the book, and asked how he would audit it. Plaintiff said he would find out from whence the money had been derived. Mr. Rodgers : You call 3'ourself an accountant? — Xo. I see b}' a mistake you are called that in the summons, but that does not matter. How would you audit this particular entry in this book? — By going through the vouchers and particulars of that particular item. Proceeding, he said he should look to see that sums purporting to be collected had been collected. Mr. Rodgers : If you saw the sum here tallied with the sum in the Corporation books and was shown to have been paid to the Treasurer, vrould that have been audited? — Certainly. I don't know exactly what you are talking about. You are wandering a bit wide. There is no occasion to be impertinent. — If it is like the Electric Light Books, I cannot understand them, and no man could. You know there is a book called the Allotment Rent Collector's Account ? — I don't know the names of all the books you have got. Mr. Rodgers took the plaintiff through several accounts, and Mr. Stevenson said he would require to know from whence the various amounts had come. STEVENSON V. BEXHILL CORPORATION. 88 1 The Judge : Supposing your whole duty was to audit those books there, would it be sufficient for your purposes to find in that book the source from which the amounts credited in that book came? — If it was my duty to do no more than that, yes. Mr. Rodgers : Now we have a payment to Hodgkinson of £.if iis. 4d. In checking these items \^ou would check them with the vouchers? — Yes. When you have seen the vouchers giving a description in respect of which each pa}'ment is made, and 3'OU have seen that Hodgkinson pur- ports to have received a cheque, is that an audit of this payment ? — I don't check them with the vouchers. I check that green book with the vouchers, and that book by the vouchers. Tell me this, -Mr. Stevenson : Are those vouchers arranged in the order in which the payments appear in that book there? — I believe they are. Are the}^, or are they not? — Sometimes they are and sometimes they are not. The general practice is for them to be arranged in that order? — The general practice is for them not to be so. I'he Judge : They are not generall}^ arranged ?-^They have been very much better this last twelve months. Mr. Rodgers : Were the)' arranged at the last audit ?— They were not. In how man}' cases were they not in order ? — I did not book the cases. I got through the audit as quickly as possible. You are here to say they are not in order by the entries there. — I won't split straws with you. Don't get me to say anything that's not true, because you will not do it. To audit fifty pages of receipts and payments with entries in the Cor- poration books, seeing payments to the Treasurer, and vouchers, and seeing receipts for payments, how long would it take? — There are other things to get with them- Answer the question.— One day. That is just what my evidence gives. — That book, I say. I am not referring to the book his Honour has got. Assume those are the Treasurer's books, and that those are all you have to audit ; would the type of audit I have put to you be a sufficient audit? — -Certainly not. L L L 882 AUDITING. There is an Allotment Rent Collector's Account. Does that account show the number of small pa3'ments from the tenants of allotments? — It does. Does that account on the other side show by payment to the Treasurer a certain sum? — Yes. If you turned to the General Fund Account of the Treasurer, would you expect to see this sum /.'4 7s. 2d. entered to correspond with this payment to the Treasurer? — Yes. When you had seen that the Treasurer properly accounted for this payment entered into this book, would that have been an intelligent audit? — It would not without the \ouchers. The vouchers! What for? — For the receipts. You are saying that the Treasurer should concern himself as to how so-and-so paid this or that? — I say the Treasurer does not concern him- self at all. He takes the amounts paid in or out. And if that book shows the sum paid to the Treasurer, and the Treasurer shows he has received it, is that not an intelligent audit? — For that particular book, but not for the amounts received from the allotments. The Judge : It is not a general audit of the finances of the Corporation. Mr. Rodgers (to plaintiff) : In the Electric Light Accounts would you consider it your duty to go through the counterfoil receipt of each con- sumer ? — Yes. What part of your nine days was taken up in doing that? There are about 500 or 600 consumers in the town. — About a day, I should think. I'here are about ^00 or 600 consumers in Bexhill. Assume there were 5,000 or 10,000. How long would it take 3'ou to go through the counter- foils? Ten days? — If they were entered up like 3'our counterfoils, it would take twenty. Mr. Rodgers said he did not wish to go into other matters. It would not be to Mr. Stevenson's credit if he did. Plaintiff : I wish you would. In further cross-examination, Mr. Stevenson said he had to adjourn the audit. The Judge : Because the counterfoil receipts were in such bad order ? — Yes, sir. STEVENSON V. BEXHILL CORPORATION. 883 Mr. Rodgers : What do you mean b}' that ? They are in consecutive order through the books. — The collector of a particular rate signed receipts a fortnight in front of himself. Did 3'ou report the accounts in order? — After we adjourned it, and after you put them in order. Just to show the type of Auditor the Council have to deal with ; you reported the irregular way in which the accounts were kept, and that certain items and books had been tampered with? — I did. Did the Council ask for particulars? — Yes. Was your reply, " We do not feel disposed to enter into any con- troversy over the report, and have no inclination to reply to details "? — Xow I'll explain. I think his Honour should know. The Judge : What is your explanation? Plaintiff (to Mr. Rodgers) : In consequence of your interference with the audit of the Electric Light Accounts we had to adjourn the audit. You refused to allow the collecting clerk to give us any information in the matter of £^ i6s. lod., said not to have been paid by a consumer, Mr. David Page. As we were getting information from the clerk the Town Clerk ordered him away, and refused any information whatever. We had to adjourn the audit, and found the book's pencil totals taken out. The _)^'3 i6s. lod. had been paid four months before that. Mr. Rodgers : Is that the explanation you refused to give to the Council ? I thought you said the books were tampered with, and you refused to give an explantion even to the Council? — We refused to give anyone anj- explanation. « Mr. Rodgers drew the plaintiff's attention to an entry " D. Page, /.'3 i6s. lod., March 25 1905," and asked what was the order in which this account was entered during the audit. Plaintiff : I say it was not marked paid until after the adjournment. You marked it paid, and then you'll find you carried that into another item and made it " /.6 '17s. pd. paid," so that ;^3 16s. lod. was paid twice. ^Ir. I'age knew it was paid four months previously. I should like His Honour to see if those figures have not been scratched out. The Judge : I am not going into that. Mr. Rodgers put questions to the plaintiff on the assumption that the Treasurer's accounts were the only ones he had to audit, but it was some time before this assumption became clear to Mr. Stevenson. In L L L 2 884 ' AUDITING. answer to Mr. Rodgers, he said he considered it his duty to go through the counterfoils of the rates, and denied that it would take years to do this in a town with a population of 600,000. It took about three days to go through the counterfoils of the rate collector. Mr. Rodgers : There are about 4,000 ratepa3'ers in Bexhill ? — No. There are 3,000? — Over 3,000. And there is a population of 15,000? — Xo. Fourteen thousand? — No. Over 13,000. If it takes you three days to complete counterfoils of the rates, if you can calculate, will you within a day or two, assuming you are elective Auditor of Liverpool, say how long it would take ? — I have never been to Liverpool. How long would it take to get through the counterfoil receipts of some 100,000 ratepayers? Would it take some months? — Certainly not. The plaintiff did not agree with views put forward b}' Mr. Rodgers as to the duties of an elective Auditor. As Mr. Rodgers proceeded, Mr. Stevenson said he did not understand, and could not answer the questions. Mr. Rodgers : I'll read this again, and I think his Honour will see the perverseness we have to put up with at Bexhill : " It is necessary to clearly understand that an elective Auditor is not an Auditor per- forming duties of a purely arithmetical character." Do you understand that? — I do not. (Laughter.) The Judge : What's the word that troubles you? "Arithmetical"? (Laughter.) Your duties are not confined merely to adding up figures and saying they correctly balance. — That's all we're concerned in — adding up figures and saying they are correct. The Judge : Is it that only? — I take it so. Mr. Rodgers : We are getting now to fathom an elective Auditor's intelligence. This is the view, " It is necessary to clearly understand that an elective Auditor is not an Auditor in the ordinary commercial sense, performing duties of a purely arithmetical character." — I do not understand what you mean. I understand my duties. I'll give that up. It's too much. No, you don't understand it. " This kind of work is very useful and necessary, but is entirely bej-ond the power of an elective Auditor." Do you understand that? — It is nothing to do with the case. STEVENSON V. BEXHILL CORPORATION. 885 Mr. Rodgers drew further comparisons between Bexhill and Liver- pool, Hastings and Devonport, which Mr. Stevenson would not accept. By Mr. Willett : He considered it his duty to see if payments were legal or not. Donald Sholto Mackenzie Douglas, a member of the Bexhill Town Council, said he was Maj'or's Auditor during 1904-5 and 1905-6. He took six and a-half days to audit his accounts, although on the occasion in dispute he did not audit at all. He would not say Mr. Stevenson's claim was unreasonable, considering that Mr. Thomas worked only four days, and that when three men were working together it took six daj's. The professional Auditor took twenty days against their total of fourteen. Mr. Rodgers suggested that Mr. Stevenson wasted his time in doing what was not necessary. Witness's cross-examination went to show the amount of time it would take to audit the Treasurer's accounts alone. James Gibb said he was one of the first elective Auditors with Mr. Stevenson. He considered the claim reasonable. Cross-examined : He considered his audit an internal check upon the financial doings of the Council. Re-examined by Mr. Willett : It would not be satisfactory to the ratepayers if the audit consisted merely of an audit of the accounts of the Corporation as contained in the two books produced, with the \'ouchers. The Judge : If their functions do extend into going into the finances of the Corporation, they must do what they have done. On the other hand, if they are confined to seeing to the Treasurer's accounts simply as an accounting person, they would not go to the extent. Councillor H. Luntley supported the testimony of the last witness, and considered the claim perfectly reasonable. Cross-examined : The ratepayers expected a report from the Auditors, and without going into the whole accounts the Auditors could not give one. In his address to the Judge, Mr. Rodgers referred to the complaint that had been made that the Auditors had to audit the whole of the books. On February 2, before the audit, he wrote them a letter, in which he wished them to clearly understand that a number of books 886 AUDITING. were placed before the elective Auditors purely as a matter of courtesy, and without prejudice to the proper audit. That defence was not put forward with the desire of .withholding anything from the elective Auditors. They could have the fullest examination of all books of account they wished, but the Corporation said that if the Auditors would not trust the members of the Council, if they represented to the ratepayers they were the only persons who protected the interests of the ratepayers, if they said that no one in the Town Hall was competent to see that payments and receipts were proper Mr. Willett : We never said anything of the kind. Mr. Rodgers : Yes, you do. If the}' say the}' can't be expected to rely one particle on a professional audit carried out by a Chartered Accountant, the Council say, if that's the standpoint you take up it is unreasonable to expect to be paid for the time you spend on that work. Continuing, Mr. Rodgers said the Council had information that they were paying four or five times more for their elective audit than they should pay, and inquiry into the duties of elective Auditors was insti- tuted. Assuming that four and a-half days were sufficient for a place like Devonport, two and-half were more than ample for Bexhill. The Council found that by reducing the Auditor's fees they had the advan- tage of an internal check upon their finance doings from a professional accountant, and would still be able to allow to the elective Auditors time sufficient for their audit, and at a cost for the professional audit and the elective audit of what previously was more for the one. Mr. Rodgers further contended that as the Council conducted the electric lighting undertaking they should have, as other large commercial con- cerns, the advantage of a professional audit, and on a consideration of the duties of the elective Auditors the Council felt they were right in holding that the audit was a strictly limited one. The Town Clerk argued that in a large town the elective Auditors would be unable to institute an internal check upon the whole finances of the Corporation, as was desired in the present case, through sheer lack of time. He did not say that the elective audit was a satisfactory audit. It had been called by authorities a farce, and it was recommended in some quarters that it should be abolished. Mr. Rodgers referred at length to the sections of the Public Health Act and the Municipal Corporations Act which had been quoted. He contended that the audit was a strictly limited one, and was not an audit of the doings of the various Com- mittees, but simply an audit of the accounts of their Borough Treasurer, Assuming that the audit was anything more than a limited one, the audit at Devonport could not have been done in four days. If the principle contended for by the plaintiff were correct, it would take ten years for two Auditors to complete the audit of a large town. STEVENSON V. BEXHILL CORPORATION. £87 Mr. Rodgers agreed that nine days constituted a reasonable time if the full audit had to be done, and Mr. Willett agreed that two and a-half days were sufficient if the other scheme was correct. The only witness called for the defence was Mr. Graham King. He said he was a Chartered Accountant, and had been appointed Auditor to three Corporations, in addition to being one of the Auditors of the City of London. He had audited the whole of the accounts of the Bexhill Corporation, and the finance transactions of the Council, for the six months ended September last, and he considered his audit was a check on the financial doings of the Corporation. There was not the slightest comparison between the elective Auditors' time and his. The book produced was a Cash Book of the Corporation, but he should not call it one of the Treasurer's accounts. The Judge: Why not? — The Treasurer does not keep it. It is not kept in the Treasurer's Department. The Judge: Does it relate to his accounts? — All the books of the Corporation relate to his accounts. The Judge : You mean by the Treasurer's accounts only the books kept by him ? — Yes. In further examination, the witness said he had audited the Treasurer's accounts with the Cash Book and the vouchers. He accomplished the elective Auditors' audit in one and a-half days, with his clerk, and produced a time table of the time spent on the various books. Cross-examined bj' Mr. ^Villett : He did not sign the Stamp Distribu- tion Account. He audited it, but did not find anything wrong with it. Mr. \Mllett : Did you find /^2 wrong with it? — Xo. Did you check it with the various accounts of the various people who have postage stamps? — Xo. You didn't follow it up in any way? — Yes, I did. How did 3'ou audit it? — I saw the names for the letters sent off, and checked it by the subsidiary books. Did you not discover that one of the officers had received £2 for stamps and there was no entry in the Stamp Distribution Book? — Very likely not. It would be either in his hands or the finance clerk's at the end of the year. If you had compared the book with the Stamp Books you must have found out there was /^2 out ? — I dare say I should have. 888 AUDITING. After further crosi-examination the case was adjourned until July 30, when Judge Scully gave judgment. JUDG.MKXT. His Honour, in giving judgment, said : This is a case in which I have reserved my judgment from the last Court. Plaintiff claims the sum of £i<^ 8s. 6d. The first point upon which plaintiff based his claim was the question of contract, and that he should be paid at the rate of two guineas a day for the time he was employed in auditing the accounts of the Bexhill Corporation. He was employed in the audit some nine and a quarter days, for which he claims to be paid at the rate of two guineas a day. As regards the question of contract, the claim for which was abandoned in the course of the argument, there was no evidence of such contract, and nothing in the circumstances which would imply contract. As regards the claim for work done as under the Public Health Acts, 1S75, ^^ is undoubtedly to be paid the two guineas a day for such time as he was employed, properly, in the prosecution of his duties as public Auditor. The whole question is made clear in the case of Thomas v. Devon-port Corf oration, and I have had an opportunity of seeing the full report in The Law Times since the last Court. The decision in that case plainly lays down that the Auditor under the Public Health Act is not to generally audit the finances of the Corporation, but only those of the Treasurer. No doubt on occasions it may be necessary for the Auditor to examine accounts other than those of the Treasurer, and it would be legal for the Auditors to do so, but the decision quoted clearly shows that the duties of an Auditor only refer to the examination of the Treasurer's accounts, although, if necessary, he can test any account by reference to any other accounts of the Corporation. The Auditor is not entitled to hold a general audit of the books, and as the plaintiff said he did go through the whole of the books, I am bound to hold that the greater part of the work is outside his rights. He could not have been employed in pro- perly auditing the accounts for more than two days. The rest of the time has been spent in examining the accounts of the rate-collectors and the subsidiary accounts. Therefore I will allow the plaintiff two guineas a day for two days' work, or a total of £^ 4s., this to be paid out of the £c, 5s. now in Court. The Town Clerk : May I ask your Honour for costs under scale " B " ? The case is a very important one to all corporations of the country. Mr. Willett asked his Honour to refuse costs to the Corporation. The case was in the nature of a trap, because the whole of the books were placed before the Auditors, and it was not pointed out to them that the}- were not entitled to go through ail of them. !■ NEWTON V. BIRMINGHAM SMALL ARMS COMPANY, LIM. 889 His Honour said he understood that they were placed before the Auditors without prejudice on the occasion of this audit. Mr. Willett : Yes, but it was never suggested until this case was brought that they Avere only entitled to audit the Treasurer's books. Mr. Willett remarked that the Council paid for their law by an inclusive salary, so that the effect of giving costs to the Corporation would be that the Corporation would be making costs out of litigants. His Honour : That might apply to profit costs. (35 Aic-r L.R. 1906, p. 17.) The case of NEWTON v. BIRMINGHAM SMALL ARMS COMPANY, LIAI. (Decided by Bucklfa", J., in the Chancery Division, on June 27 1906.) Held that Articles of Associatiori fur-porting to Limit the Statutory Powers of the Auditor of a Comfany -were ultra vires. This was the trial of an action brought by Sir A. J. Newton, suing on behalf of the shareholders of the defendant company, against the com- pany, claiming a declaration that a special resolution passed and con- firmed in January and February, purporting to alter the company's articles of association b}^ inserting provisions therein for an internal reserve fund, was ultra vires and invalid, and an injunction to restrain the company and its directors from acting on such resolution. The new article objected to was so far as material as follows : — " In addition and without prejudice to Articles 132 and 133" [which related to the formation of and dealing with a reserve fund] " the directors may in any year in which they shall recommend a dividend to be paid on the ordinary shares ... of not less than 10 per cent, on the amount paid up thereon set aside (without disclosing the fact) out of the earn- ings or profits in such year remaining after providing the amounts necessary to pay the dividends payable on preference shares and the dividend which they recommend on the ordinary shares such a sum as they may deem necessar}- or desirable in the interest of the company as an internal reserve fund or as an addition to such internal reserve fund when formed, which internal reserve fund shall be held upon the terms and for the purposes following, that is to say — {a) The internal reserve fund shall be separate from the reserve fund under Article 132, and need not be shown or disclosed b}' the Balance 890 AUDITING. Sheet, and the directors need not give any information to the share- holders as to the amount, investment, or application thereof, or other- wise in relation thereto, either in their report or otherwise, (b) Such internal reserve fund may be invested upon such investments (other than the shares of the company) as the directors maj'' in their absolute discretion think fit, without their being liable for any depreciation of or loss in consequence of such investments. ...(c) Such internal reserve fund may be used and applied at the discretion of the directors for any purpose for which the ordinary reserve fund is available, or for any purposes which the directors in their absolute discretion may con- sider will serve, protect, or advance the interests of the company, or preserve or promote the value of the undertaking, assets, or goodwill of the company, {d) The directors shall disclose the internal reserve fund and the amount thereof, and all additions thereto, and all other particulars in respect of the said fund to the Auditors of the company appointed by the shareholders, whose duty shall be to see that the same as applied for the purposes of the company in accordance with the provisions hereinbefore contained, but not to disclose any informa- tion with regard to the same to the shareholders or otherwise." !Mr. Buckmaster, K.C., and Mr. H. K. Xewton, for the plaintiffs, con- tended that the new article was inconsistent with the duties as to audit- ing a company's accounts under Section 22 of the Companies Act, 1900. The section was almost an embodiment of the provisions of Section 7 of the Companies Act, 1879, with reference to the audit of accounts of limited banking companies. The first question was, What would the new article enable the directors to do? They could create an internal reserve as to which there was no supervision, and might use it as they thought fit. iMr. Justice Buckley suggested that it was authorising the directors to use a secret service fund — a thing which was not unknown. Counsel, continuing, said that perhaps such a fund had in times past been used for purposes which would be wrong in the case of a private individual. As regards companies, however, which were not banking companies, before the Act of 1900 there was no statutory requirement as to auditing. But apart from statute, the shareholders could insist on the directors' proper management of the company's affairs, and had the right to have accounts so that they might ascertain whether the management had been properh^ conducted. In In re Forest of Dean Coal Mining Company (10 Ch.D. 450) Sir George Jessel had defined the position of directors, saying : — " Directors have sometimes been called trustees, or commercial trustees, and sometimes they have been called managing partners ; it does not nauch matter what you call them so ' NEWTON Y. BIRMINGHAM SMALL ARMS COMPANV. LIM. 89 1 long as you understand what their true position is, which is that they are realh' commercial men managing a trading concern for the benefit of themselves and of all the other shareholders in it." Statutory rights of shareholders, such as the right to petition for winding up, and the right to dissent and be paid out on a reconstruction; could not be excluded or limited b}' the company's articles — In re Peveril Gold Mines (1S98, I Ch. 122) ; Payne v. Cork Comfany (1900, i Ch. 308). Nor could the statutory right to have proper information under Section 23 of the Act of 1900 be excluded by those means. Section 21 of the Act required the shareholders at each annual meeting to appoint an Auditor, and if that was not done one shareholder could ask the Board of Trade to appoint an Auditor. I'nder Section 23 the Auditor had to report and certify, and it was not open to the company by its articles to compel an Auditor to commit a misdemeanour b}' disobeying the section. The new article was ultra vires and ought not to be allowed to be acted on. Sir Robert Finlay, K.C., and Mr. R. J. Parker, for the company, said that to a great extent the principles put forward were not disputed. But there was no attempt to make the Auditors neglect their dutj'. The question was whether there was anything in the new articles incon- sistent with Section 23 of the Act of 1900 and the duties thereby imposed. ]3efore that Act there was no statutory requirement as to Balance Sheets. Section 23 did not require a Balance Sheet. It said that the Auditors must sign a certificate at the foot of the Balance Sheet, and must report on " ever}' Balance Sheet laid before the com- pany ■' ; but the article did not prevent the Auditors from correctly certifying and reporting. The object of the article was to prevent information going out which might injure the company and help other concerns. It might not be expedient either to show that a loss had been made on some branch of business, or that even large profits had been made. Xor was it desirable to pay away to shareholders every- thing which might be distributable as dividend without laying by something for a rainy day. It was only proposed to do, with the assent of the shareholders, what was done every day without their assent. It was well known that there was a practice of writing down the value of assets so as to show a smaller margin for dividends. Each share- holder joined the company on the assumption that his rights might be altered by means of an alteration of articles. Their right to have a Balance Sheet depended on the articles, and if a Balance Sheet might be wholl}- dispensed with it might be dispensed with in part. An Auditor might say that on 99 points the Balance Sheet was right, but that on the hundredth point it did not give any information, 892 AUDITING. because the shareholders were precluded h\' the articles from requiring that information. As regards rights which were not statutoi}', these might be controlled by the articles. Mr. Buckmaster having replied, His Lordship on Juns 20 said that he would gi\e a written judgment. JUDGMENT. Mr. Justice Buckle}- on June 27 delivered judgment as follows : — In February last this company passed special resolutions the short sub- stance of which is that the dii-ectors may, under defined circumstances, set aside (without disclosing the fact) out of the profits sums to form an " internal reserve fund " — a sort of secret service fund — and that this fund need not be shown in or disclosed by the Balance Sheet, and no information need be given to the shareholders as to its amount, invest- ment, or application ; that the directors may invest it as they think fit without being liable for loss in consequence of such investments; that they ma}^ S'PPb' it for any purposes which they consider will advance the interests of the company ; and that, while the particulars as to this fund are to be disclosed to the Auditors, it is to be the Auditors' duty not to disclose any information with regard to it to the shareholders or otherwise. The question for decision is whether, having regard to Sec- tions 21 to 23 of the Companies Act, 1900, these special resolutions are ultra vires. The Companies Act, 1862, was silent as to accounts. Table A (which the company might or might not adopt, as it chose) contained provisions on the subject, but otherwise the Act left the matter untouched, relying, no doubt, upon the application of the ordinary prin- ciples applicable as between partners and proceeding upon the footing that the members of a company under the Act are partners in a special sort of partnership modified and governed b}- statutory provisions. The Companies Act, 1S79, Section 7, contained, for the first time, provisions as to audit of accounts, and was confined to banking companies regis- tered after 1879 as limited companies. The Companies Act, 1900, Sec- tions 21 to 23, for the first time contained provisions as to the audit of the accounts of other companies under these Acts. The provisions of the^Act of 1879 and those of the Act of 1900 are closely similar, though not the same ; so similar, indeed, as that the reason for the difference is hard to see. The principal differences that I trace are that the Act of 1879 does, while the Act of 1900 does not, provide afl&rmatively for an annual audit, and that the Act of 1879 does, while the Act of 1900 does not, provide that if there is no Auditor a meeting shall be forthwith called to elect an Auditor. As regards the former of the differences, I think that the Act of 1900 (though it does not do so expressly) yet does impliedly provide for an annual audit. Section 21, Subsection i. NEWTON V. BIRMINGHAM SMALL ARMS COMPANY, LIM. 893 requires the annual appointment of an Auditor to hold office for one year, and the Act contemplates that he will audit during his tenure of ofRce. There will thus result an annual audit. As regards the latter difference, I find that Section 21, Subsection 2, provides for the appoint- ment of an Auditor by the Board of Trade on the application of any member in case an Auditor has not been appointed at the annual meet- ing. Neither statute contains any provision in favour of the public in the matter of publication of the accounts. The two statutes really do not differ, I think, in substance in their result. The question is how far the Act of 1900 goes in requiring for the protection of the members that the accounts shall be open to audit and that the report on them shall be made to the members. The defendants do not dispute that, if and so far as the special resolutions are inconsistent with the Act, it is the Act which m-ust prevail. The concluding sentence of Section 23 requires that the Auditor shall state whether the Balance Sheet exhibits a true and correct view of the state of the company's affairs as shown bv the books. Sir Robert Finlay argued that these words are satisfied if the Auditors report that the Balance Sheet does not exhibit a true view and that the statute does not, in these words, say that they shall report what is the true view. This is logically true as regards the language, but, in my judgment, the statute is saved from the reproach of having achieved no more than this impotent result by words earlier in that section, which provide that the Auditors are to report to the shareholders on the accounts. A report upon the accounts involves a report of the result of the accounts, and this necessarily involves, as matter of substance if not of form, the statement of a Balance Sheet or the equivalent of a Balance Sheet. There are, I agree, in the Act of 1900 no affirmative words to the effect of what I am about to state, but I think the language of the Act is sufficient to show that by implication it requires that there shall be annually an audit of accounts resulting in a Balance Sheet, to the accuracy of which the Auditors shall speak. The special resolutions in the present case provide that the Balance Sheet shall not disclose the internal reserve fund. It must therefore omit on the assets side of the Balance Sheet the assets which make up the amount standing to the credit of that fund and the contra item — namely, the credit balance of the fund — on the liability side. The result will be to show the financial position of the company to be not as good as in fact it is. If the Balance Sheet be so worded as to show that th^re is an undisclosed asset, the existence of which makes the financial position better than shown, such a Balance Sheet will not, in my judgment, be necessarily inconsistent with the Act of Parliament. Assets are often, by reason of prudence, estimated, and stated to be estimated, at less than their probably real value. The purpose of the Balance Sheet is 894 AUDITING. primarily to show that the financial position of the company is at least as good as there stated, not to show that it is not or may not be better. The provision as to not disclosing the internal reserve fund in the Balance Sheet is not, I think, necessarily fatal to the special resolutions. The Act, however, piovides that the Auditors shall report to the share- holders on the accounts examined by them. These Auditors will examine, among others, the accounts of the internal reserve fund. A principal question in this case, I think, is whether it is a compliance with these words of the Act that the Auditors shall report that they have examined the accounts as to the internal reserve fund, that the}' are satisfied with them, and that the funds have been employed in manner authorised by the company's regulations, or whether there will be default in complying with the Act if they do not go on to say how the fund has been employed. In my judgment such a report would be a sufficient report within the Act if the Auditor is bond fide satisfied that in making this report, and nothing further, he is truly reporting as to " the true and correct view of the state of the company's affairs." But the special resolutions do not stop there. They provide that it shall be the duty of the Auditor not to disclose any information with regard to this fund to the shareholders or otherwise. It is, I think, inconsistent with the Act of Parliament that the Auditor shall be bound, even when he thinks that the true state of the company's affairs is affected by facts relating to the internal reserve fund, to withhold all information with regard to the same from the shareholders. If, for instance, the directors had invested the internal reserve fund upon investments which might involve the company under certain circumstances in enormous loss, the Act, I think, requires that the Auditor shall be at liberty and be bound to report that fact. In reporting upon the accounts submitted to them the Auditors do not, of course, report as to the details of the accounts to which they find no cause to take exception. Their duty is to call attention to that which is wrong, not to condescend upon all the details of that which is right. It is, I think, competent to the statutory majority of the shareholders to say that as to particular items of their business it is to the interest of the corporation that there shall be secrecy, and that the Auditors, who must for the purposes of their audit know all such details, shall not, unless their duty under the statute requires it, disclose such details to the members. There is no suggestion in this case _that these clauses are intended to be used for any other than a legitimate purpose. Those who are engaged in commerce are familiar with the fact that undue publicity as regards the details of their trade, or as to their financial arrangements, may often be injurious to traders, having regard to the rivalry of competitors in trade, to complications sometimes arising from strained relations between capital and labour, NEWTON V. BIRMINGHAM SMALL ARMS COMPANY, LIM. 895 and the like. There are legitimate reasons for ensuring secrecy to a proper extent. It is not, 1 think, necessary, nor, having regard to the great utility of these Acts, is it desirable to expose persons who trade under these Acts to the necessities of a publicity from which their com- petitors are free unless such publicity is required to ensure commercial integrit}'. I am not disposed to look too closely for reasons why I should find clauses such as these to be inconsistent with the Act if I see that the true purpose cf the Act is satisfied. I think, however, that these special resolutions go too far. Any regulations which preclude the Auditors from availing themselves of all the information to which under the Act they are entitled as material for the report which under the Act they are to make as to the true and correct state of the com- pany's affairs are, I think, inconsistent with the Act. The defendants have left me in some doubt as to the exact position which the}' take up in the matter. They have desired to obtain the opinion of the Court upon the general question under the Act. They are entitled to do so, and this judgment I hope will put them in possession of my views on the subject, but I am not clear whether they threaten and intend to act upon the resolutions as they stand. They say, truly, that as regards the details of the resolutions, when they know the view of the Court upon the Act of Parliament, they can by further special resolutions alter their scheme so as to make it consistent with that view. There are no plead- ings, so that it is only from the attitude of the defendants at the Bar that I can ascertain whether they threaten and intend to do the act against which an injunction is sought. It is not according to the practice of the Court to enjoin an act unless the defendants threaten and intend to do it. I postpone, therefore, for the moment the ques- tion of the exact form of the order so that I ma}' hear what the defendants have to say. Mr. R. J. Parker said that the company did not intend to act on the new article in its present form, and suggested that a declaration that it was uliyd vires so far as inconsistent with the Act of 1900 would be sufficient. It was pointed out that there might be some difficulty in case an appeal was brought from his Lordship's judgment, and, after some discussion, his Lordship granted an injunction to restrain the company from acting on the special resolution, and ordered the company to pay the costs. (22 Times La-w Reforts, 664.) 896 AUDITING. The case of GEDGE AND OTHERS v. YE MECCA, LIM., AND OTHERS. (Decided by Kekewich, J., in the Chancery Division, on nth May 1907.) This Case, while not defining the Law, indicates the Course likely to be pursued by the Court in cases when the Validity of an Auditor^ s Af-pointment is Questioned. Mr. P. O. Lawrence : My I>ord, I have a motion in the action of Gedge and others against Ye Mecca, Lim., and others. The object of the motion is to determine whether my clients, who are Chartered Accountants, are or are not Auditors of the company. As to the form, your Lordship need not be troubled with it very much, because the parties must have it determined who are the Auditors of the company. As your Lordship knows, under the new Acts they have very onerous obligations to perform and are liable if they do not perform them. ]\Ir. Justice Kekewich : I am afraid I do not know very much about the new Act. Mr. P. O. Lawrence : All my clients desire to know is whether they are or are not Auditors. If they are Auditors they have got to have access to the books of the company, and they have to perform their duties under the Act ; otherwise they incur penalties and also are liable for misfeasance in case anything happens or is wrong. The question is a very short one, and depends upon the construction of the articles and what happened at the meeting. The company has been a very successful one, having coffee shops, and so on, but during the last few years a large number of the shareholders were dissatisfied with the management, and a committee of shareholders was appointed some time during last year to investigate the cause of the falling-off of the profits during the last few years ; and they made a report to the company and to the shareholders, and in that report they stated that they found (amongst other things — this is only a small portion of it) that the Auditor of the company was a partner of one of the directors, and they brought that to the attention of the shareholders. He had been Auditor for the last three or four years at any rate. Mr. Clauson : Seven 3'ears. Mr. P. O. Lawrence : Seven years. There is not the slightest > imputation upon him for my part. He is a Chartered Accountant ; but the objection to him which is put forward by the shareholders is that it was contrary to the spirit of the Act, which says that no director shall be an Auditor, and therefore a partner of that director was not a A . GEDGE AND OTHERS V. YE MECCA, LIM., AND OTHERS. 897 desirable person to have as an Auditor. Now, the anual general meeting in this year brought up the question under the articles of •electing Auditors ; and when the re-election of the gentleman, who was the partner of the director, was proposed, an amendment was pro- posed of appointing my clients, who were Chartered Accountants, Auditors ; and that resolution was carried, and was carried by a show of hands. The votes were counted : there were 47 persons there, and 24 or 25 voted for my clients and 23 or 24 against ; but it was declared carried by the Chairman of the meeting. Mr. Clauson : My friend will forgive my interrupting — I appear for the directors — according to the shorthand notes Mr. P. O. Lawrence : I am going to read the shorthand notes, and I have read them myself. Mr. Clauson: I only took objection to the word "'declared" in order that there should be no confusion. Mr. P. O. Lawrence : Quite. After that the Chairman of Directors said, " Then there will have to be a poll," and proceeded to take a poll. Now, under the articles a poll could only be demanded in writing by five members. The poll was taken, and the amendment was lost and the original resolution on the poll was carried — that the same gentleman be appointed. It was very close voting — 27,000 odd for and 27,000 odd (just a little less) against. But that does not matter ; the question was whether the resolution by the show of hands was the right resolution of the company, the poll not having been demanded, accord- ing to the articles, by five members in writing. I should have thought the case was covered by authority, but there seems to be some ques- tion about it ; and as my friend has stated that there is some question about the facts, I will take his own version of the facts. He is the managing director, who has put the version before us and has •e.xhibited the shorthand note of what took place. I will hand up the shorthand note as far as it relates to this matter. (Handed.) That is m\^ friend's exhibit ; I have not seen the actual exhibit, but I have an •extract, which, I am told, is a correct extract from it, and which, I am told, relates to the auditor. It begins at what is said by ^Ir. Fairclough. He says: "I beg to propose the re-election of Mr. John A. Heiron as Auditor of the company. I do so with very great confidence because I feel sure that as we voted for him before we shall vote for "him again. I hope even Mr. Wells will withdraw his objection to him, T^ecause he told 3'ou that he spent a week of his time in checking and <:riticising the accounts, but he has not told you that there is anjthing M M M 898 AUDITING. wrong with them." Then a g-entleman whose name is wrongly put there — Mr. Farhng he is called, but I think his name is something else — says, "I beg to second that." Then Mr. Wells says, "I must object to this proposal " Mr. Justice Kekewich : He is a shareholder? Mr. P. O. Lawrence: Yes, he is a shareholder: " I have not a word to say against the integrity of Mr. Heiron, but I do say it is an improper thing for a partner of one of the directors to audit the accounts of this company. It is contrary to the intention of the Legis- lature, because the object is to have" independent Auditors. What an extremely painful thing it would be to Mr. Heiron if he had to take his partner to task as a director of this board for some improper expenditure." Mr. Justice Kekewich: Was Mr. Heiron the sole Auditor? 'SIy. p. O. Lawrence: He was the sole Auditor. " It would certainly place him in a diificult position. I have a strong feeling with regard to directors, and I think no director should engage in trade. Our officials should only have one object in view and that is the business of this company, and no outside business, and I shall, without making any imputation against our Auditors, propose as an amendment : ' That Messrs. Gedge, Illott ik McLeod, of 3 Great St. James Street, Bedford Row, be appointed Auditors.' (Dr. White) : I second the amendment on the same principle as I did the other. (The Chairman :) Have either of you an3-thing to say in connection with the fees ? (]\Ir. Wells, Senr. :) I suggest the same fees as before. (The Chairman :) The other proposition is that the fees should be what they were before. (Mr. Wells :) I move that the fee be fifty guineas, and not what it was before. (The Chairman :) Will you give me the names of the gentle- men you propose as Auditors, Mr. Wells? (Mr. Wells, Senr.:) Messrs. Gedge, Ilott & McLeod, of 3 Great St. James Street, Bedford Row. (The Chairman :) Now, Mr. Wells, am I to take all your proxies for the amendment? (Mr. Wells:) Yes. (A Shareholder:) You have not taken a show of hands yet. (The Chairman :) Then we will take a show of hands on the amendment. All in favour of Messrs. Gedge, Ilott & McLeod, please hold up their hands." Then I have here a note— I do not know whether it is in the exhibited shorthand notes — that the amendment was then put by the Chairman. Mr. Justice Kekewich : No. " The amendment was then put and the Chairman declared that 25 voted for and 24 against, with my own vote." GEDGE AND OTHERS V. YE MECCA, LIM., AND OTHERS. 899 Mr. P. O. Lawrence : Yes, my Lord, those are the words I have. Of course, that must be a note by somebody, not a shorthand note of what was actually said. Mr. Justice Kekewich : Well, it is neither one nor the other, because it says "with my own vote," so that it professes to be what the Chair- man said — "The amendment was then put and the Chairman ' declared,' and so on." It ought to have been that " 25 vote for and 24 against, with my own vote," but putting " my own vote " is a direct statement by him. Mr. P. O. Lawrence : Yes, it is curious. Mr. Glasier, the Chairman, makes an affidavit, and he says these actually represent what took place. Mr. Justice Kekewich : Obviously they do not state it accurately, because when a witness says, " I saw James Brown and John Smith, and they said," of course you know they did not both speak at once and say the same thing. Mr. P. O. Lawrence : Yes, quite. I take it that "with my own vote " means that 24 includes his own vote. Mr. Justice Kekewich : Yes ; he is entitled to vote. Mr. P. O. Lawrence: Quite so; thiat is what I mean — "25 voted for and 24 against, with my own vote." I do not know whether he held up his hand, but still we are not troubling about that, because a bare majority is enough, whichever way you take it. Then, " I do not think that the Secretary voted " ; well, I suppose he need not vote if he does not like. " (The Chairman :) I am sorry to say we have to take a poll. Mr. Beare, may we take the whole of your proxies in favour of the amendment? (Mr. Beare:) They are not my proxies, they are Mr. Gibson's. (The Chairman :) Will those proxies given in favour of Mr. Morris be given against the amendment?" Then I have in brackets "Uproar " ; and then " The poll was then taken." Then the Chairman says : " The result of the poll is that 27,230 have voted in favour of the amendment, and against the amendment 28,293. The consequence is that, although it is very close voting the amendment is lost." Mr. Justice Kekewich : I suppose it is a different rule on a poll — it is by share? Mr. P. O. Lawrence : Yes, on a poll each share carries a vote according to the articles. Then " (Mr. Wells, Senr. :) I wish to pro- pose another amendment, and that is that the remuneration of the Auditors instead of seventy-five guineas be fifty guineas. (The Chair- man :) I must put the resolution first. (Mr. Wells, Senr. :) The resolu- tion includes the remuneration, and I will move that the resolution be M M M 2 poo AUDITING. amended by striking out seventy-live guineas and putting in fifty guineas. (A Shareholder :) I second that. (The Chairman :) I want to dismiss this meeting as soon as I can. Do you want to have another poll on this question? (Cries of ' No.') Will you allow me to say that if you do it must be identical voting to the last " — so that he held the majority of proxies in his hand evidently. " The resolution is that Mr. John A. Heiron be re-elected Auditor of the company, and that the remuneration for the current year be seventy-five guineas. (Mr. Wells, Senr. :) The amendment is that the remuneration should be fifty guineas instead of seventy-five. (The Chairman :) The voting will be the same. (Mr. Wells, Senr. :) I do not care whether it is or not, but it is your duty to put it to the meeting. (The Chairman :) Then I will put the amendment that Mr. Heiron be appointed Auditor at a remuneration of fifty guineas. Will those in favour hold up their hands? (The amendment was then put, 15 voting for and 20 against.) (Mr. W'ells, Senr. :) This gentleman voted twice, he voted for you and for us. (The Chairman :) Which side will you take his vote for ? (Mr. Wells, Senr. :) Go on with the business. (The Chairman :) I have to put the resolution that Mr. Heiron be appointed Auditor. (Mr. Wells :) You cannot put that resolution now, as you put a resolution that Mr. Heiron be appointed at fifty guineas, and it was lost. (Cries of ' No,' and uproar.) (A Shareholder :) You insisted on having it put. (Another Shareholder:) Who is Mr. Hart? (Mr. Wells, Senr. :) He is one of the family. • (Cries of ' Order,' and uproar.) (A Shareholder :) You have no right to make that remark. (Uproar.) (The Chairman:) We refuse to give you a hearing without you withdraw that remark. (Hear, hear.) You said he is one of the family. (Mr. Wells :) I with- draw it, he is not a member of the family. (The Chairman :) You should have done it at first with good grace. I will now put the resolu- tion. (Mr. Wells :) You cannot put it now. (The Chairman :) I will now put the original resolution that Mr. J. A. Heiron be elected Auditor for the current year at a remuneration of seventy-five guineas." Mr. Justice Kekewich : There is nothing else of importance. Mr. P. O. Lawrence : The sole question is whether, a show of hands having been taken, declared by the Chairman to have been carried by a majority and no poll demanded — — Mr. Justice Kekewich : It is simply a question of the articles. Mr. P. O. Lawrence : Yes. There is no dispute as to the terms of the articles. I will refer your Lordship to page 17 of the articles, article 60 : " Eyery question submitted to a meeting shall be decided in the first instance by a show of hands, and in the case of an equality GEDGE AND OTHERS V. YE MECCA, LIM., AND OTHERS. 9OI of votes the Chairman shall, both on show of hands and at the poll, have a casting vote in addition to the vote or votes to which he may be entitled as a member." Then article 61 : " At any general meeting, unless a poll is demanded in writing by at least five members, a declaration b}'^ the Chairman that a resolution has been carried, or carried by a particular majority, or lost or not carried by a particular majority, and an entry to that effect in the book of proceedings of the company shall be conclusive evidence of the fact without proof of the number or proportion of the votes recorded in favour of or against such resolution." Article 62 : " If a poll is demanded as aforesaid it shall be taken in such manner and at such time and place as the Chairman of the meeting directs, and either at once," and so on. Mr. Justice Kekewich : There is nothing said about proxy. Mr. P. O. Lawrence: Not there; the provisions with regard to proxies are in articles 67 and 68 — " may vote at any meeting either personally or by proxy." As your Lordship knows, it is now settled after great difference of judicial opinion that on a show of hands you can only vote one vote personally, although }'ou may hold proxies for other shareholders. Mr. Justice Kekewich : I did not know there was so much doubt about the matter. Mr. P. O. Lawrence : Yes, my Lord ; there was a great conflict of opinion, I think, until it was settled b}' the Court of Appeal. It is now settled that on a show of hands there is one vote per person present at a meeting, and if a person attends holding proxies who is not a shareholder he can vote on a show of hands one vote for all the proxies he holds, so that you simply have to count hands on a show of hands. I thought the question was covered by decision : the precise point that I am now upon was gone into. Mr. Justice Kekewich : Is there proof independently of this short- hand note that the amendment was carried ? Mr. P. O. Lawrence : We have the evidence of one gentleman who makes an affidavit in support, stating it, and we have also the evidence of the Chairman, who states that that is an accurate record. Mr. Justice Kekewich : That is not what I wanted. The article, which is common form, says " Every question .... shall be decided in the first instance by a show of hands." Then article 6i sa3's : " At any general meeting unless a poll is demanded in writing by at least five members, a declaration by the Chairman that a resolu- 902 AUDITING. tion has been carried or carried by a particular majority, or lost or not carried by a particular majority, and an entry to that effect in the book of proceedings of the company shall be conclusive evidence "• — but it does not say that is the only evidence. You may prove aliunde that it was carried. Mr. P. O. Lawrence : Yes. I have not seen the Minute Book, but I do not think we have got in the Minute Book an entry to the effect. The article here says : " A declaration by the Chairman and an entry to that effect." Mr. Justice Kekewich : \'es, I know ; but that is not dealing with my question. This article says that if you get that that is conclusive, but it does not say that is the only evidence of it. If some gentleman present at the meeting swore, and it was uncontradicted, that such and such a thing happened, we should get evidence of the decision quite independently of this. Mr. P. O. Lawrence : I understand, I had not followed your Lord- ship. I think we have evidence quite independently of the declara- tion of the Chairman. Mr. McLeod was present at the meeting ; he is also a shareholder, and I think he attended as a shareholder. Your Lordship will see that in paragraph 5 of his affidavit he says : " On the 19th February 1907 the annual general meeting of the defendant com- pany was held. I was present at the said meeting. The defendants, G. H. Brougham Glasier, Charles A. Harrington Fry, and Edward Hart, who are directors of the defendant company, were present at the said meeting, and the said defendant, G. H. Brougham Glasier, was Chairman." Mr. Justice Kekewich : That deals with it. Mr. P. O. Lawrence : Yes, I had not quite followed before. The question came up where a poll had been irregularly demanded and taken at a meeting after a show of hands, and the question arose which resolution was the one which ought to prevail, in the case of The Queen v. The Government Stock Investment Company, Lim., reported in 3 Queen's Bench Division, p. 442. There " at the meeting for election a show of hands was taken, when the prosecutor obtained the largest number of votes. A poll was then demanded by the deputy- Chairman, who was the holder of twenty shares only, but who held proxies for more than 2,000 shares." Nobody could demand a poll unless he had a certain holding, under those articles. A poll was taken, and at the poll the resolution which had been passed by the show of hands was reversed. Your Lordship will see at p. 443 : " In GEDGE AND OTHERS V. YE MECCA, LIM., AND OTHERS. 903 accordance with the articles of association, which required two of the directors who had been longest in oflBce to retire at each annual meet- ing, it was announced in the report of the directors that two of them, Mr. G. Clerihew and Mr. Andrew Macpherson, would retire at the meeting to be held on the 14th February 1878. At this meeting there were four candidates for the two vacancies, the two retiring directors, the prosecutor, and a Mr. Griffiths. Upon a show of hands being taken under article 64 " — I think the articles were very similar to these, I will read them directly — " the prosecutor obtained the largest number of votes, and was declared elected. A poll was then demanded by the deputy-Chairman, who was the holder of twenty shares only, but who held proxies for more than 2,000 shares. No objection to the poll was made at the time, the prosecutor being ignorant of the law upon the subject, but after the poll he made a formal protest. The poll was fixed for the 21st February, and at the close of the poll on the same day the two retiring directors were declared duly elected, the prosecutor receiving the next largest number of votes." Mr. Justice Kekewich : I suppose, if it was so specified, a proxy might be good for demanding a poll? Mr. P. O. Lawrence : I think it might. Mr. Justice Kekewich : But not the ordinary form of prox}^ to support a certain resolution? Mr. P. O. Lawrence : Yes, that is so. It was Chief Justice Cot kburn and Mr. Justice Mellor who gave the judgment : " It is not without considerable regret that 1 think that this rule must be made absolute. The gentleman on behalf of whom this application is made was, no doubt, upon the show of hands, declared elected, but, upon a poll being demanded, he received a smaller number of votes than two other of the candidates. But the construction which we feel compelled to put on article 67, reading it in connection with article 64, obliges us to set aside the real election upon an objection which is purel}'' technical. Article 64 directs that ' upon all questions at every meeting a show of hands shall in the first instance be taken, and unless before or imme- diately upon such show of hands a poll be duly demanded as herein- after mentioned, such question shall be decided by the result of such show of hands.' Then article 67 provides that if a poll is demanded by shareholders qualified to vote and holding in the aggregate 2,000 shares or more, it shall be taken in such a manner as the Chairman shall direct. The poll must therefore be duly demanded, and the question is, was the poll duly demanded? I cannot but think that Mr. Bray is right in his contention that the poll ought to be demanded by the prescribed number of shareholders, and that they must be present 904 AUDITING. and qualified to vote, and although the articles enable votes to be given either personally or by proxy, yet that proxy has no power to demand a poll. The words in article 67 ' If a poll is demanded by shareholders qualiiied to vote ' must, I think, be read as if they were ' shareholders themselves qualified to vote,' for I think no one can be said to be ' holding ' shares within the meaning of this article when, instead of holding shares, he is holding the proxies of other persons who do hold them. The result, therefore, is that the rule must be made absolute, and the defendants may, if they please, allow the facts to be put on the record for the purpose of obtaining the opinion of the Court of Appeal." Mr. Justice Mellor was of the same opinion. Mv Lord, there is a case noted up to that report of In re Bi dwell Brothers . Mr. Justice Kekewich : Yes, I have it. ]\Ir. P. O. Lawrence : That decision was reversed in the Court of Appeal, and that is one of those decisions which I was alluding to of the difference of opinion as to how shareholders could vote. Mr. Justice Kekewich : Yes, they held that they must vote for one person only. That seems to be wrong. They counted the proxies — he asked him whether he might count the proxies. Mr. P. O. Lawrence : Yes. That decision was reversed, and I will tell your Lordship what the result now is : you cannot count the votes of those persons who are present in proxy as one vote each — that is to say, supposing I have 100 proxies from different shareholders and attend at a meeting, I cannot count 100 votes on a show of hands for those persons. That is what Mr. Justice Vaughan \\illiams (as he then was) held. That has been set at rest now; you cannot do that; you cannot count the person present by proxy as one shareholder. He held there that every person who was present by proxj' had a vote although no poll was demanded ; so that if a person attended with twent}' proxies his vote would county twenty, although the shareholders themselves might have had a different number of shares. Mr. Justice Kekewich: 1 confess I find great difficulty in getting that out of the judgment of Mr. Justice Vaughan Williams, as he was at that time. I have a difficulty in understanding how it works out. At the bottom of p. 608 he says, "... each person present by proxy must vote." Mr. P. O. Lawrence: Yes, but he fell into the error which some of the other cases had — that those persons present by proxy could vote, althougli no vote was demanded, in accordance with their holdings. GEDGE AND OTHERS V. YE MECCA, LIM., AND OTHERS. 905 He held that each person had a vote although thev were not personally present but only present by prox}'. Mr. Justice Kekewich : Although they could not hold up their hands. Mr. P. O. Lawrence : Although they could not hold up their hands. Mr. Justice Kekewich : I think that is the meaning although the language is a little enigmatic. Mr. P. O. Lawrence : If a person is pre-ent not as a shareholder but as a proxy for others, his vote counts, but only as one : but all those properl)' present at a meeting on a show of hands must hold up their hands if they want to vote. Mr. Justice Kekewich : That is to say, a hand is not multiplied bv the fact that it holds several proxies. Mr. P. O. Lawrence : That is the result. I do not know that it is going to be suggested here that in addition to the right given by these articles there is the common law right to hold a poll at the instance of any shareholder. I submit there is a fallacy underlying that, because in the Companies Acts you have, under Section 51, a special direction as regards poll — five members have to hold a poll, and the articles in Table "A" of the Companies Act provide special methods of voting by poll. Therefore, you do not come within the ordinary rides, that there are no regulations as to poll, and that, therefore, the common law right applies ; but you have express regulations shown on the face of these articles, which follow pretty closely Table "A," and you have the fact that under the Companies Act, Section 51, the Legislature recgnises that in companies of this sort there is no absolute right to demand a poll in the absence of resolution, but there is a special right given to five shareholders to demand a poll, and it is only upon that that a poll can take place. There are numerous expressions in the books with regard to this matter, and I have not been able to find a single case under the Acts in which, under a resolution passed where a poll has been irregularly demanded, it has been held to be valid. \'ice-Chancellor Bacon, in the case of Re Haven Gold Mining Comfany (reported in 20 Chancery Division, p. 151) says this: '"The votes were counted, and a large majorii}' were in favour of the resolution. But then the petitioners say, ' Yes, but a poll was demanded.' The articles of association provide for the manner in which a poll can be properly or lawfully demanded, and no other can be resorted to. The poll was demanded by two or three persons, and the petitioners say that the articles were fulfilled because these persons held in their pockets the proxies of some other persons," and then he said ■" I desire to look at 9o6 AUDITING. the proxies," and he found there that the pull demanded was irregularly- demanded. I submit on the authoiities that my clients have been elected, and they will have to perforin the duties. They only, of course, desire to know where the}- are. Mr. Gore Browne : My Lord, I represent the company and the directors. Our position is exactly what my learned friend has indi- cated. We do not care who is Auditor, and if my learned friend is taking that view I am not sure that we might not cut the knot by both Auditors resigning any such right — I believe the other Auditor would do the same — and go back to the company to see who it really wants. But if that is not accepted as a proposal, which would seem to be perhaps really arriving at what are the real wishes of the company, all that the company and directors have to do is to submit to your Lordship the facts, and to take a direction from your Lordship as to who is the Auditor, in which case thev will, of course, accept him, and he will audit the accounts of the company with all proper care and skill, because I believe the}^ are both perfectly uniinpeachable and thoroughly competent gentlemen. !Mr. Justice Kekewich : What is the provision with regard to the election of Auditors in the articles? Mr. Gore Browne: It is on page 30, article 119. Tiie first two lines of that article saj' that the accounts shall be audited ; then the next two lines are: "The first Auditor or Auditors shall be appointed b}^ the directors, subsequent Auditors shall be appointed by the company at the ordinary meeting in each year." Then article 120 : " If any casual vacancy occurs in the office of Auditor the directors shall forthwith fill up the same." If my suggestion were adopted the course Vvfould seem to be that we might hold a meeting, and then the directors at the meeting would appoint any person properly indicated by the resolution. Mr. Justice Kekewich : It would be a great pity that tiiere should be any difficulty about this, and I quite sympathise with what you say; but, of course, if you are going to propose Mr. lleiron you cannot expect others to fall in with it. ^Ir. Gore Browne ; 1 am not going to propose anybody at all, but if he is proposed then the company would decide upon who they thought fit. I take no part whatever in representing the company or the directors, but if the shareholders propose Mr. Heiron his name would be submitted GEDGE AND OTHERS V. VE MECCA. LIM., AND OTHERS. 907 Mr. Justice Kekewich : ^^'ill you allow me to saj% with a view to peace, that I think it is a very awkward thing that a partner of a director should be appointed Auditor. I have filled the office of lay Auditor for a large number of years myself, and I know very delicate relations sometimes arise between me and there is no question of partner on the board, but personal friends whom J know extremely well, and sometimes it is extremely difficult to remonstrate as one has to do with proper severity. Mr. Gore Browne : As far as the company and directors are con- cerned, we should accept at once your Lordship's indication. We are not taking any part in this dispute. Mr. Justice Kekewich: You cannot undertake that ^Ir. Ileiron should not be proposed, but j'ou can undertake that he should not be supported. ^Ir. Cartmell : My Lord, I appear for Mr. Heiron, and the view v/hich he takes is that he does not wish to force himself into any position in which any reflection can be made in an)^ way upon him. Of course, I came here prepared to argiie as far as necessary the point Mr. Justice Ivekewich : There is no imputation upon him at all. Mr. Cartmell : Xo, but after what has fallen from your Lordship I feel it would not be right to put Mr. Ileiron forward in any way. Mr. Justice Kekewich: Well surely on those lines j^ou can settle it. [The learned Counsel and parties conferred.'') Mr. Gore Browne : My Lord, as far as the directors and Mr. Heiron are concerned, they are prepared to treat the election as null, and to make whatever proper arrangements are necessary for appointing an independent Auditor — that is to say, either leaving it to the Board of Trade or to your Lordship to nominate, and it can be carried out then under the articles. Mr. Justice Kekewich : What do you suggest I should nominate? Mr. Gore Browne : An Auditor. Mr. Justice Kekewich : Oh, no ; the company must elect an Auditor. Mr. Gore Browne : If your Lordship thinks it would be undesirable that you should do it we can do it in this form : The directors not making an appointment it falls to the Board of Trade to do it. 908 AUDITING. Mr. Justice Kekewich : You mean under the articles? Mr. Gore Browne : Under the articles. Mr. Justice Kekewich : If Mr. Heiron resigns then there will be a vacancy ? Mr. Gore Browne : If he resigns there will be a vacancy, and then the directors would have power to fill the vacancy. Having regard to what has passed they would be prepared not to exercise that power, and that puts it on the Board of Trade to exercise the power, and that is what the directors are prepared to do. I do not know whether m)^ learned friend accepts that. Mr. P. O. Lawrence : I am quite willing that m\^ client should also resign and do that. But there is this further question — and this, I think, is going to be serious : My friend suggests that I should pa}' m}' own costs of these proceedings. To put that upon the Auditor, a professional gentleman Mr. Justice Kekewich : I think if that is part of the proposition 5'ou had better go on. Mr. P. O. Lawrence : Yes, I think the company ought to pay them; they are very small at present ; but Mr. Justice Kekewich : There is no imputation upon either one or the other, and, to put it at the lowest, there has been an irregularity on the part of the corporate body. Mr. Gore Browne : I observe your Lordship's attitude with regard to the costs, and I am prepared to leave the question of costs in your Lordship's hands, notwithstanding what I have observed. We will not make any admission that we were wrong, because I think there is a great deal in law to be said about it. Mr. Justice Kekewich : I think you are quite right to leave it in my hands, and I will tell you wh}' — because I think if you consented to pay them the Auditor might not pass them, but if I order you to pay them he will have to. Mr. Gore Browne : When the new Auditor came into office he might say, "You were right in law all the way through." Mr. Justice Kekewich : I think he verj"^ likely would. Mr. Gore Browne : Yes; therefore I leave myself in your Lordship's hands. GEDGE AND OTHERS V. YE MECCA, LIM., AND OTHERS. 909 ^Ir. Justice Kekewich : And I am not sure that he would not be right. Mr. Gore Browne : I think he would probably, and that we have done what is proper in these proceedings. But we are quite willing to do whatever your Lordship thinks is right and proper. Mr. Justice Kekewich : I am quite prepared to direct that the costs of all parties up to trial (which should now be sta3'ed, and there be an end of it) should now be paid out of the funds of the company. Mr. Cfore Browne : If your Lordship pleases. Then both Auditors retire, as far as they are appointed or if they are appointed, and it will be left to the Board of Trade. Mr. P. O. Lawrence : I daresay 3-our Lordship would help us. It is only the directors who have to appoint : if your Lordship suggests a person they will appoint him — the}^ will give any undertaking now to appoint any person your Lordship suggests, and then we will both retire and need not trouble to go to the Board of Trade. Mr. Gore Browne : There is only this one point, that it must be an Auditor who is willing to do it at a fee of seventy-five guineas. Mr. P. O. Lawrence : Yes, at a fee of seventy-five guineas. If your Lordship would name a person, and if, as is possible, that gentleman does not accept the position of Auditor at that fee, your Lordship would give us another name — there must be many Chartered Accountants whom 3''our Lordship knows who would be willing to do it. Mr. Justice Kekewich : Yes, they are all very willing to do it ; it is part of their business. Mr. Gore Browne : The directors will appoint whoever your Lordship mentions as Auditor. Mr. Justice Kekewich : Seventy-five guineas is not a very small fee for an audit. There are not many auditorships that get seventy-five guineas. Mr. Gore Browne : There is a great deal of detail in this trade. Mr. Justice Kekewich : I do not know in the least. I will name Mr. Whinney, and, failing him, Mr. Fitch Kemp. {Acct. L.R., 1907, p. 17.) piO AUDITING. The case of THE LIVERPOOL AND WIGAX SUPPLY ASSOCLA.TION, LIM. (Decided b\' his Honour Judge Thomas, in the Liverpool Court of Bankruptcy, on 14th June 1907.) Held that, to establish a claim for Misfeasance, it micst he shown that the Company has sustained an actual Loss. This was a case in connection with the winding-up of a grocery and pro\'ision concern named " The Liverpool and Wigan Supply Association, Lim." Mr. J. \Y. Wall, solicitor, appeared on behalf of Mr. John ^I'Cormick, Chartered Accountant, Liverpool, the liquidator of the company, and moved the Court, under Section 10 of the Companies Act, 1900, for an order on Mr. Arthur Campbell, Chartered Accountant, Booth Street, Manchester, " To contribute such sum of money to the assets as to this Court may seem fit and proper, by way of compensation in respect of his misfeasance and neglect of duty as Auditor of the company, for that he being Auditor of the company did make Balance Sheets for the half-years ending the 30th day of June 1905 and the 31st daj- of Decem- ber 1905 which were incorrect and misleading, and that the said Arthur Campbell did not use reasonable care and skill in the making and preparing of such Balance Sheets, and neglected his duties as Auditor of the said company, and thereby caused loss of assets, and damage to the shareholders and creditors of the said compan}'." Mr. Wall stated that the respondent had acted as Auditor of the company from its formation in May 1899 to the winding-up order in August 1906, when there was /.Hyg due to unsecured trade creditors, and the assets realised had not been sufficient to pay the initial costs of winding-up. The business of the company was mainh' carried on in a shop in Standish Gate, and the Market Hall, Wigan, and Mr. Wall proceeded to quote figures from the half-yearly Balance Sheets as audited and certified by the respondent, the main points on which the present motion was founded being that book debts, to a considerable amount, were again and again included in the assets when with reason- able care and skill the Auditor could have ascertained that the}^ were worthless, and that the half-yearly Balance Sheets in question did not show the true position of the company on the dates given, inasmuch as they included in both instances receipts to about a week later, without having regard to the purchases during the interval, which had increased the debits of the company. Mr. Wall cited a number of cases bearing on the question of the duties of Auditors, amongst them the judgment of Lord Justice Lopes in the Kingston I, THE LIVERPOOL AND WIGAX SUPPLY ASSOCL\TION, LIM. 9II Cotton Mill appeal case, in which his Lordship laid it down, " It is the duty of an Auditor to bring to bear on the work he has to perform that skill, care, and caution which a reasonabl}- competent, careful, and cautious Auditor would use. What is reasonable skill, care, and caution must depend on the j>articular circumstances of each case. An Auditor is not bound to be a detective, or, as was said, to approach his work with suspicion, or with a foregone conclusion that there is something wrong. He is a watch dog, not a bloodhound. He is justified in believing tried servants of the company in w'hom confidence is placed by the company. He is entitled to assume that they are honest and to relj' upon their representations, provided he takes reasonable care. If there is anything to excite suspicion, he should probe it to the bottom, but in the absence of anything of that kind, he is only bound to be reasonabl}^ cautious and careful." Later in the judgment his Lordship held, '"It is not the duty of an Auditor to take stock — he is hot a stock expert. There are man}' matters in which he must rely on the honesty and accuracy of others. He does not guarantee the discovery of all fraud."' On this and other cases cited, Mr. Wall submitted that directors are entitled to presume that the Auditor does his work properly, and that relieved them from any onus in the matter. He then read the affidavit of the liquidator, setting out the points complained of in regard to the audits, and remarked that the present was a class of case that very seldom came into Court, thus giving rise to the suggestion often heard that under the Companies Acts people from whom redress was wanted could not be reached. He felt in the public interests that it was a case that ought to be brought into Court for consideration, whether there was misfeasance or not, and he did not think it should be a factor whether the Auditor was able to pay or not. The Judge : I think you are right there. Mr. Wall : The proceedings are not brought with any vindictive feel- ing against the Auditor personally, but the certificates of Auditors are so much relied upon commercially that it is very important that the public should know that where Auditors" certificates are wrongly given they may be, and will be, attacked. Mr. Wall proceeded to support his motion by reading extracts from the observations of the Official Receiver of Liverpool upon the failure. Bernard M'Guirk was then called, and was cross-examined by Mr. Courthope Wilson. He, for about a month after the formation of the company, was a director, and he then retired, as he was a creditor for about ;^40o, and thought he should not remain a director. He alleged 912 AUDITING. that he had ]ost heavily owing to the incorrect state of the Balance Sheets, which had shown that 20s. in the £, could be paid if the com- pany were wound up. He was never a promoter of the company, though Mr. Oliver, whose business was taken over by the company, owed him at the time about ;!f400. Oliver, who was the managing director, was instructed to keep a Cash Book and Ledger, and witness did not know, until the winding-up proceedings, that no Cash Book was kept. The Judge : Did you hope that the formation of this company would help to pay off 3-our old debt? The witness : No ; there was money in the bank then. In reply to a further question b}^ ^Nlr. Courthope Wilson, witness admitted that he, as a shareholder, saw the Balance Sheet in Decem- ber 1899, and that it bore a certificate by the Auditor to the effect that information and figures it contained on certain points were obtained by the Auditor from Mr. Oliver. Mr. Courthope Wilson, in his statement for the defence, said he would call Mr. Campbell, if necessar}^, but his (counsel's) case was a very simple one. Under Section 10 of the Companies Act, 1900 — which is the misfeasance section — it had been established that that section J did not create an}'^ new rights, and only provided a summary remedy for enforcing rights a company would have had apart from the altera- tion under the old Act. To bring the present case within the section, 4 Mr. Wall must prove a breach of trust by an officer of the company, and he must prove loss to the company by reason of that breach of trust. The Judge : The present is not a complaint by the company, but by a creditor of the company. Mr. Courthope Wilson : It is the liquidator who is claiming. He cannot have a claim unless the loss is a loss by which the assets of the company are diminished. Counsel proceeded to cite a case in which the Court of Appeal had held that misfeasance in Section 10 meant misfeasance in the nature of a breach of trust, and he also cited a decision of the House of Lords to show that the loss must be a loss to the company. The Judge : The result of the cases cited is that in these circum- stances you cannot, according to your contention, recover under this section. Mr. Courthope Wilson : Yes. The Judge: Is there any remedy at all? ^Ir. Courthope Wilson : Yes. It might be done by a common law action by a creditor personally, but I submit this is M'Guirk's action THE LIVERPOOL AND WIGAN SUPPLY ASSOCIATION, LIM. 913 really. As he said in the box, he had been "induced to trust the company on account of these Balance Sheets," but it is clear that it was not in consequence of these Balance Sheets he was induced to trust the company — he went on and increased his debt — but whether he acted on the Balance Sheets or not, there is no loss to the company. There is no diminution or loss to the assets of the company, and that must be shown in order to enable this application to succeed. Counsel proceeded to criticise the report of the liquidator, and a long legal argument ensued on various points. The Judge : Whether there is breach of duty or breach of trust, to succeed on this application must not you show that there is a loss to the company? Mr. Wall : If I say there is a breach of duty that is all I need show, but I contend there has been loss to the company, inasmuch as the assets shown were about /.900, and the result we have obtained from the assets is £22 os. gd. One Balance Sheet showed £46 in the bank, whereas it should have shown 13s. id. The Judge : Whose is the loss ? ^Ir. Wall : The compan}' — the shareholders and creditors. The Judge : All tne assets would have been wiped out by the creditors at that time Mr. Wall : I take it the law must not be strained to say who would have got the assets — they belonged to the company and the company have lost them. The Judge : The loss is to the unfortunate creditors. There is no doubt Mr. M'Guirk went on trusting the company, but whether on these Balance Sheets or not I don't think it is necessar}' to determine. You have to show me that the assets of the compan}'^ have been diminished by the misrepresentations in these Balance Sheets. Mr. Wall : Assuming there is an amount in the bank on any par- ticular date, and the company had passed a resolution to wind up, the company would have been in possession of that money. The Judge : Yes, but you have to show me that the company has lost something. Mr. Wall : The money comes to the compan}^ first, and they dis- tribute it, so 1 submit it cannot be said that the money lost is the creditors' money, because there is not enough to go beyond them. The company as a body has lost that money by not getting it into its assets. The company must get the money before it is distributed to the creditors. Is not that the true position? If not, I don't see that I can carry it further. N N N 9J4 AUDITING. JUDGMENT. The Judge : In this case I think that the Auditor was negligent as an Auditor in the sense that he relied on statements made to him by the directors, and did not put in his certificate the fact that he was relying on the statements of the directors. The Auditor did not dis- close that there was no Cash Book, and, if it were material in this case to say so, I think the Auditor ought to have disclosed it. I don't think he ought to have accepted the statements of a director as to the taking of stock, and the Balance Sheets should have shown the position of the company on the dates the}' purport to have shown the position. But none of these acts appears to me to have diminished the assets of the compan}' as such. What may have happened is that the creditors went on dealing with the company longer than they otherwise would have done, but I have no evidence before me that satisfies me that even that was the case, and with respect to creditors this is not the proper form of procedure, if the}' have any remedy at all. I think Mr. Courthope Wilson is right that under this form of proceeding it must be established that there has been breach of duty that has resulted in some actual diminution of the assets of the company. And in regard to the statement as to the book debts, there is no evidence that at anv time those could have been collected, but in fact the report shows to the contrary. In regard to the amount that ought to have been to the credit of the company at the bank, that is accounted for in the statement as to the extent of the company's assets, and it is not evervthing that diminishes the company's assets, consequently no evidence has been brought before me to show that the assets of the company have been diminished by anything the Auditor has done, and these proceedings, I think, must fail. Mr. Courthope Wilson asked for costs. The Judge : I give no costs. (Atrci. L.R., 1907, p. 4.) The case of REX v. OLIPHAXT. (Decided by Lord Alverstoxk, C.J., and Lawraxce, Kex.neuv, Ridlev, and Channell, J J., in the Court for Crown Cases Reserved, on Sth April 1905. Held thai a Servant forxvardiug False Returns to the Head O ffice of his Emflovers for record there is chargeable tinder Section i of the Falsification of Accomits Act, 1875. This was a case stated by the Common Serjeant of the City of London on the trial of William Clarke Oliphaut at the (Jld Bailey on. REX V. OLIPHANT. 915 an indictment charging him under the Falsification of Accounts Act, 1S75, Section i, as a clerk or servant with omitting and concurring in omitting material particulars from a book belonging to his employers with intent to defraud. The evidence established that the defendant was employed in Paris as a clerk or servant by a firm of tailors, Messrs. Sandon & Co., of London, who had a branch establishment in Paris. Fie was paid a salary and commission upon orders, and received weekly remittances from London to meet expenses. It was his duty, amongst other things, to receive mone}' on account of his employers at their shop in Paris and to pay every day the sums so received into a Paris bank, and on e\er3^ day on which he had received any such money to enter on slips furnished to him an account of every sum so received and transmit the same by post to the firm in London. A book called the Paris Cash Account Book was kept in the office in London showing all the sums received and paid by the defendant in Paris for his employers. The entries in this book were made by Mr. Moore, one of the partners in the firm of Sandon & Co., items of receipts being entered from the slips made out and transmitted to London by the defendant. The defendant knew that this book was so kept and that items omitted by him in his daily slips would necessarily be omitted in that book. He himself from time to time when in London went through the entries in that book with one of Mr. Sandon's clerks, and compared the entries with the slips he had sent from Paris, and caused any entries to be corrected which he showed to be wrong. He went through the book in this way in August 1904, after the misappropriation and omission from the book of two of the sums mentioned in the indictment. On the date stated in the indictment the defendant received the three sums therein men- tioned and fraudulently appropriated them to his own use, and omitted each of these sums from the slips which he sent to London. The receipt of each of such sums was consequently omitted in the Paris Cash Account Book. Counsel for the defendant contended (i) that the defendant could not upon this evidence be convicted of omitting or con- curring in omitting particulars from the book referred to, and (2) that there was no jurisdiction in the Court to try the case, as the offence was not committed in England. The Common Serjeant reseryed these points, and directed the jury that if the}^ were satisfied that the defendant had fraudulently omitted from the slips returned to London the receipt of the sums he misappropriated, intending they should be omitted from the Paris Cash Account Book, and thereby caused such payments to be omitted in that book, and that his conduct and acts as above set out were a scheme of fraud, they should find the defendant guilty. They thereupon returned a verdict of guilty. The N N K 2 9l6 AUDITING. Common Serjeant postponed judgment, and released the defendant on bail. The question for the Court was whether the defendant could rightly be convicted on an}' and which of the counts in the indictment. yir. Arthur Gill, for the defendant, submitted that there was no evidence of any offence. There was no duty on the defendant as to making entries in the London books. Those entries were made by the employer, ^eg. v. Butt (15 Cox, 564) had no application, as the entry was made b}^ the master. To make the omissions from the books the act of the defendant the person making the entries in them must have been the agent of the defendant. The word " concur " in the statute did not apply unless both parties agreed. Secondly, there was no authority for the contention that where a person was out of the jurisdiction he could be indicted for a mere act of omission done abroad. Venue must be distinguished from jurisdiction. He referred to British South Africa Co. V. Comfanhia de Mocambiqiie (1803, A.C., at p. 631), Reg. v. Ellis (1S99, I Q.B., at p. 241), Stephen's History of Criminal Law (1883 edition, vol. 2, p. q), and Rex v. Munton (i Esp. 60), Rex v. Johnson (29 St. Tr., at p. 499), and Reg. v. Keyn (2 Ex.D. 63). Mr. R. D. ]\Iuir, for the prosecution, submitted that, as the object of sending the slips was that the books might be made up in London, the defendant's duty was to give correct information in London, and there was therefore an omission to do something in London — Reg. v. Davison (7 Cox, at p. 162). The point was covered by Reg. v. Butt [supra). An act committed out of the jurisdiction, but taking effect within it, was triable where it took effect (see the cases cited in argu- ment in Rex v. Johnson [supra) ). He also referred to Rex v. Brisac (4 East, at p. 171), Chitty's Criminal Law (2nd edition, vol. i, p. 191), Rex V. Girdzvood (i Leach, 142), and Rex v. Coombes (i Leach, 388). JUDGMENT. The Lord Chief Justice, in giving judgment, said that he had no doubt that this conviction ought to be affirmed. The real point was what was the duty that the defendant had to perform, and what was the act done that was alleged to be the omitting or concurring in the omitting to make an entrj'. He thought that the statute was wisely framed in somewhat wide language in order to prevent the class of fraud referred to in Reg. v. Butt [siLpra). The duty of the defendant, as stated in the case, was in order to enable the Paris Cash Account Book to be correctly entered up from information transmitted da}"- by day through the post. He could draw no distinction between sending by letter and telephoning and giving direct instructions from time to time in London. There was no other way (jf keeping a check on the defendant day by day REX V. OLIPHAXT. 917 than by means of the entries made up on information he himself sup- plied. It was absolutely essential that the accounts should be piroperly made up ; but he had omitted to send the correct entries and had con- curred in the book being made up with the omission of the proper entries. Though the case stated that the defendant came to London, his Lordship did not base his judgment upon that, as he thought it would be quite sufficient to support the conviction that, in regard to these two particular matters, the defendant concurred in the omission. His Lordship thought the conviction might be justified, even though the defendant had not come to London. The Common Serjeant's direc- tion to the jury put the matter in the strictest way in the defendant's favour, and it could not be said that the direction permitted the defendant to be convicted on wrong grounds. It was said that, as the defendant's master made the entries, there was no offence ; but that could not be seriousl}' pressed, as it was clear from Reg. v. Butt [supra) that the fact that the hand which made the entry was an innocent one made no difference. He could not see any distinction that could be drawn between an improper entry in the books occasioned by a false return and an improper entry occasioned by an omission from an other- wise genuine return, and Rex v. Brisac laid down the same principle. Mr. Justice Lawrance agreed. Mr. Justice Kennedy said that he was not prepared to differ ; but it was a case of very considerable difficuliy, and the danger was that where a man had acted with gross dishonesty one might try to see whether the statute did not cover the case. His difficulty was that the defendant was not charged with any act of wrong-doing in regard to the slips themselves. There was som.e difficulty where, as in this case, the defendant did a dishonest act in omitting to send to this couirtry proper information ; but the doubt he felt was whether one could saj' that when the result of a mere wrong communication was that a false entry might be made, the case came within the statute. Ought one, under this section, to find that a man was guilty of omitting from the Ledger because he had made an omission from the Cash Book, the Ledger being made up bv another clerk? Could the clerk who omitted from the Cash Book be properly convicted under this section of omitting from the Ledger ? He confessed that he had had doubt. But as the jury had found in this case against the defendant on the direction stated in the case, then, if there was evidence proper to be submitted to them of the intent that this particular book should be made a false book by the omissions from the slips, he was not pre- pared to differ from the judgment of the Lord Chief Justice. 91 8 AUDITING. Mr. Justice Ridley agreed with the judgment of the Lord Chief Justice. Mr. Justice Channell said that he agreed in aflBrming the conviction, but he shared the doubts that Mr. Justice Kennedy had expressed. It was doubtful whether the defendant had any duty in reference to the keeping of the London books. He did think that a man who sent a wrong return to his employer and knew his employer would keep his books accordingly thereby falsified his employer's books or concurred in the omission from them of something that would have been there if he had sent a correct return. To justify a conviction the defendant must have had something to do with keeping the books. That was a question that depended on the facts of this particular case, and there was no general principle involved. {AccL L.R., 1905, p. 49.) The case of ROMAN v. QUILTER. (Decided by his Honour Judge Rentoul, in the City of London Court, on 27th February 1908.) Held that an Accountant em-ployed at an Annual Fee and disinissed during the Currency of a Year, is entitled to a Full Year's Fee. F. W. Honiau, accountant, sued Sir William Cuthbert Quilter, Bart., M.P., stockbroker, for thirty-five guineas for accountancy work done. The plaintiff's case was that for thirteen years he had been employed by Sir Cuthbert to prepare his private accounts of income and expenditure. Formerly he was paid fifty guineas yearly, but it was reduced to thirty-five guineas. On May 22 last be was informed that the engagement would terminate on June 30, but he contended that the notice was insufficient. For the defence it was contended that the engagement was not a yearly one, although the amount was paid annually, and defendant was not entitled to notice. Eighteen pounds seven shillings and si.xpence was paid into Court. JUDGMENT. Judge Rentoul said he had not a shadow of doubt that judgment must be for the full amount claimed, with costs. {Acci. L.R., 1908, p. 25.) REX V. SOLOMONS. 919 The case of REX v. SOLOMONS. {Decided by Lord Alverstone, C.J., and Darling and Jelf, JJ., in the Court of Crininal Appeal, on 17th July 1909.) Held that a Mechanical Check {in this case a Taximeter) is an '' account" within the meani^ig of the Falsification of Accounts Act, 1875. The appellant was a taximeter cab driver, and had been in the habit of taking out one of the cabs belonging to the General Motor Cab Com- pany. He had been convicted of falsifying the taximeter, b\" driving fares, from whom he had taken mone}^, without putting down the flag which set the taximeter at work. There were also charges under the Larceny Act, 1901. It appeared that on a consecutive number of days the appellant had driven two music-hall artistes from one music-hall to another and back, without putting the flag of the taximeter down. For each journey he was paid gs., which was less than the amount that the taximeter would have registered had it been working. At the end of the day, it was customary for the drivers of cabs belonging to the company to sign a paper, which was an account of the da3'^"s takings, recorded by the taximeter clerk, from the figures registered by the taximeter itself. Of the amount so registered and checked, the driver was entitled to one-quarter and the company to three-quarters. It was contended for the appellant upon appeal against conviction that there was no contract of service between him and the company. It was true that there were various notices and regulations concerning the drivers, one of which was to the effect that a driver who absented himself, without special leave, for more than twentj^-four hours was liable to instant dismissal, which might suggest a contract of service. On the other hand, there were other matters to show that there was no such contract, such as the lack of any control by the company over the drivers, once the cabs had left the compan3-'3 premises. Drivers could go where they pleased and were subject to no orders. The Common Serjeant had told the jury that he had grave doubt as to whether the appellant was a servant within the Act dealing with falsification. For the Crown, in respect only of the question as to whether a taximeter was an account, it was contended that a taximeter machine was an account within the Act of 1875. There was nothing in the statute to show that an account must be on paper. The machine on one side had a record of the number of miles run, which record, in this case, was untrue. The number of miles traversed would show how much the driver ought to have received. The paper drawn up by the clerk was 9-° AUDITING. copied from the machine, and both paper and machine were accounts, just as much as a Ledger and Day Book. Held, that an offence was committed when the taximeter, which was an account within the meaning of the Act, was falsified ; that the appellant, being a servant of the company, was rightly convicted of falsification under the Act of 1S75 ; and that therefore the appeal must be dismissed. (Acct. L.R., 1909, p. 22.) In re JAMES \VILLIA:\[S (deceased) and in re THE PUBLIC TRUSTEE ACT, 1906. (Decided by SwixFEx-E.\nv, J., in the Chancery Division, on 7th July 1910.) Held that Trustees must frodttce Accounts to an Auditor af fainted under the Public Trustee Act, 1906, without seeking to imfose terins. This was a summons by an Auditor appointed by the Public Trustee under Section 13 of the Public Trustee Act, 1906, to investigate the condition and accounts of the trusts of the testator's will, and it asked that the trustees of the will should be ordered to produce to him the books, accounts, and other documents relating to the trusts. There was also a summons by John \Mlliams, the acting trustee, asking for the discharge of the Auditor, or in the alternative that the audit should be limited to accounts of capital money. The testator, a brickmaker and contractor, died in 1886, having devised and bequeathed all his pi'operty to two sons, one of them his partner, and to a co-partner on trust for sale and conversion (with power to postpone), and there were separate trusts of the income and capital. Out of the former, annuities were given to si.x of the testator's children and two orphan grand- children, the surplus income being given to the two other sons (the trustees), and on the death of each of the six children a capital sum was settled on his or her famil}-, a lump sum being also payable to the two grandchildren on the younger of them attaining 21, when their annuities were to cease. The two trustee sons were residuary legatees. There was a clause in the will under which if any of the above-named beneficiaries commenced an action in the High Court in respect of the trusts, the whole of the costs were to fall on his or her share. Three of the children had died and the younger grandchild had attained 21 in 1900, but the trustees had raised none of the capital sums due on those events, but had paid interest thereon at 4 per cent., alleging that the complicated nature of the testator's property, which consisted IN RE JAMES WILLIAMS (DEC.) AND IN RE THE 921 PUBLIC TRUSTEE ACT, I906. largely of ground rents and hou?e property at Hammersmith, rendered it impossible to realise the capital required. It appeared, however, that on the falling in of a lease of part of the property they had granted a renewal and taken a fine of ^^'2,000, which in the absence of any direc- tion to the contrary in the will, they had treated as income, dividing it between themselves as surplus income. On the appointment of the Auditor, which was made on the application of one of the grand- children, the acting trustee had declined to produce the necessary books and documents except on the terms of the costs of the audit being borne by those v/ho asked for it. The other trustee was said to be willing that the audit should proceed. JLDG.MENT. 'Mr. Justice Swinfen-Eady said that, in his opinion, there was no answer to the Auditor's summons. Being appointed by the Public Trustee he had a right to all books and other necessary documents, and the trustee was in error in refusing to produce them e.xcept on terms. There would, therefore, be an order for access, including access to the partnership books, and John Williams must pay the costs. The other summons was a different matter. It raised the question whether the audit should not be limited to capital, but it should be observed that it first asked that the investigation and audit should not be proceeded with at all. He saw no grounds for that claim and refused it, being of opinion that investigation was neces- sar}-. Xor was there any ground for limiting the audit to capital matters. It appeared that ;i^2,ooo had been received and divided between the residuary legatees as income, they at the same time alleging that there was no money to pay the settled portions. The Court had no information as to the testator's share in the partnership business. His Lordship was of opinion that the audit should not be limited to capital, though it might be that on looking into the accounts the Auditor might find it possible to confirte his investigation, and it was not to be anticipated that a person selected by the Public Trustee would incur undue expense. At the present time no directions as to scope could be given, and this part of the second summons would stand over generally. (26 T.L.R., p. 604.) •922 AUDITING. The case of THE ATTORNEY-GENERAL v. CORPORATION OF ^YEST HAM. •(Decided by Neviij.e, J., in the Chancery Division, on 29th July 1910.) Held that a Bank Overdrajt for general fiirfoses in resfeci of borrow- ing -powers granted for specific purposes, the application of money due to the Consolidated Loans Fund in payment of such Overdraft, and borrowing from a Bank otherwise titan in the exercise of borrowing powers sanctioned by the Local Government Board, are all illegal. This was an action by the Attorney-General, at the relation of certain ratepayers of the Borough of West Ham, against the Corporation and Mr. Patterson (their treasurer), and their bankers, the London and County Bank, and raised importajit questions as to the validity of the ■Corporation's overdraft at the bank during the three years ending March 31 1908, and the manner in which they kept their accounts at the bank. The statement of claim alleged (amongst other things) that the Corporation's overdraft at the bank on March 31 igo8 was _;i^90,949 4s. 4d. on Capital Account, and £./\/\,<^^2. 12s. on Revenue Account, and that, of these sums, ;!^2o,8r7 7s. 9d. on Capital Account and the whole of the £.a,&„C)-^2 12s. had respec'tivel}' been borrowed without the sanction of the Local Government Board, and were wholly unauthorised and illegal ; that the Corporation's illegal overdrafts on Capital and on Revenue Account at the bank had been continuous and increasing during the three years ending March 31 1908, that the bank had each year charged and paid themselves interest on these illegal overdrafts, and that these payments of interest were defrayed out of the fund or rate applicable to the general purposes of the Public Health Act, 1875, were illegal and breaches of trust to which the bank was privy. The statement of claim further alleged that the Corporation kept one general account at the bank, which in fact comprised, and was an amalgamation of, ten different accounts in respect of separate under- takings under various Acts of Parliament, that the moneys received for each undertaking were trust moneys held upon a separate and distinct trust from every other account of the Corporation, which the defendants well knew, that this amalgamated account had been wrongfully applied in reduction of illegal overdrafts during the period in question, and that the bank had paid themselves interest on these illegal overdrafts during the period in question to the extent of some ;i^i4,ooo ; and the plaintiff claimed [inter alia) declarations that the above transactions were illegal and ultra vires, and that the defendants Patterson and the bank might be ordered to restore to the funds of the Corporation the ■alleged illegal overdrafts and all payments of interest on such over- THE ATTORNEY-GENERAL V. CORPORATION OF 923 WEST HAM. drafts. The defendants denied all the allegations of the plaintiff. In particular the Corporation and their treasurer alleged that all moneys borrowed by the Corporation were used and applied in payment of the lawful debts due to lawful creditors of the Corporation, and the bank alleged that the relation between them and the defendant Corporation and their treasurer was the ordinary relation of banker and customer, and that they were wholly unaware of the purposes for which the cheques were drawn, and that all moneys overdrawn from them by the Corporation were duly and properly applied in payment of the Corporation's just debts and liabilities, and that they (the bank) were in any event entitled to stand in the place of the creditors whose debts were so paid and to be subrogated to their position. During the trial of the action the plaintiff and the bank came to an arrangement whereby, upon payment by the bank to the Corporation of ,^7,000 in respect of the paj'ment to the bank of iiiterest on the balances of over- drafts and upon the bank agreeing to pay plaintiff the difference between party and party costs and indemnity costs of the plaintiff, such sum to be settled by Sir Thomas Rawle in case the parties differ, further proceedings against the bank were stayed. But this left untouched the main issues between the plaintiff and the Corporation. The arguments involved the construction of various Acts of Parliament and the consideration of accounts of much complexity during the three years in question, and at the conclusion of the arguments judgment was reserved. JUDGMEXT. Xeville, J., gave judgment as follows : — In this case the Attorney- General sues the Corporation of West Ham to put an end to alleged illegality on the part of the Corporation in the conduct of the businesses entrusted to them by the Legislature. The statutory powers of the Corporation include the supply of electricity and of electrical fittings. For these and other purposes they have been entrusted with extensive powers of borrowing, in some instances ^including their electrical undertaking) to be exercised with the sanction of the Local Govern- ment Board. The Corporation had ten different accounts at their bankers, into one of which, the general account, they paid all receipts on account of the borough fund and the general district rate, and upon which they drew in respect, amongst other things, of their expenditure upon their electrical undertakings. The Corporation kept in their books two electricity accounts, one called the Capital Account, dealing with expenditure on fixed capital, and the other the Revenue Account, which, besides showing the surplus or deficiency on the year's working, included their expenditure upon electrical fittings and stores. For the latter they had borrowing powers to be exercised with the sanction of 924 AUDITING. the Local Government Board, but they had not on March 31 1908 obtained any such sanction. Any deficiency upon the year's working was estimated for in the rate for the following six months and levied ; but no estimate was made in respect of the capital expenditure upon the electrical undertaking whether fixed or floating. This was found either from other funds of the Corporation not properly applicable for that purpose or by overdraft from the bank. On March 31 1908 the overdraft on the electricity Revenue Account was over ^44,000, and on the Capital Account over ^92,000. In my opinion these overdrafts were illegal. On April 15 sanction was obtained from the Local Government Board for a loan on electricity Capital Account of some ^64,000. Towards the end of 1905 by this and other expendi- ture made for legitimate purposes, but which was intended to be met out of funds to be produced by the exercise of their borrowing powers and for which consequently no estimate was made or rate levied, the Corporation had got themselves into considerable financial difficulties and were unable without financial assistance to provide for their current expenditure. They had at this time unexhausted borrowing powers which (upon the sanction of the Local Government Board being obtained) would, if exercised, have to some extent enabled them to recoup their expenditure upon Capital Accounts, and in the month of December 1905 they applied for sanction to borrow moneys in respect of certain works. It is only fair to the Corporation to say that the sanction which was ultimately given in respect of the greater part of their application was not so given until April 18 1908, and this delay undoubtedly added to their embarrassment and tended to prolong the period during which they sought assistance. In this state of affairs the Corporation in the month of November 1905 applied for an over- draft to the defendant bank, and after some negotiation an overdraft was granted to them to the extent of ^f 120,000, subsequently increased to ;if20o,ooo. From the time when the overdraft was granted until shortly before the commencement of the action the accounts were almost continuously overdrawn. At the time the Corporation obtained the overdraft they had unexhausted borrowing powers, and I will assume that these were in excess of the overdraft, though the evidence is some- what meagre on the point. The Corporation appear to have considered, and they certainly acted, as though they were entitled to use moneys borrowed under specific powers, not merely for the specific purposes for which the powers were bestowed, but for any purpose to which any funds of the Corporation could lawfully be applied so long as they kept proper accounts of the expenditure. I think the correspondence and applications to the bank show that they intended so to apply the bank's advances from the first : see, iu/cr alia, Mr. Patterson's letter of THE ATTORNEY- GENERAL V. CORPORATION OF 925 WEST HAM. December 7 1905 — and in fact the overdraft was allowed on all the accounts and a general balance struck daily upon them all. In my opinion, this view of the position of the Corporation was erroneous. I think if they raised moneys under a borrowing power they were bound to apply the moneys so raised for the specific objects indicated by the statute. I think upon this ground the obtaining of the overdraft was ultra vires of the Corporation. Whether an overdraft extended over several years for substantially the whole amount of the authorised loan could be justified as a temporary loan within the meaning of the decisions I need not decide, but in my opinion the question is at least doubtful. Upon the point whether having regard to the statutory provisions under which corporations are enabled to procure the funds to discharge their liabilities they are entitled to borrow mone}' by way of overdraft for general expenditure, at all events except under special circumstances, I also reserve my decision. The impropriet}' of muni- cipal corporations incurring large expenditure on Capital Account in anticipation of sanction for loans not 3'et obtained is well illustrated in the present case, where the Corporation failed to obtain sanction for a lean in respect of an expenditure of over _^'io,ooo on Electricity Account, with the result that they were driven to make a levy for the amount, in m}- opinion an illegal levy, inasmuch as the proceeds were applied in payment of liabilities incurred more t'han six months before the levy of the rate. The bank having agreed terms with the plaintiff, I refrain from discussing what, upon the evidence, their position would have been in respect of their advances. On March 31 1908 the general account of the Corporation with the bank was largely overdrawn — to the extent of some ,1/^38,000 after deducting the amount due to the consolidated loans fund, but which had, from time to time, been paid into the account in reduction of the overdraft in accordance with an arrangement with the bank. In my opinion the application of the amounts due to the consolidated loans fund in reduction of the over- draft was illegal. At the trial application was made for leave to plead the Public Authorities Protection Act, 1893, and the Trustee Relief Act, 1S8S. In the course of the trial I gave such leave, subject to all questions of costs and adjournment, and the matter proceeded upon that footing. Counsel for the Attorney-General having refrained from asking for relief against the defendant Patterson personally, the Trustee Relief Act can have no application. The question of the applicability of the Public Authorities Protection Act, 1893, was not fully argued. In my opinion, however, it would apply in favour of the Corporation and the borough treasurer in respect of acts completed more than six months before 926 AUDITING. action. The overdraft, however, from the bank and repa^vments out of nionevs due to the consolidated loans fund continued up to a period within six months before the commencement of the action, and I think the plaintiff is entitled to declarations in respect of such continuing illegal it V. Although the plaintiff is not entitled to all the relief claimed, I think that, having regard to the time at which the appli- cation to amend was made, this should make no difference as to the incidence of the costs of the action. I propose to declare : — (i) That the overdraft obtained from the bank for general purposes in respect of borrowing powers granted for specific purposes was ultra vires and illegal. (2) That the application of money due to the con- solidated loans fund in repayment of such overdraft vv^as ultra vires and illegal. (3) That the borrowing of money from the bank for the purpose of the Electricity Accounts, otherwise than in the exercise of borrowing powers with the sanction of the Local Government Board was ultra vires and illegal. The defendant Corporation and the defendant Patterson must pay the costs of the action. Mr. Danckwerts : Your Lordship promised to sa}- something about the sanction of the Local Government Board being held back, you remember. If we get that sanction it will put us straight and we shall be able to proceed. Mr. Justice Xeville : The action is over now, I understand. Sir Alfred Cripps : It does not arise as to what the Local Govern- ment Board may do ; we are quite neutral about it, of course. I do not see how your Lordship can say anything about that. Mr. Justice Xeville : I think now the action is disposed of it cannot affect that matter. I do not think I ought to give anything that would appear to be like a direction as to that. ■Mr. Danckwerts : All 1 ask from your Lordship is an expression of opinion that so far as your Lordship's view is concerned there is nothing to prevent the Local Government Board, if they think fit, from giving that sanction. Mr. Justice Neville : I think that is so obvious that I do not think I ought to say anything. Mr. Danckwerts : If your Lordship pleases ; that is enough for me. There will be some time required to put ourselves straight. Mr. Justice Neville : Yes. Mr. Danckwerts : Of course, in order to do that your Lordship will give us, say, till March 31 next, so that we should not be presumed to intentionally break the declarations that your Lordship has made. IK RE THE SPANISH PROSPECTING COMPANY, LIM. 927 Sir Alfred Cripps : I ask your Lordship not to du that. Mr. Danckwerts : Some proceedings ma}' or may not be taken on the other side. Mr. Justice Neville : Mr. Danckwerts, I do not think there are any means that I know of by which a declaration can be enforced. I have- not granted an injunction. Mr. Danckwerts : No; I noticed that, my Lord. Mr. Justice Neville : It makes it res judicata between the Attorney- General and the Corporation. I think it has no further operation than that. Mr. Danckwerts : If j-our Lordship pleases. [Times, 30th Juh' iqio.) In re THE SPANISH PROSPECTING COMPANY, LIM. (Decided by Cozens-Hardy, M.R., and Fletcher Moulton and' Farwell, L.JJ., in the Court of Appeal, on 9th November 1910.) Held that when a Salary is fayable oitt of Profits, such Profits are not necessarily the Profits shown by the Coiiifanv- s Annual Accounts,, but may include accretions of Cafital. Considered judgment of the Court of Appeal reviewing the decision of Mr. Justice Swinfen-Eady. The facts are sufficiently set out in the judgment of the Master of the Rolls. JUDGSIEXT. Cozens-Hardy, M.R. : This appeal turns upon the meaning of the word " profits." The compan}- is in voluntary liquidation; The creditors, except Messrs. Punchard & Vivian, have been paid in full,, and all the subscribed capital has been returned, and there is a surplus of upwards of ;i^3,ooo in the hands of the liquidator, and this sum, less costs, is claimed by Punchard y \'ivian under the following, circumstances : — By an agreement dated the 4th June 1901 Punchard & Vivian were, for the valuable consideration therein mentioned, to receive a salary at the rate of £af\ 13s. 4d. per month each, subject to the proviso that they should not be entitled to drav/ their salary "except only out of profits," if ajiy, arising from the business of the company which may from time to time be available for such purpose, but such salary shall nevertheless be cumulative, and accordingly any arrears thereof shall 928 AUDITING. be payable out of any succeeding profits as aforesaid. The business of the company inchided the purchase and sale of shares. In 1901 the company purchased 6,000 fully-paid shares of ^i each in the Spanish [Minerals Development, Lim., the consideration being the allotment of 6,000 fully-paid shares in the Prospecting Company. Twelve hundred of the Development Company's shares were sold, leaving 4,800 on the company's hands. The Development Company was wound up and the Prospecting Company received in respect of their holding [a) ^3,840 in cash, {b) ^^3,840 debentures of the Esperanza Copper and Sulphur Company, Lim. (which had acquired part of the property of the Development Company), and {c) 3,360 shares in the Esperanza Company. In the Balance Sheet for 1906 the cash was sub- tracted from the ;^4,8oo and the shares were put up as an asset at the figure of /^g6o. A note was added that the company had also received items [b) and (c), but no value was attributed to them in the Balance Sheet. In 1907 the shares (item c) were sold, and the proceeds were carried to the credit of the Profit and Loss Account, and it was stated that there would be a further credit when the debentures (item b) were realised. In 1908 the report of the directors stated that the deben- tures were still in the hands of the company, and that it was proposed to wind up the company. The debentures were sold by the liquidator shortly after his appointment. There was no goodwill and no fixed capital. The assets consisted solely of cash and loans and shares, and these debentures. Mr. Justice Swinten-Eady has held that at the com- mencement of the winding-up the debentures formed a part of the assets of the company, but that there was still a debit balarice on Profit and Loss Account, and that the company's business came to an end with the winding-up, and that the claimants were not entitled to be paid. With great respect to Mr. Justice Swinfen-Eady, I am unable to agree with this conclusion. The proceeds of 6,000 shares from time to time realised by the company were properly entered on the accounts and placed to the credit of Profit and Loss. This appears fiom the accounts for 1907. The Balance Sheet for the same year recognises that the company held the debentures which had at present no market quotation, and the directors did not put any estimate of value upon them. The liquidator has, however, realised these debentures, and I can see no reason why the proceeds should not be placed to the credit of Profit and Loss. The realisation of this asset was not new business carried on by the liquidator. If goods are sold and bills given b}' the purchaser which have not matured at the commencement of the winding-up, the liquidator can collect the bills or discount them without embarking on new business. IN RE THE SPANISH PROSPECTING COMPANY, LIM. 929 The language of Lord Justice Lindley in the Bridgwater Navigation Company case (1891, 2 Ch. p. 317) seems to me to be a clear authority in support of this view. He points out that although, while the com- pany was carrying on business, debts owing to it were under-estimated, this was done from motives of prudence, but that when the actual value was known the difference between the estimated and ascertained value really represented overdrawn profits. In the present case no estimate was put upon the debentures, and the result is that the entire pioceeds realised by the liquidator should be treated as overdrawn profits arising from the company's business, out of which the claimants are entitled to be paid. It follows that, in my opinion, the appeal should be allowed, and the claimants should be declared entitled to the balance in the hands of the liquidator, subject to the costs of the liquidation including the liquidator's remuneration and the costs of this summons here and below. Fletcher Moulton, L.J. : The question for our decision on the present case is of some general interest, because it follows upon the legal meaning of the word " profits," and inasmuch as I believe that the decision of the learned Judge in the Court below is erroneous, and that uncertainty and error in so fundamental a matter may lead to serious confusion. I shall, in the first place, consider the general question, and then proceed to deal with the special points of the case. The word " profits " has, in my opinion, a well-defined meaning, and this meaning coincides with the fundamental conception of " profits" in general parlance, although in mercantile phraseology the word may at times bear meanings indicated by the special context, which deviate in some respects from the fundamental signification. " Profits " implies a comparison between the state of a business at two specific dates, usually separated by an interval of a year. The fundamental meaning is the amount of gain made by the business during the year. This can only be ascertained by a comparison of the assets of the business at the two dates. For practical purposes these assets in calculating profits must be valued and not merely enumerated. An enumeration might be of little value. Even if the assets were identical at the two periods, it would by no means follow that there had been neither gain nor loss, because the market value — the value in exchange — of these assets might have altered greatly in the meanwhile. A stock of fashionable goods is worth much more than the same stock when the fashion has changed, and to a less degree, but no less certainly, the same consideration must apply to buildings, plant, and other fixed assets used in the business, because one form of business risk against which business gains must 930 AUDITING. protect the trader is the varying value of the fixed assets used in the business. A depreciation in value, whether from physical or com- mercial causes, which affects their realisable value is in truth a business loss. We start, therefore, with this fundamental definition of "profits," ■viz., if the total assets of the business at the two dates be compared the increase which they show at the later date as compared with the earlier date (due allowance, of course, being made for any capital introduced into or taken out of the business in the meanwhile) represents in strictness the profits of the business during the period in question. But the periodical ascertainment of profits in a business is an opera- tion of such practical importance as to be essential to the safe conduct of the business itself. To follow out the strict consequences of the legal conception in making out the accounts of the year would often be very difficult in practice. Hence the strict meaning of the word " profit " is rarely observed in drawing up the accounts of firms or companies. These are domestic documents designed for the practical guidance of those interested, and, so long as the principle on which they are drawn up is clear, their value is diminished little, if at all, by certain departures from this strict definition which lessen greatly the difficulty of making them out. Hence certain assumptions have become so customary in drawing up Balance Sheets and Profit and Loss Accounts that it may almost be said to require special circum- stances to induce parties to depart from them. For instajice, it is usual to exclude gains and losses arising from causes not directly con- nected with the business of the company — such, for instance, as a rise in the market value of land occupied by the company. The value assigned to trade buildings and plant is usually fixed according to an arbitrary rule, by which they are originally taken at their annual cost and are assumed to have depreciated by a certain percentage each year, though it cannot be pretended that any such calculation neces- sarily gives their true value either in use or in exchange. These, how- ever, are merely variations of practice by individuals. They rest on no settled principle. They mainly arise from the sound business view that it is better to underrate than to overrate the profits, since it is impossible for you to foresee all the risks to which a business may in future be exposed. For instance, there are many sound business men who would feel bound to take account of depreciation in the value of business premises, or in th6 value of plant specially designed for the production of a particular article, although they would not take account of appreciation in the same arising from like causes. i» IN RE THE SPANISH PROSPECTING COMPANY, LIM. 93I To render the ascertainment of the profits of a business of practical use it is convenient that the assets, of whatever nature they be, must be represented by their mone}' value. But as a rule these assets exist in the shape of rights, and not in the shape of money. The debts owed to the company may be good, bad, or doubtful. The figure inserted to represent stock-in-trade must be arrived at by a valuation of the actual articles. Propert}^ of whatever nature it be, acquired in the course of business has a value varjdng with the condition of the market. It will be seen, therefore, that in almost every item of the account a question of valuation must come in. In the case of a company like that with which we have to deal in the present case, the process of \aluation is often exceedingly difficult, because the property to be valued may be such that there are no market quotations and no con- temporaneous sales or purchases to afford a guide to its value. It is not to be wondered at, therefore, that in many cases companies that are managed in a conservative manner avoid the difficulty thus pre- sented, and content themselves by referring to assets of a speculative type without attempting to affix any specific value to them. But this does not in any way prevent the necessity of regarding them as forming a part of the assets of the company which must be included in the calculation by which de facto profits are arrived at. Profits may exist in kind as well as in cash. For instance, if the business is, so far as assets and liabilities are concerned, in the same position that it was the year before, with the exception that it has contrived during the year to acquire some property, say mining rights, which it had not previously possessed, it follows that those mining rights represent the profits of the year, and this whether or not they are specifically valued in the accounts. But though there is a wide field for variation of practice in these estimations of profit in the domestic documents of a firm or company, this liberty ceases at once v^'hen the rights of third persons intervene. For instance, the Revenue has a right to a certain percentage of the profits of a company by way of income-tax. The actual Profit and Loss Accounts of the company do not in any way bind the Crown in arriving at the tax to be paid. A company may wisely write off liberally under the head of depreciation, but they will be only allowed to deduct the sum representing actual depreciation for the purpose of calculating the profits for the purpose of income-tax. The same would be the case if a person had a right to receive a certain percentage of the profits made by the company. In the absence of special stipulations to the contrary, " profits," in cases where the rights of third parties come in, mean actual profits, and they must be calculated as closely 0002 932 AUDITING. as possible in accordance with the fundamental conception or defini- tion to which I have referred. I would have it clearly understood that these remarks have no bearing upon the vexed question of the fund out of which dividends may legally be paid in limited companies. Cases such as Verner v. The General and Commercial Investmeyit Trust and Lee v. Neuclidtel Asfhalte Co., show that this fund may in some cases be larger than what can rightly be regarded as profits, and the decisions in these cases depend largely on the fact that there is no statutory enactment which forbids it to be so. In the present case, however, no question as to the imitations of the fund arises, so that I shall not make any further reference to these decisions or to the principles on which they rest, as they do not affect the matter before us (The learned Lord Justice then applied the foregoing principles to the facts of the case, and ruled that the appeal should be allowed.) Farwell, L.J., in agreeing to the reversal of the judgment in the Court below, said that money which had in fact resulted from the profits made in trade is none the less profit because it is carried over to a Suspense Account or to a Reserve Fund. If it be lost in trade there is an end of it, but so long as it remains in statu quo it remains as undistributed profits. The profits arising from the business of a company are not necessarity the same as the profits of that company. A company may have fixed capital as well as circulating (as I have endeavoured to explain in Bond v. Barrow Hamatiie. Co., 1902, i Ch. 353), and in that case the profits of its busi- ness would be those arising from the use of its circulating capital, excluding its fixed capital. For instance, the profits arising from a trader's business would not include the increase of the cost price of a freehold warehouse used in the business and afterwards sold. But in this case the company acquired in the course and for the purpose of its business certain shares and debentures in the Esperanza Co. It is not suggested that the company had anything that could be called fixed capital. The learned Judge in the Court below had decided on the authorities that the surplus of realised assets on winding-up over and above the subscribed capital was not a profit arising from the business of the company. This, in my opinion, depends upon the nature of the company's business and assets, and cannot be predicated as universally true of all companies, and the authority of Frames v. Bulfontcin Mining Co. (1S91, i Ch. p. 140), on v/hich the learned Judge relied, is really our authority against his decision. [Acct. L.R., 17th December 1910.) IN RE ARTHUR FRAN'CIS, LIM. 933 In re ARTHUR FRANCIS, LIM. (Decided b\^ Swixfen-Eady, J., in the Chancer}- Division, on 4th April 1911.) Held that any Lien an Accountant may have ti-pon a Comfany^s Books must not be allowed to embarrass the Windi}ig-u-p of such Co7nfatiy. This was a Court summons issued at the instance of the liquidators of Arthur Francis, Lim. — Mr. E. H. Hawkins and Mr. H. C. Hicks — against Messrs. Linnett and Davis, Chartered Accountants, asking for an order for the handing over of certain books belonging to the company. Mr. J. S. Green, who appeared for the appellants, explained that the respondents were formerly the accountants and auditors of Arthur Francis, Lim. On November 15 igio a resolution was passed to wind-up the company voluntarily, and Mr. H. C. Hicks was appointed liquidator. Subsequently an ordinary creditors' meeting was held on December 14, and Mr. Hawkins was appointed by the Court as joint liquidator with j\Ir. Hicks. They asked the respondents in the present case to produce to them a Ledger which they admitted they had, but they declined to do so, on the ground that there was an amount of ^47 3s. 4d. owing to them in respect to their work as auditors, and £2j i8s. 4d. for their work as accountants. The respondents contended that they had a lien on the books, but he (counsel) submitted that the directors had no power to give any such lien, because, under the articles of association, the books were to be kept at the company's office, and therefore they could not be subject to any lien. The only book he wanted was the Private Ledger, and he asked his Lordship to make the necessary order for the respondents to deliver it up. Mr. Whinney, for the respondents, said he claimed a lien over the books and documents in their possession relating to the company, on the ground that they had worked upon them, and had not been paid either their audit fees or accountancy charges. The Judge observed that he did not think the respondents could be allowed to embarrass the winding-up of the company by keeping the books. He should have thought that the Ledger was a most essential book for tne purposes of the liquidation. Mr. Whinney said his point was that he could not help producing the book to the Court, but he submitted that its production must be v/ithout prejudice to his lien. JUDGMENT. His Lordship made an order that the books should be produced, without prejudice to the lien (if any) of the respondents, and remarked that he hoped, as a result of the investigation, it would be shown that the assets would be sufficient to pay the respondents their charges. {Acct. L.R., 8th April 1911.) 934 AUDITING. The case of REX v. LOCKE ; ex farte BRIDGE. (Decided by Vaughan Williams, Buckley, and Kennedy, L.JJ., in the Court of Appeal, on 14th December 1910.) Held that a Loan from a Local Authority to a Bank may be validly Transferred to another Bank without a neiu Mortgage being taken. This was an appeal from a judgment of the Divisional Court (the Lord Chief Justice, Mr. Justice Bra}', and Mr. Justice Pickford), which is reported in 26 The Times L.R., 486; (1910) 2 K.B., 201, discharging a rule nisi calling upon H. Locke, the auditor appointed to examine the accounts of the Corporation of Bournemouth for the financial year ended March 31 1909, to show cause why a writ of certiorari should not issue directed to him to remove into the High Court a certain certificate of disallowance and surcharge made by him for the sum of £2 12s. 6d. disallowed and surcharged upon G. E. Bridge and A. Youngman and A. Lickfold, which sum was part of a sum of ^{.5,561 os. 6d. paid to the National Provincial Bank of England, Lim., on or about October 29 1908. The rule was moved upon the ground that the sum disallowed, £2 i2S. 6d., was interest upon a loan which the Corporation were authorised to borrow by Section 233 of the Public Health Act, 1875, and was payable out of the district fund by virtue of Section 207. The material facts were shortly these : — On April 3 1900 the Local Government Board gave its sanction to a borrowing by the Bourne- mouth Corporation of the sum of ;^6oo, to be borrowed on the credit of the rates, and to be repaid with interest within ten years. On May 19 1900, in accordance with this sanction, the Corporation borrowed from the Wilts and Dorset Bank the sum of ;^6oo, and mortgaged a certain proportion of the rates, charges, and assessments as security for the advance. In February 1902 an arrangement was made between the Corporation and the National Provincial Bank of England, Lim., for the transfer of the Corporation account to that bank. In pursuance of this arrangement the National Bank paid the principal and interest due from the Corporation to the Wilts and Dorset Bank in respect of the said sum of ^600 and a number of other loans which had been advanced on mortgage by the Wilts and Dorset Bank to the Corporation. The mortgagees from the Corporation to the Wilts and Dorset Bank were not transferred to the National Provincial Bank, though receipts for the sums paid by the latter bank were endorsed thereon. The terms of the arrangement with the National Provincial Bank and the grounds of the surcharge as stated in the auditor's certificate are fully set out in 26 The Times L.R., 4S6. REX V. LOCKE ; EX PARTE BRIDGE. 935 No mortgage or other documents securing the National Provincial Bank were executed. The Divisional Court held that the arrangement with the bank could not be regarded as a temporary arrangement, but was an exercise of borrowing powers for the purpose of permanent loans to be repaid by instalments, and that as in respect of the loan no security had been given to the bank as provided by Section 233, the borrowing was not authorised, and therefore that the auditor was right in disallowing the pa3-ment of interest thereon ; and they discharged the rules. Mr. Bridge and others appealed. JUDGMENT. The Court allowed the appeal. Lord Justice Vaughan Williams, in delivering judgment, said he thought that he had not to decide the question which had been dealt with by the King's Bench Division and which was accurately set forth in the headnote of the report. He might say that if he had had to decide that question he should have come to the conclusion that this borrowing was not at any stage a borrowing for temporary purposes. He thought that that meant borrowing under conditions which were discussed in Smith v. Southamfton Corforation (1902, 2 K.B., 244). It would be seen from the judgment in that case that the decision there turned on a question very remote from what had been submitted in argument here as to what would constitute a temporary lean for temporary purposes. There was no suggestion that it was a temporar}' loan here. This case really turned on a very different matter. It was quite plain on the admitted facts that the original intention of the parties was not that the old debt to the Wilts and Dorset Bank should be blotted out and a new loan obtained from the National Provincial Bank ; en the contrary, it was perfectly manifest on the antecedent correspondence that the original intention of the parties was that there should be a transfer of the loan, not that a new loan should be created. It was simply an assignment of the debt and of the mortgage securing it. But it was said that if you looked at the pass books and the accounts and saw how the matter had been carried out it would be seen that the National Provincial Bank had lent a sum of money to the Corporation, that it was a new borrowing, and that with the money thus obtained the Corporation had paid off the debt due to the Wilts and Dorset Bank. He agreed that, looking at the pass books, yo\x might find in form that that had happened ; but he was of opinion that that was mere machinery. In substance the transaction which took place was a transfer of a debt and of the mortgage securing it. The form in which it was carried out did not alter the effect of the transaction. He 936 AUDITING. thought it was plain on the facts that the mortgage documents and the sanction by the Local Government Board for creating additional stock were intended to pass to the National Provincial Bank, and were in fact tendered to them, but they said they did not desire to have mort- gages. That, however, did not alter the substance of the transaction. He thought, both on the documents and on the admitted facts, it was quite clear that there had been no new lending by the National Provincial Bank to the Corporation and no new borrowing by the Corporation from that bank. It was merel)' a transfer of the old debt and of the security. That being so, and there being a sanction for the old loan and a security for the same, in his opinion the certificate of disallowance and surcharge could not be justified. He did not propose to discuss at length the effect of Section 233 of the Public Health Act, 1875. He thought it was a very difficult question in a case where a proper sanction had been obtained for the original borrowing or re-borrowing, whether it was necessary to take a security in order to make the loan legal. In his judgment there had been no re-borrowing here; it was merely a transfer of the old loan. Under those circum- stances he thought there was no reason for the surcharge, and the appeal must be allowed. Lord Justice Buckley and Lord Justice Kennedy also delivered judgment allowing the appeal. (27 T.L.R., p. 148.) The cases of HENRY SQUIRE (CASH CHEMIST), LIM. v. BALL, BAKER & CO., and MEAD v. SAME. (Decided by Lord Alverstone, C.J. (sitting, by consent, without a jury), in the King's Bench Division, on i6th February 191 1.) Consolidated Actions for Daviages for Alleged Negligence brought [a) by a Com fatty against its Auditors ; [b) by a Shareholder and Director of such Comfany against a Firm of Chartered Accountants emfloyed to investigate Books of Vendor to such Com-pany. Resfonsibility for failure to detect Systematic Fraud. These were actions to recover damages from the defendants for negligent performance of their duties as Auditors. The action by Henry Squire, Lim., was taken first. The defendants denied that they had been guilty of negligence, and further said that owing to a provision in the plaintiff company's articles they were free from any liability for negligence, as the articles provided that officers of the company should only be responsible for dishonest}'^, and this was not alleged. HENRY SQUIRE (CASH CHEMIST), LIM. V. BALL, BAKER 937 AND CO., AND MEAD V. SAME. The hearing occupied nearly four days. It was begun before the Lord Chief Justice and a. special jury on February 9, but before the opening statement of Sir Edward Clarke had been concluded, the jury was discharged bj^ consent of the parties. Sir Edward Clarke, K.C., Mr. Holman Gregory, K.C., and Mr. G. L. Hardy appeared for the plaintiffs; and Sir E. Carson, K.C., and Mr. Bremner appeared for the defendants. Sir E. Clarke, in opening the case for the plaintiffs, said that for about ten years before 1903 a Mr. Reece had carried on business as a cash chemist at various shops in London in the name of Henry Squire. Owing to the opening of new branches Reece required financial assist- ance, and at the end of 1902 he had raised _j^i,2oo on mortgage from a solicitor named Mead. Early in 1903 he wished to obtain more money, but Mead was getting uneasy and was thinking of calling in his mortgage. It was suggested that the business should be turned into a limited company, and Mead insisted that an independent firm of accountants should be employed to ascertain its value, as he was not satisfied with a report prepared by Reece's own accountants. The defendants agreed to make a report, and did so in August 1903. On that report Mead went on to form the company, and registered it on November 26 of that year. Mead was substantially the only person who put money into the company, and he and Reece were its only directors. The defendants were appointed Auditors of the company at an annual fee of 30 guineas. They audited the accounts for 1904, 1905, and 1906, and one of the principal questions in the action was in respect of inaccurate increases which had been made in the stock during those years,- as was alleged by a member of the board of directors and an employee, which were not noticed by the Auditors. In 1904 it was made clear to the defendants that a verj' careful examination of the company's position was required. Reece had been in the habit of paying for all his business requirements by bills ; but the company decided it would be better to pay cash, and in order to raise the money thought of issuing debentures. The defendants pre- pared a Balance Sheet, showing a net profit of ^630 on the year's trading, and in consequence of that the company on September 26 1904 issued debentures for ;^5,ooo. For 1905 the defendants prepared a Balance Sheet showing an apparent net profit of £jo8 ; and on that the company declared a small dividend. For 1906 they showed a net profit of £~44- Ihe amount of stock-in-trade kept increasing, and in August 1907 the defendants were requested to look specially into the state of the stock in hand and the efficienc}' of reserves. Thereupon Mr. Ball, of the defendants' firm, went into the affairs himself, and 938 AUDITING. found that there had been falsification of documents and non-dis- closure of liabilities, and that extensive frauds had been committed in each year from 1903. The secretary was dismissed, and Reece, who was acting as managing director, was asked for explanations and at once resigned. It was discovered that the business had been losing money at the rate of ,^^40 a week. The loss on trading was ^8,000, and the secretary had suppressed liabilities amounting to ^1,184. The secretary con- fessed his fraud, and the plaintiffs contended that the defendants should have noticed the manifest falsification of the Stock Sheets. Mr. Ball became managing director, and shortl}^ afterwards was appointed receiver and manager of the company. The business was sold in July 190S ; and in the result the debenture-holders got 9s. 6d. in the £, while creditors and shareholders got nothing. Sir Edward Clarke then went through a number of items in the Stock Sheets and other matters, from which he submitted that if the defendants had exercised reasonable care they must have discovered that frauds were being perpetrated. John Phillips Mead, called by Mr. Holman Gregory, said he was a solicitor practising in the Temple. In 1902 he had advanced _;^i,2oo on mortgage to Reece, and jointly with another person had advanced a further ;^5'jo. Owing to difficulty in getting his interest he pressed for an independent inquiry into the affairs of the business. The defendants were instructed to make a report, and in the result the company was formed. The witness then gave evidence as to the history of the company in accordance with Sir E. Clarke's opening statement. Cross-examined by Sir E. Carson, witness said that he had been connected with Reece since 1901. He had always found him difficult to get money out of, and was not satisfied he was conducting his business in a straightforward way. He had, however, considered Reece a fit man to leave in sole business control of the company. The secretary was a man whom he trusted also, and he did not think that either of them v/ould knowingly make any false statement. He had not stated any suspicions to the defendants. It was true that year by year the Auditors had drawn his attention to the great increase that had taken place in the stock ; he wondered at the increase, and spoke about it frequentl}'. Sir Edward Carson said the increase was said to have been as much as would have met the requirements of the whole business for a year. HENRY SQUIRE (CASH CHEMIST). LLM. V. BALL, BAKER 939 AND CO., AND MEAD V. SAME. Witness, continuing, said that the amount of liabilities alleged to have been suppressed by certain persons connected with the company amounted to /,"i,i84. Mr. James Fabian, a Chartered Accountant, of Holborn, said he had investigated the plaintiff company's accounts, and had prepared a list of items from the Stock Sheets, which had been altered by the persons referred to. For instance, one item had been altered from " one single sponge" to '"one case of sponges, ^^25." Some of the altered items were difficult to notice, but there were among them those to which he thought a vigilant Auditor would have called the attention of the board. Lord Alverstone : Of course, sometimes when there is an honest stock-taking such alterations may be made by people taking the stock. (To witness) : A prudent man would not have accepted these Stock Sheets without requiring an e.xplanation as to some of the alterations? Witness : No ; he would have made further inquiries. Lord Alverstone (to counsel) : I shall not assume that the Auditors should have counted every plaister and powder, but what I have to remember is that the witness says the Auditor, seeing these sheets, should have made reasonable inquiry. In reply to Sir Edward Carson, Mr. Fabian said he found no errors in the casting of the Stock Sheets, although the alleged alterations had been made after the sheets were prepared. Other evidence having been called. Lord Alverstone called counsel's attention to the fact that the action was brought by the company, that the negligence was alleged in 1906, while the debentures were raised two years previously. That being so, he asked what was the measure of damages. Sir Edward Clarke said the question was the amount lost between the time the company stopped business and the time the alleged breach of duty occurred. Lord Alverstone : The company got ;^5,ooo debentures. Where was the damage then? Sir Edward Clarke : The damages include the loss of the debenture- holders. Lord Alverstone : The company is not trustee for the debenture- holders. You will have to satisfj' me as to what was its financial position when it was wound up. It may be that the company benefited b)'' this rather than lost. 94° AUDITING. Mr. Charles William Cornish, F.C.A., a member of the defendant firm, stated that he had been concerned with this audit since 1903. The checking of the stock, and the examination of the company's books and vouchers, had been done by his clerks. He wrote the letters drawing attention to the continual increase in stock. There was nothing to arouse suspicion until 1907, and then the inflation of the stock was not found out from the examination of the Stock Sheets themselves ; but because a letter had been received from the secretary of the company stating what had been done. Cross-examined by Sir Edward Clarke, witness said the Stock Sheets had not come before him personally ; even if they had done so, his suspicions would not necessarily have been aroused. He relied, not on the Stock Sheets, but on the certificate signed by the managing director and secretary of the company, who, he believed, were honourable men. Sir Edward Clarke : I suggest to you it was as much your duty to protect the company against the managing director and secretary as against any other person in the company. The \\'itness : There must be some limit to an Auditor's duty. If we are not to be allowed to rely upon the word of the managing director and secretary, then no entry of any kind in the books can be accepted without investigation. Lord Alverstone : Of course, if suspicion is aroused, there is no difficulty about it at all ; but with regard to the prima facie right of an Auditor to accept a certificate of a manager, it has been accepted by the Court. In reply to other questions, the witness said with regard to five items of payment made on the 3rd of August 1904, but which related to 1903, that if he had examined the books personally he would have asked the secretary how the entries came to be out of date. If the secretary had explained that he omitted to enter them in the Bill Book at the time, he would have considered it a sufficient explanation. Sir Edward Clarke : But would not you have asked him for invoice and account? The Witness : As a matter of fact, I should not have had occasion to ask him, because the account was closed when we went through the book in 1904. There was no balance on that account at all. Sir Edward Clarke : Surely the fact of accounts being entered in wrong order of date in a book of that kind is very suspicious? li HENRY SQUIRE (CASH CHEMIST), LIM. V. BALL, BAKER 941 AND CO., AND MEAD V. SAME. The Witness : I do not agree. This man had a great deal of work to do, all the writing work, correspondence, ordering of goods, keeping books. If he had said to me that, in the rush of work, it escaped him making the entries at the time, I should have considered that a reason- able explanation. Further questioned, the witness said it was not the practice to go behind the last Balance Sheet. Some limit must be put to an Auditor's work, and it was the custom to assume the last Balance Sheet as correct. Certain green ticks in the Private Ledger were not put there by himself or clerks. In reply to the Lord Chief Justice, witness said that the fact that sales were stationary, while stock was increasing, was not a suspicious circumstance. It was a question of policy for the board as to whether they were buying more than necessary. It might be they had excep- tional opportunities of bujdng at a cheap rate. Mr. Francis Temple, a clerk in the employ of defendants, said that he had taken part in every audit of the accounts of plaintiffs except those for 1904. The work he had done on the Stock Sheets of 1905 was to check additions, and compare some of the prices with invoices. Nothing in the Stock Sheets had aroused his suspicions. In 1907 he had been again instructed to undertake the audit, and had made certain discoveries, which he communicated to Mr. Ball. Thereupon Mr. Ball called on Kingston, the secretary of the company, and after- wards investigated the books himself. Cross-examined by Sir Edward Clarke, witness said that, in checking Stock Sheets, he never took any steps to see whether the quantity of the stock was inflated. Mr. John Ball Ball, F.C.A., said he was the senior partner in the defendant firm. He had nothing to do with this audit previously to 1907. On August 19th of that year his clerk Temple had told him he could not agree the balance according to the Cash Book with the balance as shown in the Pass Book, and that he had noticed the pay- ment of a large sum in cash. The next day Temple reported seeing some marks or erasures on statements of creditors that had been pro- duced to him in verification of Bought Ledger balances. Upon this,, witness had gone over to the office of the company in Newman Street, and had looked into the question of the cash very carefully. He had found there was no cash missing, but certain statements which Temple had shown him had evidently been altered, and in some of them there were erasures. He had spoken to Kingston, the secretary, and got a 942 AUDITING. plausible explanation which he did not accept. He had communicated with Mr. Mead and Mr. Steele, the company's solicitor, asking permis- sion to communicate direct with the creditors. That permission was given, application was made to the creditors, and when the statements came in to the Auditors, they found very serious differences between the figures in the books and the statements rendered by the creditors. A board meeting was afterwards ■ held, and on the next day Reece resigned. With regard to the Stock Sheets, the witness said that, being rough originals, the alterations would not have excited attention on his part. As to the liabilities that had not been disclosed in 1903, there was nothing in the books by which this suppression could be discovered at the time. In 1907, after Kingston had made his confession, they had naturally scrutinised exceedingly closely any alterations which might have been made in the accounts, and on looking into the original docu- ments in relation to these four items, it seemed they had not been brought into the accounts in 1903. Afterwards, the}' had found, with regard to one of them, there was a genuine dispute. Cross-examined by Sir Edward Clarke, he said he had not seen the original documents referred to previously to 1907. Other witnesses having been called : — Sir Edward Carson said that the points which arose required con- sideration, but they narrowed down to very small dimensions. The first point was as to negligence. In this regard he left out of con- sideration entirely the question of the ;/^i,i7o, because it was not now pretended by the plaintiffs that the Auditors might have found out that liabilit}' was being suppressed from the 1906 account. There remained the question of the Stock Sheets and the 1904 account. The only Stock Sheets which had been proved, as a fact, to have been wrone were those of 1906 ; and although it was said an inference might be drawn that the others were wrong also, Kingston's confession was only evidence that the totals had been altered, and nobody really knew what was the extent of the default, if anything, as regards inflation of the stocks in 1904 or 1905. Dealing broadly with the Stock Sheets, his Lordship was asked to hold that there was negligence, because the Auditors had not been led by them to institute inquiries which would have shown the inflation. On both sides the witnesses admitted that the ordinarj^ course was to entrust this matter to clerks. Doing these additions, exten- sions, comparison of summaries, and so on, was clerical work, and if there was nothing to excite the clerk's suspicion, he did not bring the matter before his principal. In this case there was not a particle of evidence that any clerk had his suspicions excited. His Lordship might take it that none of the clerks had had their suspicions excited. HENRY SQUIRE (CASH CHEMISX), LIM. V. BALI,, BAKER 943 AND CO., AND MEAD V. SAME. and consequenth' the matter had not been brought before the principals. That fact carried them a good deal of the wa_y. All the witnesses called by the other side were principals; they were approaching the case as if they were in the position of men whose attention had been called to these alterations by the clerks. Of course, if that had been done, the principal would at once have asked why the clerk had brought the thing before him at all ; but it did not carry the case much farther to sa\' that if the matter had been brought before a principal, that principal would have been suspicious. All the witnesses agreed that Auditors were entitled to rely upon the certificate of the manager and secretary ; in this case he speciall}^ pressed that fact, because Mr. Reece was the original founder of the business. He was the man who had built up the branches. He had taken one-half the capital, and was therefore vastly interested in the proper running of the business, and he was the only man connected with the business who thoroughl}- under- stood its technical working. The certificate in this case was of a very strong kind ; the}- had the manager's certificate from each shop, and these again were certified by Reece and Kingston. And Reece did not merely certify that the Stock Sheets were correct, but said that he, or he and Kingston, had inspected this stock, gone through it, and found that all was there and in saleable condition on these particular dates. It would be impossible to carry on any audit at all if the Auditor was to suspect everybody without any grounds of suspicion being put before him. Reallv, therefore, as regarded the Stock Sheets, the question was this : Ought those clerks, having found everything correct as regarded additions and extensions, and having called for invoices to check the prices put down, and not being bound or in anywise in a position to check the amounts — ought they to have been suspicious of something wrong in the face of the certificate of the manager and the secretary, simply because they saw these alterations ? In Stock Sheets, where the person compiling them has to go about from one part of the premises to another, collecting from here, there, and everywhere, if he finds a parcel of goods in one place and another parcel of the same sort in another place, he does not make two separate entries Lord Alverstone : Sir Edward Clarke does not deny that. He suggests to you that the character and kind of the entries goes beyond that. Sir Edward Carson replied that the suggestion was easy to make, but here were experienced clerks, and their suspicions were not aroused. It had been said that these Auditors did very little. He hoped this Lordship would not come to that conclusion. The correspondence 944 AUDITING. showed that the one matter which could have aroused any interest in an Auditor, not as regarded dishonesty, but as regarded the way in which the business was being conducted, i.e., the vast accumulation of stocks, considering the small business done, was a matter which the Auditors brought before the directors in every report from beginning to end. In 1905 they pointed out in their report that the company had then on hand very nearly a year's stock, having regard to the amount of sales which were being made, and they asked that the certificate should be qualified or some materials be kept by which they could check the amount of goods going out, because it was impossible for them to check the amount of goods, especially at the head warehouse. This accumu- lation of stock was one of the things which caused concern to the directors when, in 1907, they called for a special audit to be made; but the Auditors had been pointing it out from 1905. The request made by the Auditors in 1905 was not acceded to, but the fact that they made it showed that they were not performing any duty in a perfunctory manner, but were attempting to deal with the situation which had arisen by drawing the attention of the directors to a fact which turned out a cardinal fact in the end. He contended that, as regarded all these matters, the Auditors had exercised ordinary and reasonable care in carrj-ing out their duties. The other matter which arose was as to the four items. These items did not appear in the 1903 accounts at all, and whether the Auditors were liable for them, was the question which had to be tried in the Mead action. It could not come into this action. Therefore, when in 1904 they came to audit, all they had done was to allow into the Balance Sheet items which had not been in the 1903 accounts. It was not disputed that these items were really paid in the year thev were certified, and the sole charge was that the Auditors, having found these items were paid in respect of goods ordered and supplied in the previous year, did not specially report that matter to the directors. As a witness had said, it would be impossible for many reasons to do that ; items like that occurred over and over again, and here, at all events, it was a fact that these items had not appeared in any previous accounts. Lord Alverstone : I do not think Sir Edward Clarke disputes that. But he said it was your duty, as auditors, to draw the attention of the directors to the fact that in these outgoings for 1904 they had, in fact, paid liabilities that ought to have been called to their attention at the end of 1903 Sir Edward Carson : I understand that is what he suggests. But your Lordship sees you would have first to say in that case that it was their duty to sit down and examine what had been included in the HENRY SQUIRE (CASH CHEMIST), LIM. V. BALL, BAKER 945 AND CO., AND MEAD V. SAME. schedule of liabilities. My Lord, nobody has said they ought to have done that. Lord Alverstone : They are entitled to take the liabilities of 1903 as a total sum ? Sir Edward Carson : Yes. Continuing his argument, the learned counsel said that all these were payments that were made by the directors themselves. Mr. Reece certainly knew of them and Mr. Mead was a party to them, and, as regarded the Haskins case, the account was actually brought two or three times before the board with a view to a settlement of the matter, and was paid by them. He could have understood the charge if it had been alleged that the money had been really paid in 1902 or 1903, and the accounts had been cooked in some way so that an employee had kept the money for himself and had then charged it to the next account. As to the way in which an Auditor might be satisfied by vouching, there were many ways. But certainly, if payments were made by bills, and the Auditors asked to see the bills, that would be the very best way. Lord Alverstone : Take the case of a bill sent in twice. It might be that it would not be right to assume, particularly if the goods were supplied before, that that bill was not included in an outstanding liability as on the 3rd August 1903. Sir Edward Carson replied that if that were so, an Auditor would have to go through every item to test if it really occurred after the date of the previous audit. All were agreed that, whatever was being done with these moneys, they were not being in anywise purloined. When an Auditor had traced a charge through the Cash Book and Bank Book, and was satisfied that all had been honestly done, he had done all that was essential to the company in the way of seeing it was not being cheated. In this case there was no special circumstance which would in the slightest degree lead the Auditors to suspect that what was being done was not perfectly bond fide and in the ordinary course of the business of dealing with accounts that came in during the year and were discharged. There were two things which his Lordship would have to consider. The first was as to whether there was any suspicion ; it was quite clear there was no suspicion. The second point was, ought there to have been any suspicion? In a case where there was no evidence of a single penny being taken out of the coffers of the company, what were the Auditors to be suspicious of? Sup- posing they had a suspicion of something, what ought they to have done? Supposing they had had a suspicion, on seeing the Stock P P P 946 AUDITING. •Sheets, all the}^ could have done would have been to go to the managing director — who was the owner of half of the capital of the compan}^ — and say, "Why are these alterations here? We see you "have certified them as all right; we find the balances and every- " thing right. But why are the alterations here?" Was it suggested that I\Ir. Reece, having certified these Stock Sheets, would or could have given any information which could have led to anj^ result? The only other matter upon this branch of the case which he wished to say anything upon was this ; an Auditor, it had been said, in these cases, was not bound to be suspicious Lord Alverstone : I think Lord Justice Lindle\' went further, and said he ought not to be suspicious. Sir Edward Carson : I suppose you could not carry on business at all if you were suspicious. And another thing, he is not to be a detective. These statements especially applied in a case like this. Continuing, counsel said that no case had ever laid down that an Auditor was not entitled to accept what a managing director had certified, and no case had gone the length that had been attempted here, of suggesting that the principal would be liable if the clerk had done something in the ordinary course of his duty, and b}- reason of that fact a matter had not been brought to the notice of the principal. <3n the question of damages, if something had been done which had prevented the company getting its debentures, a claim might have been made ; but how could it be suggested that a company was injured because the inflation of a Balance Sheet had led to its getting more money than it otherwise would have done ? This money being supplied gave them the chance to go on and make the business a very great success ; although, certainty, this possibility was not realised. The only way in which the case might be put would be to say that, if the stocks had been rightly returned in 1904, 1905, and 1906, the business would not have been gone on with, and for that reason the plaintiffs would have been in a better position. But that was exacth' what Lord Justice Vaughan Williams had said was too remote a case of damages. In the present case no one had attempted to estimate what would have been the relative position of the company in any of those three years if a liquidator had been appointed then, as compared with 1907. Apart from the question of remoteness, it would be utterly iH:po£,sible to assess the amount of damage. His last point was that under the articles of association the Auditors were officers of the company. Under the misfeasance sections of the Companies Acts, Auditors had been held liable as being officers of the company they served, and in the Kingston Cotton Mill case, where the articles were exactly the same as here, the Auditors had been held to be officers of HENRY SQUIRE (CASH CHEMIST), LIM. V. BALL, BAKER 947 AND CO., AND MEAD V. SAME. the company. He submitted, in conclusion, that there had been no negligence, that no damage had been shown, and that the Auditors were protected b}- the provisions of the articles of association. Sir Edward Clarke spoke at length on the question of whether the Auditors were p.rotected by being officers of the company. The decisions which held that they were for purposes of misfeasance required to be carefully looked at, and would be then found not to apply to a case of this kind. Auditors had been in those cases held to be officers, for the public reason that it was essential some means should exist of making an Auditor responsible for misconduct. The articles did not protect the Auditors from the consequences of negli- gence ; if an article did say that they should not be so responsible it would be illegal and therefore null and void. The officers who were protected were the executive officers, who were appointed and were removable by the directors. Turning to the facts, nothing was to be gained by quoting passages here and there from Lord Justice Lindley's case, because, however carefulh' expressed, thej^ were balanced passages. He understood the ruling in that case to be that Auditors accepted for reward a particular position, the duties of which were laid down by statute. They were so employed because they professed to bring to the discharge of these duties a trained capacity for dealing with such matters. Thej^ were bound to bring that capacity to bear upon the execution of those duties, together with fair and reasonable industr}'. If they were found negligent in the discharge of their dut}-, and mischief resulted, they would be liable in damages. Before deal- ing with specific facts there were two observations which he wished to make. Sir Edward Carson had said it was a common practice for accountants who were Auditors of a companj' not themselves to inspect Stock Sheets Lord Alverstone : I have thought a great deal about that, and I am not with Sir Edward Carson. It seems to me the same standard is due both from the man who is sent as from the man himself. I do not, with a very slight modification perhaps, agree that if Mr. Cornish's suspicions ought to have been aroused it is any answer to say that Temple's suspicions were not aroused. Sir Edward Clarke : The Auditor is retained to do his duty ; if he chooses to delegate that duty to somebody else he is responsible. Continuing, counsel said that his learned friend had stated that from time to time the Auditors had called the attention of the directors to the fact that the stock on the new Balance Sheet appeared to be exces- sive as compared with the stock of the previous year. They pointed P P P 2 948 AUDITING. this out, and said they reUed for valuation of stock upon the state- ments of the manager and secretary. It was true this would be found in their letters. They also pointed out that especially with regard to the proprietary stock they had no means of testing its value, and he agreed that was so. But it was not on the question of valuation of stock that he attacked these Auditors. It was that under their eyes there was growing up year by year an abnormal figure. It was clear upon the accounts that there was something which required investiga- tion. With this large increase in the amiount of stock appearing on these Balance Sheets it was evident that either there was an enormous and curious increase in the stock itself, or, which was quite a reason- able hypothesis, and one the}- ought to have contemplated, the Stock Sheets were not trustworthy. They might not have noticed this in the first year, but the fact that they went on year after j'ear with this sort of thing growing up before their eyes, without ever once looking at the sheets from which they might have discovered the explanation of the growth of this amount, was conclusive evidence of negligence. There was a prima facie case of negligence upon the Balance Sheet that his Lordship had before him under date 14th October 1907. There was an item there of Stock £^,'i2>^•: instead of an amount which, beginning four years before with _2f6,826, had grown from that to ;^8,7oo, from that to /"io,4oo, from that to £\\,-joo, and even a larger amount than that. On the same page were two items which, taken together, were strong prima facie evidence of negligence against the defendants : " Creditors' claims suppressed by Kingston on the 5th of August 1906, ;^i,i84," and " Debit balance at profit and loss for year to 5th August 1907, consisting to a large extent of loss incurred before the 5th August 1906 concealed b}' L. H. Kingston b}- means of inflating the stock, ;,^8,i9i." That Balance Sheet was dated October 1907; the result of the intelligent and diligent audit of this firm of accountants during three or four years was that under their verj- eyes there had grown up by alteration of Stock Sheets this /.'8,i9i of deficiency. And whatever the materials which had been placed before them, they had had the opportunity of making any inquiry they chose during all this time. In the year 1904 they were ejTiplo3'ed to make a specially careful investigation of the position of the company, because, with the abandonment of the practice of paying by bill and resorting to the more economical practice of paying by cash, it had been determined, if the position of the company entitled them so to do, to issue deben- tures. On the 27th of August of that year they had sent in a pre- liminary report on the accounts, which contained two passages which he thought important. One did not refer to the stock ; it related to an item cf ^53 i6s. sd. for certain liabilities of the vendor which had not appeared in the Balance Sheet of 1903. The other related to the- HENRY SQUIRE (CASH CHEMIST). LIM. Y. BALL, BAKER 949 AND CO., AND MEAD Y. SAME. increases in the valuation of stock: "The increase from 1903 to 1904 chiefl}' occurs in the stock at the warehouse, which in 1904 is ^"4,048, as compared with /^2,/\;^^." So the stock in that warehouse had been increased about 66 per cent, in the oxie year. This report was sent on the 27th August, and on the ist September there was a notable interview between Mr. jNIead, i\Ir. Steele, and Mr. Cornish with regard to the investigation which was then going to be lullv made, and Mr. Cornish was told the companjr contemplated issuing debentures. At that time, as stated in their report, they had not the certified details of the stock before them, but the Stock Sheets were sent in a letter of 2nd September. Those Stock Sheets never came before the eyes of any one principal of the defendant firm ; they were never seen by anybody' but Mr. Temple and two other clerks. Mr. Cornish had gone away for his holiday before they were received. The figures in the Stock Sheets were corrected by the clerks. Mr. Cornish wrote from Sheringham, " With regard to the corrections foimd in the Stock Sheets, please write to the secretary returning the summary', pointing out the corrections," and there the matter of the Stock Sheets ended, although later Mr. (?ornish made a claim on behalf of the firm for an increased payment on account of the extra labour that had been expended in making the investigation of these documents. On the 6th October he wrote, " The Stock Lists are very voluminous, but w-e have examined and tested these as far as we have been able." The statement was not correct ; in fact, they had never been tested at all. If they had been tested what would have been found out ? One witness, Mr. Kelleway, had been called as an accountant to support the defendants. He had been asked, supposing he had noticed that the alterations in the Stock Sheets were not casual blunders, now one way and now another, but that they substantially inflated the stock in the aggregate* would not that have put him upon inquiry, and had replied, "Yes, 1 should have inquired." If the defendants did not find out about the Stock Sheets, and therefore did not inquire, it was their fault ; for these Stock Sheets were amongst the most important vouchers supplied to them in connection with the business. There was another observation of Mr. Kelleway. Asked if the rough Stock Sheets were not safer, he had replied. Yes. The defendants had the rough Stock Sheets under their eyes; thev had also under the Act of Parliament all the books and vouchers of the com- pany at their disposal. It was not for them, after four vears of disastrous trading, to come before the Court and say thev had never looked at these most important documents. If they had looked — if any reasonable man with any sort of equipment as an accountant had looked, he must have noticed some, at all events, of the items which 950 AUDITING. had been brought to hi;. Lordship's attention. That would have put him upon inquiry as to the truth of the items which he was called upon to accept. His learned friend had made a comment on this. He had said, What could they do, suppose the}^ did find them ? They would have had to ask Mr. Kingston or Mr. Reece, and in either case they would have been asking somebody who, being himself responsible for the fault they were trying to detect, would, by his assurances, have met their inquiries. But it would have been no fultilment of their duty merely to have asked a question of Mr. Kingston or Mr. Reece. When the Auditors saw the Stock Sheets in 1904 they ought in the first place to have found out some of the spurious items. He did not say all ; but if they had onl}' found two or three out of the forty items which had been submitted to his Lordship, the}' would have been impelled to look further. If on the second page two or three more such had been found they would have gone on to look carefully thiough the whole, and would have found again and again an inter- polated entry with a very considerable sum attached to it, and altera- tions which must have put them upon inquiry. They would have made inquiries; and whatever answer they got, they should have told the company itself that this had happened, and that they had been called upon to make inquiries with regard to the matter. Had such a communication been made to the compan\- in 1904 the debentures would not have been issued. With regard to the omitted liabilities, it had been suggested that Auditors examining a Balance Sheet were entitled to look to the previous Balance Sheet as being a document on which they might rely, that whether it was their own or anybody else's they were not called upon to go behind it. But when this Balance Sheet was drawn up in August 1904 Mr. Cornish knew per- fectly well that from August 1903 Reece had started a fresh set of books, which were described and suggested by Messrs. Baker and Cornish themselves, opened b}' thssm, and charged for at a fee of ;^9 gs. Among these books was a Private Ledger, in which there was an amount put down for liabilities ; and that it was present to Mr. Cornish's mind that he had to look out for liabilities which were not properly charged against the company was shown in the letter of 27th August 1904, where he said there were ,^53 of liabilities of Reece which did not appear in the Balance Sheet of 3rd August. The entrj"- in the Private Ledger should have brought to their mind the amount of the liabilities which should have passed to the company. It was clear they had seen this book ; at all events, they were entitled to ask for it. Lord Alver stone : I think Mr. Greenstreet was extremely fair about it. He said: " No doubt I saw that book; there are entries I made in passing." HENRY SQUIRE (CASH CHEMIST), LIM. V. BALL, BAKER 95 1 AND CO.. AND MEAD V. SAME. Sir Edward Clarke said the book being seen carried them to a total amount of liabilities at August 1903. Directly Mr. Ball addressed himself personally to the investigation of these accounts in 1907, before any accounts had been obtained from the firms dealing with the com- pany, he discovered four accounts, amounting to about ;if 500, which on the loth October had been omitted from the liabilities. The question was whether the Audiors ought not to have found that out in 1904. It was a very material thing for them to have found out. It was true the agreement was to take over the concern as from the 3rd of August, but it was taken over on the basis of the Balance Sheet which they themselves had prepared Sir Edward Carson : You have no right to say that. Sir Edward Clarke : I say it. Lord Alverstone : Never mind. On the basis, say, of the 1903 Balance Sheet. Sir Edward Clarke, continuing, said the accounts were taken over as current accounts as from the 3rd August 1903, being taken over on the basis of the Balance Sheet, and the Auditors dealing with the first year of a business, which might or might not be liable as between the company and the vendor in respect of certain things which had been incurred before 1903, ought surely to have checked and obtained vouchers for amounts — especially amounts which were shown to have been paid out during the verj^ early part of that year. In Haycroft'a case, for example, where the amount was ^^48 3s. 4d., the Auditors had before them the Bought Ledger ; the}^ had before them the Bills Pay- able Book. In each of those two books they would find entries with regard to Ha3^croft made before their account was made out — consider- able sums of money paid out of the company's cash to Haycroft in excess of the amount which the company had taken over as a liability. It could never have been suggested to them that these were new liabili- ties incurred subsequently to the 3rd of August, because the date of the entry which referred to these amounts was actually the 4th of August, the very day after the transfer of the business. They were in this position, that the books before them showed when looked at that, whereas on the 3rd of August 1903 the liability was taken at ^48 3s. 4d., on the very day after the beginning of the account, ;if3ii owed had been paid in bills, entered in the books, and in each case — both in the case of Haycroft's account and in the case of the Bills Payable Book — entered at that date. One witness had said that if he had seen that he would not have paid attention to it, because the sec- retary had a great deal to do, and might make a mistake and not enter 95^ AUDITING. those bills. Was not that a ludicrous explanation ? The secretary was supposed on the very first day of his dealing with the accounts of the new company to have paid out bills in respect of an item exceeding by six times the amount of the liability which had appeared on the Balance Sheet of the day before. Lord Alverstone : 1 do not know that it matters. I see j'our argu- ment, but it is a little overstated. There is only one bill on the 4th ; all the others are on the 24th. I do not see any difference. You cross- examined the Auditors about the next month, but I should think they ought to be equally careful about any payment made in the course of that year. Sir Edward Clarke : I am not minimising the care they ought to give to every payment ; but I think it strange that immediately after the exchange is made on the basis of this /l^8 3s. 4d. being owing the man gives bills on the 24th August, and is supposed to forget them, and to forget to enter them in the Bills Payable Book and the Ledger — in the one case .until after July of the following year, and in the case of the Ledger until after February. Continuing, the learned counsel said he had himself taken out seme figures from the books which would show that it ought to have been obvious to defendants that there had been an inflation of stock, not really an increase of stock. Purchases were in 1903 ;^'8,275, in 1904 they were ;/^"9,i48, in 1905 ;;^8,5i9, and in 1906 /'7,856. That showed purchases were diminishing. Sales were diminishing also. In 1903 they were £13,457, in 1904 ^,13,437, in 1905 y'13,097, and in 1906 ^"12,564. But with diminishing purchases and sales stock was increasing. In 1903 the increase was ^^1,300, in 1904 it was ;^'i,897, in 1905 ;i^i,75o, and in 1906 ;,^i,i7o. It had been suggested that the wages affected this ; but there was no increase of wages which would account for stock being manufactured and brought into the account. Wages in 1903 were £2,316, in 1904 they were ;i^2,i75, in 1905 £2,340, and in 1906 _;^2,27i. These were figures which, seen by an accountant from year to year, ought to have shown him con- clusively that this was not a real accretion of stock, but must be an inflation of the figures by which that stock was represented. It was a state of things which in 1904 would be surprising; in 1905 it would be suspicious; in igo6 it must surely have amounted almost to demonstration that there was a fraudulent tampering with the Stock Sheets. The stock had begun as ;^'6,826, when it was taken in 1907 it came to ;,^4,334; that was a difference of ,^2,500. If to this latter figure they added the ;f 1,300, £i,Sqj, ^'1,750, and ;^'i,i7o the total was £ii,20o, almost exactly the figure which was shown upon the Balance HENRY SQUIRE (CASH CHEMIST), LIM. V. BALL, BAKER 953 AND CO., AND MEAD V. SAME. Sheet of 14th October 1907. Realty the whole losses of the company during this tinae had been accounted for by that figure. One other observation he would make before leaving this subject. The altera- tions in the Stock Sheets of 1906 were so recklessly made that Sir Edward Carson had said that it anyone had seen them he would have been put off the idea of fraud, and been led to think it must be mere carelesness or stupidity. Really, if those Stock Sheets had been examined b}' anyone used to accounts it would have been impossible for him to escape seeing they had been inflated to a remarkable degree. The learned counsel then addressed himself to the cjuestion of damages. In consequence of the negligence of the Auditors dividends had been paid of £2QQ in 1905 and ^.'315 in 1906. Beyond this the company had been led to raise ;i^5,ooo on debentures. Upon the /."5,ooo so borrowed it had paid 9s. 6d. in the /". It had discharged its obliga- tion so far as it could by realising all its assets ; but it had not been wound up, and remained under a liability of about ^^2,500. The evidence was then heard in the second case. Mr. Mead retold the story of his advancing monej- to Reece, and of the formation of the company. Mr. John Harmar Steele, who had acted as Mr. Mead's solicitor in the transactions, gave evidence on the same subject. He had believed both Reece and Kingston to be honourable men. He thought Reece's difficulties were entirely due to want of capital. At the time when Mr. Mead had advanced money, witness had believed the business was genuine and could be developed into a good thing. Other witnesses for the plaintiffs repeated or confirmed evidence as to the Stock Sheets, &c., which had been given in the previous case. For the defence, Mr. Cornish was again called, with Mr. Ross, Mr. Temple, and others, in rebuttal of the charges of negligence ; their e\idence being necessarily very similar to that which had been given in the previous case. The evidence being concluded : — Sir Edward Carson said he would respectfully submit that in this case there was no shadow of evidence of negligence. What had come out in cross-examination as to labels? The witness was to find out anything he could by going through the accounts Avhich would raise suspicion. As the witness knew, when doing this, that something had happened, it would be the most unfair way in the world to judge Auditors or any other professional men. His Lordship had been asking as to the Stock Sheets, whether any inquiry had been made of district managers and sub-managers. The reason no such inquiry had been 954 AUDITING. made was that nobody had, from beginning to end, thrown an}- doubt on the honesty of the sub-managers. Mr. Mead, himself a director of the company, brought into contact with them, had the best means of finding out. Lord Alverstone : That is not the only point. I have got to be satisfied on the earlier x'ears, 1903 and 1904, that the stock was not there ? Sir Edward Carson replied that there was no evidence that the stock was not there in 1903, except Kingston's statement that he began falsifying the accounts at an earlier date. Lord Alverstone : Everybody agrees that up to a certain time there was no possible reason for mistrusting either Kingston or Reece — - according to Mr. Mead, up to 190b or 1907. You have yourself given evidence that the suppression of the four accounts in 1903 was some evidence of misconduct by Kingston at that time. That is the only evidence that he was fraudulently inclined then. Of course. Sir Edward Clarke's case is that he was fraudulent long before, but I have got to consider what the e\'idence is about it. Sir Edward Carson : He says Kingston was fraudulent all through. But here your Lordship is asked with regard to these Stock Sheets to say there were fraudulent entries upon them, or something which looked like fraudulent entries. All they had to do to prove that was to go to any one of these managers — for anything I know they are still in the same shops — and say to them, " What about this change? Was your certificate put on before or after that?"' But instead of doing that, they have been asking your Lordship for the last two days to go through a kind of analysis of these various books — the very thing which Lord Justice Kaye said was not to be done. The learned counsel, continuing his argument, said that on the question of the outstanding liabilities no book had been produced, or could have been produced, before the Auditors which would have shown them anything with reference to the accounts except what they had returned as being the true state of affairs. One of the witnesses for the plaintiffs, Mr. Fabian, had his mind so full of the incompetence of the defendants, and his own better system, that he had actuall}- taken a closed account of a bill in the book, and said that an Auditor of his cleverness, even though he suspected nothing, would have inferred from the closed account that there was an account open. If that was out of the question, as it was, what remained in this case? Sir Edward Clarke had tried to prop it up by saying there was some extra duty b}' reason ot the faa that there was nionev outstanding. He ventured to HENRY SQUIRE (CASH CHEMIST), LIM. V. BALL. BAKER 955 AND CO., AND MEAD V. SAME. submit that in all cases, what an .\uditor was bound to bring was reasonable skill and care, and, as to the degree of such skill and care, there was no higher degree or lower in the case of the shareholders or of the intending purchaser. Towards the end of this case, Sir Edward Clarke had been so pressed that he had attempted to cross-examine as to whether the creditors ought to have been sent to for statements. But not e\'en Mr. Fabian could screw himself up to saying that the creditors ought to have been asked for statements without special directions and some reasons being given. He would, ask his Lordship to approach this case with the belief that Auditors have the right to believe a man honest until thev have something on which to rest a suspicion of dishonesty. Their business could not be carried on unless they could accept books as honest until they found something either in the men or in the books to show they were dishonest. There was nothing of the kind in this case. It was a matter of very great importance, and he asked his Lordship to say that his clients had exercised the reasonable skill and care which was their duty, and had discharged the whole duty which lay upon them towards their clients. Sir Edward Clarke : There are two matters in which this case now before your Lordship differs from the other. It is different in the position of the defendants in relation to the person who is suing them upon the contract. I shall ask your Lordship to reconsider the opinion which I think has been expressed, namel3S that the duties are upon the same level. Lord Alverstone : I was not putting it against you. I was only saying that, in the company's case, I should put the duty as high as in the purchaser's case. What I n\eant was that I did not propose to assume a less standard of duty in the one case than in the other. Sir Edward Clarke : I am much obliged to 3'our Lordship for saying that. What I point out here is that when my learned friend has been tr3'ing to interweave with his arguments in this case the considerations which appl}' to the Auditors of a company, I think that he is, for the moment at all events, disregarding the essential difference between the two cases. Where the Auditors are advising a company, and are invited to rely upon, and do rely upon, the statements of the manager or secretary or other official, they are relying upon the statements of persons employed by the company to which they are reporting, and who are piesumably trusted by the company in the sense that they are trusted by the persons who are authorised to carry on the responsible business of that company; but, in the case where accountants are called in to advise a person who is intending to put monej' into a business, or 956 AUDITING. purchase a business, the persons who are carrying on the business are rot his servants, trusted b}- him, but they are the persons in respect of whose conduct in relation to him he has to be guarded by the advice he is seeking. Lord Alverstone : Xobody suspected Reece. He was advancing monev through 'Sir. Steele, and Mr. Steele says he believed Reece to be perfectly honest, and that his only difficulty was due to low capital. Sir Edward Clarke replied that, in this transaction, Mr. IMead was at arm's length with Reece and Reece's servants, with opposite interests in this investigation. In a letter of the 9th of May 1903 the defendants were put upon notice of this fact — quite apart from what had been communicated to them in the interview to which Mr. Steele had spoken. The letter said : '" You will please bear in mind that the report is primarily required to satisfy Mr. Mead, the mortgagee, that the business is conducted upon business principles, and that the accounts of assets and liabilities fairly show the state of the business." A witness called for the defence had put the exact case which was now before his Lordship. It was the case of a person going to buy a business, and requiring to be advised, not as to the contents of books which had been kept by the persons who were carrying on the business, but as to the real condition of that business and of the amount of liabilities and assets which he would be taking over. The duty of the defendants was not to accept the statements of the vendor or his manager and c lerks, but to test those statements in order to protect Mr. I\Iead ; and, that being the case, they had done nothing whatever that could not have been done by a board school scholar who had learned arithmetic. The important things which appeared on the accounts were really the question of th§ liabilities and the question of the stock. With regard to the liabilities, what they did was to receive a list of liabilities from Kingston, and then they employed a clerk — the principals did not seem to have taken any very active part in it them- selves — to do what? To see that the figures which had been entered in the list corresponded with the figures which appeared in the books. Of course, that was no check at all. A man intending to be dishonest would not hand to the Auditors a list of accounts, the dishonesty of which would be detected the moment they turned to the books. It was no test of honesty, only of accuracy. He had asked Mr. Jenks, "Would you be content with that?" "No," he said, "in the case of a purchaser I would not." "What would you do? What could you do?" " I would ask for the creditors' statements." His learned friend was under quite a misapprehension when he said it had been suggested the creditors should be written to for their statements. It HENRV SQUIRE (CASH CHEMIST). LIM. V. BALL, BAKER 957 AND CO., AND MEAD V. SAME. was not suggested that any accountant would, in the ordinary course of his work, write to the creditors of an existing and continuing busi- ness to ask them to make special statements. But in anj- current business at any moment there were upon the files in the place the latest statements that had been supplied and receipted by the firms which were dealing with this business, and these statements could always be asked for. The responsibility in this matter had been handed down from one to another. Mr. Cornish was on a holiday at Sheringham, and left the matter to Mr. Ross, who did the work through Temple. Temple was the man who had betn realh' emplo3'ed upon this. He had been asked with regard to that list of liabilities. He said, " I checked it with the books, and it agreed with the books." Asked if he did anything else but check, he could not tell of a single item in that list with regard to which he had made inquiry. He had said generally that he made inquiry with regard to some of them ; but could not state in the witness-box that he had asked a question with regard to any one except the item of Haskins with the £2^ receipt. This was the only one he would pledge his oath to having seen, and it was a curious thing that this was one which told him upon the face of it that there was something wrong in the statement that had been made to him. He had seen this receipt for ^25, and upon the document which carried the receipt v/as a statement that a sum of ^'69 more than had been put into the list was claimed by Haskins. What did he do then, this Auditor who was to protect Mr. Mead against anything which would be dishonest or deceitful on the part of Reece and Kingston? He asked Kingston what was the explanation. Kingston replied, " Oh, it had been agreed at a lower figure." And without one fraction of evidence that this was true, Mr. Temple accepted the statement and passed the list. If ever there was a case in which the accountants had absolutely failed to discharge any duty that they owed to their employer, it was in the present one. Temple was the firm, for the purposes of this case, and Temple, looking to one of the items, found that item a suspicious one, an item in which the amount was put lower than it ought to be, and he contented himself with asking Kingston — the very man who, if there was any deceit or fraud,would be the man perpetrating the fraud. It was not true that any such agreement had been made. Sir Edward Carson : Vou have not proved that. Sir Edward Clarke : It is not true, and that is proved by the subse- quent proceedings in the case. If there had been any such agreement the sums which were afterwards paid in respect of this would not have been paid. 958 AUDITING Continviing his argument, the learned counsel said that the Auditor was bound to verify Kingston's statement. When Kingston told him an agreement had been made whereby he was entitled to include in his list of liabilities an amount which was /^.yo less than should have been there, the Auditor was bound to ask who had made the agree- ment, when it was made, and where it was. But Temple never made any inquiry at all. If Mr. Mead had been told that Kingston had been making a statement which had been checked and found incorrect, he would have been put upon suspicion with regard to the honesty of these figures — a svispicion which, as he submitted, the Auditors ought to have entertained when they found a thing like this occurring. It was not as if this had been one of manjr matters which had been inquired into, and this the only one that had been found incorrect ; but this was the only item with regard to v/hich Temple would pledge himself that he saw a statement or asked for a voucher, and it was one which ought to have put him upon inquiry. Passing over tlie Balance Sheet in which these items should have been carried in on one side or the ■other — thejr would certainly have reduced the profit of the year by ^^169, or something of the kind — the real point was that Mr. Mead should have been advised by the Auditors that they had found they could not get vouchers for the items which represented liabilities he was undertaking, and that would have put him at once in such a position that he would have declined to go on and purchase a business with regard to which there were matters of this kind. If that were so with regard to the liabilities, the case was even stronger with regard to the stock and with regard to the labels. Their own letters showed that their attention was attracted to the ver}- considerable increase of stock as shown on the accounts. They asked for an explanation, and one was given which might be considered reasonable as regarded part of the amount. But surely if they had asked about the increase of stock at Kentish Town, knowing that it had all been dealt with, they would have prevented a misleading inference being drawn that sufficient profit was being made there to warrant continued negotiations being made for the purchase. With regard to labels, there was a letter which showed that the accountants' attention was called to it, in which they stated that the increase in the quantity of labels at the warehouse — ^rom ^335 worth to ;{:'475 worth— was because labels which had been previously included in the stock at the branches had been transferred to the warehouse, as all medicines made by the firm were now made there. It was the duty of the accountants to test the explanation that had been given for this very serious item. Anybody who had addressed himself to this question with ordinary diligence and ordinary intelligence would have looked at the Stock Sheets. He would have HENRY SQUIRE (CASH CHEMIST), l.ni. Y. BALL, BAKER 959 AND CO., AND MEAD V. SAME. then found that at the warehouse the item of labels was increased from ;if335 to /J475. The explanation of this being that it was due to the withdrawal of labels from the branches, he would have looked at the Stock Sheets of the branches. Had he done this with ordinary care, he would have seen that there were certain items, apparently bcvid fide items, such as would in ordinary course be included, viz., 7,000 labels at lod., and so on, carried out, and always carried out to amounts which were less than £2. £1 iSs. was the largest of these detailed items in the Balance Sheet. He would then have noticed that somebody had put into those Stock .Sheets items which, as applied to labels, were absolutely ridiculous. An item of £2,Si ^^ applied to labels, taking them at such prices as were shown in the detailed estimate, would mean hundreds of thousands of labels, for the presence of which at the branches no conceivable explanation could ever have been offered, while their presence at the branches and in the Stock Sheets of those branches was utterly irreconcilable with the statement that the stock had been moved from the branches to the warehouse. The first dutj^ of these accountants was to look at the Stock Sheets and to look at the item to which, obviously, by their own statement their attention had been called ; and to endeavour to ascertain the truth with regard to that. If they had done so they would have come upon this series of items — ^^20, £20, £i^., and so on, which would represent a preposterous number of labels, and were entirel}^ different from the other sort of items. The total amount of labels on the branch sheets was over £200; and this, added to the £^'j^ for labels at the warehouse, would inflate the item beyond all possible reason. The importance of it was that au}^ Auditor detecting these items and ask- ing for an explanation would be bound to get information as to the cumber of labels which there were in fact ; and would have pointed out to his client that these sheets were unreliable. When defendants were assuring Mr. Mead that he would be justified in dealing with this business on the basis that there were so man)'^ thousands of pounds' worth of stock at the warehouse and the branches which would be security for any moneys advanced, they were assuring him of that which they did not know and which thej' had taken no means what- ever of checking. In these circumstances he asked for damages. There v.'ould be no difficulty in assessing the amount. ;^"3,ooo was the amount which his client had lost by the default of the accountants, and he asked his Lordship to give judgment for that amount. p6o AUDITING. JUDGMENT. Lord Alverstone : These two cases have been before me for the best part of four days, and I do not wish to conceal the fact from anybody that I have spent a great many hours out of Court in dealing with them. I have had the very greatest assistance from the eminent counsel before me, and I must of necessit}' deal with a great deal of detail. It must not be thought, if I do not happen to refer to every one of the minute points to which my attention has been called, that I have not considered them ; and, inasmuch as there is no jury here, and my findings may be considered^ I only trust that those who may criticise them hereafter will not suggest or think that because I do not note a particular thing it has not passed through my mind. I will onl}^ endeavour to give such reasons as I can for the judgment I have formed to enable those Avho review ni}' decision to understand the grounds upon which it proceeds, and, of course, if they are wrong I can be corrected. I only hope that I shall not be corrected for grounds which I have not considered or thought of sufficient importance to mention them myself. The case is one of very great importance, because it raises in a very distinct way the question of what is the obligation of accountants who are instructed to advise either an individual or com- pany with reference to the condition of business of a going concern. I propose to take Mead's action first, not that in any way to my mind it differs from the other in principle, but because it is suggested by Sir Edward Clarke that a higher standard of duty is required from the defendants. If that is right, and if I come to the conclusion that there is no breach of the higher standard of duty, I shall have less difficulty in dealing with the case where, according to him, there is a lower standard of duty ; but I myself have not been able to recognise the distinction. I think in both cases Messrs. Ball & Co. were in this position, that if, by the exercise of reasonable care, they would have sent in a different Balance Sheet, or would have cautioned their client in regard to the items in the Balance Sheet, they would be liable for damages in this action ; therefore I do not draw any distinction betvi'een the two cases. The other reason why I propose to take this action first is because, historically and chronologically, it is the com- mencement of the story, and a good deal of that which I have to refer to in Mead's case can be dealt with in the other case afterwards in shorter terms. I have already stated — I will refer to the authorities in a moment— my view of the obligation of these accountants. I think it only right to say, as so much distinction has been drawn, that a little too much has been made of what is supposed to be the non- connection of Mr. Mead with this business before these accountants were consulted at all. He had advanced ^^1,200 on mortgage. He was HENRY SQUIRE (CASH CHEMIST), LIM. V. BALL, BAKER 96 1 AND CO., AND MEAD V. SAME. receiving a high rate of interest, i2i per cent. I attach no importance to that ; he is equally entitled to be protected, but it does seem to me that it has a bearing on the confidence which Mr. Mead had in the people with whom he was dealing. Having regard to certain evidence that was given me by Mr. Steele I have not the slightest doubt, and so far as a finding of fact goes I find as a fact, that Mr. Mead never had the slightest suspicion of either of these gentlemen until probably the middle of 1907. He has said himself that he asked questions, most pertinent questions, of Reece and to a certain extent of Kingston. He acted on the board with Reece for, practically speak- ing, four years. He and Reece were partners in this business, the company was only a two-man company. Reece was the vendor, Mr. Mead was the holder of the 3,000 shares ; and it is only doing justice to Mr. ^lead to say that he was innocentty and completely misled by what he believed to be the way in which Reece and Kingston were carrying on this business. At what stage Reece became a scoundrel - — if I may use that expression — became fraudulent, or at what stage Kingston became fraudulent, I am not able to judge. The plaintiffs, having it in their power to give me very material evidence upon these matters, have advisedly, or for some reason which I cannot gauge, abstained from giving that evidence. There are a number of witnesses, who could have been called to support the plaintiffs' case, who could have given the Court most material evidence with regard to the allegations upon which the charge of negligence is made. But I dismiss all those considerations from my mind, and I approach this case of the action of Mr. Mead from the point of view that he was employing the defendants' firm to guard his interests against a vendor who might be putting upon him too flourishing and glowing an account of what his business was. An honest vendor, so far as Mr. Mead believed. It is not suggested that at any stage of which I am now speaking — the years 1903 and 1904 — he cautioned Messrs. Ball & Co. against either Reece or Kingston ; and it is very material, in order that we may try and put ourselves in the position of what that of reasonable men would be, and see whether or not Mr. Fabian, Mr. Dicksee, and Mr. Caesar's criticisms were well-founded or not, that we try and put ourselves in the position of everybody in the years 1903, 1904, 1905, and 1906. It is not immaterial to observe that Mr. Steele, an experienced solicitor whom I implicitly believe, told me m the box that he believed Reece had been very successful, that he had established verj^ successful shops, that he was doing extremely well; and he pointedly put it twice that all Reece's difficul- ties arose from not having capital enough. Not that he could not make the profit or turnover necessary or that he was charging prices which Q Q Q 962 AUDITING. could not pay ; but he had to buy in a dear market and give bills, and was constantly worried by thoie bills. Mr. Steele attributed all Reece's difficulties to want of capital. If that was true Mr. Mead was entering into a very good thing indeed. He was quite entitled to ; a solicitor is entitled to make 12 per cent, as much as any other man. I am endeavouring to steel my mind as much as possible against every possible suggestion that ^Ir. Mead was not entitled to be protected. Under those circumstances I think it will be wise to attempt for a very few minutes to examine what the standard of duty is. Fortunately for me in this Court the principles have been laid down so clearly in a germane case with germane subject-matter that I do not think I ought to go wrong, although I may not apply them properly. I have already said that I put the duty of Messrs. Ball in both cases on the same standard. I do not agree that their dutj^ as Auditors would be less than their duty as advising a purchaser who was buying a business. Under those circumstances let us just consider what the case was. The Balance Sheet of 1U03 may be spoken of as what may be called an ordinary Balance Sheet ; in this sense, that it had upon it the usual items — that is to say, the outstanding credits and the outstanding liabilities. Taking Daviesand Tait's Balance Sheet for the moment, he owed Mr. Mead £1,770, he had a loan from the bank of ;/^63i, and he had creditors _j^2,6oi. On the other side he had got his fixtures and furniture and his stock-in-trade. The actual amount dealt with in the year was ;^9,96o. When you come to the first Balance Sheet with which Mr. Ball had anything to do, that of 1903, there are, practically speaking, four items to be considered. The first is on the credit side, stock ^^6,826 ; then the fixtures, fittings, and furniture ;!f 4,620 — which make a total of just over ,2^1 1,500. On the other side there are creditors ;^4,83i, and Loan Accounts /,8i5, making together, as is stated on the Balance Sheet, _2{;'6,647. Therefore, there was for the purpose of the business into which Mr. Mead was supposed to be going to enter as a purchaser — when I say as a purchaser I only mean that he was going to find the working capital and become the owner of a half share — a balance of ;,{."4,8oo. Goodwill is taken at the low figure in the agree- ment of ;i^i,ooo. In some other cases which we are sometimes engaged in, if we were dealing with seven retail shops with this turnover, probably we would have heard a great deal more of the value of good- will. But it is not unimportant, with reference to what Mr. Mead is supposed to be getting for ;^3,ooo, that upon the Balance Sheet there is not a penny put down for goodwill. It is outside altogether stock, furniture, and fixtures. V\'e do not know exactly how it was that ;^6,ooo was agreed upon — /.'3,ooo cash and /.'3,ooo shares to vendor. All I say is that upon the figures it is b}' no means an excessive amount. HENRY SQUIRE (CASH CHEMIST), LIM. V. BALL, BAKER 963 AND CO., AND MEAD V. SAME. It may be said to be ;^"2,ooo or ;^'3,ooo less than might Avell have been given having regard to all we know now of the goodwill of the business and the way it was being carried on. They have not so much as had the sum of ^6,000. I think Mr. Steele put it quite rightly that there never was ,,^6,000 ; _,f 3,000 was going to be found for working capital in respect of which a half interest in the business was to be given. Under those circumstances what is the duty of the accountant employed to protect Mr. Mead? It is to be observed that the onh- practical assets for the purpose of this case are the stock and the furniture. There were no outstanding trade debtors to speak of, only ,^"49 or a very similar sum. Therefore, what we have to consider is, what is the duty of an accountant so employed to make out a proper trading account to advise his principal in such a transaction? ^Yell, I do not attach any importance to the low scale of remuneration. Xo words have been addressed to me by Sir Edward Clarke, or anybody else in that respect. Messrs. Ball should have charged whatever ma}' be a proper amount, and having regard to what they have done I should assume they were quite sufficiently paid. Onl}^, with regard to certain matters, the clerks do consult their principals and the principals rightly tell them that the work cannot be done. Now, no attack is made upon the fixtures, fittings, and furniture, ^4,620, in the Balance Sheet of 1903. Two-fifths of the assets, it is not suggested, have been inflated ; to be otherwise than accurate. They are not in any way attacked. There would be a certain amount of investigation required with regard to such an item as that. It is not suggested that Ball & Co. did not properly examine the Fixtures and Fittings Account. The other item is for stock. That brings us ^t once to the important and difficult question in this case : ^Yhat is the duty of a manager with regard to such a stock as this? The business is peculiar, it is carried on in one wholesale and nine retail places. It will probably not be thought that I am going beyond an3'thing proved in evidence in this case when I say that it is common knowledge that chemists' shops do require an enormous number of items. It was admitted bj' !Mr. Fabian that the fittings and property of a chemist's shop, the utensils and so on, are of an exceptionally minute and valuable character. Therefore, there must be very considerable details. This is not unimportant with refer- ence to what I have got to show afterwards. I have gone through the sheets sufficiently to be able to vouch my own accuracy. Each of these pages represents fifty items, either in the whole page or in the half- page. Sometimes the page represents one hundred items, sometimes fifty, according as they are carried right across or not. Some of the Stock Sheets are made up one way, some the other. There were, roughly Q Q Q 2 964 AUDITING. speaking, at Newman Street upwards of 2,000 items. There were at the branches never less than 1,000 and sometimes considerably more, and there were, as I have said, nine branches. Therefore, the items are extremely numerous. Before I deal with the facts of this case, what standard ought I to lay down as to what the duty of an accountant is wdth regard to the stock? It has been held over and over again, and it has been recognised in the Court of Appeal, that it is not his duty to take the stock. In justice to Sir Edward Clarke and Mr. Gregory I must say that they do not suggest it was his duty to take the stock. They endeavour to base their argument on a different state of things ; they say, given the Stock Sheets, they were such that no reasonable and prudent accountant would pass them without calling attention to what are now called suspicious circumstances. I do not want to read it at length as part of my judgment, but I will call attention to Lord Justice Lindley's judgment at page 284 (2 Ch., 1896), that in any particular case what is a reasonable amount of care and skill depends on the circumstances of the case, and if there is nothing which ought to e.xcite suspicion less care might properly be considered reasonable than could be so considered if suspicion was or ought to have been aroused. At page 285 he refers to the stock-in-trade being stated " as per manager's certificate. There were also in the Balance Sheet entries on the opposite side of the values of the stock-in-trade." Each year " the Auditors took the entry of the stock-in-trade at the beginning of the year from the last preceding Balance Sheet, and they took the values at the end of the year from the Stock Journal " — the book which contained a series of accounts under various heads — and he again refers to summaries signed by manager's certificate. '' I confess I cannot see that their omission to check his returns was a breach of their duty to the coinpanj'. It is no part of an Auditor's duty to take stock. ... In the case of a cotton mill he must rely on seme skilled person for the materials necessar}' to enable him to esti- mate the stock-in-trade." In this case the Auditors relied on the manager. He was a man of high character, competent, and trusted by everyone. The Lord Justice held that the directors were not to be blamed for trusting him. The Auditors trusted him in that matter. " But, it is said, they ought not to have done so for certain reasons." At p. 287 the Lord Justice proceeded: "'Although it is, no doubt, true that such a process might have been gone through, and that, if gone through, the fraud would have been discovered, can it be truly said that the Auditors were wanting in reasonable care in thinking it not necessary to test the managing director's returns? I cannot bring myself to think they were, nor do I think any jurj' of business men would take a different view. It is not sufficient to say that the frauds HENRY SQUIRE (CASH CHEMIST), LIM. V. BALL, BAKER 965 AND CO., AND MEAD V. SAME. must have been detected if the entries in the books had been put together in a way which never occurred to anyone before suspicion was aroused. The question is whether, no suspicion of anything wrong being entertained, there was a want of reasonable care on the part of the Auditors in relying on the returns of a competent and trusted expert relating to matters on which information from such a person was essential." This judgment is the more important for this reason, that Mr. Justice Vaughan Williams, accepting this principle, had added to it this corollary — which I do not think was wrong in law, though the Court of Appeal did not approve it in fact — that if the figures which he was auditing would themselves enable him to check the Stock Sheets, that there might be the duty upon the Auditors to act upon the result of those figures, and so to have discovered the mistake. That is the passage which is found on p. 350 of i Ch., the same case in which Mr. Justice Vaughan Williams had cast the Auditors on that ground. I had looked at that very carefully before I considered the whole of this case, for this reason, it is not suggested by either Sir Edward Clarke or ^Ir. Gregory that any figures within the Stock Sheets would have enabled them to discover this improper conduct if it existed. There- fore we have a case before us where, if it is negligence at all, it is negligence with regard to Stock Sheets and nothing else. That is not an unfair statement of Mr. Gregory or Sir Edward Clarke's argument. I will only say that I wish to call attention to Mr. Justice Lopes' judgment, page 288, from which I commend the words of Sir Edward Carson that he is not bound to be a detective. He is a watch-dog rather than a bloodhound. Figures of speech are rather dangerous; all I venture to say is, that he has got to act as a reasonable man under the circumstances of the case. He may even be a detective in some cases if there is something to arouse the suspicion of a reasonable man. I will read the passage at the bottom of page 2S8 and the top of page 289, also Lord Justice Lopes' judgment about not guaranteeing fraud, and Lord Justice Kaye, page 292, which was read bj' Sir Edward Carson, or part of it, to-da^^ I call attention to these passages. I understand them to lay down this rule that the Auditor is not bound to take stock ; that the highest which can be put against an Auditor or accountant in the one case or the other is that he is bound to make a reasonable and proper investigation of the accounts and of the Stock Sheets so far as he can, and if a reasonable and prudent man would have come to the conclusion that there was something wrong, that then it is his duty to call the attention of his employers to it, and in that consideration he is entitled to take into account the fact that the documents are vouched by trusted servants of his employers. For this purpose I do not draw the distinction which is drawn by Sir Edward 966 AUDITING. Clarke of J»Ir. Reece not being the employee of Mr. IMead in the first case. In one sense it is true, I have not overlooked that ; but he is entitled to reh' on the honest servants — those believed to be honest — and experienced in the business of the companj^ whose accounts he is examining. He is not supposed to be put upon inquiry because a later examination shows that something has gone wrong. I have put together with some care what was done in this case, and I propose very briefly if I can to summarise it in order that m_v judgment may be self- contained and may show any other Judges who consider it the ground on which I proceeded. I do not quite come to the conclusion — I say nothing with regard to any other case — but I do not quite come to the conclusion that in this particular case the Auditors were content to take only the certificate of the managers. The}' are entitled to rely on the certificate of the managers most unquestionably for the reason already given ; but I find that the Auditors and accountants did in both these cases do more than that. It was their duty to a certain extent to examine the accurac}' of the certificates. A part of their duty in that respect is not only found to have been efficiently per- formed, but is not attacked by the plaintiffs in any respect. In justice to Mr. Fabian, Mr. Dicksee, and Mr. Ciesar, who certainly went rather far in some of the things they said, the}' did not attack the conduct of the defendants in this respect. They said: "We agree, prima facie, given certified Stock Sheets, all the Auditors need do in the first instance, apart from suspicion being aroused, is to take totals and extensions. That would be an ample discharge of their duty when there is a duly certified Stock Sheet, correcting extensions and totals, and checking a sufficient number of Stock Sheets which are found to be accurate." ISo attack of any kind is made upon the defendants in that respect. It is not suggested that, properly cast or properly extended, these Stock Sheets have shown a farthing less — still less a substantial sum less. All I can say is that the defendants were certainly undertaking to give to these Stock Sheets at least that amount of examination. That will appear from the letters of the 2nd September. 1 am deaUng first with the year 1904. That will appear also from the documents read to-day of the 21st of April 1903, of the i6th May, and of the final report of the sSth September. All those documents show, as I have said, that they had checked a great many of the additions and extensions in order to test the accuracy of the sheets, and had in certain cases compared the prices at which the stock had been valued with those on supphers' invoices. That was the statement of how they discharged their contract in 1903, and if the letter of the 2nd September 1904 be looked at :" I got all the Stock Sheets from Newman Street this morning, and checked the totals on HENRY SQUIRE (CASH CHEMIST). LIM. V. BALL, BAKER 967 AND CO., AND MEAD V. S.A.ME. to the summary of totals at each branch. Do 3-011 want all the additions checked? It would be rather a big job." ^Ir. Cornish replies that he is to check them all. On the 3rd September, nth September, and 26th October that j'ear, it will be found that the defendants were examining the Stock Sheets from the point of view which it is suggested by wit- nesses on both sides would ordinarily be sufficient. In the }'ear 1905 the letters of 23rd and 27th October show the same thing. I have not got note of the corresponding letter, but those letters to which I refer are a few of those which I put together to show that in this case it must be taken in considering the duty of the defendants that they had got these Stock Sheets before them.. I further rule, as a guidance to myself, that, with some slight exceptions where judgment and discre- tion come in, the skill of the clerk must be the same as the skill of the principal. The principal must not excuse himself for his clerk's negli- gence by saying that he employed a clerk, and Sir Edward Carson did not contend to the contrary. Of course, it must not be understood that I am dealing with a case where judgment has to be given as to whether a thing has to be treated as capital or revenue. I am not dealing with questions of judgment, but with questions of fact. If the examination of Mr. Cornish would have led him to suspect that there was ground for suspicion, the examination of Mr. Temple ought to have been at least as effective. I now come to the Stock Sheets them- selves, and here I must, as it were, of course, deal slightl}- at first with the Stock Sheets of 1903. Xow, it is in evidence before me — I think it is right : I have no doubt it is true — that the Stock Sheets of 1902 never were before these defendants at all. I can see no reason why they should be, apart from what I will call attention to in a moment about the labels. But I will take it from evidence before me ; I am not deciding this case b}' believing one set of witnesses more than the other. I am not deciding that I disbelieve the evidence of Mr. Fabian or other gentlemen on questions of fact. I do not accept their opinions, as I will show in a moment ; but it must not be thought that I have decided this case in favour of the defendants, in reference to part of the case, by disbelieving anything Mr. Fabian or the other gentlemen have said in fact. But, for reasons I will give in a moment, I should not draw the same conclusion as they have done. Subject to their being slightly partisan in one or two respects, both sets of wit- nesses gave their evidence very fairly. I now come to 1903, and here I am at once pulled up by a most astonishing state of things in this case. It is said that upon the 3rd of August 1903 the estimate of stock, _jf6,S20, was excessive. There are nine shops, nine managers, and there are the Newman Street people. Whether there are anybody beside Kingston and Reece, I do not know ; there must have been some others. 968 AUDITING. but they may not have been responsible. It is to my mind very greatly astonishing that in this case the plaintiffs have not made the slightest effort to say that, in fact, not a single item of the stock was not in the shops at the time. If the witnesses were honest, as I should assume them to be, they must have said one of two things: " I certified that sheet after those insertions, to which attention was called, were made. They were made by So-and-so, and I certified them and they are correct." Or they must have said: "I certified those sheets when certain items were left out, and they have been tampered with after- wards." If the latter were the true state of things, there is no con- ceivable reason why they should not have been called, or some of them. And the astonishing thing is that, both from the point of view of damages and from the point of view of imputing negligence, from beginning to end of this long case, nobody on behalf of the plaintiff has suggested what the effect of these additions would be either in total money or the items to which attention has been called. Let me take a striking instance, though it is not in this particular year. \Ve have not got Newman Street here. There are in ever}'' case three or four entries in the bottom of a page of considerable amounts, in a handwriting different to the bulk of the page. I have tried to make out in my mind what is the theory which suggests that the attention of the Auditors should have been called to this fact. Were the lines supposed to be blank? If so, why would they be left blank? If not blank, but filled up in a strange handwriting, why is no explanation given? It has made a very deep impression on my mind that not one single one of the managers of these nine shops have been called. It is only three or four years ago. I can see no reason why honest people should not have been called to say either, " These Stock Sheets are in the condition I certified," or " They have been tampered with since." On the face of these Stock Sheets themselves — I am speaking entirely of 1903 — I will endeavour to summarise for the purpose of my own judgment what I find about them. I find several different hand- writings sometimes, certainly two or three. I agree with Mr. Dicksee that frequently the figuring seems to be done in a different handwriting from what I may call the writing out of the articles. That is what you would expect. I find corrections both ways. It is quite true that the particular items to which attention has been called do, in fact, make additions in considerable amounts ; but I find corrections both ways. I find the corrections in a different handwriting, and I find writing which, even if the same— though I am not sure of that— has obviously been made at a different time. To many of these things no attention has been called at all. I know the witnesses for the plaintiff have said that there are a great many other things of the same character to which they could call attention if they liked, but I ask myself, looking at HENRY SQUIRE (CASH CHEMIST), LIM. V. BALL, BAKER 969 AND CO., AND MEAD V. SAME. these Stock Sheets, what is there to arouse suspicion? Now, in fair- ness to Mr. Dicksee, he said to me, when I took him through one, "That Stock Sheet would not have been enough of itself. But," he said, "it is the cumulative effect of all the Stock Sheets in that year 1903 which would have aroused my suspicions." I have a little difficulty in judging that. It is quite clear that j-ou are not to assume that the work must always be done by the same clerk. By taking it that Mr. Temple saw them all, you have got to come to the conclusion that, with these tens of thousands of entries, he is to carry minute entries from one page to the other so as to arouse his suspicion. And that, in the face of a certificate of a man believed to be honest, who has certified that the stock is there. Now I come to the case which has been made in addition to that upon this part of the matter — that is, the labels. For some reason or other which I cannot explain, the case has been left absolutely bald of any evidence at all. I have not even been told what would be the average amount of labels for a retail chemist's shop. I have no idea. All I have got is what I can gather from this case, that is, that the warehouse labels were put down at £4~S- At the nine shops thej^ are put down as /210. If you divide £210 by nine, it makes an average of ;(.2s^. If you divide £47$ ^Y ni^e — for the warehouse is only averaging the other shops — it makes it as nearly as possible ;^5o for each shop. I have not the slightest idea, nor can I form any conclusion, as to whether or not, if you have got ;^475 of labels — between ^^45 and ;;^5o for each shop — in the whole concern, particularly in respect of the proprietary medicines, whether ;i^25 a shop is too much for the shops. The plaintiff knows perfectly what he ought to prove — for aught I know he has tried to get evidence and cannot, though I do not speak of that — and I want to know what right he has got to ask me to come to the conclusion that it ought to be suspicious because I find ^25 worth of labels is put down for a particular shop. Then it is said that because he was told — I quote now from memory — that the £475 had been increased because the labels had been brought from the shops to the store, and all the pro- prietary articles labelled in the store, not the shop, it is said that ought to put him on inquiry as to why there were still anj' labels at the shops at all. If the state of things is to be such that an ordinary accountant ought to draw that conclusion, at least th3 Court is entitled to ask for some evidence of it. As I have said, I do not know — except from the visits which I sometimes have to pay to chemists' shops — I do not know the number of labels that would be required. I do not think they can possibly be small; Mr. Gregory would not assist me by recollections of an early novel which I hoped he had read, and all I say is that I have no means whatever of judging as to whether or r\ 970 AUDITING. not there is here sufficient evidence of negligence. Looking at it for myself — as I do not know, or it is not suggested to me, what the total effect is, as I have no evidence to show that these shops ought to have so many labels — I cannot come to the conclusion that any reason- able man, looking at those Stock Sheets, would have thought there was something suspicious so as to call the principals' attention to it in the year 1903. With regard to the year 1903, the other matter relied upon is based solely upon a statement made by Mr. Ball in the minute of 1907, that four items had been held back and not included in the list of liabilities taken over by the accountant. As I have said, I use that — and the plaintiffs are entitled to use it, so far as they can — against Mr. Ball. At the same time, what does it amount to? It is a statement that somebody, for some reason or other, has kept back four items from the 1903 Balance Sheet, and that these have not appeared until 1904. In this part of the case I must deal only with the 1903 Balance Sheet. I find, as a fact — and the evidence is all one way — that it has not been proved to me that there is a single entry in the books of the company which did come before the accountant, or in any document which must have come before the accountant, that these items ought to have been included. I find, as a fact, and, so far as they touch the point, I believe the statements made b}' the defendants' witnesses, that they did not see it. For this reason, that they have honestly ticked every entry they saw. It was opened by Sir Edward Clarke that they ticked these incriminating entries, and ought to have seen the mistakes, as they had the entries under their eye. That has been disproved : Mr. Ball, Mr. Temple, and all those who represented the defendants, swear that the green ticks are not their ticks ; and that statement has not been cross-examined to by the plaintiffs. Therefore I come to the conclusion that, when auditing the books in 1903, the defendants had no document before them which would have shown the omission of those four items. With regard to three of them, I will not stop to point out in more than one sentence the distinction which I think arises between them. With regard to the first three items — Haycroft, Ha.skins, and Shoolbred — I can see a reason why they might properly be even excluded, because they related to the fittings of the Kentish Town shop, and were part of a much larger item ; but I say again, I dp not rely upon that, because Mr. Ball has taken the view they ought to be put in. W^ith regard to the £6g 3s., it depends upon there having been some voucher or statement which Messrs. Ball's representa- tives ought to have included, and which they overlooked. W^itnesses for the plaintiffs, who had these books under their careful consideration, are not able to show any single item which ought to have called their i HENRY SQUIRE (CASH CHEMIST), LIM. V. BALL. BAKER 97 I AND CO.. AND MEAD V. SAME. attention to that. Under these circumstances, I come to the conclusion that this omission to include in the 1903 Balance Sheet the items which afterwards appeared in the 1904 Balance Sheet fails; and upon the allegation made with regard to the claim made by Mr. Mead, I find that there was no negligence on the part of Messrs. Ball, and that, in discharging their dut\- as they did discharge it, rendering accounts and reports to Mr. ^lead in the 3'ear 1903, they discharged their duty in accordance with their contract, and are rot liable to damages in the action. The case against the company rests upon a rather different state of things, but it does not involve any different considerations of law, and I do not rebate what I have said about the duty. They audited in 1904, 1905, and in 1906. and the suggestion made is that in 1904 the defend- ants were negligent in respect of the stock and negligent in not discovering the previous omissions of 1903. ^^'hat it would have mattered if thej- had then discovered it I have never been able to see ; but I will assume for this purpose that it might have had some influence upon somebody's mind if they had found out that these things ought to have been properly attributed to the earlier three months — these four items, I mean. But the main complaint is the same, that the stock had increased to ;^8,7oo, and that the Stock Sheets themselves — it being the main asset apart from the fixtures and furniture — should have shown the defendants that there was something wrong. I may as well now deal with these three years, and also with the first, in one sentence as regards one part of the case, because a certain reliance has been placed upon it by Sir Edward Carson, and, I think, rightly placed. In each one of these years — certainly in three, if not in four — the Auditors pointedly called the attention of the directors to the increase of .stock as appearing on the Balance Sheet ; and they give the explanation given them which could only have come from Mr. Reece. That it was so given is confirmed by Mr. Mead, who says that he asked Reece the question, but got the same answers. Reece told him that it was necessar)' to have more goods in order to do a larger trade, and in the earlier years I think he also mentioned that they were opening further shops. Therefore, so far as attracting the attention of the directors to the fact is concerned, the Auditors undoubtedy did it. But what passed through my mind, and what affects my mind, is this, if it did not arouse, or ought not to have aroused, the suspicions of Reece and Mead, wh)' should it have aroused the suspicion of the Auditors? At this time, as I wish to point out, you are not entitled to distinguish Reece from Mead for the purpose of duty to the company. Reece was just as much a shareholder as Mead for this purpose, and why should it be i! 972 AUDITING. supposed that it is to arouse the suspicions of the Auditors when the fact of the increase of stock and the existence of increased stock is called to the attention of the directors by the Auditors and no comment of any sort or kind is made? The reason given may be a very bad one, but it is believed. As I have already said, I am not called upon to make up my mind at what epoch in the story Mr. Reece became fraudulent— if he did become fraudulent — or how it was Kingston says that at the same time they took to inflating the stocks. All I say is I have yet to learn that if the Auditors call the attention of the directors of the company to the fact, they may not also rely upon the fact that the directors of the company, with that information before them, make no further comment and give no further instructions. Mr. Mead told us that Reece told him it was necessary to have the stock. That some- thing of the kind was said appears from some of the reasons given in the reports made by the defendants. They pointed out that the increase of stock was more than the total gross profit ; so they were investing all their profit, and they give another illustration of the extent to which the stock had been increased. But apart from the j-ear 1904, I must say I certainly should have thought that the fact that the attention was being called of Mr. Mead, who was a director, and of Mr. Reece, who was also a director, to this fact, and that neither Mr. ^lead nor Mr. Reece — certainly not Mr. Mead — thought it their duty, or fair to the Auditors, to give them any extra caution, is a circumstance not to be lost sight of when we are dealing with alleged negligence in three consecutive years ; and I find as a fact, and do it on the evidence of Mr. Mead himself, that up to September 1907 Mr. Mead had no suspicion of Mr. Reece at all. He said that he had asked him several questions and was always getting certain answers. In the light of what we now know, those answers might not have been satisfactory ; but that Mr. Mead did not suspect Reece is clear, because it is common ground that in September, or thereabouts in 1907, he asked Mr. Cornish if he had any suspicion against Kingston ; Mr. Reece's resignation was not brought about until the day after the rupture, so to speak, had taken place, when Kingston was suspended. Under these circumstances I have to answer m3'self the question. Are the Stock Sheets examined as they were in 1904 — and in all the years, I make no distinction — are the 1904 Stock Sheets such as would arouse the suspicion of a reasonable man ? Here we have got the Xewman Street document, and we have got the certificate of Mr. Reece and Mr. Kingston, and the certificates of the nine branch managers. I have done my best, not by a hurried examination, but by a most careful examination ; I have looked at those Stock Sheets with the greatest care, and I have turned them over as I think one would turn them over — I I HENRY SQUIRE (CASH CHEMIST), LIM. V. BALL, BAKER 973 AND CO.. AND MEAD V. SAME. not looking at items which are marked until one has made his mind up as to the general aspect — and I find four items pointed out as suspicious at the bottom of one of the sheets, and an item of three lines one-third of the wa}^ up. I ask myself when could these have been written. la between the attacked items there are several very peculiar items which are not attacked at all. To give an illustration, one attacked item is three dozen antexema, another is 24 dozen Scott's emulsion, 15 dozen Scott's emulsion, and 36 dozen assorted wines. I ask myself what hap- pened here? Am I to assume that these lines were left blank, and then filled up afterwards? If so, a witness ought to have come and told me so. Or am I to assume that they were written in at the dme ? If they were written in at the time, there is no inference to draw hostile to the sheets, however many different people are doing them. One man has got as far as certain items ; then he comes across a batch of Scott's emulsion or wine and puts it in. I am not ordinarily of a suspicious tempera- ment, and I have a difficulty, looking at those items, to see why that is sufficient to arouse suspicion. Putting it as fairly as I can to these witnesses, I say that on turning over those sheets you see a number of alterations, but what is to make you think that they have been tampered with b}' somebod}' ? The plaintiff says it is the number of alterations ; I am a juryman for this purpose, and all I can say is that, looking at the Stock Sheets, I should not have come to the conclusion that they had been tampered with. I am not an accountant, but I must say I do in this respect, for the reason I have given, prefer the evidence of the defendants as compared with that of the plaintiffs. It is extremely easy when you are wise after the event to pick out particular things and say that they would have indicated to you that there was something wrong about the Stock Sheets — that is the strongest that it has been put to me — calling for further inquiries. All I can say is that it does not to my mind appear to be a reasonable view. I do not under- stand, if this is so, why there should be a certificate of the shop manager in respect of each case. Either they must all have been fraudulent, or all have been hoodwinked and made to leave those places to be filled up. There is no conceivable reason why that should have been done. You may sa}' to yourself you have got accountants of respectability who come and say they would have thought it suspicious. One cannot help saying that this is evidence given after a fraud has been discovered — if it be a fraud — and again here I am in a difficult position, as I wish to point out ; because I do not know to this moment how much stock is said to have been short in the year 1904, either in amount or in quantity. I have not the least idea what the suggestion of the plaintiffs is. They have taken no pains whatever to put it before me ; all they have said is that these entries would have been enough to 974 AUDITING. have aroused suspicion. I have looked at the so-called confession of ]Mr. Kingston ; it does not enable me to come to any other conclusion than that at some time things were inflated, whether that means 1904, 1905, or 1906. There is some indication that it was later than 1904, because he speaks of a time Avhen he had to find his own money to meet pressing wants and payments, and it does not look as if it was very early in the proceedings. However, I can only say I have come to the conclusion that a reasonable man doing his duty might have well been led to the conclusion that there was nothing suspicious about those Stock Sheets. It must be remembered they are original documents ; I think this is a matter of the very gravest importance. Both Sir Edward Clarke and his witnesses agree that if this had been what I may call real fraud the simplest thing would have been to have fair copied the Stock Sheets. Then nothing w'ould have been discovered. They would have been certified in the same way. Every witness, both for the plaintiff and for the defendant, said that one expects to find corrections in original Stock Sheets. \Vhen you come, as I think Sir Edward Carson put it, to have a parcel of stuff, some of which may be in the shop, some in the back shop, some upstairs, you may have to add the thing together. I decline to find people guilty of negligence on this kind of inference unless I feel satisfied without reasonable doubt that any prudent man looking at those Stock Sheets would have come to the conclusion that they were suspicious — I use no stronger word ; I cannot think they were suspicious. Xow the omission of the accounts in 1903, with regard to those four items, is relied upon by Sir Edward Clarke as showing negligence in 1904. As to that, I must just state one fact in addition. In November 1903 the business was sold to the company for 3,000 shares fully paid up, the company to undertake to pay all the liabilities of the firm as it stood to the ^nd of August. Therefore, if thej? had really paid the mone}', it does not matter whether it ought to have been included in the 1903 Balance Sheet or not. I want to make this point clear in order that I may not be misunderstood. In Mr. Mead's action it might be of some importance, because it would to a certain extent affect the profit and loss in that year ; but in the company's action, if they had to pay those bills, it makes no difference from the point of view of damage. What are the facts? The facts are they did pay them in the twelve months ending August 1904. I think they were passed by the directors and paid by the company's cheques ; and in the accounts rendered by these defendants they put the payments in, and, of course, the receipts were in a;\other shape, not as the receipts for sales. But they put the payments in and included them, and but for the fact that Mr. Ball himself found out in the year 1907 that they HENRY SQUIRE (CASH CHEMIST), l.IM. V. BALL, BAKER 975 AND CO., AND MEAD V. SAME. ought to have been inchided in the accounts of 1903 this charge of negUgence could not have been launched at all. I believe the wit- nesses for the defence here, who say, " We were shown the payments had been made in the year and we included them in the year."' As Mr. Cornish said, " I knew at the time that the company had to pay all the debts, and therefore if it was a dona fide payment made by the directors it was not only no part of my duty, but it would have been outside my province, to say to the directors that the}^ ought not to have paid this sum in 1904." They ought to have paid it. I believe this charge was only brought in consequence of what Mr. Ball said when he made that report pointing out that there had been, as he thought, a suppression by Kingston or somebody when Mr. Cornish had been asked the question whether Kingston was honest or not. I attach no importance to the fact that Mr. Ball was appointed director. 1/ I attach no importance to the fact that Mr. Cornish was appointed secretar}', bej-ond this : that it is not suggested that Mr. Mead had any suspicion of them at that tiine. Therefore everything which is said against them rests on something which has been discovered after that. If it ought to have been discovered before, it is equally cogent assuming it to amount to a proof of negligence. I think, with one exception, 1 have covered the ground which is alleged to establish negligence. 1 find as a fact that in auditing the accounts of 1904 and 1905 there was no negligence. If 1906 had stood alone, I think that possibly the character of some of the Stock Sheets onl}' might have led one to the just observation that they were not so satisfactory ; but 1 cannot take that one Stock Sheet for one place — it is only Xewman Street — by itself. It is very carelessly made up. I have gone through it most carefull}', and I find mistakes in both directions, apparently made by somebody who wrote very badly. I am unable to sa}- that there is an}^ negligence in the year 1906. It would have had no effect on the substantial case made against these defendants; but I come to the conclusion that in none of these years was there any evidence on which I can find them guilty of negligence. With regard to the defence raised under the articles, I have some doubt. It is quite true there is a judgment of mj' brother Neville's to which I should pay the greatest respect, having regard to his experience in company matters, upon the words of this article itself ; but that was a case of directors, and there is this further observa- tion that occurs to me about it, that I am rather impressed by the ver}^ clear argument of Sir Edward Clarke that it is possible to con- strue the last part of that article 149 as not including negligence. I do not give any judgment against the defendants in respect of it : but 976 AUDITING. as it is not necessarj' to decide it I do not go into the matter further. I am not altogether satisfied that; if negligence had been proved, article 149 would have been a defence. I should have required further argu- ment before I came to that conclusion. I am sorry to have occupied so much time ; but it is due to the argument addressed to me. I am painfully conscious I have omitted to notice some of the details. I do not think I have omitted to notice any substantial head of the plaintiffs, but I come to the conclusion in both cases that the action fails. Both actions must be dismissed with costs. (AccL T.aw Reports, 2!;th February 191 1.) CORK MUTUAL BENEFIT TERMINABLE SOCIETY V. 977 ATKINS, CHIRNSIDE AND CO. SUPPLEMENT TO APPENDIX B. While this edition was in the press, one or two further legal decisions of interest have been delivered by the Courts. To bring the work as closely as possible up to date, these are included here, with short notes as to their practical bearing on the general position of the Auditor. The case of CORK MUTUAL BENEFIT TERMINABLE SOCIETY V. ATKINS, CHIRNSIDE & CO. (Decided by Mr. Justice Wright, in the Irish Court of King's Bench, on July 31st 1911.) On an Action against Auditors for Damages arising out of Alleged Negligence ; held, that failure to examine all the Pass Books of Members is not necessarily evidence oj Negligence ; and that while an Erasure might excite attention, where there were no suspicions circumstances, failure to notice one is no ground for making an Auditor liable. This action, which involved an important question as to the liabilities of Chartered Accountants acting as Auditors of companies, was brought to recover the sum of ;/?8i odd alleged to have been lost to the plaintiffs through the negligence of the defendants, a firm of Chartered Accountants, while acting as the Auditors of their accounts. JIDGMENT. The Judge, in delivering judgment, said that this was an action for the sum of ^^81 odd, which had been tried before himself without a jury at the Cork Assizes on the 26th and 27th July. It was an important action to the plaintiffs and to building societies generally, and it was an exceedingly important one to the defendants, who were a well- known firm of accountants in Cork, the partners in which were Mr. Chirnside and Mr. Olden, because the action was one for negligence of that firm in the discharge of their duty as Auditors of the plaintiff society. The plaintiff building society had been incorporated about the year 1896 ; it did not appear who had been Auditors up to the year 1903, but in or about that year the defendants were appointed to audit the accounts of the society, and he took it that they were duly appointed every year till 1908, when the matter occurred which gave rise to the present action. It appeared that the secretary of the society was a Mr. O'Connor, who in reality had the whole management in his hands. In R R R 978 AUDITING. the end of the year 1908 there were some charges against him in reference to irregularities not in any way involving dishonesty, but the society was put upon inquiry, and in September 1908, when O'Connor either resigned or was dismissed, the Auditors were directed to make a special report and to examine all the Pass Books of the members. A special examination and report was accordingly made by the defendants as Auditors, and they reported that there was a deficiency of ^^131 odd on the Cash Account — that is to say, it appeared that O'Connor, from the accounts as they appeared in the books, was in default to the extent of ^{."131, which sum was afterwards paid to the society either by O'Connor or on his behalf, whether with the idea that O'Connor might be continued on as secretary or not he, the Judge, did not know. In addition to this /.'131 the Auditors reported that there were differences between the Pass Books and the books of the society, in one or two instances the Ledger showing that there had been paid more than was credited to members in their Pass Books, but in some cases that the Pass Books showed that more money had been paid by members than was credited to their accounts in the Ledger. A list of the Pass Books which appeared to differ from the Ledger was furnished to the society by the Auditors, and in November 1908 the deficit was ascertained. O'Connor had given a guarantee, the Ocean Accident Corporation being the guaranteeing company, but this guarantee, amongst other limitations, was confined to one year. The total sum involved was about ^'167. The Ocean Accident admitted £46 and paid £40 in settlement of their liability, making ^86 altogether, which being deducted from the ^^167 left ;:^8i, the claim in this action. The action, as he had said, was one of negligence. The law applicable to the case was in reality not in dispute, but he had thought it better to reserve judgment in order to examine the authorities. He would only refer to three, which were the ones cited to him at the trial. The first was the case of Leeds Estate Company (36 Ch.D. p. 787, at page 802). Mr. Justice Stirling said as follows :— " The Auditor's duty is not to confine himself to merely verifying the arithmetical accuracy of the Balance Sheet, but to inquire into its substantial accuracy and to ascertain whether it is properly drawn up so as to contain a true and correct representation of the state of the company's affairs." The next case was the London and General Bank (1S95, 2 Ch. 683), where Lindley, L.J., says : " It is the duty of the Auditor to examine the books not merely for the purpose of ascertaining what they do show, but also for the purpose of satisfying himself that they show the true financial position, and this is quite in accordance with the decision of Stirling, J., in the Leeds Estate Company. An Auditor is not bound to do more than exercise reasonable care and skill in making his CORK MUTUAL BENEFIT TERMINABLE SOCIETY V. 979 ATKINS, CHIRNSIDE AND CO. inquiries. He is not an insurer, he does not guarantee that the books are correct or show the true position of the compan}-, he does not even guarantee that his Balance Sheet is accurate according to the books of the company. If he did he would be responsible for error on his part, even if he were himself deceived, say, by the fraudulent concealment of a book from him. He must be honest, he must not certify what he does not believe to be true, and he must take reasonable care. Where there is nothing to excite suspicion very little inquiry will be reason- ably sufficient, and I believe business men select a few cases haphazard, see they are right, and assume that others like them are correct also." The last case to be mentioned was Re Kingston Cotton Mills Coin f any (1896, 2 Ch. 279), in which Lindley, at page 284, says : — " An Auditor is not an insurer, and in the discharge of his dut}' is only bound to exercise a reasonable amount of care and skill." And Lopes, L.J., at 288, says : — " An Auditor is not bound to be a detective, or to approach his work with suspicion or with a foregone conclusion that something is wrong ; he is a watch-dog, but not a bloodhound ; he is justified in believing the tried servants of the company, he is entitled to believe they are honest and to rel}" on their representations." Now in this case the real complaint was that the Auditors did not get the Pass Books of each and every member of the company, and the plaintiffs sa}' that if this had been done a great part, at all events, of the dis- crepancies would have been discovered earlier. The rules of the society make no express reference to the production of the Pass Books, and no duty as to their production is expressly thrown on the Auditor ; but this leaves open the question as to whether non-insistence upon the production of each and every Pass Book was negligence on the part of the Auditors. The first witness for the plaintiffs, a Mr. Curtin, the present secretary of the society, seemed to be of the opinion that the Auditors ought to have got in all the Pass Books. He admitted, how- ever, that there was great difficulty in so doing and that a number had never been produced. Mr. Stapleton, an accountant, was the second witness for the plaintiffs ; his advice was of importance, because he was the Auditor of another building society in Cork, the Munster Building Society, the rules of which were produced, and included a rule specifically requiring every member to send in his Pass Book before the audit. Mr. Stapleton, in cross-examination, admitted that notwith- standing this rule there had for a long time been great difficulty in getting in the Pass Books, and that he believed that sending out notices to members informing them of how their account stood in the books of the society would be an efficient check. Now the particular items complained of divided themselves into three heads, first, seven or eight small items, being monthly subscriptions which were undoubtedly paid R R R 2 980 AUDITING. and appeared in the Pass Books, but were not credited in the Ledger. As to these, he came to the conclusion that with the exception of one, No. 698, O' Sullivan, none of these books had ever been produced to the Auditor. Then there was one case in reference to a larger amount, Mrs. Berkely, who paid £.\2 3s. od., for which she got no credit. There is no evidence whatever that her book was ever before the Auditors. It was not the Auditors' duty to get in the Pass Books ; they had to depend upon the secretary to produce them, and they examined every Pass Book that was produced. Then there were two cases, that of Mr. Woulfe and Mr. Cross, where they paid b}^ cheques. In Cross's case Mr. Cross admitted that he could not say whether his Pass Book had ever been with the society since 1904, and Mr. Woulfe said that he believed he gave his books to the secretary in 1905 and never got them back, and in his case the misfeasance relied on was in 1906, and it was clear that neither the books of Mr. Woulfe or Mr. Cross were before the Auditor at all. There was only one other case which had to be mentioned, because it was of a different class, a Mrs. Kirkby paid in £,22. 19s., and only £2 19s. was credited in the Ledger, the first " 2 " of the "22" having been erased. It was said that the Auditor ought to have seen the erasure. The erasure might have excited attention, but at the time O'Connor was under no suspicion, and it is quite impossible to hold the Auditors liable. Mr. Brew, who did the actual work, says that he did not notice the erasure, and that the account was totted with the figure standing as £2 19s. As regards the witnesses for the defendants, Mr. Peterson and Mr. McGovern, both Chartered Accountants, were examined, and in their opinion it was in no way the duty of the Auditors to examine every Pass Book, and that sending out the notices informing members of the amounts standing to their credit was a much more efficient check. Lastly, Sir Robert Gardner, who every one knew as the most eminent accountant in Dublin, stated emphatically that the defendants had really done more than their strict duty, that the examination of Pass Books was no real check unless all could be got in, which was in fact impossible. What he, the Judge, had to decide was whether the defendants had acted with reasonable care and skill. He said that he had come to the conclusion on all the facts and circumstances of the case that the Auditors had discharged the onus that rested upon them, and that they had done all that they could be reasonably expected to do, and accordingly, after full con- sideration of all the facts of the case, he gave judgment for the defendants with costs. On the application of Mr. P. D. Fleming, K.C., his Lordship gave a stay of execution till the 2nd of November. {Acct. L.R., p. 13, September 1911-) MEAD V. BALL, BAKER AND CO. 981 \NOTE. — This case is chiefly of interest as siiowing how care- fully the Courts weigh evidence in cases of this description ; that something much stronger than a suggestion that some other Auditor might have performed his duties differently, and might thereby have stumbled upon the frauds, is needful to secure judgment for the plaintiffs.] The case of MEAD v. BALL, BAKER & CO. (Decided by Cozens-Hardv, M.R., and Fletcher Moultox and Farwell, L.JJ., in the Court of Appeal on November 21st 191 1). Appeal from the decision of the Lord Chief Justice {vide page 936) ; held, that in the circumstances there was no evidence that Plaintiff advanced money on the strength of Defendants'' report, and that therefore he had no cause of action, apart from the merits of the case, which were rightly decided in the Court below. This was an appeal by the plaintiff from a decision of the Lord Chief Justice. The action was brought to recover damages from the defendants for the negligent performance of their duties as accountants. For about ten years before 1903 a Mr. Reece had carried on busi- ness as a cash chemist at various shops in London in the name of Henry Squire. Cowing to the opening of new -branches Reece required financial assistance, and at the end of 1902 he had raised _^i,2oo on mortgage from the plaintiff. Early in 1903 he wished to obtain more money, but the plaintiff was getting uneasy and was thinking of call- ing in his mortgage. It was suggested that the business should be turned into a limited company, and the plaintiff insisted that an independent firm of accountants should be omploj'ed to ascertain its value, as he was not satisfied with a report prepared by Reece's own accountants. The defendants agreed to make a report, and did so in August 1903. On that report the plaintiff went on to form the company and invested upwards of ^^3,000 therein. The plaintiff was substantially the only person who put money into the company, and he and Reece were its only directors. The defendants were appointed Auditors of the company. The company continued to carry on business until 1907, and the Auditors prepared yearly Balance Sheets during that time, but failed to discover falsifi- cation of documents, non-disclosure of liabilities, and other acts of fraud which had been going on since 1903. Finally, in August 1907, 982 AUDITING. the defendants discoveied the frauds, and in 1908 the company's busi- ness was realised, with the result that the debenture-holders received 9s. 6d. in the £, while the creditors and shareholders received nothing. The failure of the Auditors to discover the frauds subsequent to 1903 was the subject-matter of an action entitled Henry Squire, Cash Chemist, Lim. v. Ball, Baker &^ Co., which came before the Lord Chief Justice at the same time as the present action. There was no appeal from the judgment of the Lord Chief Justice in that action, dismissing the plaintiff's claim. The present appeal related only to the report made by the defendants in 1903, on the strength of which the plaintiff had invested ;^3,ooo in the company when formed. The Lord Chief Justice, in giving judgment, said that the charge of negligence was based on the state of the Stock Sheets. It was not the duty of an Auditor to take stock, but the plaintiff alleged that the Stock Sheets showed suspicious circumstances. It had been said that an Auditor was not a detective, it was his duty to exercise what was reasonable care in the circumstances. The most that could be said was that he must make a reasonable and proper investigation of accounts and Stock Sheets, and if a reasonably prudent man would have concluded on that investigation that there was something wrong, it was his duty to call his employer's attention to the fact. In making his investigation he would be entitled to rely on documents vouched by servants of the business at whose accounts he was looking, unless there was some reason for believing those servants to be dishonest. As a matter of fact the defendants in this case had not been content to rely on such documents, though they would have been entitled to do so. His Lordship went through the Stock Sheets in detail, and in conclusion said that in his view it could not be said that a reason- able man must have found something suspicious in them, and that, therefore, there must be judgment for the defendants. From this decision the plaintiff appealed. Sir Edward Clarke, K.C., in opening the appeal, said that two actions had been brought against the defendants for negligent per- formance of their duties as accountants. The first had been brought by Henry Squire, Cash Chemist, Lim., and the second by the present appellant. The two actions were closely connected, and had been heard together by the Lord Chief Justice, who had dismissed both actions. There was no appeal in the company's action, and his sub- mission in the present appeal was that the Lord Chief Justice had decided Mr. Mead's by applying the same principles that he had done in the company's case. MEAD V. BALL, BAKER AND CO. 983 In the case of the company, accountants acting as Auditors might be justified in relying on the reports of trusted officers. There was, however, no such justification for accountants when they were advising an individual who proposed to purchase the business carried on either by an individual or a company. In such a case the pur- chaser was at arm's length from the vendor and was not trusting in either the vendor or the agents of the vendor. Counsel then went through a number of items in the Stock Sheets and other matters, from which he submitted that if the defendants had exercised reasonable care they must have discovered that frauds were being perpetrated. The decision in Re Kingston Cotton Mill Company (No. 2, 1896, 2 Ch. 279) was not applicable to the facts of the present case, and as there was evidence that the plaintiff had suffered damage through the failure of the defendants to discover these frauds, he was entitled to recover damages. At the conclusion of the argument on behalf of the appellant their Lordships dismissed the appeal without calling upon the respondents. JIDGMEXT. This is an appeal by the plaintiff against a judgment of the Lord Chief Justice, who tried a very serious and important question, in which Mr. Mead sought to recover damages against the defendants, who are Auditors, for negligence resulting in damage to the plaintiff. Although I am bound to say that I think this appeal fails, and that the form of the judgment of the Lord Chief Justice was quite right, I desire, not having heard Mr. Sankey's observations as to the precise limit and extent of the duties of an Auditor towards his client in a case like this, to say that I keep an open eye as to whether those duties are or are not as certain and defined as the}' purport to be defined by the Lord Chief Justice. I only state that because I wish in my judg- ment to say that I entirely agree, as at present advised, with the limitations which the Lord Chief Justice put upon the duties of an Auditor. Xow the case, I think, may be narrowed to a very short point. Mr. Mead had had business relations with Mr. Reece, who was carrying on the business of cash chemists, a business carried on in Newman Street, with eight or nine branch shops. He did not suspect Mr. Reece, so far as appears, and he did not in the least imagine that he was guilty of fraud. Mr. Reece, who had had an advance of, first, ;^i,2oo, and then of ^^507, from Mr. Mead, was desirous of obtaining a further advance. He applied through, I gather, Mr. Steel (who was the solicitor both of Reece and Mead) to Mr. Mead for help, and Mr. 984 AUDITING Mead very prudenth' said : " I must have this matter looked into by an independent Auditor ; I want to see how matters are going on, and whether the business is properly conducted." Mr. Steel, acting for Mr. Mead, made an offer to the defendants, Messrs. Ball, would they undertake this duty at an agreed fee? The fee was agreed. No ques- tion arises as to the amount, or anything else, and undoubtedly there was a perfectly good contract for value between the plaintiff and the defendants with reference to the obligations imposed upon the defendants as Auditors in a transaction of this kind. They were furnished, amongst other things, with the account of the previous year made by Auditors employed by Mr. Reece. They also were furnished with Stock Sheets, all but one of which we have seen here, the one from Newman Street being missing, and they purported to be Stock Books for each of the branch establishments, showing in great detail items extending over hundreds, and, I might say, thousands — so many pills brought out at so much, and so many boxes at so much, and so many labels at so much, and in addition there were entries of a lump kind, occurring mostly, if not in all instances, either at the top or the bottom of the Stock Sheets, and those items were brought to a ver}' large extent to lump sums, such as " labels," the lowest value. In one case it is " Labels lowest value about ^,1^ or ;^2o," or sometimes it is ;,^io. The Stock Sheets are not altogether in one handwriting, and I assume now favourably to the plaintiff — not having heard Mr. Sankey — not deciding, but assuming for the purpose of argument that there was so much in those Stock Sheets which were under their eyes, or under the eyes of their clerk, for whose negli- gence they are responsible — I assume, without deciding, that it was negligence on their part not to have called attention to those par- ticular items, and to have asked for an explanation of them. Although it is quite clear that it is not the duty of an Auditor to take stock, one cannot say that it may not be his duty to call attention to suspicious items appearing in Stock Sheets which are put before him. But assuming all that, assuming that the negligence has been proved, what further has to be established? It surely has to be established that it was the negligence of these defendants which induced the plaintiff to lend his money as he subsequently did, or to take shares in the company, as he subsequently did, on the strength of this report. Well, in the first place, he goes into the box, and he does not say so. In the next place, is it a legitimate, I might almost say is it a neces- sary, inference that if they had done their duty and there had not been negligence the advance would not have been made? I am wholly unable to draw that inference. Again, not having heard the other side, but taking the case which has been opened to us, there is the MEAD V. BALL, BAKER AND CO. 985 item of the labels, which I am bound to say strikes me more than an}-- thing else, and what does that amount to ? It amounts to this, that there was an over-statement of the value of the stock to an amount of 3 per cent., and perhaps more or less, I care not which, but to the amount of 3 per cent, only, the stock being, according to the defend- ants, a little over ;^6,ooo, the label items being ;!f2oo. Is it at all a legitimate inference to say that an over-statement of stock to the amount of 3 per cent, was such as would have induced Mr. Mead to make this advance ? I entirely decline to draw any such inference. It seems to me that the whole thing, so far as appears, does not neces- sarily involve fraud on the part of the persons who d'd it. The mere discovery by the Auditors of these inaccuracies, which for the present purpose I assume they ought to have discovered, is something ver)' different indeed from a discovery of the scheme of fraud which is suggested on behalf of the plaintiff. I say " suggested," because there is not a particle of evidence — I use that word advisedly — of fraud in these 1903 accounts. The only suggestion is that in another action brought by a company against the same gentlemen as Auditors, the statement was made to Mr. Mead, and was, in fact, adopted by the company and treated in that action by all parties as true, that the man Kingston, four or five years after — I think in 1907 — confessed that he had inflated the accounts habitually and regularly, at any rate for a year or some j-ears before, and certainly for years after 1903. -\ confession of that kind made by Kingston, not in any way a party to this action, cannot possibly be regarded as evidence of any fraud proved in 1903. It remains thus — assuming negligence, assuming that the accounts were inaccurate, and would have been established to be inaccurate if the defendants had doiae their duty in 1903, does it follow that the plaintiff, who does not sa}' that this inaccuracy would have made any difference if he had known of it — does it follow as a neces- sar}'- consequence that it was this negligence which resulted in the loss which he sustained.-' It seems to me quite clear, given a mere inaccuracy in a report, even though it be due to negligence in the report, it by no means follows that if that inaccuracy had been corrected it would have led to a different result. Of course, if they had done their duty, and they had been bound to find the fraudulent conduct of Reece or his subordinates, different results would have followed. There is not a tittle of evidence so far as I have heard to show that Reece himself was fraudulent. It may or may not have been so, but there is no proof that Reece himself is fraudulent through- out the whole of the transaction. In my opinion, without going further into the case, we ought to hold that, however negligent they may have been, the plaintiff has not succeeded in proving that which he has 986 AUDITING. pleaded in paragraph 6 of his statement of claim, and on that ground the decision of the Lord Chief Justice was correct, and this appeal must be dismissed with costs. Lord Justice Fletcher Moulton : I am of the same opinion. In this case the plaintiff has to prove negligence on the part of the defendants, and also that the negligence caused him damage. First of all, let us consider what the negligence alleged is. The negligence, put in a concrete form, is that the defendants ought to have discovered that the stock was over-valued ; in other words, that fictitious items of stock had gone into the Stock Sheets and been carried into the totals, and also that certain liabilities which actualh' existed were suppressed, and that the defendants ought by a proper examination, such as an accountant ought to make, to have discovered those facts. Now, first of all, let me take the case of the inflation of the stock. It relates partly to the stock of labels and partly to other things, but there is not one particle of evidence that everything which appears in the Stock Sheets was not actually at the branches or at Newman Street at the time. The view for my part which one is inclined to take, knowing that some years after the confidential servant of the company, who was then the servant of Mr. Reece, and who had been employed during all these years in the business, gave a written con- fession that he had during the whole of the time been guilty of fraud in the way of making fictitious entries of stock, and in other ways, colours one's mind at this time, and makes it very necessary that one should guard oneself against accepting things which, if they were true, ought to have been proved by evidence against the defendants in this case. There is no evidence whatever that there was an}' fraud at the time, and therefore we cannot assume that these items which are objected to in the Stock Sheets do not represent goods actually in existence. It is perfectly true, if they were commencing an investi- gation, the fact that they are jnade in the handwriting which was probably the handwriting of the superior confidential clerk, Mr. Kingston, is a thing which once having started suspicion one would regard as a matter of gravity ; but to a person who examines these accounts without the slightest idea that there is any possible fraud, the fact that an item was in the handwriting of Mr. Kingston would piobably make him justly pass it with less inquiry than if it had been in the handwriting of a subordinate clerk. So far as the items other than labels, there is no evidence whatever that there was any negligence in connection with them. Now I take the labels. This is a case in which, I think, had suspicion once been aroused, it might very likely have led to a second investi- MEAD V. BALL. BAKER AND CO. 987 gation which would h/ive discovered the fraud if there was any fraud then, but I find that there is nothing in the evidence before the Court which proves that these labels were not there except one thing, and that is that the amount for labels, the value of the stock of labels, is, accoiding to the evidence of the experts, very much higher than one would expect in such a business as this. If that was so, it was certainly not a thing that an Auditor or an accountant could be expected to know ; how much a portion of the stock of a business like this — things that are called cartoons and labels — should be I certainly do not know, and I cannot expect that they would know. But if the magnitude of the item is that which should have excited suspicion, the client was certainly told of it, because he was told that included in the stock at the warehouse are labels and cartoons to the amount of £4j^, and there is ;,f335 shown in the Balance Sheet of the 2nd August 1902. If it ought to have alarmed the defendants that the figure was so large, I can conceive no reason wh}' it should not alarm the plaintiff just as much. I cannot impute in law a higher duty of knowledge of details of that kind of a retail chemist's business to one than I can to the other. But, apart from that, it is said, and I confess it made a great deal of impression on my mind at the time, that you are told that the labels had been removed to Xewman Street and tal;en away from the branches, and therefore it was a suspicious circumstance that there were still considerable stocks of labels and cartoons in the Stock Sheets at the branches. But when you come to read the paragraph on which this is based, it certainly fails to bear that inference. It says that the increase in the figures ot 3rd August last is accounted for by the labels that had previously been included in the stock at branches having been transferred to the warehouse from the 3rd August last, and all medicines made for the firm are now made up at the warehouse and are labelled there instead of at the branches as hitherto. ^^ hen you consider what is prac- ticable in a business of this kind, it is obvious that that can only refer to proprietary medicines, and therefore there would still be labels and cartoons and other kinds of medicines at the branches. _^'2io — that is, an average of /."30 for each branch — appears in the Stock Sheets. I cannot say that it was the dutj' of the defendants to know that that was too large an amount, nor do I know of any evi- dence that I can accept that there were not cartoons and labels to that amount at these very branches, and therefore I cannot say that, even if they were to have asked questions about this, they would not have found that these Stock Sheets were accurate. It is for the plain- tiff to prove his case, and certainly if those Stock Sheets were inaccurate, and it is not shown that they were, inquir}' would not have led to any alteration of the report at all. 988 AUDITING. Now, passing from that, what would the consequences be of the neghgence with regard to those suppressed Uabihties ? It is admitted and proved by the plaintiff's witnesses that down to the date at which they commenced their audit there is not one single entry in the books which would have shown the existence of those suppressed liabilities. Let me take one. Large repairs put down to one shop during the year, and the bill has been run up with a firm who dealt in these things to the extent of ^^279. No reference whatever was made to that in the account. It was not paid by August 3rd. I confess for myself I cannot see how the defendants could have known those repairs had been done or that there was any outstanding account of the kind. There is no entrj'^ in the books. The witnesses of the plaintiff admit that unless the defendants had Letter Books put in their hands they could not discover that. One or two smaller liabili- ties which are said to be suppressed, amounting to y^'60 in all, could have been found out by subsequent entries in the Cash Books, if those entries were made at the time when they were examining the books. There is no evidence that they were made at the time when they were auditing the books, and therefore I really think the case with regard to negligence as to the suppression of liabilities breaks down ; the plaintiff has not proved it, and has not brought it home. I assume, therefore, that, supposing the defendants had exercised a more suspicious caution, they would have found some of these errors, I cannot see anything which would have made them take the view of anything but mistakes. To a certain extent, the figures in the final report would have been altered, but, taking the only one as to which it seems to me there is any chance of holding the plaintiff's case proved (that is to say, the labels), it would have been something equal to or less than ^^210 — £210 less than the actual amount of labels that were at these various branches. You generally find that there are some inaccuracies, and, in fact, in this case, on a Trial Balance Sheet, it was found that there was sotnething like £11 out, showing that there had been mistakes in the books ; but if the figures had been corrected to that extent, can we, as a matter of law, when the plaintiff does not give evidence to that effect, conclude that that made the difference between his advancing the money and not advancing the money? I am perfectly satisfied that the burden is on the plaintiff to show that the consequences of the negligence of the defendants were that the report was so seriously altered — so seriously incorrect — that it would have made the difference between advancing the money and not advancing the money. I can see nothing which would justify us in drawing that conclusion as a matter of law, which is a conclusion of fact really, for saying that the possible correction which would have MEAD V. BALL, BAKER AND CO. 989 been made by what I have called a suspicious caution would have altered the report to such an extent that we would say that the loss the plaintiff has suffered was in consequence of the negligence of the defendants. For these reasons I think that the plaintiff has failed to prove his case, ^^■hat I think he believed he had proved was this: that the defendants ought to have discovered that there were fraudulent altera- tions in the books. In the first place, it seems to me that with regard to the labels he has not proved that there were any false entries at all. With regard to the suppressed liabilities, I do not think that, with the exception of that £60^ he has proved that there was any negligence whatever in not discovering the liabilities, but I am perfectly certain that there is no evidence to support the theory that the omission of two liabilities, amounting together to £62, ought to have made him suspect that there was fraud at work. I have not the slightest doubt that, unless we were to hold that he was bound to report that fraud was at work, nothing is proved to have resulted from any even hypo- thetical negligence of the defendants which we ought to consider would have prevented them going on wi^h the scheme and advancing the money. For these reasons I think the appeal must be dismissed. Lord Justice Farwell : I am of the same opinion. We have not heard Mr. Sanke}^, and therefore in Avhat I say I merely assume, of course without saying that it is the fact, that, as far as regards the examination of the Stock Account, there was something to put the Auditors on inquiry. Certainly when I examined them myself, they did appear to me to have some very odd looking entries. I will assume, therefore, that they ought to have made some inquiry, but then, as the Lord Chief Justice saj^s, it is to my mind perfectly astonishing that in this case the plaintiff has not made the slightest effort to show that in fact any single item of stock was not at the shops at that time. What is the result? If they are put on inquiry, the plaintiff has next to show, if they had made proper inquiries, something would have resulted which would have affected their report. He stopped short of that, and has failed to do it altogether. Certainly, with regard to all the items that we have heard of, I can find nothing to show that there was anything actually wrong in the accounts which we have seen, or in the report which was made ultimately by the Auditors. Then, as regards the liabilities which are said to have been sup- pressed, the Lord Chief Justice finds, as a tact, " it has not been proved to me that there is a single entry in the books of the company which did come before the accountants, or any document that must have come before the accountants, which showed that those items had 99° AUDITIXG. been included. I find as a fact, and I believe the statements so far as they touch this point of the defendants' witnesses, that the}^ did not see the entries." Looking at the accounts for myself, and judging as well as I can, it seems to me to be perfectly possible, and how the Auditors could be held liable for not having discovered something from entries not existing at the time they examined the accounts, I fail to see. The case limps up to that point, but it breaks down entirely when you come to this, that the plaintiff went into the box and did not say that he had, in reliance on the report, made advances which he would not have made otherwise, and it appears to me for a very excellent reason, because he could not have justified it by giving an}" reason. If he had been cross-examined, what possible grounds cculd he have suggested for being deterred by anything that the Auditors did or failed to do to prevent his lending the money? The real truth of the matter is that it all came out of the confession by Kingston, which, of course, is not evidence at all in this action as against this firm. ; it has nothing to do with them. A man years afterwards writes a confession to the company of misdeeds which he says he commntted in the matter of the accounts of the company, and also before the company's existence. Well, it may or may not have been true ; I do not know. But, at any rate, there is no evidence against the defendant firm, and I have very little doubt that Mr. Mead would have had to admit, in cross-examination, that it was by reason of that fraud, which he had got into his mind had been committed, that something or other, if the}- had examined further, would have been discovered b\' the Auditors. I can only say that it is a ground which has not in any way been proved, and which ought not to be regarded by the Court as having any bearing on the subject. I agree with what mj- brothers have said on the details, and I will not go through them again. I agree the appeal should be dismissed. Mr. Sankey : The appeal will be dismissed with costs, nw Lord ? The Master of the Rolls : Yes. {Acci. L.R., p. 23) December 2 191 1.) [NOTE. — This ca.se seems to be chiefly remarkable for the apparent reluctance of their Lordships to deal with it on its merits, and the undue weight they seem to ha\-e attached to a preliminary objection as to what the plaintiff did. or did not. say in his evidence in chief — which, one would imagine, could easily have been cleared up by calling further e\idence. Apart from that, it follows much the same lines as the decision of the ' CUFF V. LONDON AND COUNTY LAND AND BUILDING 99 1 COMPANY, LIM. Lord Chief Justice, and is chiefly of interest because it seems directly opposed to the decision of the Irish Court of Appeal in Itisli Woollen Comfany, Lim. v. Tyson and Others (page '^^5)' so far as both relate to the omission of liabilities from the accounts. On the subject of Stock Sheets, the effect of the decision appears to be : (i) That the Auditor is entitled to rely on the certificate of some trusted ofiicial, in the absence of suspicious circumstances ; (2) that numerous alterations in the Stock Sheets are not -prima facie matter for suspicion ; (3) that, assuming there are inaccuracies which ha\"e negligently been overlooked, the onus is on the plaintiff to show that the aggregate amount of such inaccuracies is so great that it would have made all the difference between his advancing the money and not advancing the money which he claims to have lost.] The case of CUFF v. LONDON AND COUNTY LAND AND BUILDING COMPANY, LIM. (Decided by Mr. Justice Eve, in the Chancer}' Division, on 19th and 23rd January 1912.) Held that an Auditor^ s Statutory Right to Inspection of Books, &^c., of a Comfany is indefeasible, and. may be enforced by a Mandatory Order. This was a motion as against the compan}' and the directors, that they and each of them should give the plaintiff access at all times to the books and accounts of the company and all information as might be necessary for the performance of piaintiff's duty as Auditor to the company. Alternatively it was asked that defendants might be restrained from preventing him performing his duty as Auditor. Mr. Cuff, with Mr. Hind, said Mr. P. O. Lawrence, K.C., counsel for the plaintiff, were the appointed Auditors of the company, and defendants were the directors. The plaintiff's term of office had not expired. The property consisted of lands, and the way the accounts were audited had been the examining of the receipts on behalf of the company by the secretary, and seeing that the amounts had been paid into the bank. They had always reported arrears of rents not received by the secretary, but they had not looked at the counterfoils of the receipt book. Nobody had any suspicion of any fraud, but the secretary had an operation and died, and then investigation into the affairs of 992 AUDITING. the company shewed that the secretar}- had received some ^2,500 which he had not accounted for. The directors now said they were going to bring an action against the Auditors for negligence, and they had declined to give them access to the books. Plaintiff and his colleague had, therefore, been compelled to come to the Courts. When the time came plaintiff would say that the directors were to blame, but that was another matter. He submitted the motion was an undefended one, as plaintiff was the Auditor of the company till the next annual meeting. Mr. Core-Browne, K.C., for the directors, said the}- believed they had a right of action against the Auditors for negligence, and in their opinion the Auditors were not fit and proper persons to act as Auditors and have access to the books and accounts. As they intended to bring an action, they did not think it was advisable to allow plaintiffs to go to the books before "discovery"' was given. The company proposed to put to the test of an action whether the Auditors were responsible in the matter. He said plaintiff had been grossly negligent in omitting to see whether the money had been paid or not by omitting to examine the vouchers. JUDGMENT. His Lordship, in giving judgment, said the plaintiff, Mr. Cuff, and his colleague were appointed Auditors of the defendant company on March 30 191 1, at the annual general meeting of the company. They had audited the books of the company for some years previously to that date. After the discovery of the dishonesty of the late secretar}' the directors alleged that this dishonesty was facilitated and was largely due to the neglect and the ineffectual character of the audit made of the accounts by the plaintiffs, and last July they gave notice that proceedings would be instituted against the Auditors for the loss sustained by the company in consequence of their alleged negligence. The directors suggested that the Auditors should resign their office, and had instructed a well-known firm of Chartered Accountants to investigate the books of the company. Plaintiffs repudiated the suggestion, denied that they were under any liability to the company, and refused to resign their office. The defendants also refused to allow the plaintiffs to have access to the books, and by the present action the plaintiffs asked for a declaration in accordance with their claim, and moved for an order giving them access to the books and all information to which, as Auditors, they claimed to be entitled. Objection had been taken to such relief being granted on an interlocutory motion; but having regard to the fact that the present was the time of year when the accounts were prepared, and that the matter arose on a point of law. CUFF V. LONDON AND COUNTY LAND AND BUILDING 993 COMPANY, LIM. he thought that objection was untenable. The duties of Auditors were to ascertain whether the statements in the Balance Sheet were true, and were correctlj'' entered from the books, and also whether they showed a true view of the affairs of the company. But no one would say that was the whole of the Auditors' duty, and the Court of Appeal had said that they were bound to ascertain whether the books them- selves showed the company's true position, and such investigation must range over vouchers, invoices, and other things, constituting the matters out of which the entries originated. It was not necessary for him to consider whether the Act empowered the company to remove the Auditors from their position during the year of office, as the Auditors had declined to resign, and the company had taken no steps to remove them. The Auditors were bound to exercise the statutory duties for which they were appointed. In his opinion the charges of incompetency and negligence formed no sufficient answer to the claim made to exercise those duties. As to the objection that the audit would allow the plaintiffs to see entries and other matters which would help them in their defence to an action, that was matter which must come out on discovery. He must hold that the motion was well founded, and that he ought to make a mandatory order in the terms of the motion. Mr. Gore-Browne, K.C. (for the defendant company), asked that the order might be stayed for seven days, in order to allow the directors to consider whether they should go further. His Lordship assented. {AccL L.R., p. 9, Januarj' 1912.) THE SAME CASE. (Decided by Farwell and Kennedy, L.JJ., in the Court of Appeal, on 5th February 1912.) Held that when Auditors have been Refused Access to the Books of a Company on the ground of Alleged Negligence, the Court will not interfere by granting a Mandatory htjufiction. This was an appeal by the defendants from the decision of Mr. Justice Eve on a motion by the plaintiffs, as Auditors of the defendant company, for an order giving them access to the books of the compan}'' and such information as might be necessary for the performance of their duties as Auditors. S S S ..- 994 AUDITING. In March 1910 the company, which carried on business as owners of land and buildings, appointed the plaintiffs Auditors, to hold office until the next annual general meeting, they having filled the office for many years previously. In June 191 1 the secretary of the company died, and it was then found that he had -defrauded the company of a considerable sum representing rents treated by him as being in arrear. The directors alleged that the fraud of their servant was largely due to the negligent character of the Auditors' investigation of the books, and in July last they intimated to the plaintiffs that proceedings would be instituted against them for negligence, which proceedings were delayed only until the actual loss was ascertained. The directors also suggested that the plaintiffs should resign. The plaintiffs denied liability and refused to resign, and further claimed to exercise their statutory right of access to the books. The directors refused to recognise this claim, and the plaintiffs brought this action for a declaration in accordance with such claim, and moved at once by way of an interlocutory application for an order giving them access to the books. Mr. Justice Eve granted a mandator}- injunction in the terms of the notice of motion, but allowed a stay in view of an appeal in the event of the defendants giving notice of appeal within seven days. Subsequently the directors issued a notice to the shareholders expediting the general annual meeting of the company, which in the ordinary course would be held in March. By this notice the meeting was to be held on the 8th February 1912. JUDGMENT. The Court allowed the appeal. Lord Justice Farwell said that in his opinion the order of Mr. Justice Eve could not stand. This w^as an interlocutory application of an unusual character. The plaintiffs were the Auditors of a public compan}', and they were charged by the directors, by way of suggestion, with having been guilty of negligence in not discovering that the late secretary of the company had been defrauding the shareholders through failure to inspect the counterfoils of a book of receipts for rent. This was only a suggestion on the part of the directors, but the fact that the counter- foils had not been inspected by the Auditors was not disputed. The directors told the Auditors that their further services were not required, and that they were not to come an}^ more to act as Auditors. The Auditors now claimed to be entitled to have access to the books of the company for the purpose of auditing the accounts. It looked frimd facie as if they were attempting to obtain discovery to help them in the CUFF V. LONDON AND COUNTY LAND AND BUILDING 995 COMPANY, LIM. action for negligence which the directors were threatening to bring against them. The argument put forward on the part of the plaintiffs went to this extent, that an Auditor of a company, even if he were a convicted felon, had a statutory right to have access to the books of the company of which he could not be deprived. Even if that were so, it was one thing to affirm such a statutory right and it was another thing to say that the Court would grant a mandatory injunction to give effect to such a right. He thought that the usual practice of the Court when such a case arose was to direct that a general meeting of the shareholders should be held in order that their wishes might be ascertained. If the shareholders expressed the wish that a particular person should not act as auditor, the Court certainly would not force that person upon them. Section 112 of the Companies Act, 1908, conferred the power of appointing an Auditor or Auditors on the company. An Auditor so appointed had a frimd facie right to rely on such appointment, and if he were discharged without cause the remedy of bringing an action for wrongful dismissal was open to him. But to sa}' that he could force his services on a company which did not wish for them appeared to be extravagant. They now knew, though the learned Judge when he took off the stay did not know, that a general meeting of this company was going to be held next Thursday. He did not see any real difficulty with regard to Section 113 of the Companies Act. That section said that every Auditor of a company should have a right of access at all times to the books and accounts and vouchers of the company. But if an Auditor were excluded vi et armis from the offices of the company, he could not be blamed for not performing a duty which he was manifestly unable to perform. At any rate there seemed to him to be no reason for interfering in this case in a summary manner, or for making an order which appeared to be asked not in the interests of the company, but in the interests of the plaintiffs themselves. The appeal must be allowed. Lord Justice Kennedy concurred. [Acct. L.R., p. 13, February 1912.) \]SIOTE. — The contrast between the two decisions herein is particularly interesting. The mere layman has, perhaps, some excuse for being puzzled, as none of the findings of Mr. Justice Eve are answered, still less refuted. The explanation probably is that a mandatory injunction is not usually granted unless the merits of the case are overwhelmingly strong. No one could be seriously prejudiced in this case by the slight delay, pending the holding of the general meeting.] s s s 2 APPENDIX C. The following extract from the translation of Sir Walter of Henley^ " Tretyce off Husbandry " (a maimscrift work of the thirteenth century, recently printed by the Royal Historical Society) is of considerable interest, as showing the remarkable similarity of the duties of the Auditor of the f resent day with those of the Auditor of seven hundred years ago : — " Buy and sell in season through the inspection of a true man or two who can witness the business, for often it happens that those who render accounts increase the purchases and diminish the sales. Have an inspection of account, or cause it to be made by someone in whom you can trust, once a year, and final account at the end of the year. View of Account is made to know the state of things, as well as the issues, receipts, sales, purchases, and expenses, and for raising money. If there is any (money), let it be raised and taken from the hands of the servants. For it often happens that servants by themselves, or others, make merchandise with their lord's money to their own profit ; and if arrears appear in the final account, let them be speedily raised, for often servants are debtors themselves, and make others debtors whom they ought not — and this they do to conceal their disloyalty. Those who have the goods of others in their keeping ought to keep well four things : to love their lord and respect him ; as to making profit, they ought to look on the business as their own ; as to outlays, they ought to think that the business is another's. But there are few servants who keep these four things altogether, as many take, right and left, where they judge that their dis- loyalty will not be perceived. Look into your affairs often, and cause them to be reviewed, for those who serve you will thereby avoid the more to do wrong, and will take pains to do better. APPENDIX C. 997 " In the first place, he who renders account ought to swear that he will render a lawful account and faithfully account for what he has received of the goods of his lord, and that he will put nothing in this roll sa\e what he has to his knowledge spent lawfully, and to his lord's profit. And the clerk shall swear that he has lawfully entered in his roll what he understands his master has received of the lord's goods, and has entered nothing in the roll but what he understands may be to the profit of the lord. And then, if he has rendered account before, see how it compares ; and if he is found in arrears of money, corn, or stock, put the whole in a stated money valuation, and charge it at the commencement of his roll, also charge it with receipts of rents and many other things. " At the end of the year, when all the accounts shall have been rendered of the lands, the issues, and all expenses of the manor, take to yourself all the rolls, and by one or two of the most intimate and faithful men you have, make very careful com- parison with the rolls of the accounts rendered, and of the rolls of the estimate of corn and stock, and according as they agree you shall see the industry or negligence of your servants and bailifl"s. " The lord of the manor ought to command and ordain that the accounts be heard every year, not in one place but on all the manors, for so can one quickly know everything, and under- stand the profit and loss. The lord ought to command the Auditors on the manors to hear the plaints and wrongs of every- body who complains of the steward or others, that full justice be done, and that the Auditors do right at their peril. " The Auditors ought to be faithful and prudent, knowing their business, and all the points and articles of the account in rents, outlays, and returns of stock. And the accounts ought to be heard at each manor, to know the profit and loss, and then can the Auditors take inquest of the doings which are doubtful, and hear the plaints of each plaintil^' and make the fines. The steward ought to be joined with the Auditors, not as head or 998 AUDITING. companion of the account, but as sub-ordinate, for he must answer to the Auditors on the account for his doings, just as another. It is not necessary so to speak to the Auditors about making audits, for they ought to be so prudent, and so faithful, and so knowing in their business, that they have no need of others' teaching about things connected with the accounts." ? APPENDIX D. DEPRECIATION TABLES. The following Tables, which have been expressly compiled for this work, are designed to show the gross amount to be debited to Revenue annually in order to write off the requisite proportion of a lease costing ;£'ioo, having any number of jears unexpired. It is contemplated that .each year a corresponding entry will be made to the debit of Lease Account, and to the credit of Revenue Account, in respect of interest (at the rate stated at the head of the column) upon the balance standing to the debit of the Lease Account at the commencement of the year. For example, if a lease having 30 years unexpired is purchased for ;^ioo ; then, if it is contemplated to credit Revenue Account at the rate of 5 per cent, per annum upon the reducing balance standing to the debit of the Lease Account, it will be necessary to credit that account, and debit Depreciation Account, with jPfi los. id. per annum. On the other hand, if the rate of interest lie taken at the rate of 4 per cent., then the depreciation will be ;^5 15s. 8(1. The Table has been worked out to the nearest penny in each case ; but, where the figures given have to be multiplied by any considerable number, it is desirable that a slight addition should be made, to compensate for the absence of fractions in the Table. In any event, it is further desirable that some substantial provision should be made to co\-er the cost of dilapidations at the end of the term. lOOO AUDITING. No. of years unexpired 4 per cent. 5 per cent. 6 per cent. I s d i s d i s d 1 104 105 106 2 53 5 53 15 7 54 10 10 3 36 9 36 14 5 37 8 1 4 27 5 5 28 4 28 17 2 5 22 8 11 23 1 11 23 14 10 6 19 1 6 19 14 20 6 9 7 16 13 3 17 5 8 17 18 4 8 14 17 1 15 9 5 16 2 1 9 13 9 14 1 4 14 14 1 10 12 6 7 12 18 11 13 11 9 11 11 8 2 12 9 12 13 7 12 10 13 11 5 8 11 18 7 13 10 2 10 2 8 11 5 11 14 9 9 5 10 2 10 15 2 16 8 19 10 9 12 8 10 5 11 16 8 11 8 9 4 6 9 17 11 17 8 4 4 8 17 5 9 10 10 18 7 18 8 11 1 9 4 8 19 7 12 3 8 5 6 8 19 2 20 7 7 2 8 6 8 14 4 21 7 2 7 7 16 8 10 22 6 18 6 7 11 11 8 6 1 28 6 14 7 7 8 3 8 2 7 24 6 11 2 7 4 11 7 19 5 25 6 8 7 1 11 7 16 6 26 6 5 1 6 19 1 7 13 10 27 6 2 5 6 16 7 7 11 5 28 6 1 6 14 3 7 9 2 29 5 17 9 6 12 1 7 7 2 SO 5 15 8 6 10 1 7 5 4 31 5 13 8 6 8 3 7 3 7 32 5 11 10 6 6 7 7 3 33 5 10 2 6 5 7 8 34 5 8 8 6 3 6 6 19 3 35 6 7 2 6 2 2 6 18 36 5 5 9 6 10 6 16 9 37 5 4 6 5 19 8 6 15 8 38 5 3 3 5 18 7 6 14 9 39 5 2 2 5 17 6 6 13 10 40 5 11 5 16 7 6 12 11 41 5 1 5 15 8 6 12 1 42 4 19 2 5 14 9 6 11 4 43 4 18 3 5 13 11 6 10 8 44 4 17 4 5 13 2 6 10 45 4 16 6 5 12 6 6 9 5 46 4 15 9 5 11 10 6 8 10 47 4 15 5 11 3 6 8 3 48 4 14 4 5 10 8 6 7 9 49 4 13 8 5 10 1 6 7 4 50 4 13 1 5 9 7 6 6 11 DEPRECIATION TABLES. lOOI '4 No. of years unexpired 4 per cent. 5 per cent. 6 per cent. I s d £ s d L s d 51 4 12 6 5 9 1 6 6 6 52 4 11 11 5 8 7 6 6 1 53 4 11 4 5 8 2 6 5 9 54 4 10 10 5 7 9 6 5 5 55 4 10 5 5 7 4 6 5 1 56 4 10 5 6 11 6 4 9 57 4 9 7 5 6 7 6 4 6 58 4 9 2 5 6 3 6 4 3 59 4 8 9 5 5 11 6 4 60 4 >S 4 5 5 7 6 3 9 61 4 8 5 5 4 6 3 6 62- 4 7 8 5 5 1 6 3 4 63 4 7 4 5 4 10 6 3 2 64 4 7 1 5 4 7 6 3 65 4 6 10 5 4 4 6 2 10 66 4 6 6 5 4 1 6 2 8 67 4 6 8 5 3 11 6 2 6 68 4 6 5 3 9 6 2 4 69 4 5 9 5 3 7 6 2 2 70 4 5 G 5 3 5 6 2 1 71 4 5 3 5 3 3 6 1 11 72 4 5 5 3 1 G 1 10 73 4 4 9 5 2 11 6 19 74 4 4 7 5 2 10 G 1 8 75 4 4 5 5 2 9 6 17 80 4 3 8 5 2 1 6 12 85 4 2 11 5 17 6 10 90 4 2 5 5 13 6 7 95 4 2 5 10 6 5 100 4 1 7 5 9 tt 4 1002 AUDITING. ^ U c (U u H Z CL, ^ > O o i-H u Jh < a w C/3 tn <| (U w t-c at J o a\ nj CI -lo I o a» I n^ ri vo -/> U) c>o CTi o o> ^+J (-1 -t v8 o o o o VJ o o u u a « 0) ifl Q CQ >^ 03 ■ 'a, a n c 3 ^*-< O o o tn < o '/I (U (A (U B o o H c . o .73 cfl 4) c D a) Qffl CQ O o c 3 O u u < S S * .2 o o u S c 3° o a O (U 13 J3 0/ Q mo Q Q -0 o o o ,y, O O o o o o ^g"" u-1 o " C; -0 o (/) o o^ Ol m o a. CO t: CO o :/D y5 O O^ o\ o> " o r , CI CO VO ^^VO Jti -500 ^J f'l PI UI o o ^ ri '-*J c eg o^ o ^ ^ •H M t:) IN. CO av "S55 ^Q •a < CO o> « *— 1 Q e ng P S " o ^ H - it! O ■5 c gg ■rtB INDiEX. Abatements of Income Tax, 400, 403 Accident Insuraiice Accounts, Audit of, 106 Acts of Parliament {Vide Appendix " A ") Adders, Mechanical, 23 Additions, Points on checking, 16 Adjustment Accounts, 50 Agents, Accounts of, 62 Agreements, Hire-purchase, Treatment of, 213 Alterations, Fraudulent, during Audit, 13, 29 Amateur Auditors, 304 Appointment of Auditor to Companj^, 327, 462 Apportionment, 107, 157 Architects' Accounts, Audit of, iS6 Articles of Association to be considered, 38 Assessable Profits, 398 Assessment, Modification of, 405 Assets, Fixed, Valuation of, 196 ,, Floating, Valuation of, 197 ., Prmciples of \^aluation of, 190 ,, Responsibility for Valuation of, 19S ,, \'erification of existence of, 199 ,, ,, ,, outstanding, 210 Association, ^Vrticles of, to be considered, 38 ,, Memorandum of, to be considered, 38 -Vulit, Advantages of an, 10 ,, Clerks, 2, 312 ,, Note Rooks, i , (> ,, Object of, 7 ,, of Accident and other Insurance Accounts, 106 ,, Accounts of Charities, 162 ,, Architects' Accounts, 1S6 ,, Bank Accounts, 94 ,, Brewery Accounts, 76 ,, iirickmakers' Accounts, 90 ,, Building Society Accounts, 173 „ Chuich Accounts, 172 ,, Club Accounts, So „ College Accounts, 172 ,, Colliery Accounts, 88 ,, Conunercial Accounts, 71 „ Companies' Accounts, 34, 36 I004 INDEX. Audit ol Contractors' Accounts, 75 „ Co-operative Societies' Accounts, 182 „ ( 'ost Book Mines, go ,, Dividend payments, 36 ,, Electric Eight Accounts, 119 „ Executors' Accounts, 155 ,, Finance (Companies' Accounts, no ,, Fire Insurance Accounts, 102 * ,, Friendly Society Accounts, 176 ,, Gas and Water Companies' Accounts, iiS ,, ,, Companies' Accounts, 112 ,, Hotel Accounts, 79 ,, Interest payments, 36 ,, Life Insurance Accounts, 105 ,, Local Authorities' Accounts, 135 ,, Manufacturing Traders' Accounts, 72 J, Medical Men's Accounts, iSS ,, Merchants' Accounts, 71 ,j ]\Iining Accounts, 88, 90, 92 ,, Motor Cab Accounts, 132 ,, Municipal Trading Departments, 142 ,, Newspaper Accounts, 87 „ Omnibus Accounts, 131 ,, Public House Accounts, So ,, Publishers' Accounts, 84 ,, Railway Companies' Accounts, 120 „ Kent Accounts, 48 ,, Retailers' Accounts, 72 ,, Savings Banks, 176 ,, School Accounts, 172 ,, Share Capital Accounts, 34, 36 ,, Shipping Accounts, 133 ,, Solicitors' Accounts, 183 ,, Stockbrokers' Accounts, 185 ,, Theatre Accounts, 82 .,, Tramway Accounts, 125 ,, Trust and Investment Coni|)anies' Accounts, 107 ,, Trustees' Accounts, 155 ,, Warehousemen's Accounts, 71 ,, Water Companies' Accounts, 117 ,, I'ro foniid. Instructions as to preparation for, 3, 68, " " )j for, 3 * ,, Scope of, 7 ,, The late Mr. David Cliadwick's pro forma Instruc- 4 tions for, 3 • INDEX. 1005 Auditing by Tests, y Auditor, Liability ul, for DefHlcations of J';niployees, 200, 343. 35°. 352 „ Libel, 350 ,, Mil behalf of (Jreditors, I'osition of, 316 ,, Responsibility of, for Errors, 351 ,, to a Company, Appointment of, 462 ,, ,, Firm, Position of, 314 ,, ,, Limited Partnership, 31b ,, „ an Individual, Position of, 313 „ under the Companies Acts, Position of, 317, 331 Auditors, Amateur, 304 ,, and Secret Reserves, 39 ,, Appointment of, 327, 331, 333 „ Civil Liability of, 335, 354 ,, Criminal Liability of, 351 ,, Dual Appointments of, 370 „ Duties of, 12, 39, 313 „ Liabilities of, 335, 350, 351, 354 ,, Limits to liability of, 368 ,, Official, 309 ,, . Proceedings against, by Misfeasance Summons, 33^> 340. 357 •,, Professional, 307 ,, Qualifications of, 310 „ Re-appointment of, 329, 331 ,, Remuneration of, 328 „ Rights of, 333 ,,' under the Companies Act, 1908, Counsel's opinion on position of, 323, 326 Auditors' Certification, Extent of, 319, 335 „ Reports, 318, 319 Audits, Continuous, 12 ,, (.)rganisation of, i Partial, 319 ,, Periodical, 13 Authorised Trustee Investments, List of chief, 158, 159 Had and Doubtful Debts, Provision for, 235 ,, ,, Treatment of, 59 Balance Sheet, Auditor's duties in relation to, 17 ,, Form of, 263-268 ,, of (Jas and Water Company, Pro jormd, 281, 282 ,, Fro forma, of Manufacturing Company, 283 „ Fro forma, of Trading Firm, 284 I006 INDEX. Balancing b}' Check Figures, 33 ,, Mechanical Adders, 33 ,, Tabulation of Ledgers, 32 ,, Importance of Exact, 30 ,, Localising Errors in, 31-49 ,, Methods of, 30 ,, of }}i)oks by Auditiirs, 30 ,, Sectional, 49, 65 ,, Sir J. G. Cragg's system of sectional, 31 Bank Accounts, Audit of, 94 ,, ,, Vouching, 25 ,, Audits, Report of Conniiittee of Victorian Account- ants on, 100 ,, Balance, Verification of, 205 ,, Charges, Verification of, 46 Bills Payable, Vouching, 28 ,, Receivable, Verification of, 207 ,, ,, Vouching, 28 Book Debts, Verification of, 204 Branches, Accounts of, 64, 9(1 Brewery Accounts, vVudit of, ~G Brickmakcrs' Accounts, Audit of, 90 Building Societies, I'rescribcd form of Accounts for, 625 ,, Society Accounts, Audit of, 173 Buildings and Land, Verification of, 199 Calling l)a( k Ledger postings, Points on, 14 Capital and Revenue, U-j , 122, 287 ,, I'lxpeuditure, Cash Discounts on, 45 Caril lioi )kkceping, 52 ("asfs. Reports ol (I /,/r Api)cndi\ " H "') Cash Hook, k'orin of, 45 ,, Discounts, 45 ,, ,, on ( apital l^xpenditure, 45 ,, ,, i'roxisifjn for Outstanding, 237 ,, ill lland, \ I'vi Hi atioii of, 207 ,, Reieipts, \onching, k) ,, Values under 1 1 ire purchase Agreements, Table showing, 214 Charities, Audit of Accounls of, 162 ,, Fro forma Accounts of, 163, 618 Check Figures, 33 ,, Internal, Organisation of system of, 41 ,, Marks, Form of Auditors', 28 INDEX. 1007 Checking Additions, Points on, i6 „ by Totals, 9 „ Postings, 14 Church Accounts, Audit of, 172 Civil Liability of Auditors, 335, 354 Clerks, Audit, 2, 312 Club Accounts, Audit of, 80 College Accounts, Audit of, 172 Colliery Accounts, Audit of, 88 ,, Royalties, Treatment of, 89 Commercial Accounts, Audit of, 71 ,, ,, Form of, 250 Commissions, Underwriting, Treatment of, 35 Companies' Accounts, Audit of, 34 Company Prospectus, Statement in Lieu of, 472' ,, Report for Statutory Meeting of, 317 Consignment Accounts, 63 Consignments, Vouching, 29 Contingent Liabilities, Verification of, 213 Continuous Audits, 12 Contractors' Accounts, Audit of, 75 ,, Form of, 259 Co-operative Societies' Accounts, Audit oi, 182 Copyrights, Depreciation of, 224 ,, \'aluation of, 86 Cost Account, Pro forma Summary of, 261 ,, Accounts, Importance of, 44 ,, Book Mines, Audit of, 90 Creditors, Position of Auditor on behalf of, 316 Criminal Liability of Auditors, 351 Debentures and Shares, Treatment of Premiums on, 34, 239 ,, Redeemable, Treatment of, 243 Decisions, Legal (Vide Appendix " B ") Defalcations of Employees, Liability of Auditor for, 343 Definition of Profits, 291, 294 Depreciation and Local Authorities' Accounts, 144 „ „ ,, Authorities, The late Mr. Edwin Guthrie on, 145 „ ,, Repairs, 224 „ ,, Sinking Funds, 144, 147, 149 ,, ,, the Double-Account System, 265 „ fully considered, 215 „ Method of providing for, 266 IOo8 INDEX. Depreciation, Necessity of provision for, 265 „ of Copyrights, 224 „ Electrical Plant, 120 ,, Electricity Supply Undertakings, Municipal Electrical Association on, 148 ,, „ Undertakings, Institute of Municipal Treasurers and Accountants on, 148 ,, Freehold Buildings, 218 ,, ,, Lands, 218 ,, Goodwill, 219 ,, Horses, 219 ,, Investments, 220 ,, Leaseholds, 221 ,, Licensed Houses, 222 ,, Machinery, 222 „ Mines, 222 ,, Motors, 223 ,, Patents, 224 ,, Plant, 223 ,, Ships, 224 ,, Tramways, 127 ,, „ Institute of Municipal Treasvirers and Arcoiintants on, 128 ,, ,, Municipal Tramways Associa- tion on, 128 ,, Practical Treatment of, in Accounts, 233 ,, Tables, 233, 1000 ,, The late Mr. Adam Murray on, 225 Detection of Errors of Principle, 7 „ Fraud, 7, 10, 41 „ Technical Errors, 7 Directors' Fees, 238 Discounts, Cash, 45 ,, ,, on Capital Expenditure, 45 ,, ,, Provision for Outstanding, 237 Dividend Payments, Audit of, 36 Double-Account System and Depreciation, 265 ,, ,, considered, 263 Doubtful Debts, Provision for, 235 ,, ,, Treatment of, 59 Electric Light Accounts, Audit of, 119 ,, Lighting Act 1882, Extracts from, 548 ,, ,, Clauses Act 1899, Extracts from, 557 INDEX. 1009 Electric Lighting Companies, Prescribed form of Accounts for, 549 Electrical Plant, Depreciation of, 120, 148 Electricity Supply Undertakings. Depreciation of, Muni- cipal Electrical Association on, 148 Undertakings, Institute of Municipal Trea- surers and Accountants on, 148 Errors, Detection of Technical, 7 „ in Balancing, Localising, 31 „ of Principle, Detection of, 7 „ Responsibility of Auditors for, 351 Exact Balancing, Importance of, 30 Examination of Vouchers, 18, 27 Executors' Accounts, Audit of, 155 Exemptions from Income Tax, 400, 403 Expenses, Preliminary, 239 „ Revenue, considered, 298 Finance Companies' Accounts, Audit of, no Fire Insurance Accounts, Audit of, 102 Firm, Position of Auditor to a, 314 Fixed Assets, Valuation of, 196 Fixtures, &c.. Verification of, 203 Floating Assets, Valuation of, 197 Foreign Exchanges, Treatment of, 246 Forfeited Shares, Treatment of, 242 Form of Accounts, 249 „ Auditor's responsibility for, 285 of Local Authorities, Suggestions as to, Annual Return prescribed for Friendly Societies, 650 Form of Balance Sheet, 263 „ Contractors' Accounts, 259 „ Manufacturers' Accounts, 255 Mining Company's Accounts, 262 prescribed for Accounts of Building Societies, 625 Parish Councils, 582 of Annual General Statement for Trustee Savings Banks, 666 Forms of Account, Statutory, 263 „ „ Cash Book, 45 ,, under Companies Act 1908, 472 Forward Contracts, Verification of, 209 Fraud, Detection of, 7, 10, 41, 200, 378 10 I O INDEX. Frauds in connection with Wages, 23 Fraudulent alterations during Audit, 13, 29 Freehold Buildings, Depreciation of, 218 ,, Lands, Depreciation of, 218 " Free of Income Tax," 36 Friendly Societies, Prescribed form of Annual Return, 656 ,, Society Accounts, Audit of, 176 Gas and Water Companies' Accounts, Audit of, 112, 118 ,, ,, Company, /"r^/yrwa Balance Sheet ofj 280 ,, Companies' Accounts, Audit of, 112 ,, Companies, Statutory form of Accounts for, 540 General System of Accounts, Pro forma Instructions as to, 41 Goodwill, Depreciation of, 219 ?Iire-Purchase Agreements, Table showing Cash Values under, 214 ,, ,, Treatment of, 213 Horses, Depreciation of, 219 Hospital Accounts, Uniform system of, 618 Hotel Accounts, Audit of, 79 Income Tax: " Free of Income Tax," 36 ,, ,, Summary of provisions as to, 394 Incorporation, Profits prior to,. 302 Individual, Position of Auditor to an, 313 Inscribed Stocks, List of principal, 202 ,, ,, Verification of, 202 Instructions for audit, 3, 68, 171 Insurance Accounts, Accident and other. Audit of, 106 „ ,, Fire, Audit of, 102 ,, ,, Life, Audit of, 105 Interest, 46 ,, during construction, 303 ,, Payments, Audit of, 36 Interim Stock Accounts, 55 Internal Check, Organisation of System of, 41, 42 Intestates, Rules for Distribution of Estates of, 603 Investigations of Accounts, 371 Investment and Trust Companies' Accounts, Audit of, 107 ,, of Reserve Funds, 273 Investments authorised for Trustees, List of chief, 158, 159 ,, Depreciation of, 219 ,, Verification of, 201 Joint Auditors, 370 Journal Entries, Vouching, 26 ,, Uses of, 60 INDEX. lOII Land and Buildings, Verification of, 199 Leaseholds, Depreciation of, 221 Ledger postings. Points on calling back, 14 Ledgers, Balancing by Tabulation of, 32 Card, 52 Loose-Leaf, 52 Self-balancing, 49 ,, applied to Branch Accounts, 64 Tabular, 51 Legal Decisions {Vide Appendix " B ") Liabilities, Contingent, Verification of, 213 „ of Auditors, 335, 350, 351, 354 „ Verification of Outstanding, 212 LiabiUty of Auditor for Defalcations of Employees, 242 „ „ „ Libel, 350 „ „ Limits to, 368 „ Auditors, Civil, 354 „ „ Criminal, 351 Libel, Liability of Auditor for, 350 Licensed Houses, Depreciation of, 222 Life Insurance Accounts, Audit of, 105 „ ,, Statutory Forms of Account, 506, 515 Limited Partnership, Auditor to, 316 Local Authorities' Accounts and Depreciation, 144 Audit of, 135 Local Authorities and Depreciation, The late Mr. Edwin Guthrie on, 145 J, ,, Suggestions as to form of Accounts of, „ Board's Accounts Order 1880, 582 Localising Errors in Balancing, 31, 49 Loose-Leaf Ledgers, 52 Machinery, Depreciation of, 222 Manufacturers' Accounts^ Form of, 255 Manufacturing Account, Pro forma, 258 „ Company, Pro forma Balance Sheet of, 283 „ Traders' Accounts, Audit of, 72 Mechanical Adders, 33 Medical Men's Accounts, Audit of, 188 Memorandum of Association to be considered, 38 Merchants' Accounts, Audit of, 71 Mines, Cost Book, Audit of, 90 ,, Depreciation of, 222 I p 4 IOI2 INDEX. Mining Accounts, Audit of, 80, 90, 92 ,, Company's Accounts, Form of, 262 Minute Book, Uses of, to Auditor, 241 Misfeasance proceedings discussed, 359 ,, Summons, Proceedings against Auditor by, 357 Modification of Income Tax Assessments, 405 Motor Cab Accounts, Audit of, 132 Motors, Depreciation of, 223 Municipal Audit, Electrical Association on Depreciation of Electricity Supply Undertakings, 148 „ Trading Departments, Audit of, 142 ,, Tramways Association on Depreciation of Tram- ways, 127 ,, Treasurers and Accountants, Institute of, on Depreciation of Tramways, 128 ,, Treasurers and Accountants, Institute of, on Depreciation of Electricity Supply Under- takings, 148 Newspaper Accounts, Audit of, 87 Note Books, Audit, 1,6 1 Ofl&cial Auditors, 309 Omnibus Accounts, Audit of, 131 Organisation of Audits, i Outstanding Assets, Verification of, 210 ,, Liabilities, Verification of, 212 Parish Councils, Prescribed form of Accounts for, 582 Partial Audits, 319 Partnership Accounts, Audit of, 314 ,, ,, Limited, Audit of, 316 Patents, Depreciation of, 224 Payment of Salaries, 61 ,, to Public Auditors, Ofiicial Rates of, 671 53 ,, ,, Valuers, Ofiicial Rates of, 672 Payments of Dividend, Audit q^, 36 „ ,, Interest, Audit of, 36 ,, Vouching, 21 Percentage Calculations, Uses of, 262 Periodical Audits, 13 Petty Cash, Systems of, 46 ,, Vouching, 22 Plant and Machinery, Verification of, 203 ,, Depreciation of, 222, 223 ,, Electrical, Depreciation of, 120, 148 JJ INDEX. IOI3 Postings, Checking, 14 Preliminary Expenses, 240 Premiums on Shares and Debentures, Treatment of, 35, 240 Preparation for Audit, Pro fornid Instructions as to, 68, 177 Privilege of Auditors, 330, 351 Proceedings against Auditors by Misfeasance Summons, 357 ,, Misfeasance, discussed, 359 Professional Auditors, 307 Profit and Loss Account, Pro fornid, 253, 254, 256, 260 Profits, Assessable to Income Tax, 39S ,, ■ Definition of, 291, 294 ,, Determination of, 287 ,, Prior to Incorporation, 302 Pro forma Accounts of Charities, 163 ,, ,, ,, Hospitals, 618 Balance Sheet of Gas and Water Companj', 2S1 „ ,, Manufacturing Company, 283 ,, ,, ,, Trading firm, 284 „ Instructions as to general system of Accounts, 42 „ ,, ,, preparation for Audit, 3, 68, 177 „ „ „ Audit. The late Mr. David Chadwick's, 3 ,, Manufacturing Account, 258 ,, Profit and Loss Account, 253, 254, 256, 260 ,, Summary of Cost Account, 261 ,, Trading Account, 253, 256, 258 Prospectus, Statement in Lieu of, 472 Provision for Bad and Doubtful Debts, 235 ,, ,, Depreciation, Necessity of, 265 Public Auditors, Official Rates of Payment, 671 ,, House Accounts, Audit of, 80 ,, Valuers, Official Rates of Payment to, 672 Publishers' Accounts, Audit of, 84 Qualification of Auditors, 310 Railway Companies' Accounts, Audit of, 120 Railways, Statutory form of Accounts for, 565 Rates of Income Tax, 404 Re-appointment of Auditors, 329, 331 Receipts for Cash, Vouching, 19 ,, Revenue, considered, 295 Redeemable Debentures, Treatment of, 242 Remuneration of Auditors, 328 IOI4 INDEX. Rent Accounts, Audit of, 4S Repairs and Depreciation, 224 Report of Auditor, 318, 319 ,, ,, Municipal Officials on Depreciation of Tram- ways, 1 28 Reports of Cases (Vide Appendix " B ") Reserve Funds, 240, 272 ,, ,, Investment of, 273 Reserves, Secret, 39, 243, 245, 247 Responsibility of Auditor for Errors, 351 ,, for form of Accounts, Auditor's, 284 Retailers' Accounts, Audit of, 72 Revenue and Capital, 67, 122, 2S7 ,, Expenses considered, 297 ,, Receipts considered, 294 Rights of Auditors, 333 Royalties, Colliery, Treatment of, 89 Rules for Distribution of Estates of Intestates, 603 Salaries, Payment of, 61 Sales for Future Deliver}', Verification of, 209 Savings Banks, Audit of, 176 School Accounts, Audit of, 172 Scope of Audit, 172 Secret Reserves, 39, 243, 245, 247 Sectional Balancing, 49, 65 Sir j. G. Cragg's system of, 31 Self-Balancing Ledgers, 49 ,, ,, applied to Branch Accounts, 64, 96 Share and Stock Accounts of Companies, 34, 57 ,, Capital Accounts, Audit of, 34 Shares and Debentures, Treatment of Premiums on, 35, 240 ,, Forfeited, Treatment of, 242 Shipping Accounts, Audit of, 133 Ships, Depreciation of, 224 Sinking Funds and Depreciation, 144, 147, 149 Slip Systems of Bookkeeping, 52 Solicitors' Accounts, Audit of, 185 Statement in lieu of Prospectus, 472 Statistical Information, Uses of, 262 Statutory Books under the Companies Acts, 37 ,, ,, ,, ,, Clauses Act 1845,38 ,, form of Accounts for Gas Companies, 540 „ „ „ Railways, 565 INDEX. IOI5 Statutory forms of Account, 263 J, ,, of Insurance Companies, 506 „ Provisions (r/(ff Appendix " A") Stock Accounts, 53 „ » Interim, 55 „ and Share Accounts of Companies, 56 Stockbrokers' Accounts, Audit of, 185 Stock-in-Trade, Verification of, 200, 201 Stocks and Shares, Verification of, 201 „ Inscribed, List of chief, 202 „ ,, Verification of, 201 Stores Accounts, Keeping of, 53 Super-Tax, 403 Suspense Accounts, 58 Tabular Ledgers, 51 Tabulation of Ledgers, Balancing by, 32 Tests, Auditing by, 9 Theatre Accounts, Audit of, 82 Totals, Checking by, 9 Traders' Accounts, Audit of Manufacturing, 72 Trading Account, Pro forma, 253, 256, 258 ,, Firm, Pro forma Balance Sheet of, 2S3 Tramway Accounts, Audit of, 125 Tramways, Depreciation of, 127. J, „ „ Institute of Municipal Treas- urers and Accountants on, 12S J, „ „ Municipal Tramways Associa- tion on, 128 Treatment of Bad and Doubtful Debts, 59 Trial Balance, Uses of, 29 Trust and Investment Companies' Accounts, Audit of, 107 Trustee Investments, List of chief authorised, 159 „ Savings Banks, Prescribed form of Annual General Statement, 666 Trustees' Accounts, Audit of, 155 Vltrd vires, 247 Underwriting Commissions, Treatment of, 35 Uniform system of Hospital Accounts, 618 Uses of Percentage Calculations, 262 Valuation of Assets, Principles of, 196 ,, Responsibility for, 19S Copyrights, 86 IOl6 INDEX. Valuation of Fixed Assets, 196 ,, Floating Assets, 197 Verification of Bank Balance, 205 „ Charges, 46 Bills Receivable, 207 Book Debts, 202 Cash in Hand, 206 Contingent Liabilities, 213 Existence of Assets, 199 Fixtures, &c., 203 Forward Contracts, 209 Inscribed Stocks, 201 Investments, 200 Land and Buildings, 199 Outstanding Assets, 210 ,, Liabilities, 212 Plant and Machinery, 203 Sales for Future Delivery, 209 Stock-in-Trade, 200 Stocks and Shares, 200 Work-in-Progress, 207 Vouchers, Examination of 18, 27 Vouching Bank Accounts, 25 Bills Payable, 28 „ Receivable, 28 Cash Receipts, 19 Consignments, 29 Journal Entries, 26 Payments, 21 Petty Cash, 22 Wages, 22, 23, 90 Wages, Frauds in connection with, 23 ,, Vouching, 22, 23, 90 Warehousemen's Accounts, Audit of, 71 Water Companies' Accounts, Audit of, 117 Wear and Tear {See Depreciation) Work-in-Progress, Verification of, 207 THIS BOOK IS DUE ON tbv t . stampej^SeSe^^st date DAY AND TO /° ^° ^ENTS ON "h^?"^'-^ it 1 X'i VO C5832 \f 2 s-oj?^ THE UNIVERSITY OF CALIFORNIA LIBRARY /9/^ ;'k^' •'•i,-''A-i:i'il Wim ■'■■■ '''Vu''''^"*' ^■^ 'M'M .r,,,.i,i.., ''.'v*^ ^iSi>^ ■•■■ :' vtJfi^KM