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noted that the most successful concerns carry on selling campaigns all the time, and there must be some limit to the postponement of the actual charges to current operating.

In the discussion of a paper presented at the 1908 meeting of the American Association of Public Accountants in which the matter of deferred charges was mentioned, George O. May, C. P. A., said:

A further point raised by one of the speakers was as to the carrying forward of expenses on seasonal business. I think this is a dangerous practice, especially where there is a big asset of good will. I think the more conservative view to take is that the expenses necessary to keep up the next season's business are effectively an expense for preserving the good will of the business. As regards the buying expenses of a department store, I do not think any valid objection can be taken to these being included. In my experience it has often been found, in fact generally, that department stores do not take into account discounts on purchases on the one hand, or buying expenses on the other, and that these about offset each other.

If the business is not successful there will be no future profits to which the deferred items can be charged. Therefore, the auditor should use every argument he can muster to induce his client to absorb these expenses as soon as possible, and never carry them forward unless it would be improper, from every point of view, to include them among the current expenses.

More than one enterprise has been wrecked by the failure to look preliminary or establishment expenses squarely in the face. The temptation to state the current operations in such a way as to show a profit has been too strong, and so they have gone along from year to year, the burden increasing instead of diminishing, with an inevitable day of reckoning when it is realized that liàbilities cannot be liquidated with capitalized expenses.

The recent report of an automobile business stated that the auditors had insisted on charging off all of the expenses of establishing branches which previously had been carried as an asset. The monthly reports had shown big profits, which had been largely paid out in dividends, with the result that the working capital had been reduced to an amount below the safety line.

'If auditors with the courage of their convictions had been consulted earlier and had called attention to the overstatement of profits, the company's credit would probably not have been impaired to the extent it was,

Extraordinary expenditures, such as repairs and renewals incident to accidents or storms, are sometimes capitalized at the time with the expressed intention of spreading the loss over several years. The same situation arises where accident insurance is not carried, a certain percentage of the gross receipts being set aside to a reserve account to pay losses, and the payments being in excess of the reserve. Quite frequently the debit balances. so created are carried forward as an asset until subsequent accruals wipe out the deficit.

This practice is not sound, because in the last analysis it simply results in setting up on the balance sheet accounts which are in no sense of the word assets. If the word "assets" means anything at all, there can be no justification for the inclusion of items of maintenance, expended because of necessity, and which do not tend to improve the physical or financial position of the enterprise.

It may be that these charges, if incorporated among the costs and expenses of a current period, tend to hide the normal operations, but if the unusual item is clearly set forth this procedure is preferable to making direct charges to surplus. It may be hard to resist the temptation, but the practice is to be condemned. It may not sound well or look well, but it has the advantage of portraying the actual state of affairs, which is not the case when an attempt is made to designate an expense account as an asset. Directors who realize their personal responsibility for dividends paid out of capital will not vote for a distribution of earnings which does not take into account expenses actually in

curred.

All payments for insurance, bank discount, rent, taxes, dues, subscriptions, and similar items should be scrutinized in order to determine the proportion, if any, which applies to a subsequent period and thus constitutes an asset when the books are closed, in the form of a deferred charge to the future operations of the business. In order to save the auditor's time he may request one of the client's clerks or the insurance broker to calculate the prepaid items, in all cases testing the accuracy of their work.

Where discount on bonds is carried as a deferred charge to operations, the auditor should verify the amortization calcula

tions. If this provision is not in order, an adjustment should be made before the balance sheet is certified to.

Legal Expenses and "Graft": If charges to legal expenses consisted merely of current bills from attorneys, no special mention would be necessary, but the account is such an elastic one that it requires special and careful attention.

In some lines of business secret commissions are paid to the purchasing agents of customers. In spite of the publicity which such practices have received during the last few years, "graft" still exists and no doubt will flourish for years to come. Where the recipients are unusually sensitive it is customary to charge the amounts paid to legal expenses or some other account which serves to screen the true purpose of the payments. From an accounting point of view this is, of course, highly objectionable, because it permits sales to go through with what are almost invariably excessive gross profits without the chance of charging against such sales one of the direct expenses connected therewith. Legal expense is not usually regarded as one of the items of selling costs, and the auditor who suspects the truth can hardly restate the accounts to accord with his suspicion. The vouchers for such payments will be signed by some responsible officer of the corporation or a member of the firm, so that the honesty of the disposition of the funds can hardly be questioned.

Some years ago an auditor of high standing discovered in the audit of one business that a commission had been paid to the superintendent of the plant owned by another client. He informed the latter, but was not profusely thanked for his information. The other corporation learned of the fact, called it a gross breach of trust, and declined to pay the auditor's bill.

If an auditor feels that the morals of his client are to be judged along with the accounts, he should have the courage of his convictions and so inform the client before the work is started. He will not then have to charge off his bill to bad debts.

Repairs and Renewals: In the audit of a large manufacturing establishment this will be the most troublesome account upon which the auditor will be called to pass.

The underlying purpose of the audit of expenses is to ascertain as far as possible that an equivalent was received for the liability assumed, but the improper application in the books of

the expenditure for repairs and maintenance may upset the accuracy of a balance sheet in spite of the fact that value was received for the liability assumed. That is, the expenditure for repairs or for renewals may be charged to plant or some other asset account instead of to current operating expense, thus inflating the assets on one hand and the profits on the other. It must be kept in mind constantly that tacit conspiracy usually exists to bring about this very result, and the auditor will be apt to find strong forces arrayed against him as soon as an accurate accounting for maintenance items is begun.

The ordinary manager, superintendent, or foreman seems to feel that it is a reflection on him individually or on his department to incur any considerable expense on renewals and repairs which he knows will increase his cost of operating. He knows that an item charged to an asset account will not be charged against him, so it is no wonder that an analysis of plant accounts sometimes discloses remarkable items which are in no sense of the word betterments, but current maintenance.

In order to make a complete audit of items which should be charged to repairs, the charges to plant accounts must be analyzed.

Allowances and Returns: There are two very good reasons for a careful scrutiny of all credits to customers, the first being that by means of unauthorized credits fraud may be concealed. That is, cash collected from a customer is not accounted for, and subsequently, to avoid discovery, the ledger account is closed by an entry which indicates that goods have been returned or that an allowance has been made.

The second reason is that in the absence of fraud there may be carelessness both in the manner of granting credit for allowances and returns and in the record thereof. For instance, some automobile dealers deduct freight from credits for returned defective parts; others do not. To a dealer doing a large business this makes a difference of several hundred dollars a year.

In some concerns full credit is not given where goods are returned simply on account of an overstock. In others, there is little or no check on the returns and full credit is allowed.

The auditor should, therefore, examine the record which has been kept and see to it that so far as possible the entries are

approved by some responsible official and that no abuse has been made of the return privilege. In order to test the integrity of the entries, it may be desirable to call for the correspondence in connection with a certain number of items.

Goods returned are not purchases, but deductions from sales, but so far as stock records are concerned they should be treated as purchases and tests should be made to see that the entries in the return book are posted to the stock sheets as regularly as those in the purchase records. Otherwise an opportunity might be afforded to a stock clerk to ship goods without accounting therefor.

Separate columns should be kept in the allowance and return book, as allowances may or may not be posted to a separate ledger account, while returns are always deductible from sales.

The newspapers recently reported a case wherein it appeared that the bookkeeper of a baking company had manipulated his books by crediting customers with excessive returns. The following is the police account, in part:

He (the bookkeeper) left the firm the early part of this month, and when his books were examined, the firm found a shortage of more than $1,500. He admitted entering in the books to the credit of customers a greater number of loaves of bread daily than were actually returned by the firm's drivers.

Empties: In many lines of business shipments are made in bottles, boxes, barrels, or other form of package, which have a residual value, the test of the latter being the cost, durability, and expense of return. When no charge is made for the package and credit is allowed for returns, there is the equivalent of a purchase, provided the allowance is not more than the open market price. If the credit is at a higher price than the market, the excess is clearly a deduction from sales. If credit is passed only upon return and the allowance is not more than cost, no record need be kept of those outstanding, as it makes no difference whether or not they are returned. If a separate charge for packages appears on the invoices, there is no difficulty in keeping track of the aggregate charged for and the aggregate returned, if the information is of value.

In the case of kegs, crates, syphons, etc., for which no charge

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