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statements were sent out. The charges were sometimes fictitious entries entered in the ledger account only or a posting made from an item in the blotter which was not covered by one of the regular cheques.

BUILDING AND LOAN ASSOCIATIONS

Building and loan associations are usually organized on the mutual plan, and the by-laws of most, if not all of them call for an annual audit of the association's accounts. Unfortunately for the stockholders, however, this requirement is most frequently complied with by the appointment of an auditing committee composed of two or three members of the board of directors, and, as is usual in the case of amateur audits, examinations made under such circumstances and by such agencies are not always to be relied upon. When it is considered how much power, as far as the finances and accounts are concerned, is exercised by one man (usually the secretary) in these associations, it would certainly pay them in the end to have the accounts periodically audited by public accountants.

The fact that the accounts are as a rule so completely in the hands of one person renders it obligatory on the auditor to make a thorough and detailed examination. In an audit under such circumstances tests of the work are not usually sufficient.

The audit of a building and loan association differs from that of most financial institutions in that it has to deal with an organization the capital stock of which is not fixed in amount, and that the borrowers are, for the most part, stockholders as well, and both interest and principal of the loans are paid in small installments, such payments being made either monthly or weekly at the same time that dues, i. e., payments on account of capital stock, are paid.

The capital stock consists of a number of series, a new series being started each year, each six months, or in some few cases even as often as every three months. A fixed amount, usually one dollar, though sometimes fifty cents or twenty-five cents. (the latter very infrequently), is paid, say, monthly, on each

share of stock held, and when these periodical contributions, together with the accrued profits, reach a specified amount, say, $200, the series of stock is paid off. In this way there is a constant contributing and withdrawing of capital going on, one or more new series of stock being started each year, and one or more series maturing in each year. In addition to matured stock, withdrawals are made by the stockholders who for one reason or another cannot or do not care to continue until the maturity of their series. In the case of such withdrawals a penalty is imposed by paying somewhat less than the full amount of the profits accrued on the stock. In a well-managed association, the by-laws of which call for monthly payments of $1 per share and fix the full value of a share at $200, a series usually matures about eleven or twelve years after its inception.

Verification of Income: The dues paid in by members are not, of course, income or earnings. They are contributions of capital, and a very careful accounting thereof is essential. By ascertaining the total shares outstanding in each series at the beginning of the year and allowing for withdrawals during the year (after the year in which a series has its inception no additional shares can be issued), the receipts from dues can be proven as a whole.

The interest on loans will need to be carefully verified. Much of the interest is paid in monthly installments, and as many of the loans are made on a six per cent basis, the interest can be quickly verified. In connection with loans to stockholders the item of premiums must not be overlooked. The by-laws of many associations provide for what practically amounts to competitive bidding by the stockholders for the funds in the treasury. When the applications for loans exceed the available funds, a premium is paid by the successful applicants. The granting of these loans should be recorded in the minutes, and the premiums to be accounted for should be ascertainable from this source.

Fines on delinquent dues and interest are other items of income. They are usually fixed at a high rate, e. g., two per cent per month, to compel promptness in making payments, but do not usually form a large item of income.

In the case of associations which charge admission fees (usually twenty-five cents per share) these are readily verified in total

on the total number of shares in the new series issued during the year.

Building and loan associations do not invest in real estate except when compelled to buy it in to protect an investment in a mortgage loan which is foreclosed. When real estate is owned, the income therefrom should be verified. A comparison of the net income with the book value of the properties should be made so as to be sure that real estate is not being carried at excessive figures.

The best verification of the dues and interest appearing as unpaid on the books is to publish a list of the account numbers and amounts of such arrearages in the association's published annual statement. A good verification of the capital stock outstanding would be for the auditor to be present at the meeting next following the commencement of the audit and to examine each stockholder's pass book as it is presented at the time of paying dues. The numbering of all stockholders' accounts and the consecutive numbering of the pass books by the printer, all pass books to be accounted for, is also a safeguard.

Expenses: These are verified in the usual manner. To the credit of these associations it must be said that most of them are economically conducted and the direct outlays for salaries, etc., are seldom excessive.

Inspection of Securities: A very important feature of the audit is naturally the examination of the securities owned. Mortgages, insurance policies, and other documents pertaining to real estate loans, assigned capital stock certificates, notes for loans on stock collateral, and real estate deeds are all to be carefully scrutinized.

Distribution of Profits: An important part of the audit is the verification of the annual statement. Most associations publish, in addition to a balance sheet, a statement of cash receipts and payments, and not the profit and loss account, although it is on the basis of the results shown by the latter that the apportionment of profits among the various series of stock is made. There are several plans of profit distribution in use, not all of equal merit.

The most equitable and accurate plan is to treat as the capital for the year the dues paid in and the profits accrued thereon

up to the beginning of the fiscal year under review, plus the equivalent sum for one year of the installments paid in during the year, and less the entire dues paid in and the accrued profits to the beginning of the fiscal year on stock withdrawn during the year. On the average working capital for the year so determined, the percentage of the year's earnings as shown by the balance of the profit and loss account is ascertained. The calculation of the average working capital is made by separate series as well as in total, and the percentage earned added to each series. The total earnings for the year are thus apportioned among the various series. The accrued profits in excess of the amounts actually paid to withdrawing stockholders are included as a part of the year's earnings.

A plan which is in use by many associations, but which is misleading, in that the apparent percentage of earnings to capital is higher than is actually the case, is that by which accrued profits are not treated as a part of the capital, the profits being calculated and apportioned simply on the basis of the dues paid in. As this constitutes a smaller amount on which to calculate the percentage which the earnings are of the capital stock, the apparent rate of earnings is higher than the actual rate.

Some associations even go so far as to reapportion each year all the profit earned, not only in the current year, but in preceding years, on all unmatured series of stock. This is clearly wrong and inequitable. Each year, which usually marks the entrance of a new series of stockholders, should witness the apportionment of its earnings in accordance with the actual earnings, which apportionment should remain undisturbed in the remaining years which the various series have yet to run.

It should be stated, however, that in many cases the by-laws of the association prescribe the basis on which profits shall be apportioned among the various series, and in such an event the auditor cannot do otherwise than comply with them. Even in such cases, however, it would seem desirable to call the attention of the directors or the stockholders to the desirability of adopting the most accurate method.

Most associations publish balance sheets, statements of receipts and payments, and statements of capital stock more or less like the following forms:

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Dues Paid In and Accrued Profits Thereon, Per Schedule of Series and Values Annexed

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