ities Departments; Examiners in the Bureau of Corporations of the Department of Commerce and Labor of the National Government; Inspectors of the Bureau of Internal Revenue assigned to examine the accounts of corporations which report their net income as required by the Federal Corporation Tax Law. The supervision of corporations by the National and State Governments has increased considerably the number of official auditors, and with the extension of this supervision their number will be still further increased. The salaries paid to many of these officials are too low to attract men of proper training and ability, and, obviously, their work cannot be expected to be of the high efficiency of that required of qualified auditors.

The following news item which appeared in the New York Times of June 27, 1912, may be of interest in this connection:

ATTACKS FEDERAL BANK SUPERVISION

BINGHAMTON, Ñ. Y., June 26.-The United States Grand Jury, in session here to-day, presented to the court a resolution advising that the revelations in the New Berlin Bank disclosed the fact that the present methods of National Bank examinations were faulty; that perfunctory examinations should be condemned; that the number of bank examiners is insufficient, and the method of compensation is certain to affect the character of the examination. Banker Arnold will be arraigned on indictments alleging bank wrecking to-morrow afternoon.

Staff Auditors: Another body of auditors, who cannot be included among any of the foregoing classes, consists of those who devote their entire time to one or a very few undertakings. This applies chiefly where the organization is large and the work diversified to such an extent that an officer can be profitably employed whose duties are supervisory only and who does not, or rather who is not supposed to perform any clerical duties or handle money, securities, etc.

In many of our largest corporations this officer is called the comptroller, and this is the correct title, but so many of these officers are and will be called auditors that it becomes necessary to classify them as such.

Experience has shown that these auditors gradually have thrust upon them executive duties which are in more or less conflict with the supervisory work which they usually are retained to perform.

A staff auditor cannot very well occupy two positions at the same time; he cannot originate or carry out a transaction which is administrative and later attempt independently to check the same operation.

There have been so many instances of defalcation and fraud by officers or clerks with the title of auditor that it makes the term a misnomer in the mind of the general public. No auditor should have such an opportunity, and if his duties are changed to such an extent that he has the same opportunity to defraud as a treasurer or cashier, then he should no longer be called an auditor. If he does retain the title, it is deceitful, whether willfully or unintentionally.

Professional Auditors: The professional auditor is one whose services are at the disposal of the public. He is charged with the responsibility of undertaking practically all of the work which may be tendered to him. He may, therefore, be said to owe a duty to the public to have a well-equipped office and a staff of specially trained assistants, otherwise he cannot conscientiously undertake work of any magnitude.

There are, however, a great many persons whose experience and ability qualify them as auditors of the highest rank, but whose services are not at the call of the general public, and who, therefore, cannot claim to be professional auditors.

Not an Insurer: In the exercise of his profession the auditor does not become an insurer, in spite of the desire on the part of many clients so to consider him. It is obviously his duty to provide such safeguards as are possible, based on his experience and familiarity with modern practice. He is assumed to have a full theoretical as well as a practical knowledge of the principles of auditing and to apply them skillfully to every case on which he is engaged. But this, fortunately, is the full measure of his responsibility.

The position is a reasonable one when examined from an equitable standpoint, particularly when compared with the premiums paid to liability insurance companies for protection against loss by fraud. The audit fee is not intended to and does not include insurance against loss by dishonesty.

Of course, circumstances may be such as to raise a presumption of negligence or lack of skill on the part of the auditor, but

this does not alter the general rule. A full discussion of this subject will be found in Chapter XXXII, "Liabilities of Auditors."

Employees' Bonds: Irrespective of the question as to whether or not an auditor is an insurer, he should always include in his audit program the query: "Are all employees who handle funds under surety bonds?" If not, they should be. Some employers are lax in this respect, others will not incur the expense, and a fairly large class dislike to mention the matter to employees who have occupied positions of trust for a number of years.

The auditor should present the importance of such protection and point out that the expense is comparatively small, but that the risk is not an imaginary one. Of course the auditor has performed his full duty after his recommendation has been considered, and if nothing is done he cannot be blamed for subsequent loss.

It may be, however, that the matter should have consideration at each audit as conditions and employees change. It might not be difficult to persuade an employer to adopt a rule that every new employee should furnish a bond at the time of employment. This would mean that in time the entire staff would be bonded. In every case the employer should pay the premium.

Many employers find it valuable to insist on practically their entire force, including salesmen, furnishing a surety bond. The reason given is that all of them handle funds at one time or another. It makes it easier to demand bonds from cashiers when the rule is general, and a lower rate can be secured where several persons are covered by one bond. The chief value, however, in requiring bonds from salesmen is that the employer is assured that a most exhaustive inquiry is made into each applicant's character and reputation, extending back over a considerable period of years. This search is far more extensive than an employer can, or cares to, make himself, and as such a bond for, say, five hundred dollars does not cost more than two or three dollars, it is well worth a trial. Salesmen are usually intrusted with a traveling expense advance, and similar funds are placed at the disposal of other employees.

Several firms of accountants have enforced this rule for some

years with a considerable measure of satisfaction. It is surprising sometimes to ascertain that an applicant whose credentials seem to be above criticism cannot qualify for a minimum amount bond.

This is considered a prima facie reason for nonemployment, or dismissal if taken on temporarily, and a good reason must be furnished to offset the effect of the refusal of the surety company.

It is obvious that a man who cannot furnish a five-hundreddollar surety company bond is not a desirable audit clerk.

Employers sometimes think that placing an employee under bond in some way obviates the necessity for an audit. As a matter of fact, this precaution is all the more advisable in that a means is provided for recouping the amount misappropriated, if a defalcation does occur. The surety companies themselves advocate periodical audits. The National Surety Company of New York, one of the leading bonding companies in America, says:

Frequent, regular, and thorough audits of cash and books of account by certified public accountants are unquestionably of the greatest benefit to the business man and institution, and should be universally adopted.

We cannot put what we state above too emphatically, and it is deserving of the serious consideration of every business man.

The surety companies frequently quote their minimum. rates where they find that the books are regularly audited by professional auditors in whom they have confidence, and this may represent a considerable saving to the assured.

AUDIT OF A FIRM OR AN INDIVIDUAL

The duty of an auditor to an individual or a firm is, of course, to disclose to his client, or clients, the facts as he finds them.

In audits of firms, the rights and liabilities of each partner must be considered. Usually one partner names or retains the auditor, and in many cases assumes an embarrassing proprietary interest over him. Nevertheless, the auditor must maintain the strictest neutrality, for partnerships too often end in litigation, and the auditor who has shown any signs of favoritism may find himself in an unpleasant position.

The partnership agreement should always be read carefully and any provisions as to the accounts noted and verified. Where there is no partnership agreement or where it is deficient in terms, the following guide may be profitably consulted, and where any material divergence exists between what a partner does and what he should do, the attention of each partner should be called to the infraction noted.

Partnership Agreements: Business men are beginning to appreciate the fact that professional accountants are able to advise them properly with respect to the accounts necessary to prevent disputes over partnership agreements. As accounts are the written record of the business, it follows that almost all differences of opinion between partners relate to the accounts. A lawyer does not foresee these differences and most of them do not understand accounts, therefore the accountant, whose experience fits him to point out in advance the various matters out of which misunderstandings arise, is the logical adviser and insurer against many of these points of difference.

The duties of the professional auditor are not always analytical; prevention is better than cure, so that when an opportunity presents itself whereby litigation and other unfortunate experiences may be avoided, it is his clear duty to point out the best course to pursue.

The following rules cover the more important points in partnership agreements, so far as the accounts are concerned.

(1) Nature of Business: The scope of the business and the relation of each partner to the business should be clearly stated, also whether a partner is permitted to engage in outside transactions and whether or not each partner is required to devote all of his time to the business.

(2) Capital: Specify amount to be contributed by each partner, and how it is to be paid. If partners agree to contribute equally, the agreement should state whether cash or its equivalent is to be provided and the penalty, if any, for the failure of one partner to contribute as much as another.

(3) Changes in Capital: If undrawn profits automatically increase and losses decrease the capital accounts of the partners, the agreement should cover the point fully, as the interest of the partners in capital and profits may not be the same.