the result of the omission over a period of years to make renewals as they are needed, and thus, when extensive expenditures for the rehabilitation of the property are finally imperative, they really represent an accumulation of long-deferred maintenance charges. It is manifestly unfair to charge the entire amount of the expenditures against the operations of the particular year in which they happen to be made. On the other hand, if they are but accumulated maintenance charges, the mere size thereof does not justify capitalizing them. Then, too, the problem is usually complicated by the fact that the expenditures usually result in some increase in the carrying capacity of the road. The wornout rolling stock is replaced with larger units, heavier rails are laid, and power-plant equipment of increased capacity is installed. The proper treatment of reconstruction charges is to charge to capital such part thereof as represents an increased value in the reconstructed part of the property over the original cost of the property replaced; such part of the expenditure as represents a fair or normal annual maintenance charge should be debited to operating; and such part as represents the making good of neglected maintenance applying to prior years should be treated as a special charge against profit and loss. When such reconstruction expenditures are made by a company after the purchase of a dilapidated property, it is assumed that in fixing the purchase price allowance was made for the expenditures required to be made to place the property in good operating condition. Consequently, under such circumstances the entire amount of the reconstruction expenditures are considered to be a proper capital charge. It is to be borne in mind that especially under such circumstances it is essential that depreciation allowances be included in the accounts. Otherwise, with the abnormally low maintenance expenditures which will naturally follow during the first few years after extensive reconstruction, the showing of net earnings will be misleading. It should be borne in mind that there is danger in capitalizing charges for betterments which do not increase earnings nor decrease operating expenses. On the other hand, in view of rate regulation it is not safe to wipe off all such expenditures. The situation can perhaps best be met by capitalizing the charges and segregating a liberal proportion of the surplus to prevent the payment of unwarranted dividends. The liability for unsettled damages to persons and property always needs to be thoroughly investigated. In practically all cases some suits will be found to be under way or threatened, and in addition, consideration should be given to all accidents for which releases have not yet been obtained, even though suit has not been entered. Large companies have a special claim department, from which the desired information can be obtained, and for smaller companies a letter from the company's attorney should be obtained stating all unadjusted claims and the probable cost of settlement. Many companies create an accident reserve by crediting to such an account and charging to operating expenses a certain percentage of the gross earnings. Payments in settlement of claims are charged against the reserve. This plan is preferable to that of charging accident payments directly to operating expenses, as it equalizes the charge to successive fiscal periods and, if the charge is ample, creates a reserve for those claims which are unsettled at the end of each period. The plan must be intelligently used. Some companies use too low a percentage and carry the resulting debit balance in the reserve account along from one period to another as a deferred charge to operations. Obviously, payments for accidents occurring in one period are not of the slightest benefit to the operations of a future period, and if a debit balance develops in an accident reserve account, it should be forthwith written off. Such a condition is sometimes due to an unusually serious and costly accident, which is not likely to occur again soon, and it may not be necessary to raise the percentage of gross earnings credited to the accident reserve. As already stated, however, the overdraft in the reserve account should be immediately written off, as it is not an asset in any sense of the word. The extensive development of the interurban electric railway field during the past decade has resulted in conditions which in some respects are perhaps even more analogous to those of steam railroads than to those of the city electric railway. With considerable mileage, a large freight and express business, graduated rates of fare for passenger traffic, etc., an efficient auditing department as a part of the company's organization is a necessity. This department will naturally audit the details of the company's operations, and the professional auditor's duty with respect to this part of the work will ordinarily be limited to such tests and investigation as will satisfy him that the prescribed system is being followed and that the client's interests are safeguarded in every way possible. TAXICAB COMPANIES In auditing a taxicab company, the procedure would be much the same as for an ordinary manufacturing company, excepting the verification of its chief source of income-the charges for service rendered. The taxicabs, as the name indicates, are equipped with taximeters. These show both the total mileage and the revenue miles, i. e., the mileage run during the time the cab is carrying passengers. Most companies keep what is called a master's sheet or some record showing the car number, the time out and in, and the reading of the meter, both as to revenue and total miles. When the cab leaves the garage, the reading is entered on the sheet, and on its return, the reading is again taken and entered alongside of the first or "out" reading. The difference in the revenue miles reading represents the revenue miles run and has to be accounted for by the driver of the cab, either in cash or by proper evidence of having carried a charge customer. With the larger companies most of the calls originate at some hotel or at a stand where there is a starter employed by the company. It is the starter's duty to determine whether or not the customer has an account, and if so, he signs a ticket which is given to the driver, so that the driver turns in either cash or tickets for all fares. By most companies any shortages are deducted from the drivers' wages. Each driver is provided with a daily card, which should show the same mileage as the master's sheet, but in addition gives the details of the call. The cash received from this source is entered in a cash-fares column in the cash book and the charges are posted from the tickets to the customers' ledgers, the total being posted through a journal to the general ledger. In some cases these charges are written up on sheets, or a journal, and posted to the ledgers therefrom. It would not be practicable for the auditor to check the accuracy of all of the entries, but a thorough test should be made for a certain period. The total cash fares and charges should be checked with the drivers' cards. The mileage shown by the drivers' cards should be checked with the master's sheets, and the "out" readings of the mileage should be compared with the “in” readings of the previous day. The latter is important, as it would be an easy matter, if collusion existed, for the starter at the garage to add several miles to the "out" readings or to deduct several miles from the "in" readings, which, if the driver used the same figures on his card, would give him less mileage to account for. Many companies keep mileage records. Where this is not done, it would be well, in connection with the checking of the master's sheets, to make a list of the mileage, both revenue and total, and compare the ratio of the one to the other for the period investigated. There are many expenses which should vary directly as the mileage. Tires sometimes are rented on a mileage basis. Using the mile as the unit and stating the earnings and expenses per mile, especially when such results can be compared with the results of another period, enables the auditor to uncover many discrepancies. In the verification of the pay rolls, disbursements, purchases, sundry sales of gasoline and supplies, storage, etc., the procedure should be the same as in any other business. Depreciation is an important item, but it should be borne in mind that a good taxicab can be renewed in large part, and where tires and motors and other repairs are being charged against operations, a reserve of only fifteen to twenty per cent is sufficient to cover all depreciation in a going concern. As an illustration of the accounts to be found in a taxicab company, the following form of balance sheet and statement of earnings and expenses is presented: |