In addition to the periodical examination made by the national bank examiner, every bank should be required by law to have an annual audit made of its affairs by a competent accountant, in order that the directors may be assured that the books of the institution correctly represent its liabilities, and not rely upon the bank examiner to determine this for them. It is not the duty of the bank examiner to ascertain the condition of the bank for the directors. It is the business of the directors to determine this for themselves, independent of the examiner. Examinations are made by bank examiners for the information of the Comptroller, who represents the interests of the public in the bank, and not for the officers or directors of the institution, who have no right to rely on the examiner to determine for them the condition of their own association. If the liabilities of a bank are correctly recorded, the examiner can be depended upon to determine with a reasonable degree of accuracy the value of the assets, at least to the extent of satisfying himself whether or not they are sufficient to pay the liabilities to creditors in full.

No better or more convincing illustration can be presented of the necessity for and the advantages of an audit of a bank than that afforded by the failure of the National City Bank of Cambridge, Mass., on February 23, 1910, as a result of the defalcation of the individual ledger bookkeeper, George W. Coleman.

Coleman kept a small personal account in the bank, but never had a pass-book, consequently his account never was balanced. He would draw his personal check for three, four or five thousand dollars on the National City Bank of Cambridge, take this check to the office of a curb broker, whose manager would issue the broker's check for a like amount, payable to the order of a friend of Coleman. The broker's checks were cashed by the bank in which he kept his account and the proceeds were turned over to Coleman. Coleman's checks were deposited by the broker in the bank with which he did business, for collection for his account, and were paid the following morning through the Clearing House by the National City Bank.

It was Coleman's duty in the National City Bank to check the Clearing House items, and in doing so he would abstract his own checks from the incoming mail. The general ledger and the general cash books were kept by the cashier, and the total checks paid, including those coming through the Clearing House, were entered by him in the cash books. It appears that the cashier never inspected the Clearing House ledgers, but simply posted the totals of these ledgers in the cash book. The general ledger, therefore, always agreed with the general cash book, but the amount actually due individual depositors was more than the amount shown on the individual ledger, owing to the fact that Coleman's checks were continually paid and were not charged to his account. In order to make the total deposits on the individual ledger agree with the amount shown on the general ledger, Coleman, it appears, resorted to false entries and the reduction of balances when he carried forward accounts.

Through this system of "kiting" checks with the broker, Coleman stole approximately $310,400 of the bank's funds, and in carrying forward balances from day to day he manipulated from forty to fifty accounts. The defalcation was not discovered until an audit of the bank's books was made, although Coleman's peculations extended over a period of several years.

The directors of the bank acknowledged that while they had noticed a continuous shrinkage in deposits, they concluded that it was due to the competition of a trust company in the same city which was paying four per cent, interest on deposits, and the fact that the board was not specially active in striving to increase the business of the bank. The audit which uncovered the shortage was not made for the purpose of ascertaining why the deposits were continually diminishing, but with a view to placing the association in liquidation and selling its business to the competing trust company.

When this bank was closed by its directors and the facts became public in regard to the defalcation, the examiner, as usual, was severely criticised for permitting the conditions disclosed to have existed so long without detection, not only by the press of the locality, but by the directors of the institution and the Comptroller of the Currency as well. The directors assumed to hold the examiner blamable for the conditions for which they alone were responsible, and endeavored to exonerate themselves by throwing the blame upon him under the plea that if he was not able to detect the shortage, they certainly could not be expected to discover it. And the Comptroller gave credence to their ridiculous claim by publicly suspending the examiner, to his great injury and the discredit of the service which he represented, before he had any knowledge of the facts other than that derived from unfavorable press despatches.

It never occurred to the directors or the cashier of this bank to examine the individual ledger to ascertain whose accounts were being withdrawn and to inquire of the depositors the reason for closing their accounts. Had this been done in any one of the fifty accounts that the bookkeeper manipulated it would have led to the discovery of the fact that the books of the bank did not show the correct balance due the depositor whose funds were being embezzled and whose accounts were being falsified. The account of the President of the bank was one of those that was manipulated. They counted the cash and examined all the bills and notes at regular intervals. So did the examiner. But they never undertook to call in and balance pass-books, or verify individual deposit balances in any other way, nor did they direct the cashier to do so, and this was the defective and vulnerable point in their management which the bookkeeper took advantage of.