One who makes a profession of examining and reporting upon the financial condition of a firm, corporation, municipality, etc.; a person competent to examine accounts; compare the charges with the vouchers; to establish the fact that the financial condition is, or is not, as represented. A railroad " Auditor" is the official who examines the accounts of the different ticket offices, departments, etc., to ascertain that no errors or dishonest acts have occurred. The Auditor of Public Accounts is he who examines into the accounts of all the departments of a State, for instance, and so on.

It is generally customary for investment bankers to employ an " auditor," or expert accountant, to examine in detail the books of a corporation which is already in existence and running, to verify the earnings as rendered by such corporation, and whose bonds, stocks, or other obligations it is the banker's intention to purchase. Of course, in the case of many corporations, like large established railroads, which are obliged to furnish, at stated intervals, a public statement of their earnings, sworn to by the road's own officials, it is very often not customary to have their accounts verified in this way, but in the case of street railways, electric light companies, gas companies, etc., and even in the case of the smaller railroads, the custom is generally followed.

The necessity for such examination is well set forth in the following true case: Several existing properties had been consolidated and operated as a single property for about one year; a statement of the earnings of the property since consolidation had been furnished to the bankers intending to purchase the bonds. The earnings seemed very satisfactory, but an expert accountant, in making a very exhaustive and careful investigation of the books, found that at the time of consolidation, each of the various properties had on hand quite an amount of supplies, such as coal, oil, etc., and that during the period since consolidation, these supplies had been consumed without any charge for the value having been made against the earnings. If these supplies, which were necessary supplies, had been purchased during the period of operation, the net earnings as rendered would have been very much lessened. The result was, that the earnings were found insufficient to warrant the banker's taking the bonds. This is not an unusual case, and any " auditor " should have readily discovered the discrepancy. It does not argue in any way a desire to deceive upon the part of the officials of the corporation. They were very likely unconsciously deceiving themselves, and were as much surprised as any one to find that they had misrepresented the true state of affairs.

Now, be it said, in support of the honourable banking fraternity, that this banking firm having contracted for the purchase of this issue of bonds, based upon everything being as represented, had in turn sold it to a large institution, which had sent its own expert to examine the property, and who had made a careful and favourable report. The issue of bonds was of some considerable size and represented an attractive profit to the bankers. Upon finding the discrepancy in the earnings, the matter was at once reported to the institution, the bankers declining to have the issue pass through their office, necessitating not only the loss of anticipated profits, but an actual financial loss resulting from employment of experts, etc., running into quite a sum.

This specific example has been set forth here to show some of the troubles and tribulations of the banking houses, of which the investment public may know but little. It is perhaps a safe statement to make that on the average, one out of three issues of corporation bonds investigated, and generally at some considerable time and expense, are declined by bankers after examination. The direct money expense, and the loss of time to the banking houses from this source, is considerable in the long run, and an investor must understand that it is done primarily to protect the investors' interests, and, next, to maintain the good reputation of the banker.

There are, of course, some exceptions to this rule; banking houses have been known to buy issues of bonds without proper investigation or the employment of sufficiently expert examiners, but the bankers in general must not be condemned on account of the faults of the few. This fact is emphasized because of the unfair charge often made of the desire of the average banker to sell anything that will sell and so make a profit. The investment public little knows the care which is generally taken to safeguard its interests, and even in spite of all this care, some unforeseen condition, like possibly unexpected competition, or the invention of some new method of accomplishing what the corporation in existence may already be doing, will bring disaster, and, in such cases, the investor is too prone to heap all the blame upon the banker. And let me say a word here to the investor, before he puts the blame of financial loss upon the person from whom he makes the purchase. Let him make a thorough investigation of what has brought about the loss, let him ascertain the care that was taken at the time of purchase to safeguard his interests, and then let him be willing to take his own share of the responsibility, and remember that there is no investment of any kind that can be made without some risk, and the greater the interest obtained, as a rule, the greater the risk. Remember that risk increases tremendously with the growth of the size of the promised interest return. When an investment turns out favourably, and, as in some cases, a profit from the increase in value of the security additional to the interest return is derived, the investor is inclined to pat himself upon the back with great satisfaction and give himself all the credit for this profit; whereas, it may have been due entirely to the advice of the banker. The banker usually gets no credit; but, if a loss results you may rest assured that the banker will get all the odium of the blame.

The writer desires to lay considerable stress upon the importance of the wording of an " auditor's certificate." There are certificates and certificates, and although a banker may state that a certain issue of bonds has been safeguarded by a careful examination into and report upon the earnings of the corporation,yet that fact in itself is not sufficient. Knowledge should be had somewhat as set forth by the following, which appeared in the Wall Street Journal:

"The public . . . has suffered enough disappointment from accounts certified by reputable auditors to make the whole question of the public accountant and his function a matter of direct interest to the investor. It is very hard for the outsider to discriminate between what is really a trustworthy certificate and what is a bad one. There is no standard form.

Here is a typically bad certificate:

" ' We certify that the above condensed balance sheet is correct, according to the books and accounts.


" ' Accountants.

"Such a certificate has little value. If the affairs of the company have been administered against the stockholders' interests and for the benefit of a dishonest executive it is certain that the books submitted to examination will balance. The certificate professes to give independent protection to stockholders, but it could be used by the crudest swindler that ever deluded the unwary investor.

" There are plenty of good certificates. Here is one in abridged form which amply protects the stockholder:

"'we have examined the account books and vouchers of this Company and its associated companies and have verified the consolidated profit and loss account and balance sheet published herewith. We find the inventories sound and conservative. The depreciation and reserves are such as to leave no doubt in our minds that the final balance asset values are safe. Every care has been taken to include in the balance sheet all ascertainable liabilities of the company.'

"What should an examination be? It should be such an investigation as the stockholder would make for himself if he were an expert accountant. The great societies of accountants in Europe demand a certain standard of their members, and will not tolerate certificates given where no real audit has been made. Every one is willing to believe that this is the aim and ideal of our Society of Public Accountants. They can do more in a month than ill-informed State legislatures can in a year. They can establish a standard form of analysis for their members of such a character that no respectable corporation will care to use the certificates of accountants not responsible to a powerful and high-principled organization such as theirs."