[ Volume XXV
THE CHICAGO BANKER
18
great advance. The United States possesses both of these essentials, and as we stand as near as any nation of the world to her, if we will but take advantage of the great opportunities presented, we shall share with the Chinese and the rest of the world the great benefits which will accrue from her complete awakening and development.
Prof. Monoghan's appearance before the 1 ’hila-phia Chapter was an event that has been long desired, and at the conclusion of his address he was given one of the most enthusiastic ovations that has ever been accorded a speaker on our platform.
That the excellent programme of the evening was appreciated and enjoyed by the young bankers of Philadelphia, was demonstrated by the fact that the attendance was well over sixty per cent of the local chapter’s total membership.
From this season’s indications, signs are not wanting that the serious problems of “crowded quarters" may again be forced upon the hustling board of governors of the Philadelphia Chapter in the near future.
as hallowed ground. Their present awakening and disposition to utilize the abundance of wealth in the ground, opens a new era in the commercial world and presents a real danger and especially in this country where coal, iron and steel are supreme. He also called attention to the great skill of the Chinese in weaving silks and other costly fabrics and predicted that when factory methods superseded individual industry, with their cheap wages for labor and abundance of raw materials, no tariff wall, however high, would prevent that empire from successfully competing with the other nations of the world for industrial supremacy. Commercial invasion and not military, he declared to be the “real yellow peril,” and as the whole world is eagerly watching the amazing advances made by the Celestials along this line, it behooves the American people to take notice and prepare for the inevitable results. The professor, however, took an optimistic view of these conditions, and reminded his hearers that China in order to realize her fullest possibilities needs both capital and trained men to guide her in her
our surplus annual wealth. These and many other facts are well known and recognized by the wise Japanese statesmen, and they preclude' all possible danger from that source for many years to come.
In answer to the proposed danger of China and her awakening hordes, Prof. Monoghan gave a brief history of the Chinese and analyzed all the possibilities of their fulfilling the warnings advanced in respect to them. His brief outline proved conclusively that the teachings of their revered Confucius still obtain and that the basic principle or ruling desire of the Chinese may be summed up in their repeated assertions that they want no war but “peace and justice.”
The speaker then proceeded to give a brief outline of the magnificent material resources of the Chinese Empire in the way of coal, ore for making all kinds of precious metals, iron, steel, etc., all of which has been lying waiting for centuries, to be utilized. The ancestral worship of the Chinese has caused them to revere the burial places scattered haphazard all over the empire,
Commercial Balance Sheet as Bankers View It
be able to repay the loans and no exposure of his methods will come to light, while if he becomes bankrupt, he has succeeded in postponing the failure of his business, and in the mean time obtained a livelihood from it. The reason why the law fails to reach such people lies in the fact that fraudulent intent must be proved beyond a doubt, and intent is one of the most difficult things to determine that the law has to cope with. The usual defense when a concern becomes bankrupt and a very different condition of affairs is discovered than exhibited in the statements rendered to the banks, is that the statement was handed to the bookkeeper and he filled it out; that the signer of the statement was not himself a bookkeeper and that he relied upon the bookkeeper. A hundred and one reasons can be found for escaping this liability, but it is usually the bookkeeper who must bear the blame, whether the erroneous statement is due to errors in the description of the assets, an overstatement of inventories, or fixed assets, or even the elimination of a part of the liabilities. Under the new interstate commerce law it is a criminal offense for the auditor to sign a report to be submitted to the Interstate Commerce Commission, which is false and he cannot offer an excuse of ignorance. This regulation gets at the gist of the matter, and it may be that in years to come we may find a similar law applied to mercantile concerns, making it necessary for all statements used for the purpose of borrowing money to be signed by the head-bookkeeper, or auditor under oath. Bookkeepers and auditors may, in order to retain their positions, acquiesce in furnishing figures which they know to be wrong, but they are unlikely to do so, if such action places them in the penitentiary.
We will now take up for consideration exhibits “A” and “B” which you have before you, as they furnish practical illustrations of some of the topics already discussed. And the value of these exhibits lies in the fact that they are not theoretical and drawn up from imagination, but are actual facts prepared by my firm and submitted to committees of bankers. The names of the concerns are, of course, withheld, and it would be useless to attempt to guess what concerns they represent, as the figures given really illustrate the “swan song” of so many corporations that have passed away since November, 1907.
Exhibit “A”
I desire to call your attention in the first place to the summary at the bottom of the page, and you will note a remarkable decrease
A valuable paper read before the Chicago Chapter, A. I. B., by Ernest Reckitt, C. P. A. Printed in three parts.
periodically paid to a certain individual, but the books do not show any present or past liability due to such individual, the matter would call for inquiry.
On the other hand, I have known instances where loans had been made to a business by partners, officers or other relatives, and not entered on the books of account, while the interest has been always met by the private check of one of the officers. In such cases it is, of course, impossible to discover the existence of such indebtedness.
Another class of liability which is frequently omitted, but which is readily estimated by the accountant is accrued interest on unpaid purchase money, loans, taxes accrued, etc., and also in some cases amounts due to sinking fund trustees. In the case of lumber companies, for instance, where bonds have been lloated on security of the standing timber, it is customary to appoint trustees for the bond holders, and to provide in the trust deed that so much per thousand feet be paid over to the trustees in respect of the timber cut each year. I have known instances where this liability has been ignored by borrowers in preparing statements.
I could, of course, continue giving innumerable instances of the way in which statements can be manipulated, but the instances I have mentioned are. I think, sufficient to demonstrate my point that in many cases only a detailed examination by public accountants will reveal the true condition of a borrower’s business.
A question which undoubtedly will present itself to you as a corollary to the foreg'oing remarks will be:	“What recourse has the
banker against the party who signs a false statement of assets and liabilities, knowing it to be false or misleading?” The answer is, I fear, a discouraging one, for in all the many cases I have come in contact with, while there was no question in the minds of the bankers or of myself that the party who signed the statement had a guilt)׳■ knowledge of its falsity, it would have been impossible to obtain a verdict of guilty from any jury. The result is that under the present law a premium is placed upon dishonesty. The practicer of this form of fraud has everything to gain and nothing to lose; for if he is successful in making good profits out of the funds loaned to him, he will
(PART THREE)
Goods on consignment are also frequently included amongst the accounts receivable, and as these on such occasions are invariably included at selling price, it will readily be seen that a very different position of affairs may be brought out when such consigned goods are isolated and reduced to cost prices, and shown as a separate item. It is very usual to charge such consignment with the freight charges on sending them to consigned points, and if the venture has proved unsatisfactory, it may be necessary to return the goods to the factory, in which case they will ultimately be worth to the borrower only his cost price, less the outward and inward" freight.
Another very misleading practice is quite common, and is often the result of thoughtlessness, rather than due to a deliberate intent to defraud, as indeed is very often true of most of the other instances which I have quoted. The practice to which I refer, is that of stating real estate at the net expenditure on same, whereas, as a matter of fact, a large liability exists in respect of unpaid purchase money and the asset should consequently be stated at its full value and the corresponding liability shown. It is also a common practice to assign increased valuations to real estate, which on investigation prove to have been made on the mere say so of some irresponsible real estate man. The accountant should, of course, ascertain the actual cost to the borrow'er of any real estate owned and only permit the inclusion of increased valuation after having submitted to him very good evidence and justification of such increase.
Another device is to state the fixed assets, such as plant and machinery, at original cost, although the borrower’s plant may have been operated for a number of years. In such cases an estimated amount should be deducted from the cost value to cover depreciation.
I have frequently found that balances due on stock subscriptions have been included amongst customers’ accounts receivable. This is, of course, most misleading, as in many instances the subscribers for stock are “men of straw” and expect to pay for their stock out of the dividends earned by same.
As regards the liabilities, it is a matter of considerable difficulty for an accountant to ascertain that all of these are included, but I have known several instances where by a careful analysis of the interest account, failure on the borrower’s part to include certain liabili-ites has been discovered. For instance, where the accountant finds that interest has been