The Technical Audit

IT IS universal practice for corporations, at the end of the fiscal period, to call in a firm of chartered accountants to audit the books. The effect of this is to put an independent organization's seal of approval on the accounting of the business done by the management. Their report lets the stockholders know that the accounts rendered truly present the results of the year's business. This is as it should be; the average stockholder has no personal contact or even acquaintance with the managers of his enterprise and the approval of their stewardship by an indepen-dent agent is very desirable for maintaining confidence in their honesty and ability. But such an examination deals only with what may be called the arithmetic of the business; even the most elaborate audit, as the practice is at present, goes no further than to verify the items of the inventory. In other words, while checking up the entries showing the transaction's of the year and certifying to the correct-ness of the items of the balance sheet, such a report gives the stockholder no idea of the ability with which his affairs have been managed. If the profit and loss balance is satisfactory, as certified by the public accountants, he assumes that the management has been able; where it is not, he turns to the president's report and usually finds an explanation. Such an explanation never takes the form of admission of mis-takes in business judgment or of bad technical manage-ment. It could hardly be expected that it would. The stockholder is generally furnished, therefore, with a certificate of the honesty of his management, but never one of its ability. He does not worry about the latter as long as dividends come in; when they cease, his action generally finds expression in replacing the management. In other words, so long as profits are realized, he assumes the management to be good, even though its success is a matter beyond its control and better management would make larger profits. When there is no profit, the stockholders have no means of knowing whether it is due to conditions beyond the control of the management, as the annual report is sure to allege, or whether, by better management, profit is possible. Here is where the technical audit comes in.