New-York tribune., 1910-01-03
COMPANIES ACTS
Drastic Reforms Needcd-Bal-
ance Sheets and 1udifing.
London. Dccember 20.

London. December -
Lord Russell Of Killowen. astute as he
was. left the reform Of the Companies
Acts unfinished The fate Of the Law
Guarantee and Trust Society. which has
recently gone into voluntary liquidation.
IL convincing proof that radical changes
In bookkeeping and auditing ars indi5-
pensable in the management OK great
companies. This was peculiarly law
yers' company. in which learned Judges.
eminent barristers and experienced and
wealthy solicitors had invested their saw
ings. 1t started off with every eridencs
of prosperity, and conducted an Immense
and profitable business in insurinS or
guaranteeing mortgages and debentures.
Ten per cent dividends were declared
year after year for the enrichment OF
ordinary shareholders, who had paid only
a small fraction of their subscription
As late as 1908 there was a dividend.
which was apparently justified By the
annual balance sheet. Instead Of sur
plus there is now an estimated loss OF
6 E1,50e.0oo; the paid up capital Of l.
20s,962 with the preferences shares has
been wiped out: there is a deficiency OF
E19S.949 10 be met out Of capital still un-
paid. and voluntary liquidation is the
only alternative for drastic com 1pulsory
processes.
There IS not the slightest suggestion
Of fraud or dishonesty in the manage
ment of this unfortunate company. Its
directors were men Of unblemished rep
utation. and its shareholders included
the flower of the legal profession in
England. There may have been lack OF
caution in the guarantees on theatres,
hotels, metropolitan and suburban fats
and public houses when d general de-
cline in the values of house and other
properties was impending Cuipabis
mismanagement is not alleged by the
most excitable shareholders, who have
been compelled to make up losses by
paying up their holdings nearly in full.
An unprecedented decline In real estate
values partly accounts for loss OF
about tSt0.ooO on outstanding risks OF
to.6o5,0oo on guarantees.
The chairmans explanation is ryor.
comprehensive. He has asserted that
the company had gone into an iHegifi-
mate and unsound branch OF insurance
business, and was forced 10 pay The pen
atty when there was a widespread de-
cline in values. When investors were
alarmed by the trend of general bust
ness or political affairs they obtained
guarantees Of debentures or mortgages
from the company. which were unsafe
risks
The business OF guaranteeing mort
cages may not be so insecure and
as the chairman has stated.
That is controversial ma atter with
much TO be said on both sides. What IS
undeniable is that the honorable men
acting as directors and the eminent
judges and lawyers holding the ordinary
shares did not know the actual state OF
affairs when they sanctioned or drew the
last dividend They had the printed
balance sheet. which had been audited
by expert talent; but il was impossible
for them TO determine from the figures
whether there was an actual surplus oe
an enormous deficiency of assets fcs
meeting liabilities
There was nothing exceptional -eifhes
in the bookkeeping or in the auditing
Ordinary rules OF procedure had beer.
followed. and no attempt had been made
to write down the assets approximately
TO the level which they were likely 70
reach in open market. The balance sheet
was thoroughly misleading, because there
was nothing like z systematic revaiua-
tion of the assets YET the bookkeepers
and auditors had merely done what they
had often done before, and were justified
in every respect by current practice-
Shareholders. directors and the public
were deceived without preueditated ef-
fort or culpable neglect on the part OF
anybody responsible for the management
of the cempany's business.
Neither the balance sheet nor the
auditors certificate proved a safeguard
for the interests of investors in the man
agement of this company. in which the
Lord Chief Justice, Sir Edward Clark
and many other conspicuous ornaments
of bench and bar we're shareholders.
The revision of the companies acts has
left the system vulnerable at these two
points. The Economist" in its whole
some comments upon this amazing
financial disaster indicates the reforms
which are necessary for the protection
of investors One is the conversion OF
balance sheet into trustworthy rec
ord of the position OF the comrany, and
the other Is the enlargement of the
euditors' functions so that they can iu-
sist upon having the realizable value ~
the assets brought out and questionabls
estimates of such doubtful resources as
the goodwill of the business eliminated
What Is needed Is not a record OF
previous expenditures OF capital but a
record of market values OF the assets, so
that investors and shareholders can
know what their property is really
worth. Window dressing for annual
meetings would speedily become dis
creditable and suspicious IL directors and
auditors were under obligation 10 ccri-
pei the managers and boolxkeepers TO
estimate what the assets would fetch IN
open market, Balance sheets might not
be so decorative as they are now. but
they would be less misleading The
credit side would represent real values:
every one concerned would know whers
the companies stood: there could he an
adequate allowance for depreciation of
properties and securities, and auditors
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