A Banker Looks at Audit Reports
by PHILIP J. SANDMAIER, JR. Partner, Philadelphia Office
Presented before a joint meeting of the Northeastern Chapter of the Pennsylvania Institute of Certified Public Accountants and the National Association of Bankers and Credit Men, Wilkes-Barre—November 1964
WHEN I was first asked to speak to your group this evening I recalled an experience during my first days in public accounting. I had a friend in middle management of a bank-loan department in New York. We frequently discussed our experiences and problems. He mentioned several times that he hadn't slept well because of a recurring nightmare. This aroused my curiosity. One day I questioned him about the nightmare. He answered that he had dreamt of an unexpected turn of events, resulting in heavy losses on commercial loans he had approved; depositors, stockholders,
bosses, and government authorities called him on the carpet and indignantly asked questions about his management of the bank's assets. Having just gotten out of school I knew all there was to know, as those of you who have sons of that age can readily attest. I quickly explained that all he need do was to insist upon an audit report from each borrower and from then on he could rest easy. Now that I'm older and wiser I know of course that bankers can never rest easy.
In all seriousness, gentlemen, I hope tonight to tell you what an audit report can and cannot do.
An audit report cannot, of course, eliminate nightmares. Can it replace a banker's judgment? Certainly not, although it does provide reliable evidence
upon which to base this judgment. Is the audit report able to replace collateral? Ridiculous, of course. At this point you are probably thinking "Well, what does an audit report do?"
An audit report is nothing more or less than a presentation of significant
information. In its most common form it comprises an auditor's opinion and financial statements, usually composed of a balance sheet, income statement, and footnotes, and perhaps some supplemental schedules. Since you are all quite familiar with financial statements I shall limit myself to comments about the auditor's opinion.
The objective of an audit is to permit the CPA to say that in his opinion the balance sheet and income statement fairly present the financial