Adequacy of reserves;

              42 HASKINS & SELLS June
IN the not so far distant past it was usual
to hear representations being made
frequently that accountants are not quali­fied
to pass on the adequacy of reserves.
Those who took this position were fond of
pointing to the matter of depreciation,
calling attention to the fact that the
measurement of depreciation largely is a
matter of guess work, the responsibility for
which accountants are not justified in as­suming.
It has been pointed out repeatedly
that accountants are not appraisers; that
it is not within their province to pass judg­ment
on valuations; and that their work as
auditors should be confined to the verifica­tion
of data recorded on the books by
employes of the client in accordance with
instructions from officers and directors.
If this line of reasoning had been pursued
much further and had come to be com­monly
accepted, it would have been diffi­cult
to have determined just what value
the services of certified public accountants
might have to clients. The restrictions on
their functions were gradually approaching
a point where there was little left for them
to do but check figures.
Included in this list of restrictions was
the matter of reserves. Accountants of the
old school were wont to dwell on the idea
that once the directors of a corporation had
made an appropriation for depreciation,
the reserve thereby created was not sub­ject
to question in this respect, and any
accountant who would presume to investi­gate
the adequacy of the reserve was over­stepping
the bounds of his jurisdiction.
This idea has not met with popular
approval on the part of progressive ac­countants
who are up and coming, so to
speak. Granting that "fools rush in where
angels fear to tread" and at times all for­ward-
looking accountants are guilty of this
mistake, the consensus of sound opinion
seems to be that public accountants not
only have a right but a duty to investigate
matters like depreciation and reserves
covering this factor of operations, for the
purpose of passing judgment thereon and
rendering an opinion to clients based on the
conclusions reached in the premises.
This investigation, if properly conducted,
frequently is productive of interesting and
valuable results. The basic factors, such
as cost of the property and the elapsed
period of its service, generally speaking, are
easy of determination. Its probable life is
somewhat more difficult, but, little by little,
experience is affording an accumulation of
data which makes the establishment of
depreciation rates fairly satisfactory.
Numerous writers have furnished tables,
based on experience, covering a great
variety of property. Appraisal companies,
while collecting such data primarily for
private use, have contributed something
now and then to the fund of information.
The Treasury Department has added a
substantial amount. It is possible now,
in a great many cases, to compute a fair
measure of depreciation and therefrom to
check the provisions for such factor.
Another item which has been the subject
of considerable controversy is the reserve
for doubtful accounts. In the past some
have been of the opinion that it was not
within the province of the accountant to
question the adequacy of a reserve for
doubtful accounts or to pass judgment
thereon. It was held to be sufficient if the
mathematical accuracy of the account was
verified, that is to say, the results of the
computations were determined to be cor­rect
or incorrect in accordance with the
bases used. If a mistake was discovered
in the course of this procedure and not
corrected before the accountant's report
was rendered, of course, it would have to
be mentioned in the comments of the
report. No thought, apparently, was
given to the fact that a certified balance
sheet, to be of any value, should reflect
the true financial condition and that one
of the items entering into such condition
is the net value of the accounts receivable.
If the accounts receivable account con-
The Adequacy of Reserves