Comments as a part of accountants' reports;

              Bulletin HASKINS & SELLS 7
Comments as a Part of Accountants' Reports
By J . M. PALEN, of the New York Broad Street Office
THE interpretation of figures is the
special province of the accountant.
The client may have a complete record
of every financial transaction, but it means
nothing until the figures are analyzed and
assembled into a balance sheet and a
statement of income and profit and loss.
By preparing these statements in com­parative
form we make them highly
illuminative in respect of the changes in
financial and operating conditions. By
the judicious use of percentages we give
them even more significance and practical
value.
The function of comments is to bring
out anything which should be considered
in interpreting the figures, which cannot
well be included or which is not sufficiently
emphasized in the statements. For in­stance,
the amount shown as accounts
receivable means nothing Unless we know
something about the collectibility of the
accounts. The balance sheet may show
property valued at a million dollars, but
if the accountant did not examine the
entries in the property accounts prior to
the current audit period, or if proper
depreciation reserves have not been pro­vided
against this asset, the reader should
know this so that he may make allowance
therefor in interpreting the balance sheet.
The most valuable service which the
ordinary audit report renders is in con­nection
with the administration of the
business. The accountant, being a special­ist
in interpreting figures and in methods
of compiling them, should endeavor to tell
the client something about the business
which he either does not know or does not
properly apply. Ratios, unless they
have already been given in the statements,
may be used to advantage; examples are
the ratio of departmental costs, expenses,
and profits to departmental sales, and
comparison with corresponding ratios in
previous periods; the ratio of the stock on
hand to the cost of goods sold during the
year; of current assets to current liabilities;
and of reserves to the assets against which
they are provided.
A summary of matter which is given in
detail in the statements may be used to
bring out an important point in a forceful
manner. Recommendations relating to
the system, if constructive and not merely
fault-finding, are valuable. Whatever is
said in a report, of course, must be said
because we think it will be of practical
value in the particular instance in which
it is used. There is no other excuse for its
inclusion. Most of the original things
which may be put into a report are things
peculiar to that particular engagement,
and must, therefore, be furnished by the
accountant. The reviewer may pick up
some things, but in the main must depend
upon the information supplied by the
accountant.
Of course, there are instances where it
is known that the client wishes only a
stereotyped report and that he objects to
any recommendations, any changes in the
form of statements, and sometimes, even,
any changes in the phraseology, but these
cases are rare.
Comments should first of all be adapted
to the purpose for which the report is to be
used. This purpose may be evident from
the nature of the work, or may be clearly
indicated in the engagement memorandum,
but in the majority of cases it is for the
accountant, by questioning the client and
from his knowledge of conditions obtained
at the work location, to determine by
whom and for what purpose the report is
to be used.
In a report to be submitted to a bank
as a basis for credit, it is highly desirable,