Don'ts for finance companies;

              Bulletin HASKINS & SELLS 87
"Don'ts" for Finance Companies
By E. E. BERGMANN, New York Thirty-ninth Street Office
WITH the undertaking of each new
engagement, the accountant starts
out in the hope that the assignment will
be one in which his technical and practical
knowledge may prove to be of material aid
to the client. But too often the engage­ment
seems to be lacking in subject-matter
which may be explored and developed with
advantage to the client, and without too
great an expense of time.
An engagement covering an examination
of the accounts of a finance company, to
which the writer was assigned, proved to
be Utopian with respect to such oppor­tunity,
inasmuch as it disclosed practices
and policies which almost precluded the
company from the possibility of being able
to operate profitably, even though the
accounting methods were practically ideal.
Among these practices were a number
which are summarized briefly herein, and
which truly can be called a list of "don'ts"
for finance companies.
The company, first of all, agreed to
finance the distributors of certain manu­facturing
companies without recourse to
the distributors, or to the companies. This
practice led to the acquisition, through
repossessions, of used equipment for which
the finance company could find no ready
market.
Second, the company advanced large
sums to certain distributors on their notes
which were to be liquidated in equal
monthly payments. These notes were
secured only by collateral purchase agree­ments.
This plan of financing gave the
distributor a great leeway in making sales
without regard to the credit risk of the pur­chaser.
It is only reasonable to suppose
that in some instances a dealer, seeing the
impossibility of meeting coming instal­ments
on his notes, would be tempted to
make sufficient sales, without due regard
for the credit risk, to enable him to obtain
funds through down payments with which
to satisfy his current indebtedness, and
then to gamble more or less on the future,
knowing that if he could pay his current
debts he could secure further financing.
Third, the company allowed dealers to
make collections from the purchasers, in­stead
of having the purchasers remit direct
to the finance company. This opened up
several dangerous possibilities, chief among
which was the withholding of collections
by dealers.
Fourth, the finance company, in accept­ing
new business, financed many dealers at
remote points far from the control of the
field force. Such dealers could withhold
collections at will and could otherwise
transact their business in such manner as
to cause large monetary losses to the
finance company.
A finance company generally works on a
slender margin of profit and must use every
safeguard against possible losses. In mak­ing
audits of finance companies, the ac­countant
would do well to analyze thor­oughly,
and consider carefully, the funda­mental
policies and practices employed by
the company in making loans, bearing in
mind the points brought forth in this
article as dangers to be guarded against
in warding off huge potential losses.