Investment trust trends;

              Bulletin HASKINS & SELLS 23
Investment Trust Trends
WHEN investment trusts were first
introduced in the United States there
was a tendency to operate along strict
trust lines by selling participating certifi­cates
or trust shares in a trust fund which
was invested in a diversified group of se­curities
and deposited with a trustee. The
holder of a participating certificate had a
proportionate interest in the total value of,
and income from, the fund. However, the
trend is now away from the strict invest­ment
trust type of organization and toward
the investing company type. Most of the
so-called investment trusts today issue
their own bonds or debentures, which bear
a fixed rate of interest, and invest the pro­ceeds
in a variety of outside securities.
Any profit made on the securities over and
above the annual interest charges on the
bonds and debentures belongs to the cor­poration.
Despite the present trend, there are
still many points peculiar to an investment
trust which the auditor should investigate
while making an audit of such a com­pany.
Perhaps the most important phase of
the so-called investment trust organization
which the auditor should investigate is
whether the company's investments con­form
with the standards of value and stand­ards
of diversification prescribed in the
articles of incorporation. The standards of
value usually permit investments only in
securities having a certain earning power,
issued by companies established for a cer­tain
length of time, and which conform to
other similar requirements. Standards of
diversification prescribe the proportion of
the funds which may be invested in any
one security, company, country, type of
industry, or type of security.
The matter of earned surplus available
for dividends also requires the attention of
the accountant. He should assure himself
that the company is not taking into earned
surplus available for cash dividends any
increase in the market value of the securi­ties
in which its funds are invested. The
accruals for the period also should be tested
rather thoroughly.
The manner in which the management is
compensated for its services should be in­vestigated
and the correctness of such com­pensation
verified. It is desirable also that
the auditor determine if any of the officers
or directors of the company are connected
with any other financial organization which
issues and sells securities. If so, it is pos­sible
that unsound securities which the issu­ing
company was unable to move may have
been "unloaded" onto the investment trust.
While in the case of a company organized
upon a purely investment trust basis it is
probably best to show the company's ac­countability
for the participating certifi­cates
as a deduction from the trust invest­ments
on the asset side of the balance
sheet, there appears to be no reason for
varying the form and arrangement of the
balance sheet of an investing company from
that ordinarily used by corporations gener­ally.
Of course, all contingent liabilities
should be shown in the balance sheet.
No matter what the trend of investment
trusts may be, the fundamental principle of
diversified investment in marketable se­curities
still remains, and the accountant
should bear that in mind while auditing
such companies.