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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.
Investment trust trends
Haskins & Sells Bulletin, Vol. 11, no. 03 (1928 March), p. 23
|Source||Originally published by: Haskins & Sells|
|Collection||Deloitte Digital Collection|
|Digital Publisher||University of Mississippi Libraries. Accounting Collection|
|Identifier||HS Bulletin 11-p23|