Modified statements giving effect to proposed financing;

              26 HASKINS & SELLS April
Modified Statements Giving Effect to Proposed Financing
BY HOMER N . SWEET
(Of Lybrand, Ross Bros. & Montgomery)
[EDITORIAL NOTE: The following article by Mr. Sweet appeared in the November, 1925, issue
of the L. R. B. & M. Journal. Because of its timeliness and excellence permission has been
obtained to reprint it. Unfortunately, limitations of space have precluded reproduction of the
entire article. With much regret it has been necessary to omit Mr. Sweet's discussion of no-par-value
stock, of modified statements of earnings, and of accountants' certificates and similar
matters in connection with modified statements.]
I N V E S T M E N T banking houses purchase
new issues of industrial bonds and stocks
and offer them for sale mainly on the
strength of the representations of financial
condition and earning capacity. It is
customary for bankers to offer the securities
for sale before the bonds or stock certifi­cates
have been delivered or even issued;
hence, the phrase "when, as and if issued."
Nor does the corporation receive funds for
the securities until after the offering to the
public. Yet a statement of financial con­dition
to be enlightening to prospective
purchasers, must exhibit the assets, liabil­ities
and capital accounts as they will
appear after consummation of the various
transactions incident to the financing. A
balance sheet as of a prior date, adjusted
to give effect to proposed financing yet to
be consummated, is called a modified
balance sheet.
Modified balance sheets are given wide
circulation and publicity. The banking
house which organizes the syndicate shows
them to other houses through which whole­sale
lots of the securities may be sold.
They are reproduced in the bankers' cir­culars
or prospectuses and are distributed
by mail to hundreds and thousands of their
customers. Salesmen of the banking
houses will show the balance sheets to
prospective purchasers of the securities.
The balance sheets are filed with the
authorities who administer blue sky laws
in various states. Financial advertise­ments
in the newspapers mention the
amounts of net assets and net current
assets derived from the modified balance
sheets.
No greater responsibility devolves upon
the public accountant in any branch of his
work than that which attends the certifying
of modified balance sheets. A material
error in a modified statement certified by a
public accountant would reflect seriously
upon his reputation, not to mention the
possible legal consequences of his negli­gence.
The accountant should take every
prudent precaution, within the legitimate
scope of his work, to save his clients, the
bankers and himself from making inad­vertent
misrepresentations of fact.
Bankers for their own protection usually
insist on having certified statements as a
condition of their buying industrial bonds
or stocks for sale to their customers. In­dustrial
issues are seldom offered without
mention in the advertisements and circu­lars
that the accounts and statements have
been certified by independent auditors.
When large syndicates are organized, many
of the participants will join without making
extensive investigation into the finances
of the corporation and will depend chiefly
upon the reports of the accountants and
appraisers. The accountant is, therefore,
regarded as in a responsible relation to
members of the syndicate as well as to the
ultimate buyers of the securities, although
his employment is by the corporation.
What has been said about a modified
balance sheet applies with equal force to a
statement of earnings which the accountant
may be called upon to certify. Usually
the accountant is asked to certify the earn­ings
as well as the balance sheet.
Bankers often look to the accountant for
correct information about details of the
modifications that have been effected in the
balance sheet and details of income, depre-