Non-recurring charges;

              66 HASKINS & SELLS September
ONE of the most important uses of
certified financial statements, because
of the number of individuals involved, is
that of using them in connection with pub­lished
advertisements of securities. Al­most
every large metropolitan newspaper
contains, daily, advertisements offering for
sale securities of a certain corporation, or
corporations, in which it is stated that
the earnings over a certain period, as
certified by public accountants, were so
much. Such a statement is important
from the standpoint of the corporation,
the bankers, the accountants, and the
general public, which is the prospective
purchaser of the securities.
Because of the widespread character of
investments and of the difficulty of ob­taining
first-hand information concerning
the financial condition of issuing com­panies,
investors necessarily have had to
depend, to a great extent, upon certified
financial statements for information con­cerning
the financial condition and earning
experience of corporations. Bankers, in
turn, also depend upon certified public
accountants to furnish true statements of
the earnings over some past number of
years, together with the present financial
condition. In publishing security offer­ings,
the bankers naturally place the re­sponsibility
for the accuracy of the state­ment
of earnings and the statement of
financial condition upon the accountants.
This perhaps is as it should be, if the
accountants have made the necessary
examination to enable them to assume the
responsibility, since they are best fitted to
furnish such information, and since pro­spective
investors place considerable
reliance upon the auditors' statements.
For use in security offerings, the state­ment
of net earnings is probably more im­portant
than a statement of financial con­dition,
since the investor is greatly in­terested
in the assurance of a regular and
sufficient return on his investment. No
matter how strong the financial condition
of an organization may be, the investor
usually is not interested if the record of
earnings has not been good. It is im­portant
then that the earnings be stated
correctly, since investors may be badly
misled if they are not. Earnings pre­sumably
will be stated correctly if they are
certified by responsible accountants, pro­vided
misstatements are not made in the
offering sheet concerning such certification
or the accountants' responsibility may
not be misinterpreted because of loose
language used in describing the extent and
character of their work.
Probably the most usual statement made
in advertisements of bonds is: "The net
earnings, after deducting all charges, in­cluding
depreciation, but before interest
and Federal income tax, as certified by
public accountants, were as follows".
This statement concerning the certification
of earnings probably is the simplest pos­sible
since it involves a certification of past
earnings and expenses without any adjust­ments.
There are seldom misstatements
of earnings in security offerings of this
kind, and seldom misinterpretations con­cerning
the auditor's work.
However, in cases of financing reorgani­zations
and mergers, it is often desired to
show the net earnings after excluding cer­tain
expenses which it is believed or known
will be eliminated from future operations.
Such adjustments are perfectly legitimate
if the amount and nature of the non­recurring
charges, and by whom they were
determined, are clearly stated in the
security circular. Accountants frequently
are unwilling to certify to earnings after
eliminating non-recurring charges. Secu­rity
advertisements stating net earnings
after eliminating non-recurring charges fre­quently
are misleading, because they fail
to show the amount or nature of expenses
eliminated, and because they often give
the impression that the accountants have
certified to the adjustments, whereas,
in reality, the management has made the
Non-Recurring Charges