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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
Object Description
Title |
Non-recurring charges |
Author |
Anonymous |
Subject |
Financial statements Securities New York Stock Exchange |
Citation |
Haskins & Sells Bulletin, Vol. 11, no. 09 (1928 September), p. 66-68 |
Date-Issued | 1928 |
Source | Originally published by: Haskins & Sells |
Type | Text |
Collection | Deloitte Digital Collection |
Digital Publisher | University of Mississippi Libraries. Accounting Collection |
Date-Digitally Created | 2009 |
Identifier | HS Bulletin 11-p66 |