166. Periodic Audits

The success of audits of the work of a bank or trust company depends entirely on the efficiency of the auditor. The subject has been under serious discussion in late years. The national and state examiners have been sharply criticized because they have not discovered defalcations and closed banks and trust companies which have not been able to stand the strain of hard times. The examiners are appointed, primarily, to see that the laws are obeyed and not to check up the thousands upon thousands of transactions which even a bank of moderate size has between examinations, in order to ascertain whether some underpaid and overworked clerk has gone astray. The criticisms in regard to the value of the resources may seem at first suggestion to be just, and yet the department may not close the institution unless the capital is impaired. Examination of banks and trust companies in New York State are made twice a year by the banking department and twice a year by a committee of not less than three of the board of directors. The following Section 21A from the Banking Law of the State of New York would be a very good guide for any examining committee:

Sec. 21-a. Books, et cetera, to be examined. It shall be the duty of the board of directors of every bank and trust company in the months of April and October in each year to examine or to c use a committe of at least three of its members to examine fully into the books, papers and affairs of the bank or trust company of which they are directors, and particularly into the loans and discounts thereof, with a special view of ascertaining the value and security thereof, and of the collateral security, if any, given in connection therewith, and into such other matters as the superintendent of banks may require. Such directors shall have power to employ such assistance in making such examinations as they may deem necessary. Within ten days after the completion of each of such examinations a report in writing thereof, sworn to by the directors making the same, shall be made to the board of directors of such bank or trust company, to be placed on file in said bank or trust company, and a duplicate thereof filed in the banking department. Such report shall particularly contain a statement of the assets and liabilities of the bank or trust company examined, as shown by the books of the bank or trust company, together with any deductions from the assets, or additions to liabilities, which such directors or committee, after such examination, may determine to make. It shall also contain a statement, in details, of loans, if any, which in their opinion are worthless or doubtful, together with their reasons for so regarding them; also a statement of loans made on collateral security which in their opinion are insufficiently secured, giving in each case the amount of the loan, the name and market value of the collateral, if it has any market value, and if not, a statement of that fact, and its actual value as nearly as possible. Such reports shall also contain a statement of overdrafts, of the names and amounts of such as they consider worthless or doubtful, and a full statement of such other matters as affect the solvency and soundness of the institution. If the directors of any bank or trust company shall fail to make, or cause to be made, and file such report of examination in the manner, and within the time, specified, such bank or trust company shall forfeit to the people of the state $100 dollars for every day such report shall be delayed, which penalty may be recovered through an action brought by the attorney general against such bank or trust company, in the name of the people of the state of New York. The moneys forfeited by this section when recovered, shall be paid into the state treasurer, to be used to defray the expenses of the banking department.

Many banks and trust companies in New York City-are taking advantage of this compulsory examination to call in expert accountants to assist in the book work. The work of accountants of this class is usually well done, but it is quite possible to get as slipshod work as can be imagined. The directors appointed by the board to make these examinations should not turn over all the work to those whom they hire to assist them, but should personally value the investments and loans and instruct the accountants to devote their attention to checking up the assets and liabilities and looking for errors in work and methods. There is plenty of work for them to do along these lines and they are far better fitted to say whether the ledgers are in balance and whether the liabilities are properly stated than are the directors. The average bank director is better fitted to say whether a borrower is good for the money entrusted to him, whether the collaterals are sufficient to secure the loans, and whether the investments are conservative, than are many of our accounting firms. At all events, the New York law provides that the directors shall make the examinations and specializes particularly in regard to the valuation of the assets. If expert assistance is called in, its work should be under the direct supervision of the committee of the directors and subsidiary to it.

Some institutions have established systems of internal audits. At intervals, determined by the officers without notice, a committee of the clerks is appointed to check up the work of an unsuspecting teller. The clerks on the committee are not notified until time to begin the work. One clerk who is capable of handling a number of men, and who understands the different departments, usually takes charge of the audit and makes the report. This kind of examination can only determine that the clerk examined is in possession of what he claims to have. Clerks cannot question the wisdom of making loans, investments, etc. The moral effect is good, but that is about the only real result. The examinations are apt to be superficial and hurried because the clerks are compelled to remain after hours when they least expect to do so, and are tempted to hurry in order to keep engagements previously made.