Corporations whose securities are largely in the hands of the public ought to furnish their shareholders a statement of their financial condition at least once a year. Accompanying this annual report there should be a statement of the earnings and disbursements during the year.

Shareholders have a right to know what the managers of their corporations are doing in a business way and how their properties are being managed by those chosen among them to officer and direct them.

Not all corporations, however, do this. Various reasons are given in explanation. Some maintain that in making their affairs known they lay their trade secrets before competitors. Others assert there is nothing to be gained by revealing their profits as long as the stockholders are receiving dividends regularly, and that such disclosures are likely to subject them to annoying inquisitions from tax gatherers. In answer to the first statement it is to be said that financial statements can be prepared so as not to reveal trade secrets. As for the second claim, no corporation ought to shirk paying its legitimate proportion of taxes.

Secrecy regarding financial operations has a bad effect upon confidence, as it rightly should have. Unless a corporation is a strong one and has had an enviable financial reputation for years, the refusal to make its affairs known to the shareholders has the inevitable tendency to create the suspicion that not all is as well with it as the corporation would wish to have the shareholders believe.

As a matter of public policy, the National Government has made it compulsory for the railroads to make monthly reports of earnings and operating expenses to the Interstate Commerce Commission, and while these reports still lack clarity to most shareholders, they at least afford the opportunity to make intelligent comparisons. Some of the states also make it compulsory for the public service corporations to file their earnings for public inspection. But compulsion is far less satisfactory in supplying shareholders with information than voluntary statements by the corporations.

The majority of our corporations have come to recognize their obligations to their stockholders in this respect and at regular intervals issue earnings statements and a report at least once a year. The great United States Steel Corporation even goes so far in recognizing the rights of its more than 200,000 stockholders as to publish at least once a month the tonnage in steel orders booked.

As far as the earnings and operating expenses are concerned, there can be little about them to confuse the intelligent stockholder. There can be no juggling with these figures without the fact becoming apparent very soon.

The Balance Sheet

Where the lay mind unfamiliar with the intricacies of bookkeeping is likely to be puzzled, is in the corporation's balance sheet, which is supposed to give to the stockholders an accounting of its assets and liabilities. It is here that a good deal of educational work is necessary. The appraised value of a corporation's assets must be largely-accepted upon faith. A large number of corporations, however, in an effort to convince shareholders of the authenticity of the appraisement of their financial condition, go so far as to secure an independent audit by certified accountants, a method which has been very well received and can usually be relied upon.

But an independent audit is not always what it should be. I have often seen certified statements of this character which would no more convince me that the balance sheet submitted was conservative than had the corporations submitted the figures unvouched for. Some of these accountants simply certify that they have checked the various items on a corporation's books and have found them as represented. This, bluntly stated, merely means that they have accepted them as being correct without carefully going into the matter to determine whether there has been any inflation in appraising the assets with the purpose in view of establishing a strong financial showing. This practice is based upon an erroneous conception of the functions of an auditor. He should be par excellence a critic, not a mere verifier of the books. It is his duty to elucidate the facts by showing errors of omission, of commission, and of principle. Independent audits are valuable only when made by auditors of ability and reputation.

To show to what an extent a financial statement can be made to falsify, I publish herewith a statement issued a few years ago by a wireless telegraph concern which had been engaged in the fraudulent exploitation of its shares until the Government stepped in and put a stop to the swindle. This is the statement:

Here is a statement which superficially presents a very strong financial position. Taken on its face, it shows a book value for the shares, which are of a par value of $10, of over $12.50, not including its speculative possibilities. On this flimsy financial statement the financial sharks who were operating this scheme succeeded in selling considerable stock for as much as $30 a share, or three times its par value. The par value is the value of the shares as printed on the face of the certificate of stock. The very fact that so many people accepted this financial statement as representing the actual financial condition of the corporation, is sufficient proof in itself that very few investors look behind figures, although a great many things may be concealed there.

To an analytical mind the first glance at this statement would arouse at once a justifiable suspicion that there was a great deal of inflation contained in the security. Investigation would have revealed the fact that an abnormal valuation was placed on "patents and patent rights." Going further, the item of stocks and bonds in other companies was apparent on the face of it to be grossly exaggerated. If nothing else would suggest this conclusion, the statement "book value" would have done so, since a well-managed corporation whose affairs are conservatively conducted does not value securities owned in other corporations at their book value, but at their market or liquidable value.