of thousands of dollars had been going on for a series of years! A small trust company was robbed of several thousand dollars by an employee who had for some time acted both as savings teller and as savings bookkeeper! In such cases one hardly knows whom to blame most, the defaulting employee or the officials responsible for the lack of intelligent system. It is true that no system can be devised which will absolutely prevent blunders on the part of careless or incompetent workers, or stealings on the part of dishonest ones; but it is entirely practicable to perfect systems which will reduce such possibilities to a minimum.

Such a system having been adopted and put into operation, the next essential is to see that it is carried out faithfully, and that nothing that smacks of habitual carelessness, mismanagement or dishonesty exists. This can be accomplished only by means of examinations and audits, regarding which a considerable change of sentiment has taken place during recent years. The old-time banker looked upon it as something of an insult to suggest that his work ought to be checked over or examined, feeling that the dignity of his trust ought to place him above suspicion. The modern view is such that the most progressive bank and trust company officials welcome thorough and intelligent audits, believing that the careful and conscientious man has nothing to lose and much to gain by having the fidelity of his administration proved beyond question. It is a frequent practice to voluntarily employ public accountants to make thorough audits.

So far as the audit is designed to detect crime, it is not a reflection upon the honesty of the average officer or clerk-which is, indeed, assumed-but rather a recognition of the fact that occasionally a dishonest man may creep in and destroy the work of the honest majority: and from this viewpoint the audit is a protection to the faithful ones. At any rate, the public is no longer disposed to accept from the directors of financial institutions which fail the excuse that "they didn't know there was anything wrong, and supposed the officers and clerks were honest," and is coming more and more to hold such directors both morally and legally responsible for such knowledge. The public is right about it, too; there is no excuse for slipshod methods and guesswork in the business of the trust company, and men who are not willing to attend to their business have no place upon the board of directors of such a corporation.

It is to be observed further that the detection of crime is by no means the only object of examination and audit. Still more important is the prevention of crime, which systematic auditing accomplishes in two ways by the discovery of stealing at its beginning, when the amount is almost invariably small, and by the deterrent effect which is inevitable when officers and employees understand that speedy detection is practically certain if anything wrong is attempted. Indeed, the very suggestion of stealing comes to most men only when the conditions seem to make it easy and comparatively safe. Another exceedingly important purpose of a proper audit lies in criticism and suggestion regarding the

system of accounting and general administration, the pointing out of loopholes for error or dishonesty and the enforcing of faithful adherence to the system in use.

Examinations by officials representing the state government are required in many states, and ought to be in all. State laws sometimes require also examinations by committees of the boards of directors; and whether required by the state or not, such examinations are usually provided for in the by-laws of trust companies. Examinations are also made in some companies by committees of stockholders who are not members of the board of directors, while a few companies have resorted to examinations of each department by employees of other departments. Among the larger companies the habit is growing of maintaining a special auditing department; while instead of this, or in addition to it, many companies have an annual or semi-annual audit by a public auditing concern.

The examinations conducted under the authority of the state are intended primarily to see that the company is conducting its business in accordance with the laws of the state; and while their purpose is attained more or less completely, according to the thoroughness of the officials who do the work and the time at their disposal, such examinations are rarely thorough enough to detect any but the most bungling attempts at stealing, while suggestions regarding the system of accounting are wholly without their province.

Examinations by committees of directors are as a rule very superficial and unsatisfactory, while many are mere farces. In the cases of "one-man companies" that is, companies in which the executive officer is relied upon to manage the company practically alone, without advice or investigation by the directors, these examinations are apt to be exceptionally farcical; and this in spite of the fact that these are the companies which specially need thorough and frequent examination. The reasons for the incompleteness of directors' examinations are found partly in the common disposition to regard the director's office as a badge of honor rather than as an avenue of service, and partly in the fact that the men chosen for such positions are usually men whose time is very fully occupied with their own affairs and who often are urged to accept the position against their wills and better judgment. Nor are the men composing these committees as a rule familiar with the details or even the principles of trust company accounting. The time given to the examination by such committees does not average over a day or a half day. It is evident that such examinations can hardly be deemed satisfactory as evidences of the sound condition of the company.

Nevertheless, the writer does not want to be understood as holding the opinion that the ordinary examination by a committee of directors is wholly useless. Failures often occur because of unsound or excessive loans or investments, and if the directors are not already aware of such conditions in their company--as they should be-even a cursory exam

ination may open their eyes, unless there is intentional dishonesty and concealment on the part of the officers. If the committee insists upon actually seeing and handling all securities and the notes for all loans, it will at least have proved that the assets called for by the books are in the company's possession at the moment; while it will also have an opportunity to observe what names of officers or directors appear as makers or indorsers on the notes. This is of some value, though of course it gives no assurance that the books are correct, nor would it detect anything that would even create suspicion against an ordinarily shrewd officer who was engaged in looting the institution. There is also some advantage in the insight into the company's affairs which the committee may gain, and in the interest which may be awakened in them.

But a directors' committee examination may easily be made, and sometimes is made, of considerable value, if men are selected who are willing to give several days to the task and who have some technical knowledge which qualifies them for the work. The committee may then make some general examination of the books, examine and list all of the assets called for, with their appraisal of same, make note of items that are worthless or unmarketable or of uncertain value, point out serious flaws and tabulate loans and investments in which officers or directors are interested, giving names and amounts for each. Such a committee should not include any members of the executive committee or any of the officers, and should work independently of the latter.

An examination by a committee of stockholders who are not direc tors may accomplish much good, provided, as in the case of the directors' committee, men of ability who will take the necessary time are found. Its work may well proceed along the lines just indicated, going further if possible. Such an examination has an advantage in that it is conducted by men who are not directly responsible for the policy that has been pursued.

Examinations by committees of employees are practicable only in companies having several departments. They may be made of some value as examinations and of much value in the way of education and increased interest among the men who do the work; but are evidently subject to the important objection that they are not apt to affect the work of officers; while, as the work must be done "out of hours," they impose a burden upon the men which is hardly justifiable.

That the insufficiency of the different kinds of examinations just named is coming to be widely recognized is shown by the steadily increasing number of companies which either maintain a special auditing department or employ outside auditors or auditing companies to make thorough examinations of their work, some companies having even adopted both plans. It is only by such means that anything like a satisfactory examination can be made, particularly of the larger institutions. The wonder is that the fact has been so long unrecognized, and that other corporations have preceded banks and trust companies in the adoption. of thorough auditing systems.

As between the maintenance of an auditing department and the employing of an outside audit company for the examination of the larger trust companies, not enough experience has been gained to determine which is the better plan, and opinions naturally differ. If, as some large companies have found to be the case, under either plan it is necessary to have a permanent force engaged in auditing throughout the year, the choice is largely one of form, except perhaps as to cost. Of course, the smaller companies do not offer work enough for a permanent auditor, unless he puts in some of his time at other duties, in which case his value as an auditor is slight. Such companies should employ a competent and responsible accountant to put in such time as is necessary for the work. He should make complete audits at intervals of six months or a year, and in addition step in without previous notice to make special examinations. His reports should be rendered to the board of directors in person, and never to an officer of the company; and the stockholders are entitled to an annual report giving at least his general conclusions.

Whether an employee of an audit company or of the audit department of the trust company, the auditor in charge should be a man who thoroughly understands both the science of accounting and the business of the trust company. He must possess courage and force of character, be not over-trusting or over-suspicious, and be endowed with more than the average amount of tact. If he has assistants, as he must in examining the larger companies, they should also be selected with a view to their fitness for this particular work.

THE AUDIT DEPARTMENT.

In 1903 a committee appointed by the Trust Company Section of the American Bankers' Association reported to that body, that while excellent systems of auditing were in use, there were but few companies which had established regular audit departments. Since that time the organization of such departments has been quite rapid, but as is natural in a new department, there is little uniformity in its conduct among different companies. In some cases a department is organized with an auditor and a number of assistants; in others, there is a single official known as the auditor, or the controller, who in addition to the duties of auditor acts as chief of the clerical force or performs other duties. In such cases his work is usually supplemented by the periodical employment of an audit company.

In the selection of an auditor favoritism should have no place. He should be appointed, not by an officer, but by the board of directors, and to them and them only, in regular session, should he make his reports. His work is quite as much a check upon the officers as upon the clerks, and for that reason it is manifest that he should not be in any way dependent upon the officers. For a similar reason his appointment should not be dictated by the executive committee alone, but by the full board of directors, and he should report also to the stockholders.

As already indicated, an important part of the duty of the auditor is to devise or to perfect the system of the institution with the special purpose of guarding against carelessness or dishonesty. He will, for example, see that the officers or tellers who are authorized to sign or countersign drafts do not have also the right to make entries in the books; that the same employee does not both handle cash or securities and keep the books; that where there is opportunity of collusion between tellers and bookkeepers, the latter are frequently shifted to other sets of books without previous notice; that the work is so subdivided that no one man can carry through all the details of any transaction.

The exact methods followed in the work of auditing must depend upon the conditions existing in each institution, and it is impossible to devise a system which will be applicable to all companies. An attempt to do this was made by a committee appointed by the Trust Company Section of the American Bankers' Association, which reported in 1903; but the committee reached the conclusion that a system applicable tɔ all trust companies was out of the question. The report of the committee, however, and the three papers on the .subject contributed by prominent trust company auditors, contain many valuable and practical suggestions.75

THE SELECTION AND TREATMENT OF EMPLOYEES.

The success of many men prominent in the business world has been ascribed to their sagacity in the selection of the men who worked for and with them. The success of a trust company is often materially affected by the kind of judgment used in the selection and training of its employees as well as of its officers. The company whose entire working force, from officers down to errand boys, is uniformly courteous, obliging, accurate and capable, has a tremendous advantage over a company whose officers have these qualities, but some of whose employees are impolite, unaccommodating or prone to numerous errors.

It is not always an easy matter, particularly in the larger companies where changes of employees are frequent and must often be made in a hurry, to find just the right person when a vacancy occurs. For this reason, if for no other, the officer in charge of the employment of the clerical force will do wisely to look up available timber before the moment it is needed, and always have on file information regarding a number of applicants whose record he has taken pains to learn. Most companies have more applications for positions than they have places to fill. Unless something appears at once that shows the applicant to be undesirable, he (or she) should be requested to write a letter of application stating his age, education, experience, present occupation, reason for proposed change, references, etc. It has been found useful to file such applications, together with other letters or memoranda relating to the applicant, in a specially printed envelope, represented in Figure 286. These envelopes may be filed alphabetically or grouped according to

75 See Proceedings Trust Company Section American Bankers' Association, 1903, pp. 12-25.