accumulated profits, thus making provision against unforeseen contingencies, and strengthening the general financial position.

The Capital Accounts show the final position of each name after the adjustment of the profits of 1900 (the last divisible year) and drawings.

The balances on the Underwriting Accounts of the years remaining open are shown. separately.

The credit side of the Balance Sheet displays the main assets of Debtors, Investments, and Cash. From the book debts is deducted the amount of the Discount Reserve Account, and the disparagement between the two items indicates how essential it is to form this reserve in the manner which has been previously indicated. In some cases, although the books are kept on the gross system, no such Discount Reserve Account is in operation; but it need scarcely be pointed out that the resulting position shown by the Balance Sheet in respect of its item of Book Debts is distinctly erroneous and misleading, there being nothing to show what proportion thereof will eventually have to be allowed as discount.

In under

The item of Investments calls for some comment. writing, as in all insurance business when judiciously conducted, money should be received faster than it is paid away. The accumulated funds-which will, of course, include the investments-represent this surplus, apart from the comparatively small proportion that may stand for realised and reserved profits. Such surplus cannot in any way be looked upon as profit, but rather as moneys held in trust for the purpose of liquidating all claims that may eventually arise in respect of outstanding policies. It is obvious that while the business is maintained or increased, and the class of risks taken kept at a

good average, the surplus moneys will correspondingly be maintained or increased; but that as soon as the business is stopped, whereas the main source of income-i.e., from new premiums -will be entirely cut off, nevertheless, claims will continue to come in in respect of insurances previously effected for a very considerable period (which, in the case of underwriting, is estimated at about eight years), and consequently, unless the surplus moneys of previous years have been retained and invested, there will be no funds forthcoming to meet these demands.

The business of an underwriter at Lloyd's differs materially from others, inasmuch as, on the death of a “name," no further risks may be taken on his behalf. Consequently death closes an account irrevocably; and it has been estimated that it requires on an average an amount equal to about 65 per cent. of the annual premiums to wind up an underwriting estate. On this account alone, apart from provision against the occurrence of "bad years," the necessity of accumulating the funds and investing them in gilt-edged securities, of keeping open the Underwriting Accounts for a period of years, and of strictly abstaining from anticipating profits is apparent.

Although the pro formâ Underwriting Accounts and Balance. Sheet as shown are drawn up in tabular form, as this is the manner in which they will be recorded in the Private Ledger, it is only customary to present to each of the names a Balance Sheet and accounts, showing his own individual position.

CHAPTER V.

THE AUDIT.

IN preface to the few remarks it is necessary to make upon the conduct of the audit of Underwriting Accounts, it may not be superfluous to point out the benefit that such an audit confers both upon the agent and his "names." The former, though thoroughly equipped to deal with the technicalities of underwriting, may not, and in fact cannot be expected to, possess such a complete acquaintance with the theory and principles of account as the peculiar nature of the business requires; but even though he may possess such knowledge, it is more than possible that his "names" themselves, or at least some of them, may not, and may endeavour to exercise their independent judgment against that of their agent, with the possible result of weakening their financial position. Consequently the employment of professional Auditors accountable to the "names" must necessarily relieve the agent of considerable responsibility, he being able to strengthen and shield his exercise of restraint behind the authority of the former; moreover, the advantage to him of having the accounts as between himself and his "names " periodically certified by experts on behalf of the latter, and so effectually preventing the possibility of a dispute arising upon them in the future, is obvious.

66 the names

The benefit conferred by such an audit upon themselves is many-sided. In the first place, they, being in the

position of principals who have delegated to their agent very considerable powers, both for the handling of assets and the incurring of liabilities, and who in many cases take no direct cognisance of the course of the transactions to which they have been made a party, should, in justice to themselves, see that they are in a position to obtain periodically a clear and accurate record of their dealings and statement of their position, certified to by a competent and unbiassed observer. In the second place, such an Auditor, by virtue of his experience, will be enabled to afford much sound and valuable advice upon such difficult and vitally important questions as the prudent withdrawal of profits and the proper accumulation of funds.

Turning now to the audit itself. It is intended here merely to endeavour to outline the main and essential features of the conduct thereof, leaving the amount of detail and the addition or exclusion of certain factors determinable according to the nature and extent of the business under examination and the particular circumstances of the case.

It is not often possible, owing to the magnitude of detail involved in underwriting, to carry out a complete check on every item, and consequently the first duty of the Auditor will be to ascertain whether a good and efficient system of internal check is in operation, and, if none such exist, to institute one that will be satisfactory at the same time to himself and to the underwriter. What is suggested here is a system of internal check, which has been found by experience to be very effective in its results. This consists of an analysis of the items in the Brokers' Ledger other than those relating to cash and discount. (The form of the Brokers' Ledger appearing on page 52 affords, by reason of the columns in which the monthly totals of the account are extended, material facilities for the carrying out of this system.) It is obvious that the totals of the monthly