page 34

Third Day—saturday.

The case was resumed on Saturday morning.

Mr Solomon: I understand that my friend is not ready with the drafts, so I propose to examine the auditor, Mr Hannah.

His Honor: Very well. Do you appear for Mr Hannah, Mr Chapman?

Mr Chapman: Yes, with my friend Mr Cooper.

Hie Honor; Do you wish this examination to be in public also?

Mr Chapman: It can proceed in the same

James Ewart Hannah, being sworn, said in answer to Mr Solomon, that he was an accountant by profession, and lived at Invercargill, and had been employed as auditor to the Ward Farmers' Association since, its inception. Previously he had been employed as auditor by other companies—by Murray, Dalgleish, and Co., and by the British and New Zealand Company white that concern was in existence. He had been auditing accounts more or lose for 15 or 16 years. It was part of his duties to examine the books of the association. He examined the journal and ledger balances.

Mr Solomon: Do you mean that you went through the ledger or the ledger balances?

Witness: The ledger balances principally.

Was it your duty to see that the entries in the journal corresponded with the entries in the ledger?—Yes.

Examination continued; His first investigation or inspection of the company's books was about June of 1893 His salary was £20 in the first year; after that it was £50. When he examined the books he saw that Mr Ward owed the company a large amount of money.

Mr Solomon: It was your duty, amongst other things, to start your audit by going to the bank and getting from the bank a certificate as to the condition of the bank's account?

Witness: I got the bank book.

Did you not get a certificate showing the balances?—I cannot say that I did.

Of course you would, amongst other things, go through Mr Ward's account in coming to your audit of June, 1893. Do you recognise that [indicating the ledger] as Mr Ward's account?—Yes.

When you audited your books at this date you would see that Mr Ward was credited at balance day with £21,000?—That is so.

Examination continued: Coming to the 1894 audit, he saw that the first entry was on the 30th June, and the next dates in order were the 8th. July, then the 10th, then the 1st, then the 18th, and then the 1st.

Mr Solomon: Did nothing strike you there as peculiar?

Witness: I saw that further advances had been made to Mr Ward.

But did it not strike you as peculiar that the first entry was on the 30th June, the next on the 8th July, then the 10th, then the 1st, then the 18tb. and then the 1st. You saw this?—Yes.

Did you make any inquiry about these dates?—I do not recollect.

Then you saw the item of £21,000?—Yes.

You noticed on the day of the balance sheet that £21,000 was paid in to Mr Ward's account?—Yes.

And when you came to audit the 1894 balance sheet you noticed that the day after the balance sheet it was drawn out again?—Yes.

Did that strike you as suspicious?—I cannot that it did.

You had no reason I suppose at that time to think that was anything but an ordinary transaction?—That was so.

When you came to analyse the accounts the following year did you notice that on the balance day again the same account is credited with £35,000?—Yes.

Did that strike you as suspicious?—No; because I always assumed that Mr Ward was a man of money and could pay off his accounts at any time.

Who assured you of that?—The manager, Mr Fisher. He could not say that he had made any inquiries why that had been done. The fact of the same thing having occurred on two successive balance days did not strike him as being for the purpose of concealing the position of Mr Ward's account from the shareholders. It now had some appearance of being page 36 for that purpose. When examining the books for the 1895 balanse, the fact that the £35 000 had been repaid the day after the previous balance, and Mr Ward's account brought busk to its original position, he did not have any suspicions aroused because it was satisfactorily explained to him that the debit bad been repaid, and the amount was a further advance. It was either Mr Anderson or Mr Fisher who told him that. He was led to believe that these were ordinary transactions and Dot balancing entries. If he knew what he did now it is probable he would not hare passed the entries.

Mr Solomon: Having learned that on the eve of the balance day in 1693 Mr Ward was credited with £21,000, in 1894 with £35,000, I take you to the 1895 balance sheet. You found that Mr Ward was credited in one item with £33,000 by transfer, and, on the same date, although not on the same day, for some. unexplained reason, he is credited with £18,000 by transfer from Brooks's account and £6500 Connelly's account. That was on the very eve of the balance sheet, and you found Mr Ward is credited with £54,000, Were your suspicions not at last around then?—In the explanation given to me of those transfers——

Be kind enough to answer my question.—I cannot say. If I had suspicions I made inquiries.

From whom?—The manager, Mr Fisher.

Did he satisfy you that they were all right?—Yes.

What did he tell you?—That these two accounts and Mr Ward's were connected with the purchase of grain.

Again let me ask you, before we go into details, who told you this?—I was told by the manager.

Witness continued: He saw the account of Brooks and Co., which showed that on June 30 the association owed the firm £18,016 9s 3d, and the whole amount was on that date transferred in the ledger to J. G. Ward and Co. He had asked the reason for this, and was told that all these accounts were treated as one, and were dovetailed into each other. The accounts, he was told, were inseparable. He could not give any explanation other than that which he accepted at the time.

Mr Solomon: Did not you deem it year duty, Mr Hannah, as auditor of the company, before that item of indebtedness to Robert Brooks and Co. left the books to see that the association did not owe the money any more, Did not you deem it your duty to satisfy yourself on that?—I accepted the explanations.

But what did you take the explanation, that those three accounts were treated together, to mean? Did not you say to Mr Fisher, "What do you mean by that? "—I do not recollect exactly all that took place at the time.

Is it not the fact that what book place amounts to this: Mr Fisher said to you, "This is all right; these three accounts are all the [unclear: a] thing," and you took his word?—[unclear: Probably] may amount to that.

Do you think that was a proper thing [unclear: for] to do as auditor?—At the time I had no [unclear: susp] at all.

What do you think now?—I [unclear: cannot] exactly.

Witness continued: If he had known [unclear: t] what he now knew, he probably would [unclear: b] made farther inquiry into it. As to the [unclear: £30] draft with which Mr Ward was [unclear: credited,] understood that was a payment into Mr [unclear: Wa] credit. He never heard about a draft, [unclear: but] told there was a payment to that amonnt [unclear: to] Ward's account, He was not told [unclear: where] money came from.

Mr Solomon: When the association [unclear: drew] Connell and Co. for £30,000 they owed [unclear: th] that money, did they not??—because the [unclear: b] discounted the draft and they got credit [unclear: fo] in their bank account. Did They not [unclear: then] Connell and Co. in London £30,000? [unclear: Do] you see that?—I do not quite see it.

Mr Cooper: Not unless Connell [unclear: and] accepted the draft.

Mr Solomon: Then if Connell and [unclear: Co] not accept the draft they owed the [unclear: b] £30,000. As soon as these people [unclear: drew] put the draft into the bank for [unclear: discount] proper thing was, was it not, to credit the [unclear: b] account by £30,000 and at the same time [unclear: c] Connell and Co. £30,000? If Connell [unclear: and] then dishonoured the draft, the proper [unclear: th] was to replace the position of the bank [unclear: acc] and debit Connell and Co. to the same [unclear: am] Is not that so?—I do not quite see it [unclear: in] same light.

What do you say ought to have been [unclear: done] I say that If there is a payment in to the [unclear: cr] of Mr Ward's account from Mr Ward it [unclear: ou] to reduce his account.

But do not you see it did not some [unclear: from] Ward?—Mr Ward was not in the colony. [unclear: j] that happened was that the association [unclear: de] from one of its clients £30,000, which was [unclear: p] into the bank account; the net result [unclear: be] that the bank account was reduced by [unclear: t] amount, and they do not show on the [unclear: other] that they owe the money to the other [unclear: people]

His Honor; I would rather that Mr [unclear: Ha] would speak in reference to the informal [unclear: n] received. If the information he [unclear: received] correct—that it was a payment on Mr [unclear: Wa] account to the company—then, if that [unclear: was] case, Mr Hannah was justified in his action.

Mr Solomon: Your Honor, I am not [unclear: blam] Mr Hannah, The only thing that one [unclear: m] say—and it is comparatively bringing—is [unclear: th] is a question whether he should have [unclear: accept] the explanation.

His Honor: If the explanation was [unclear: correct] was right.

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Mr Salomon: Yes, But I would like to know [unclear: f] Mr Hannah does not see now that he was received. That is what I want to ask. Mr [unclear: h]annah, you say you were led to believe that his was a payment m by Mr Ward to his account, but do you not see now that it was not [unclear: o], and that you were deceived?

Witness: Well, it assumes a different aspect [unclear: ow,] no doubt, knowing what I now know.

But do you not see that you were misled as [unclear: o] the real nature of the transaction?—Not except that the explanation was not full [unclear: nough].

But was it true?—I really cannot say as to the truth of it.

What else do you think should have been told to you in explanation?—If I had been told that it was a draft on the association 1 would have understood it differently.

And you would not have passed the account?—Probably not. Circumstanced have altered since then.

You now find that it was a draft, do you not? You heard that yesterday?—Yes, I heard it.

If you had been told what you now find to be the fact you probably would not have passed the item?—Probably not.

Now, let us go to the debenture account. (Books produced.) Do you see those two entries—" January 7, £20,000; January 28, £19,000"?—Yes.

You had as auditor to satisfiy yourself that those moneys had been paid into the account?—Those entries were reversed before 1 saw the books to audit them.

Did you find out what the nature of the cross entries was?—The explanation given to me was that it was a mistake on the part of the clerk who kept the ledger—that he had entered those to the credit of Mr Ward without consulting anyone.

Who was the clerk?—I think it was a Mr Smith.

Who gave that explanation?—I cannot exactly say, but it was someone who was in the office when I asked for the information.

Was it Mr Fisher?—Probably it was Mr Anderson.

Mr Ward went away from New Zealand at the time that this amount was credited to him. The sum of £20,000 is credited on the 28th, and Mr Ward left on the 29th. in his absence there was another chairman of directors, was there not?—There would be, no doubt.

Did it not occur to you, Mr Hannah, that during Mr Ward's absence inquiries might be made by that gentleman or by others as to the state of the account, and that by reason of this transaction it would show to be £40,000 better off than it really was?—No doubt it would have appeared so during that period.

Seeing that, year by year, on the very eve of the balance sheet, you found when you came to this 1895 balance sheet that in every balance sheet of the association the managing director's account was so manipulated that, whatever the intention, its condition was concealed from the shareholders, did you not consider it your duty to call the attention of the shareholders to this item of £40,000 or to the balancing entries in 1895?—When I came to examine the books on this occasion the £40,000 had disappeared.

But it had remained at his account for six months?—Yes.

Was that not a wrong thing, then?—Yes, it was wrong.

In the one case the amount was at Mr Ward's credit for six months all but seven days—from the 7th January till the 30th June—and in the other case all but five months, Now, Mr Hannah, I want to draw your attention to this: that by reason of those two entries the state of Mr Ward's account was concealed from January till June. Was that not so?—It would be so with those items appearing to its credit.

And immediately it was revealed by these accounts being transferred again it was further concealed by the £30,000, the £18,000, and the £6500, is that not so?—Of course, it altered the position of the accounts altogether.

Then, Mr Hannah, when you sawthe effect of this, whatever the intention was, on an account of such magnitude-that account being the account of the managing director—why did you not report it to the shareholders?—I accepted the statement made to me that it was an error on the part of the clerk—that he had made an entry in mistake.

Do you think now, Mr Hannah, that you satisfied your duties as auditor by simply accepting the word of a man in the office on such transactions as these?—The concern was agoing concern, and it seemed a payable concern, and perhaps I was——(Reply unfinished).

I suppose that your duties as auditor, being paid so much per year, were something more than inspecting the books; that it was part of your duties as auditor to have access continuously to these books?—I presume that 1 had, but I only went there once a year.

Did you ever speak to Mr Ward about his account?—No, I cannot say that I ever did.

Nor mention the state of his account to anyone?—No, except the manager.

I want to ask you what you consider your duties are in regard to cash and to stock. First, as to cash, do you not consider that it is your duty to see every item of cash said to have been paid out has been paid out?—Yes.

And your duty also is to get for that as vouchers the receipts of the persons to whom the money has been paid?—Yes.

And your duty also in to find out that every item of cash said to have been received has been received?—Yes.

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And you get as Touchers for that the block receipts given by the association?—I don't suppose that they kept any blocks of receipts.

But you did not get any vouchers for that?—No.

As to stock, It is your business, is it not, to satisfy yourself that every item of stock said to have been received into the store has been received?—No. No auditor would overtake a duty like that.

How do your journal entries as to stock appear?—As purchases that had been made. I could not ascertain that the stock was actually there in the store. The purchases went to the credit of the people from whom they were bought.

Take this account. Here is a produce journal account. All the entries on the debit side of that account represent prodace bought, do they not?—They have something to do with produce.

That account shows on the debit side the stock bought and on the credit side the stock sold. Is that not what it means?—Yes; it Means all that was bought on produce account and all charges on account of produce—storage for instance.

But, apart from storage, it is a record of all goods that were bought and of all charges placed upon them, and is carried forward here as an asset?—Yes.

But the item there is not charges at all; It appears there as interest. What does that mean?—I presume it means interest on the outlay on stock purchased up to the time mentioned.

Is that a proper entry of a debt of that kind?—I cannot say that it is not.

Is it not the fact that you carried that item forward to the stock account and brought to the credit of the stock account as an asset the sum of £500?—Yes, and 1 think that the stock account had a right to bear that charge. The stock had increased in value to that extent, and the account fairly chargeable with that.

I will now take you to another item, showing assets transferred—

His Honor: Has this particular item been referred to before?

Mr Solomon: Yes. Mr Ward was examined about it, and he said that he could not explain it; that I would have to ask the officer who made the entry. (To witness;) In the debit of that account there appears this entry: One-third profits transferred £1000. That increases that account by £1000, and was carried forward into the schedule as £1000 worth of stock, How could you then possibly allow that item to be debited to that account?—I don't recollect it for the moment.

Look at it and give to it the same consideration that you ought to have given to it then?—1 don't recollect for the moment what it is.

Mr Solomon: There you are, there is Bluff store account; £1000 is carried form to the debit of that account. Where is [unclear: a] asset for it?

Witness: The only explanation 1 can [unclear: g] that it is a charge for storage, and it [unclear: w]increase in value to that extent.

But if the money is not there how can it passed to the debit of that account and carried forward to schedule?—I say it [unclear: wa] fair charge on the stock there.

I suppose, Mr Hannah, that supposing: goods were stored for another year they [unclear: w] rightly debited with another item of £1000:They would be rightly charged with storage.

But don't you see that by doing that you day by day and year by year creating an aswhich you think you ought to have, but [unclear: w] you have not got; because, if you have a lot oats, however long you may keep them you not make them of any more value?—[unclear: W] think the produce ought to bear that charge.

We all know that it should bear a [unclear: chi] but should not that be shown in "charged No; I think it should go straight to [unclear: pro] and at the end of the year go to profit and [unclear: k]

But see if I cannot convince you that you [unclear: a]wrong. By doing that you are not [unclear: ma] the produce account bear a loss, but are [unclear: f] not concealing the loss by treating it [unclear: as]asset—making an asset which does not [unclear: exb] It all depends upon the prices realised.

But the result of putting that there instead of showing that the goods cost [unclear: £11] more, to say "I have there £1000 in [unclear: ha] Here is a simpler way of illustrating [unclear: wh] mean. Mr Ward is debited in his account[unclear: s] "Rent and salary reversed, £1500" on [unclear: bals] day of 1895. What explanation did you ask that?—I was told that he had forgone [unclear: a] and given it to the association.

I thought so. You were told by Mr [unclear: fi] that Mr Ward had forgone that.

Mr Chapman said that that was not [unclear: f] answer. Witness had not mentioned [unclear: i] Fisher.

Further questioned, witness fluid he [unclear: a] has been told this either by Mr Fisher or [unclear: !] Anderson. He did not recollect hearing [unclear: a] Ward say yesterday that he had never heard the transaction. He (witness) had, [unclear: how] satisfied himself of what the fact was—name that Mr Ward was entitled to so much [unclear: si] and had given it up, That being the [unclear: a] when the £1500 was debited to Mr Ward ought to have gone to the credit of profit[unclear: s] loss.

Mr Solomon: Or else in reduction of charge Should not the shareholders have been [unclear: ct] aware that the profits said to have been [unclear: m]thatyear were only made by Mr Ward [unclear: ma] a present of that sum to the association?—I not know that they were not aware.

page 39

I ask you whether they should not have been told?

His Honor: By whom?

Mr Solomon: By the account submitted to the shareholders For approval.

Witness: Possibly it should have been put that way.

But was not that the proper thing to do?—I think it would have been proper, considering that Mr Ward did concede it.

But was it not an improper thing not to do it? If the fact is thus concealed, does it not show the association to be in a much stronger position than it really was?—It ought to have been shown.

Further examined, witness said he did not know that the shareholders were unaware of that fact. After consulting the balance sheets for that year, witness said there was nothing on any of them to lead the shareholders to believe that Mr Ward had made a present of £1500 to the association. It certainly appeared at if the shareholders would be led to wrongly believe that a profit of £1500 had been made in the ordinary way of business. The company's paying dividends with the £1500 was quite right so long as Me Ward was good for that amount. The effect of treating the £1500 in the way it had been treated would be to lead one to suppose that that £1500 was profit, and not profit derived by reduction of office charges for the purpose of being able to pay dividends.

Mr Solomon: That sum of £1500 was not placed to the credit of the "charges account." I will show you what was done with it. What is done with it there (referring to ledger)?—It appear? to the credit of goods account.

That means that by that entry you show you have £1500 worth of goods more than you know you have got; and it is only by that entry of £1500 that you can get the gross profit on merchandise and produce sold up to that amount, is it not? It is only by taking credit for that £1500 that you can show that gross profit on the goods told?—Yes, that would be the effect of it.

Witness continued: Without that item the profit instead of being £5500 should have been £4000 He could not tell why he did not see that at the time of audit. If he had been then told by Mr Fisher or Mr Anderson as much as he now knew he would have stated the items separately. It was his duty as auditor to see that the item account at credit of shareholders and the clients' credit account showed all the amounts owing to the customers of the association.

You knew this, did you not, that Robert Brooksand Co. appeared in the books of the association as creditors to the extent of £18,000?—The amount was transferred when I saw the booksfirst.

But till the transfer took place these people, known merchants, stood in the books of the association as creditors to that amount?—Yes.

How could you possibly take the word of a man who said these accounts are all the name thing?—I accepted the statement in good faith, that is all I can say.

Mr Solomon: I want you to tell me now, as nearly as you possibly can, what explanation was given to you by either Mr Fisher or Mr Anderson as to the two accounts of Council and Brooks, by which you allowed them to transfer the items of £18,000 (Brooks) and £6500 (Connell's) from one account to the other?—I can only repeat what 1 said before, that to the best of my recollection these accounts were kept, for the sake of convenience, in separate accounts, but In reality they were all connected with Mr Ward's accounts. I cannot recollect the exact words. He could not say more than that he had looked upon them as being the same: that they were the grain accounts. Had he then known that Robert Brooks and Co. were separate creditors he did not suppose he should have passed that item of £10,000.

Mr Solomon: Do you not know of necessity, Mr Hannah, that if you had known what the facts really were—if you had not been misled by the officer, whoever he was—you would have known that that item of £10,000 would have had to be increased by £30,000 to Connell and Co. by £18,000 to Brooks, and by another £6500 to Connell and Co. You would have had to add on to that liability stated in the balance sheet £54,000, would you not, if you had known what the facts were?—I cannot say as to the £30,000.

It you had known at that balance day that that draft of £30,000 had been drawn on Connell and Co., you would have had to increase the debt. owing by the association by that £30,000 until the draft was dishonoured or retired? Is that not the fact?—Instead of going to the credit of Mr Ward it would have gone somewhere else, no doubt.

It would have appeared as a debt. So then, if you had been told of the affairs of the association as they really existed, you must have added to the liability side of the balance sheet the £54,000 in those three items?—Yes, that would have been so, and the assets would have increased by Mr Ward's indebtedness.

But the liabilities would have had to be increased by £54,000 Now, again I ask you, if you had knownthen what you knowto-day would you have passed that item in the balance sheet?—I say, as I said before.

I ask you to answer "Yes" or "No," Mr Hannah. If you had known on that day what you know to-day would you have passed that item in the balance sheet?—I do not think I would have passed it as it is now stated.

Here (pointing to the book) are the [unclear: term] I have referred you to—amounts at credit of page 40 shareholders' and clients' current accounts. That we have shown is altogether wrong. On that date is another account—the grain and railage account—which is in debit to the extent of £9975?—That is so.

That is a debt of the association. the association on that special account owes the bank £9975?—As regards that amount, it was stated to me that it belonged to the bank, and that they held goods against it. It was a special account, apart from the association's ordinary business.

Is it not a debt doe by the association to the back?—On a special account, for which the bank held grain against it.

Did you take any steps to verify that?—At this moment I do not recollect.

But whether it was so or not—whether it was a special account secured, or whether it was a special account unsecured—it still was a debt due by the association to the bank, was it not?—Yes.

Well, where is it in the balance sheet?—It is not in the balance sheet.

Why not? It is only fair that you should be taxed with this, Mr Hannah, Knowing that there was a debt in existence due by the association to the bank why did you not see that it was included in the balance sheet?—I forget the circumstances, but it was kept out for some reason or other—I forget what.

But if it is kept out there must be a contra for it or it could not be kept out? How could you keep out of the balance sheet an item that appears as a liability in the books? If there is a liability in the books it must go into the balance sheet?—Not if there is a corresponding asset kept out.

But did you consent to [unclear: rab] out a liability. That is what we are complaining about all through. Did you allow the balance sheet to be squared by rubbing out a liability on the one side and a corresponding asset on the other?—I forget the exact circumstances connected with the matter.

Supposing, for instance, that there are £10,000 of securities in the bank against a general account of £50,000. Could you then allow the overdraft to be reduced by £10,000, and that £10,000 of securities to be rubbed out on the other?—I understood there was special security held by the bank apart from the other security it held.

But if so, it was your duty surely to see the on the one side of the balance sheet alt the liability of the association appeared. I cannot be satisfied, Mr Hannah, with your explanation "I cannot tell you why it was done." I want you to tell me why it was done, and if you can not tell me now 1 want you to get the information for me?—I cannot recollect at the moment.

Do you know anything about that account? Do you know whether it was true what was told you—that the bank held the security? [unclear: by] I do not know. I believed at the time [unclear: tha] was true.

Did you not ascertain also that there [unclear: wa] owing to the bank at that date, on a bill [unclear: he] by the back, some £10,000 for Carswell [unclear: ha] goods? Did you not know that? It may [unclear: be] fair to ask you such a thing from memory [unclear: a] Mr Hannah, so I will show you the account [unclear: s] the books. (Book produced.) There is [unclear: a] promissory note outstanding there of £10,000. a promissory note of the association's held [unclear: a] the Colonial Bank. That is a debt of [unclear: th] association's outstanding at the time, is it not and why is it not in the balance sheet?—This is on a similar footing with the other. I [unclear: w] given to understand that the amount was [unclear: is] dispute, and that it would be reduced consider ably I was told that the goods had not [unclear: turn] out satisfactorily, and that on that account [unclear: as] amount had been deducted from the [unclear: stock] sheets.

£10,000?—Yes.

Mr Solomon: You remember what Mr Ward told us about this yesterday. This in the ordinary stock—the stock of Carswell. This is the business purchased by the association is 1893; and it had been in existence for two years. Inthe first place it was purchased in the ordinary way, and an overdraft drawn for it. [unclear: Thn] in 1894 that overdraft was changed into a promissory note; and in 1895 that promissory note was renewed from time to time, until the amount appears in 1895 as a promissory note for £10,000 The stock was purchased in 1893, and Mr Ward has told us that it went into the ordinary stock That stock had never been paid for; and at that time the bank held a promissory note of £10,000 for it. It does not appear anywhere in the balance sheet. I want to know why not?

Witness: The explanation given to me was that it was in dispute to that amount. Stock was held for the amount given. The amount was held over, I understand, by request.

By whose request? Do you not see that whatever the explanation might he there is a liability that ought to appear in the balance sheet? How did you wipe it out? What [unclear: a] responding entry did you take out to wipe it out with?—The stock was reduced to that extent.

Supposing it was, take you stock sheets and show me the items.—That is all I can say. I was informed by the manager.

Did you not look to see that This was balanced by another item in the books of the association, irrespective altogether of the question whether you should have allowed such a thing at all?—I do not recollect the circumstances now.

Let me put this to you Mr Hannah; that whereas the total liabilities, independent ofdebentures—the total amount said to be owing page 41 by this association on that date is £10,000. You admit that there was £54,000 that should have been added to that. There was £9900 that ought to have been added to it, and you cannot say what it was not. That was £64,000; and there is another £10,000 that ought to have been added to it, and you cannot tell me what It was not. So taking it altogether, in this balance sheet there is actually £74,000 that should have been added to the liabilities of the association, and you can give me no explanation why it has not been added. Whatever deductions, whatever manipulation there might have been, that is very thing I complain about. You take off £10,000 on one side, and £10,000 on the other. But do you not see that the shareholders of the association were led to believe that the association only owed £10,000, whereas you admit to me now they owed £84,000? Don't you see that, Mr Hannah? Whatever the cross entries might be, do you not see that the debts ought to be £84,000?—If the full amounts had been given on each side it would have increased the amount.

And should not the full amounts have been given on each side? Did you ever hear of such a thing as this before? Did you ever pass it before?—No.

Why do you pass it now?—I cannot tell you.

I will take you to the other side of the ledger—the assets. You have got two items—Advances against produce afloat and in store" and "Current accounts." These represent the assets of the association in the sense that they are moneys owing to the association by its clients. The first item, 1 suppose, represents secured debts, does it not?—Yess.

This item (referring to another item in the account book) represents unsecured debts?—To open account.

Look at the schedules, and show me where you got your information from.

His Honor (to witness): You compared those schedules?

Mr Solomon: I understand Mr Anderson did so.

His Honor: Is it from those returns that the balance sheet was made up?

Witness: It is from those that the balance sheet was made up.

He had those papers before him?—Yes.

Witness being questioned as to the debts due to the association, a number of papers were searched, and it was noted down that at Invercargill) the advances were £29,920 19s 54, and the book debts £6888 Is 5d; and at Gore the advances were £10,798 10s 9d, and the book debts £4180 15s 7d.

Mr Solomon said the total was £46,000 That was the statement of advances against produce.

His Honor: As distinguished from current accounts?

Mr Solomon said they were only advances. They consisted of £29,000 debts due at Invercargill and the other item, to which he should refer, in which £1500 on the Bluff store and £500 interest appeared as taken in as an asset. That was the produce account of 1894, and the produce account of 1895 was taken in to the extent of £16,000 Continuing, Mr Solomon said: Now I think I can get to the bottom of it, Mr Hannah. This is a list of advances against stock and book debts?

Witness: Yes.

That is taken out there as "Advances against stock, £29,000," leaving the book debts ?—Yes.

The advances against stock are carried forward. In addition £16,000, produce account for 1894 and 1895, was carried forward as an asset, making a total of £46,000 assets in the hands of the association. Instead of showing that total of assets in the books, you first deduct from that the whole amount of the past due bills, £10,000, do you not?—Yes.

So that, Instead of the real assets appearing, you wiped out altogether the past due bills, and have simply taken off the amount of the assets?—These past due bills were held by the bank, and were virtually under discount They had been charged to customers' accounts.

But you do not show them as a liability at all; you simply took them off the assets. Is not that so ?— Yes.

The next thing you do is to take off the £9775, which you owed to the bank on the grain account, and you reduced your assets by that amount; instead of that sum appearing in the schedules as a liability, you wiped it out altogether, and you struck a balance?—That was so.

When I now show you these things, can you in any way justify such a practice? By any process of reasoning you can get at now, is it Justifiable in any sense whatever?—It ought to have been stated from the present point of view.

I will take your answer at that. You have told me already in respect to the first item that you cannot recollect why the £9775 was not shown; but you know now why it was not shown—it was simply wiped out. I must ask you now for a direct answer: Is not that a wholly unjustifiable proceeding?—I can only repeat my former answer: It ought to have been stated.

His Honor: What is the difference between the present point of view and the point of view then? The matter was before you then.

Witness: It was before me then, but it was explained to me, as 1 have before stated, that it was a special thing.

Mr Solomon: It was a debt, was it not; you knew then it was a debt, but instead of being page 42 paid it was simply squared off?—There it some thing else taken off.

Let us see what that is £2120 is taken off. "The amount due en consignments or upon account of Brooks and Co." The net balance is £2120, which ought to have been added; out it is not shown at all; it is simply wiped out. I see the total is £42,000, of which £40,000 has been wiped out. On what possible reasoning can you explain that?—I do not recollect it.

Can you not see now—who it responsible for it I do net know—that this practice in a deliberate concealment of the state of the affairs of the association from the shareholders by wilfully stating an untrue state of the association's liabilities, and at the same time wilfully stating an untrue state of assets?—It should have been stated differently.

I must ask you for a direct answer to my question You must say either yes or no, if you can; or if you cannot answer most say so. Do not you, as an experienced accountant and auditor, now see that someone—who the responsible person was I do not know—has wilfully concealed the true state of the association's affairs?—I cannot say about wilfully; but it might have been stated the other way.

Well have they not concealed the state of the company's affairs. Is that not so?—Yes.

There is one other thing I want to know in this account. You have a total amount of £36,000 of debts, which at the bottom are subdivided into £29,000 advances and £6000 book debts, How do you know those are correct. You have told as that advances ate secured debts and that book debts are unsecured debts. Now in the schedule they are simply subdivided at the bottom. How did you know they were correct?—By going over them with the secretary at the time.

Did you take the items, out?—They would be taken out on a separate sheet.

What has become of that sheet?—I do not know.

You satisfied yourself about the securities?—Yes.

What did you do?—I went over them with the secretary.

And he told you?—Yes.

Then all you had was the secretary's statement that these were the proper amounts?—Yes. He went through the accounts and told me which was which.

Did it not occur to you that the secretary might have told you an untruth? Surely before you could sign such a statement to go to the Shareholders, that there were £29,000 of secured debts, you should have known positively that these securities really existed?—Supposing, instead of being £29000 secured debts and £6000 unsecured debts, it was the other way about and there were only £6000 of secured debts and £29,000 unsesured debts, hew would you have protected the shareholders there? Does it not now occur to you that, [unclear: instead] having the statement of these things all [unclear: jumbl] up together, there should have been [unclear: separ] statements of each list of debts, with [unclear: t] vouchers of the securities attached?—I [unclear: e] see now It would have been better to [unclear: have] it so.

Now about the goods in hand and [unclear: affo] What evidence had you?—The statements [unclear: t] the stocks of produce attached.

But no stocks were taken?—I [unclear: understo] they were taken.

Did you get any Storeman's certificate [unclear: th] the stocks were there, or did you simply [unclear: th] the stock sheets?—I only took the stock [unclear: shee] and the manager's statement that they [unclear: we] correct.

But you did not get any store certificates [unclear: ?] No.

The total amount of goods shown by you [unclear: y] assets in store and afloat was £17,840 [unclear: ?] Yes.

If you look at the books (goods account) [unclear: ye] will see that although your total stocks [unclear: u] given in the balance as only £17,000, there [unclear: e] actually in stock in Invercargill alone £23, [unclear: 737]—Yes.

You say that your accounts were [unclear: made] from the stock sheets?—Yes.

Now you see by that, that that amount [unclear: i] goods was there?—Yes.

Witness continued: There were also [unclear: goods] Gore to the amount of £2370, rye and [unclear: gr] £2500, which with the £23,000. brought up [unclear: th] value of stock in hand to £27,500, while [unclear: t] amount of stock in hand was stated at £17, [unclear: 00] Ten thousand of that was Carswell's.

Mr Solomon: go instead of showing aa [unclear: yo] ought to have done on one side of the [unclear: ledg] £27,000 worth of stock and on the other [unclear: side] the ledger £10,000 owing to the bank for [unclear: Ga] well's stock, what you did again was to [unclear: scr] the two items out—one on each side of [unclear: t] ledger—and reduce the liabilities by £10, [unclear: 00] You told me you could not remember [unclear: th] explanation. Now you have got it, can [unclear: y] justify it on any grounds whatever?—I [unclear: thi] that is so.

Answer my question. Can you justify [unclear: th] proceeding—wiping out from the [unclear: indebtedn] £10,000 on the one side of the ledger, and [unclear: wip] out deliberately, with your eyes open, £10,[unclear: 00] worth of stock on the other. I ask you, [unclear: es] you justify that at all? From your [unclear: experie] can you?—It should have been stated [unclear: otherwise] I admit.

Is there any excuse for it?—I would [unclear: rather] not answer that.

But I would rather you did answer it, [unclear: M] Hannah. Is there any excuse for it? [unclear: Answ] me, please.—The circumstances appeared [unclear: to] different at the time from what they do [unclear: now.]

But, as his Honor put it to you, the [unclear: circu] stances are not different. The schedules [unclear: y] page 43 see to-day are the schedules you saw that day. the facts as they are to-day are the facts as they were that day. Is there any excuse for the proceeding?—I cannot say there is.

Mr Solomon said he had not yet finished with Mr Hannah, as he should have to keep him for a considerable length of time upon the question of profit and loss—so far having dealt only with the question of liability. He therefore suggested that it might now be convenient to adjourn.

His Honor concurred, and the court was adjourned until 11 o'clock on Monday morning.