What the accountants said

We've seen the balance sheet. Now it's time to listen to what the accountants, Mr. Tait and Mr. Murray, had to say.

I had to look through this several times to make sense out of it. I think I've just about got a doorknob on it. There were actually three balance sheets presented at the meeting. The first was taken from the company's books. In this, the situation didn't look that black. Or rather it was in the black.

"THE ACCOUNTANTS' REPORT.
 The following report was then submitted by the accountants: -

Report by John Scott Tait, C.A., Edinburgh, and Robert Alexander Murray, C. A., Glasgow, with reference to the affairs of Pattisons, Limited, as at 6th December 1898, to be submitted to a meeting of creditors to be held in Dowell's Rooms, 18 George Street, Edinburgh, on Friday, 6th January 1899, at half-past two o'clock afternoon:

In terms of the instructions contained in the minute of meeting of creditors held on the 6th ultimo, the accountants have made an examination of the books of the Company at said date. The accountants verified the whole balances appearing in the books, and they now beg to submit balance-sheet No. 1 as at said date. From this balance-sheet it appears that the assets, including good-will, amount in all to £1,144,188 3s 5d, while the liabilities to outside creditors amount to £702,611 5s 7d, leaving a surplus of £441,577 17s 10d. This surplus consists of preference share capital, £200,000; ordinary share capital, £200,000; reserve fund as at 31st March 1898, £30,000. The balance as at credit of profit and loss account, as at said date, after payments of the fees of Directors and Auditors, salary of the Secretary, and the Income Tax on profits- £11,576 17s 10d - is then £441,576 17s 10d. In this balance-sheet the assets and liabilities are retained at the sums which they appear in the books. The valuation of the heritable properties, including plant, utensils, machinery, &c, was made by Mr W. Haldane Beattie. The stocks of whiskies, wines, &c, were valued by Mr William Sanderson and Mr R. S. Gray, and Mr James Pringle, of T. & J. Bernard, Limited, valued the stock of beer, hops, &c, at the Duddingston Brewery."
Evening Telegraph - Saturday 07 January 1899, page 3.

According the company's books, there was a surplus of over  £400,000. Not too bad at all. On  a side note, see how they brought in someone from Bernard's to value the brewery stocks.

Sadly for the creditors, the company's books weren't a true reflection of reality. This is the balance sheet that we saw earlier.

"The accountants have also prepared a balance-sheet (No. 2) as at 6th December, showing the actual position of the Company at that date on the assumption that the business is continued. In this balance-sheet, which is submitted herewith, effect has been given to the valuations of the heritable properties, and of the stocks of whiskies, wines, &c. In connection with the valuation of the book debts and trade bills outstanding the accountants have made a deduction to meet bad and doubtful debts, but this is only a rough estimate, as the accountants have no means of ascertaining what sum would be absolutely necessary. From the balance-sheet No. 2 it appears that the assets amounted to £837,606 15s 9d; while the liabilities amounted to £920,400 9s 10d, leaving a deficiency of £82,793 14s 1d. Taking the surplus as disclosed from the books at 6th December, £441,576 17s 10d, and adding thereto the deficiency shown in balance-sheet No. 2, £82,793 14s 1d, the difference amounts in all to £524,370 11s 11d."
Evening Telegraph - Saturday 07 January 1899, page 3.

In this balance sheet the assets were £300,000 less than in the company's books. And the liabilities £200,000 more. Though, as we'll learn later, the Pattison's weren't too happy with some of the valuation in this balance sheet.

Next the accountants nailed together the first two balance sheets to create a third. confusing, isn't it? No wonder it took them much longer than expected to produce their report.

"The accountants beg to submit statement No. 3 reconciling balance-sheet. No. 1 is taken from the books with balance-sheet No. 2, prepared by the accountants after giving effect to valuations and adjustments. "
Evening Telegraph - Saturday 07 January 1899, page 3.

Now there are some explanations as to the valuations.

"The accountants do not consider it necessary to make any comment upon the balance-sheet No. 1, as it was framed merely from information contained in the books. But in submitting balance-sheet No. 2, showing the actual position of the Company as at 6th December last, they desire to bring under the notice of the creditors and shareholders the following points. In connection with the valuation of the heritable properties it seems to the accountants only reasonable that, if the business is to be continued as a going concern, the properties should be included at the cost to the Company unless expenditure has been incurred which did not tend to increase the value of the property. The accountants were informed by the valuators of the stocks of whiskies, wines, &c, that these had been taken at prices at which an outsider might purchase them with safety if he were to acquire and continue the business. The accountants have not put any valuation on the goodwill, but they are satisfied that the Company has a valuable connection, and, provided the expenses in the future are kept within reasonable limits, the business ought to be carried on at a profit. The information regarding the assets at the Sydney branch was ascertained in answer to a cablegram addressed to the agent of the Company there. The accountants have no means of ascertaining whether the valuation put upon the stock at the branch is fair and reasonable or otherwise. "
Evening Telegraph - Saturday 07 January 1899, page 3.

The valuation of the whisky then was based on what someone taking over the company as a going concern might pay for them. Presumably that price was much lower than their normal wholesale value. Though with the crisis in the whisky trade, even the lower price might have been hard to obtain. There was already a glut of whisky, even without Pattison's large stock coming on the market.

Finally the accountants tell us what they think had gone wrong:

"In conclusion, the accountants have to report that in their opinion in the interests of all parties the Company should, if possible, be reconstructed or rearranged. The accountants are satisfied from their examination of the books that the stoppage of the Company arose through (1) overtrading, (2) insufficient free capital, (3) unnecessary expenditure both in connection with the heritable properties and the ordinary business, and (4) anticipation of profits. The accountants desire to record their appreciation of the assistance which they received from the Directors and the staff of the Company. Reported by John Scott Tait, C.A., and R. A. MURRAY, C. A. - Edinburgh, 3d January 1899. "
Evening Telegraph - Saturday 07 January 1899, page 3.

Point three is put so coyly. The Pattison brothers were, in reality, wildly extravagant. In spending on their premises (remember those grand offices) , their advertising and their lifestyles. Again, there will be more about that later. Put simply, their expenses were way more than the business could support. It was all bound to go terribly wrong. The whisky crisis just made that day sooner.

With all this balance sheet stuff it feels like I'm turning into my accountant brother. Sends a chili down my spine.