Auditor: “material weaknesses” at Bailey Bros. Building and Loan

Auditor: “material weaknesses” at Bailey Bros. Building and Loan
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Report of Independent Registered Public Accounting Firm to the Shareholders and Board of Directors of the Bailey Bros. Building & Loan Association

We have audited the Bailey Bros. Building & Loan Association (the Building & Loan) internal controls and financial reporting as of Dec. 31, 1945. The management of the Building & Loan is responsible for maintaining such controls, along with assessing their effectiveness and conformity with prevailing accounting and financial standards. Our responsibility is merely to express an opinion.

As such, we are compelled to inform you that we have discovered several instances of material weaknesses and deficiencies which may put shareholders and indeed the entire community of Bedford Falls at significant risk. Frankly, the Bailey Bros. Building & Loan Assoc. is a terribly run financial institution. We’ve never seen anything like it.

Much of our concern is centered on the fitness of Vice President William Bailey for the day-to-day management of the firm’s cash accounts. We made several attempts to interview Mr. Bailey as part of our audit, including arranging no less than six separate appointments at which he failed to appear. It was only after arriving unannounced at the Building & Loan’s downtown Bedford Falls headquarters on Nov. 21, that we were able to meet with Mr. Bailey. Our visit did little to allay our concerns.

Upon entering we witnessed Mr. Bailey drinking an unknown substance—we believe it to have been liquor—from a small flask. And when we questioned him about the several missed appearances, he grew visibly distraught and confused, repeatedly showing us a series of strings knotted around his fingers. Perhaps most distressing was the presence of wildlife—we witnessed a squirrel, crow and owl—in Mr. Bailey’s office, which is both a potential health hazard and liability for the Building & Loan.

Let us be blunt. “Uncle Billy,” as Mr. Bailey is known, exhibits clear symptoms of early stage dementia. And while we are sympathetic, his involvement in key operational activities amounts to a threat to survival of this institution. Indeed, it came to our attention that on Dec. 24 of last year Mr. Bailey failed to make a crucial deposit of $8,000 after misplacing the funds. The shortfall nearly resulted in the collapse of the Building & Loan, which was only averted after the wife of Building & Loan President George Bailey, Mary Bailey, undertook an unauthorized, inappropriate and potentially unlawful effort to raise additional capital from shareholders and others, via a frantic Christmas Eve solicitation that apparently consisted of going door-to-door with a large basket.

The missing $8,000 was never accounted for.

During our investigations, we also determined that the episode on Dec. 24 was not the first time the Building & Loan tottered on the brink. Soon after George Bailey assumed control, a run nearly brought down the firm, as the financial panic engulfed the country during the early 1930s.

Mr. Bailey (George) was able to keep the firm afloat but only thanks to the irresponsible and unsound financial practices that have unfortunately became a hallmark of the Building & Loan during his tenure. Our audit unearthed widespread examples of such practices including, but not limited to, co-mingling of personal and institution funds, lax financial record management, sexual harassment, more consumption of alcohol — incredibly — in the course of investment decision making, and the forced involvement of subordinates in spontaneous, silly, mini-parades.

Mr. Bailey’s personal life also raises significant questions about his fitness to continue on as president of the firm. He has been known to consort not only with town floozies but, perhaps even more troublingly, Italians. And in the domestic sphere, he is known to be domineering and verbally abusive. There have also been episodes of violence directed both towards both officers of the law and model bridges.

In our opinion, the Bailey Brothers Building & Loan Association, in all material respects, has failed to maintain effective internal controls and reliable financial reporting standards for the reporting period ending Dec. 31, 1945—and likely well before that. Furthermore, we believe it is incumbent on the board to remove Messrs. Bailey from their leadership roles at the thrift and appoint an interim director with a mandate to completely overhaul the Building & Loan’s organizational structure, with an eye toward maximizing shareholder value.

We have already conducted an exhaustive executive search focusing on the those with experience and expertise in the Bedford Falls regional economy. In something of a coincidence, we feel the best candidate to temporarily lead the Building & Loan would be our own Chairman Henry F. Potter. And we stand ready to offer further advice as necessary.

PotterHouseErnstCooper LLP
Bedford Falls, New York
March 15, 1946