The facts of this case were basically that an action was brought against the auditors of the company for negligence, in failing to detect a fraud which involved the management of the company wilfully overstating the value of the company’s inventory.
In finding that the auditors were not guilty of negligence, the Judge famously said the following:
“An auditor is not bound to be a detective, or … to approach his work with suspicion, or with a foregone conclusion that there is something wrong. He is a watchdog, not a bloodhound.”
The Oxford English Dictionary provides us with the following definitions:
Watchdog: ‘A dog kept to guard private property.’
Bloodhound: ‘A large hound with a very keen sense of smell, used in tracking.’
It’s a long time since 1896 and nowadays, there is perhaps more a way of thinking that auditors should be a little bit less of a sleepy old watchdog, and rather more of an active bloodhound.
Make sure that you are up to date on an auditor’s responsibility for detection of fraud.