Learn why an auditor is a watchdog, not a bloodhound, and how their role is essential in maintaining trust and accountability in the business world. Trust your auditor as your financial watchdog.
The auditor is the agent of the shareholders as he is appointed by them He has to protect the property of business. He has to play the role of watch dog for the protection of rights of owners. He is not a blood hound as he can not loot the property of the business for his own benefit
The duty of watch dog is as a thief enters into the house, the watch dog starts to bark at the suspected person to make the owner alert. Similarly the auditor should also act as watch dog If the management fails to protect the rights of shareholders, he must report to shareholders about this fact.
The statement “An auditor is a watch dog but not blood hound” was remarked of Justice Lopes in Kingston
Cotton Mills case in 1896. The facts of the case were as follows:-
The accounts of the company had been manipulated by the manager by overvaluing the stock for a number of years. Thus the profits were inflated and consequently dividend was paid out of capital. The auditor had relied on the stock sheet which was prepared by the officers of the company and signed by the manager. So a suit was brought against the auditor for negligence. The auditor argued that he accepted the stock sheets duly attested by officers.
So Justice Lopes remarked as
The auditor has to use reasonable caution, care and skill. What is a reasonable care depends upon circumstances of each case. The auditor has no need to behave like a detective. “He is a watchdog and not a blood hound”. So he is justified in believing on said servants of the company. He should not be suspicious unless and until circumstances make him suspicious. It is not obligatory for auditor to trace out preplanned and carefully laid schemes of fraud, which have gone undetected for years by the directors.
The case of Mckesson and Robbinson in USA in 1938 has changed the standard of audit work Now the auditor should be present at the time of stock taking He can see whether the procedure followed for stock taking is proper. If he is not satisfied with the procedure then he can mention this fact in his report.
Conclusion
In conclusion, an auditor is a watchdog, not a bloodhound. Their role is to provide assurance, maintain trust, and promote accountability and transparency in financial reporting. By understanding the true nature of an auditor’s responsibilities, stakeholders can appreciate the vital role they play in upholding integrity and confidence in the business world.