11. Attitude of an English court with regard to auditors' responsibility in accounting practice.—In a famous English case—the Kingston Cotton Mills Company case—the manager of the company had de liberately exaggerated the quantities and values of cotton and cotton yarns held by it at the end of sev eral years. It seems that a stock journal was pre pared at the end of each year showing the amount of stock on hand under the different heads. The heads were summarized, and the summary was signed by the manager. The auditors took the totals under the va rious heads from the summaries, but did not examine further into the accuracy of the accounts summarized.
The auditors of the Kingston Cotton Mills Com pany, Limited, appealed against a court order mak ing them liable to replace to the company moneys im properly applied in payment of dividends, on the face of certain balance sheets 'which they had signed.
The court, in giving judgment, said that it was no part of an auditor's duty to take stock; that he must rely upon some other person for the details of an audit, and for the materials to enable him to enter it at its proper value in the balance sheet. While, as it was pointed out, the present fraud would probably have been discovered had the auditors gone more fully into all the books relating to the inventory, the ques tion was, were the auditors lacking in reasonable care in considering it unnecessary to test the managing di rector's returns. On this question the court held : that, in the absence of any suspicious circumstances. the auditors could not be held liable; that they were watch-dogs, not bloodhounds; that they were justi fied in believing the trusted servants of the company; and that they were not to be made liable for failing to track out ingenious and carefully laid schemes of fraud, if there was nothing to arouse their suspicions. Furthermore, the court felt that to hold the auditors responsible for a case of this kind would be to make the position of an auditor intolerable.
It would seem that, in this particular case, the audi tors escaped too easily, because there is apparently no doubt that the fraud would have been discovered had the auditors gone further in their investigation. Even tho, as in this case, they had qualified the inventory in the balance sheet by the phrase, "as per manager's cer tificate," an auditor must assume some responsibility, or else what is the object of having accounts audited? 12. Moral responsibility of the auditor.—From the
tenor of numerous decisions rendered in England it would seem that by qualifying his certificate and re lying, perhaps, upon decisions which make his legal responsibility less onerous, the auditor is practically absolved from all responsibility in the only business in which he professes to engage. If the profession is to reach that place in the estimation of business men which it ought to hold, and if the auditor is to ful fil his economic functions to the community, he must assume a moral responsibility more exacting than his legal responsibility apparently calls for.
13. Abuses in the profession.—That there are abuses in the auditor's profession at the present time cannot be denied; that some auditors lack the proper conception of their responsibilities must be admitted, but the fault is not entirely with the auditor. It rests partly with the business man who fails to recognize the distinction between the right type of auditor and the charlatan. The fault also rests, to a certain extent, with state legislatures in neglecting to de mand the proper qualifications from those who are licensed to practise. Investors and stockholders are thus denied the protection of the law against dishon est bankers, promoters, auditors and corporate man agers to which they should be entitled. Fortunately, the loss from this laxity is not as great as it other wise might have been, by reason of the fact that the average American business man,, as well as the pro fessional man, tries to play the game straight.
14. Forms of certificates.—If the auditor has made XXI-23 complete audit of the accounts and is satisfied that they disclose accurately the financial condition of the undertaking, he will attach his unqualified certificate. The form of certificate differs, and it will vary from the common one "audited and found correct," to the more elaborate type now frequently used ; I have audited the accounts of the Blank Manufacturing Company for the year ended December 31, 1916, and