It has been observed in the case of Kingston Cotton Mills Co. (1896) case that an auditor is a watchdog and not a bloodhound. One area that should be looked at is the so called letter of representation which auditors require from the directors of the companies they audit. Read the Guernsey Press in full from your laptop, PC or mobile, wherever you are in the world. What is reasonable care in any particular case must depend upon the circumstances of that case. It also fails to take into account that the accounting profession has developed significantly since the famous statement of Lopes L J. Clearly, auditing has changed considerably Doug Horton. 1 Mr. Mustaffa Bin Bukhari An external auditor is a bloodhound looking for rules that have been broken. According to the above phrase it is explained that like a watch dog auditor should protect the interest of those who appointed. The art of simplicity is a puzzle of complexity.SimplicityQuotations by Doug Horton . This is in recognition of the potential of the real conflicts experienced in the larger firms. All accounting and auditing standards were now part of subordinate legislation. The auditor’s duties were now comprehensively detailed in the law. It is the duty of the owner to take action. In the memorable judgement of Lord Justice Lopes in 1896: “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. We just don’t know when you are auditor and when you are examiner. The kind of stringent measures prescribed against auditors gives the picture that the Act indeed expects the auditors to be bloodhounds in discharging their duties and not merely be watch dogs. In conclusion, the Chairman said that we need to forget the watchdog and not bloodhound description. This includes responsibilities to obtain reasonable assurance (defined as a high, but not absolute, level of assurance) that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error (SA 240). In Quotes. He is justified in believing tried servants of the company in whom confidence is placed by the company. It was noted that the auditors were to be appointed by the shareholders, and were to report to them directly, and not to or through the directors. An auditor is appointed by the shareholders in case of a limited company. Ans. The object was to ensure that the shareholders received “independent and reliable information respecting the true financial position of the company at the time of the audit.” Bernard Agulhas, Independent Regulatory Board For Auditors Click here (then “like” the page) to follow Bruce on Facebook. 3. He is a watchdog, not a bloodhound.’ (Reference 3). When any person starts the business then various transactions which are related to cash and In absence of such suspicious circumstances, he should rely on representations made by tried servants of co.(Important) Auditor has duty of “reasonable care” The auditor is a watchdog and not a bloodhound. He will not assume that the management is always upto something and try to look for fraudulent activity. More Stories Like These. The Financial Times reported recently that one large accounting firm had acquired a law firm which specialised in technology. What is reasonable skill, care and caution must depend on the particular circumstances of each case. of its accounts, equated him to a watchdog and not a bloodhound,' he would not have realised that his formulation was to become, not only the most popular formulation of the function of a com-pany auditor, but also was to be relied on by the profession in the twentieth century as a basis for the standard expected of audi-tors. His limitations are just to warn you, like a watch dog when a stranger enter house of master he just barks & get it to the notice of his master than some unknown has entered the house. NFRA “Auditor is a watchdog and not a bloodhound” is a serious misconception. bloodhound definition: 1. a large dog that has a very good ability to smell things, and is used for hunting animals or…. Lord Justice Lopes, not only referred to the auditor as a watchdog (not a bloodhound), but made other observations in relation to his role as a "detective." In addition to separating the audit function, the accountancy regulators have issued proposals that will ensure auditors will be more responsible for detecting fraud in the accounts they audit. Auditor is a watchdog not a bloodhound in HindiHello Everyone! The Companies Act, 2013, was built in substantive provisions regarding audit and auditors into the statute. He is entitled to assume that they are honest, and to rely upon their representations, provided he takes reasonable care. The object was to ensure that the shareholders received “independent and reliable information respecting the true financial position of the company at the time of the audit.”. Audit regulator National Financial Reporting Authority (NFRA) has urged the audit fraternity to refrain from taking shelter under the adulated description of the auditor “being only a watchdog and not a … It is required that an auditor must be sufficiently careful and vigilant in … The duty of the auditor is to be honest i.e., he must not certify what he does not believe to be true, and he must take reasonable care and skill before he believes that what he certifies is true. An auditor is not bound to be a detective, or, as was said, to approach his work with suspicion or with a foregone conclusion that there is something wrong. He is a watchdog, but not a bloodhound.” Where there is nothing to excite suspicion very little inquiry will be reasonably sufficient. He is a watchdog not a bloodhound.’. The foundation of good audit quality is independence,” he said. It follows from this that developments in the use of financial information that the importance of accounts is such that this view of accountants in their role is inappropriate and that the auditor should now be regarded as a bloodhound given the impact which defective accounts can have for investors, creditors and users of accountants. Unlike a bloodhound the duty of the auditor is verification and not detection. Audit regulator National Financial Reporting Authority (NFRA) has urged the audit fraternity to refrain from taking shelter under the adulated description of the auditor “being only a watchdog and not a bloodhound”. Get all latest content delivered straight to your inbox. An external auditor is a bloodhound looking for rules that have been broken. The company's internal auditor is a watchdog, making sure rules are being followed. However whilst these developments will be good for users of accounts there is a parallel development which threatens to undermine these welcome developments. For those who would nevertheless recall the watchdog metaphor with something like nostalgia, he recommended a read of the Sherlock Holmes short story Silver Blaze, where Holmes drew attention to the curious incident of the dog in the night time, a dog that did nothing, because of the identity of the criminal. This development in the Financial Times noted on 4 November 2020 that as a result of this acquisition the large scale and access to technology platforms threatens some mid-tier law firms that rely on providing process-driven legal advice but have large fixed costs and charge higher fees. If auditor is not responsible then why not have fraud examiner or forensic accountant do the job. In particular they have focused on the ‘red flags’ over Wirecard’s financial reporting over the years. After a year of inter-regnum when the National Audit Office was without a head, Anthony C. Mifsud was unanimously approved by Parliament as the new Auditor General on July 16. He is a watch-dog, but not a bloodhound. It also recognises that there have been a number of accounting scandals over the last five years of which the Wirecard fraud is just one. Clearly, what was a common law understanding of the auditor’s duty in the absence of any statute to govern the same would not at all be applicable today. Where suspicion is aroused more care is obviously necessary; but still an auditor is not bound to exercise more than reasonable care and skill, even in a case of suspicion, and he is perfectly justified in acting on the opinion of an expert where special knowledge is required. “If this is not taken care of, any talk of nuanced professional judgments in arcane business and financial matters would have to be regarded only as smokescreens meant to mislead. NFRA Chairman R Sridharan stated that the phrase that the “auditor is a watchdog and not a bloodhound” is a serious misconception. Kingston Cotton Mill Co (1986) – ‘He is a watchdog, not a bloodhound’ this means that a watchdog will only respond when a problem arises, whereas a bloodhound deliberately look for problems. Mor than half a century ago Lord Lopes, British jurist, put the problem succinctly. 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Advocate Raymond Ashton offers his insights, THE auditor’s duty of care in relation to the audit was considered by Lopes in Re Kingston Cotton Mill Co (No 2) 1895 2 Ch 2 at pp 288-289: ‘It is the duty of an auditor to bring to bear on the work he has to perform that skill, care and caution which a reasonably competent, careful and cautious auditor would use. The separation of audit and non-audit services being undertaken in developed countries is expected to boost auditor independence around the world. Two of the main reasons why it … They were also echoed before the importance of the stock market in allocating resources in a capitalist economy. The word Audit is derived from the Latin word ‘Audire’ which means to hear. A few years ago, in 2015, the Royal Bank of Scotland warned that accountancy firms were ‘quietly’ starting to take market share from established mid-market law firms that were not able to invest in the technology required to compete. He is a watchdog, not a bloodhound. Auditors like to say their role is that of a watchdog (who barks when they see something suspicious) rather than a bloodhound (who actually searches for something suspicious). An auditor is not bound to be a detective, or, as was said, to approach his work with suspicion or with a foregone conclusion that there is something wrong. An auditor is not bound to be a detective, or, as was said to approach his work with suspicion, or with a forgone conclusion that there is something wrong. I agree that Auditor is a 'Watchdog not a Bloodhound' as the main duty of the Auditor is to examine and authenticate the correctness & trueness of the accounts. Speaking of auditors, he said: “He is a watchdog, not a bloodhound.”. This letter arises because the auditors in effect audit the accounts of the directors. The art of simplicity is a puzzle of complexity. Assistant Supervisor, IS Audit. Government Quotations by Lord Justice Topes. The directors are required in this letter to confirm all the material figures in the accounts and provides a classic ‘get out of jail free card’ when accounts are found to be defective. He is justified in believing tried servants of the company in whom confidence is placed by the company. Recommended Jobs. This has been recognised by the profession, which now requires the larger firms to split off their audit function from their other activities. For interesting commentary on the watchdog theme and on whether the auditor could be likened to a watchdog, bloodhound, or other canine species, see auditor that do not bound to detect and do not need to do thoroughly inspection over fraud activity that may happened in an organization. Companies Act, 2013 does not seem to echo this thought! The Auditor has to find out if there are any mistakes, omissions, fraudulence and theft which is in interest of the company internally and externally. One suggested improvement would be for the accountancy profession to reform the reliance that can be placed on this letter. In the early 1970s there were only two routes for newly qualified accountants – audit and tax. In this vein, the European Securities & Markets Authority has criticised the German regulators for their ‘deficient’ handling of the Wirecard accounting scandal. Al-Sayer Group. The company’s internal auditor is a watchdog, making sure rules are being followed. NFRA “Auditor is a watchdog and not a bloodhound” is a serious misconception. Auditor is not a Bloodhound Speaker: CA Padma Jain B.Com(Hons.) However auditor needs to be cautious over the possibilities of fraud that may occur and if ever any frauds are found by the auditor, it is important that the fraud is address properly by the auditor. Auditors’ key task is to determine whether a set of accounts gives a “true and fair” picture of a company’s business. These developments have spurred a growth in the possibilities of conflicts. These famous words have become a watchword for accountants caught up in litigation. The separation of the audit function and the increased pressure on auditors to detect fraud means that auditors are now increasingly being regarded and treated more like bloodhounds and not like compliant watchdogs. An auditor is not bound to be a detective or was said to approach the work with suspicion or with a foregone conclusion that there is something wrong. Lord Justice Topes had once famously remarked that: “The auditor is a watchdog and not a bloodhound.”. The judge summed up auditor’s duty by stating, “Auditor is a watchdog, not a bloodhound.” It was noted that the auditors were to be appointed by the shareholders, and were to report to them directly, and not to or through the directors. “Auditor is a watchdog but not a bloodhound”- if auditor discovers something suspicious, he should probe. In conclusion, the traditional view that auditors are only required to be watchdogs, not bloodhounds, is outdated. Auditors are watchdogs, not bloodhounds. SA 240 says that when obtaining reasonable assurance, the auditor is responsible for maintaining professional skepticism throughout the audit, considering the potential for management override of controls and recognizing the fact that audit procedures that are effective for detecting error may not be effective in detecting fraud. What is not encompassed by these words is that these words were echoed before the modern Companies Acts and in particular the Companies Acts 1948, 1967, 1980 and 2006. This follows the trend of other larger accounting firms which have acquired, by organic growth or otherwise, substantial law practices. These recent developments should be carefully monitored by regulators as a matter of some priority and acting not as watchdogs but as bloodhounds. ‘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. AUDITOR IS WATCH DOG NOT A BLOOD HOUND :-"Auditor is watch dog and not a blood hound" is a phrase which is given by Justice Lopes. The NFRA is a body constituted under the provisions of Section 132 of the Companies Act, 2013. Auditors, Watch Out!! Justice Lopes in case of Kingston Cotton Mill quoted “Auditor is a watchdog, not a bloodhound.” A watchdog is defined by the American Heritage dictionary as “One who serves as a guardian or protector against waste, loss, or illegal practices.” Another area which might be reformed is the matter of audit fees, which are currently discharged by the company on behalf of the directors. auditor is responsible for authontication correctness of the account auditor duty is restricted to the reporting only and he is bound to report ... An auditor is a watch dog and but not an bloodhound ... Customize/purpose build up department is a watchdog or blood hound or both? More Details. The NFRA has the following responsibilities: The NFRA Chairman said the point that needs emphasis is that good audit quality starts from getting the very elementary basics right. It means that while auditing he will keep a questioning mind and not a suspicious mind. The perception of auditor’s duty with regards to detection and prevention of frauds and errors was initially based on the decision given in Kingston Cotton Mills Co. (1896) case. Learn more. However, parallel to this development the larger accountancy firms are becoming more like ‘bloodhounds’ by growing their management consultant arms but more particularly their legal capabilities. In 1971, when I studied the famous Kingston Cotton case where the jury said that “the auditor is a watchdog, not a bloodhound”. The auditor should investigate thoroughly but he is also not expected to be of suspicious mind. Sridharan also highlighted that India has already built into law the separation of audit and non-audit services that other countries are only now attempting to achieve. It is hoped this development will result in greater efforts by the profession to reduce the number of scandals. And if he is responsible then what is the need of forensic accountants or fraud examiners. Since then there has been a growth in the role accountants play in financial planning, consulting of all descriptions and in the US an accountancy firm even offered to design a golf course. Please drop your queries, suggestions & feedback. He is a watchdog, but not a bloodhound. These threaten consumers and users of accounts by reducing choice and potentially giving rise to new conflicts. Users of accounts are entitled to rely on accounts given the large sums of money incurred on the audit function and its related corollary the audit committee. However whilst these developments will be good for users of accounts there is a parallel development which threatens to undermine these welcome developments. determined based on the reasonable care and skill of an auditor’s performance. This is to be welcomed to say the least. The law on the fraud related responsibilities of the auditor has moved far ahead of what it was in the 1890s. He is expected to play the role of a watchdog on their behalf and should look after their interests. The judge summed up auditor’s duty by stating, “Auditor is a watchdog, not a bloodhound.”. In conclusion, the traditional view that auditors are only required to be watchdogs, not bloodhounds, is outdated. Explain fraud triangle. Sir it is rightly said that the auditor is a watchdog not a bloodhound. What is reasonable skill, care, and caution must depend on the particular circumstances of each case. Watchdogs and Bloodhounds (below) gives formal definitions of a ‘watchdog’ and a ‘bloodhound’. “If this is not taken care of, any talk of nuanced professional judgments in arcane business and financial matters would have to be regarded only as smokescreens meant to mislead. Go to www.guernseypress.com/gponline to subscribe to our discounted online edition. Justice Lopes in case of Kingston Cotton Mill (1986, UK) quoted “Auditor is a watchdog, not a bloodhound.” A watchdog is defined by the American Heritage dictionary as “One who serves as a guardian or protector against waste, loss, or illegal practices.” 1. The larger firms have developed other areas such as management consultancy activities, taxation and are now increasingly developing their legal practices. The dod do not start biting the stranger. We need to forget the watchdog and not the bloodhound description,” Sridharan said. The same is needed to be exorcised from everyone’s mind and the same has very far-reaching consequences. Accountants firms are now much bigger and academic learning has improved dramatically since the author first qualified as an accountant in the early 1970s. Q3) “An auditor is a watch dog and not a blood hound” Explain and illustrate this statement. 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