Guarding the Company against Dishonest Employees
| Date | 01 March 2001 |
| Pages | 90-95 |
| Published date | 01 March 2001 |
| DOI | https://doi.org/10.1108/eb026010 |
| Author | Mohammed B. Hemraj |
| Subject Matter | Accounting & finance |
Journal of Financial Crime — Vol. 9 No. 1
Guarding the Company against
Dishonest Employees
Mohammed B. Hemraj
INTRODUCTION
This paper, which in part includes historical analysis,
examines the following questions: (a) Whose duty
is it to guard against fraud, misappropriation and
defalcation perpetrated by the employees? (b) To
what extent are auditors and directors directly
responsible for such detection and prevention? The
issue will be analysed and explored from cases
originating from the UK and Australia.
WATCHDOG OR BLOODHOUND
Justice Fitzgibbon,1 with regard to the watchdog or
bloodhound analogy theory hitherto applied to
auditors, found that it was unfair to the bloodhound,
who was just as unlikely to have his sense of suspicion
aroused as the watchdog. But then, was not the
watchdog bound to bark? And when sniffing
around if it hits upon a trail of something wrong,
surely it must follow it up. Using this analogy, an
auditor even acting as a watchdog was supposed to
keep his eyes and nose open and like a hound was
required to follow up his trial to the end and by root-
ing up the statements of account, would discover
fraud.
A Canadian judge, Mr Justice Donovan2 found:
'[T]he useful work of a watchdog is based on the
fact that he is expected, particularly if he is in the
dark, to raise an alarm whenever he sees or hears
anything unusual, and if a possible marauder
appears to be approaching, to continue his com-
bined protests and threats with two objectives in
view: (1) that the cause of fancied threat may be
withdrawn, and (2) that his master may be aroused
to his danger; and only when one of those objec-
tives has been accomplished will he be considered
to have discharged the duties of the position
which he assumed.
He will not have performed the functions of
his office if after one howl he retreats "under the
barn", or if he confides this protest to a fellow
watchdog'.3
An English judge, Lord Denning,4 opined:
'An auditor is not to be confined to the mechanics
of checking vouchers and making arithmetic com-
putations. He is not to be written off as a profes-
sional 'adder-upper and subtractor'. His vital task
is to take care to see that errors are not made, be
they errors of computation, or errors of omission
or commission, or down right untruths. To per-
form his tasks properly, he must come to it with
an inquiring mind — not suspicious of
dishonesty . . . but suspecting that someone may
have made a mistake somewhere and that a check
must be made that there has been done . . .'
In the Australian case of Wallerawang Collieries Ltd v
Kent, Brierley & Sully,5 there was a forgery by the
employee. The directors were negligent but the
auditors were sued for negligence. The plaintiff
company contended that the defendant was negligent
in not noticing various irregularities and in not
making inquiries in the proper quarter, and that, if
they had done so, the fraud would have been dis-
covered, and there would have been no more for-
geries. The company claimed that if the auditor had
taken proper steps, the fraud would have been dis-
covered and no further defalcation would have
taken place. The auditor was negligent, for the irre-
gularities should have excited suspicion and should
have put the auditor into inquiry which when fol-
lowed would lead to the discovery of defalcation.
Failure to make such inquiry or investigation by the
auditor was tantamount to negligence.
Mr Justice Talbot in Armitage v Brewer and
Knott6
opined that one of the objectives of appointing an
auditor was to get rid of a fraudulent servant. And
the natural result, if a fraudulent book-keeper is
not dismissed, was that fraud would continue. His
Lordship conceded that detection required minute
examination of a large number of documents, but
that was exactly what the defendant had undertaken
to do. The defendant did not examine the vouchers
with proper care. A good many documents were
suspicious on their face and had called for inquiry.
Journal of Financial Crime
Vol.
9, No. 1, 2001, pp. 90-95
© Henry Stewart Publications
ISSN 1359-0790
Page 90
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