Honest but dumb;

              Bulletin HASKINS & SELLS 91
PARAPHRASING a common slang ex-pression,
one of our banker friends
recently characterized a certain firm of
accountants as being, in effect, honest but
dumb. The occasion for this remark was
a failure on the part of the accountants to
discover fraud which was alleged to have
existed and been concealed over a period of
several years, during which time the ac­countants
were making periodic examina­tions.
When the alleged shortcomings on the
part of the accountants were reduced to a
basis of fact, it appeared that they had
been engaged to perform, and did perform,
service which is specifically described as a
limited examination. All that was con­templated
by the client, and all that was
done by the accountants, was to verify
certain asset and liability balances accord­ing
to the records, which latter were not
verified, following which there were pre­pared
from the books, without further
verification thereof, statements setting
forth the financial condition at a given
date and the results of operations for a
period ended the same date.
The accountants' report was clear and
specific as to the service performed, and in
the mind of anyone qualified to judge a
report of this character, granting that such
person had taken the time to read the
report, should have left no doubt as to the
character, scope, and results of the exam­ination.
However, bankers frequently con­tend,
as was contended in this case, that
accountants are not justified in accepting
engagements of this type and rendering
reports of this character. This question
is moot in the extreme, and probably will
not be settled for some time to come.
The case just cited raises a question as
to whether or not clients understand fully
the kind of service they are to receive when,
by arrangement with public accountants,
they seek accountancy service. It is some­what
doubtful also if accountants them­selves
always are sure and clear in their
minds as to just what the different types
of service comprehend. Many firms of
practitioners, doubtless, have been going
on for years without stopping to define
and differentiate the classes of service
which they perform, and without making
clear to clients just what the clients have a
right to expect in connection with the
different classes of service.
Accountants, perhaps, are too prone to
go blissfully on, taking for granted that
definitions are unnecessary, until some un­pleasant
experience demonstrates the need
for a definite understanding. As evidence
of the fact that accountants themselves
appear not always to be clear on the sub­ject,
engagement memorandums occasion­ally
are received which describe the service
to be performed as a "balance sheet audit
for the year ended," etc.
In a case of this kind, were a shortage
later to be discovered by the client and
proved to have been concealed by falsifica­tion
of the books at the balance sheet date,
there is little question but that the client
would hold the accountants morally re­sponsible
for not having discovered the
irregularity. The point here is that it
should be explained thoroughly to clients
who desire a balance sheet verification that
the accountant does not undertake to
detect any fraud concealed by falsification
of the records, since a balance sheet
verification does not contemplate verifica­tion
of the records. It should be made
clear, however, that the accountant does
undertake to discover shortages in which
concealment is attempted through mis­representation
of the balances. In other
words, the accountant should discover
fictitious checks or vouchers in the cash,
or shortages concealed by manipulation of
bank reconcilements, but is not expected to
discover shortages concealed by misfooting
the cash book. Frankly stated, a client
who wants assurance that no fraud exists
Honest But Dumb