Professional negligence;

              42 HASKINS & SELLS June
THE following case, which attained con­siderable
publicity, illustrates the point
of the preceding article. It is stated as
reported without first-hand knowledge of
the facts. The case involves an engage­ment
where accountants not only failed
to apprise the client of a dangerous situa­tion,
but also failed to detect an embezzle­ment
until after it had grown to large
proportions.
The comptroller of a large manufacturing
concern was successful in misappropriating
more than a million dollars of the com­pany's
money. His operations extended
over a period of three years before being
brought to light. The comptroller, in
addition to the ordinary duties of such an
official, was authorized to sign all company
checks. As a result he was able to effect
embezzlement by fraudulent transfer of
funds between company banks.
Several plants were operated by the
company in various sections of the country,
some at distant points. Bank accounts,
considerable in number, were carried at the
different plants, but were controlled by the
main office of the company. Transfers of
funds between banks were made frequently,
and in large amounts. At times transfers
were effected by the remittance of checks
drawn on one bank in favor of another;
at other times bank drafts were purchased
at the home office bank and remitted.
The company's accounting procedure
provided that when a transfer check was
issued, it was credited to the bank on
which drawn, and charged to an account
called "Funds in Transit." In due course
the payee bank reported the receipt of the
check or bank draft, and an entry was made
to charge that bank and to credit "Funds
in Transit." In the usual run of business,
therefore, an individual item did not re­main
very long in the "Funds in Transit"
account.
Negligence
The defaulter obtained his funds in the
following manner. He drew checks on
banks with large balances, in favor of the
home office bank. These checks osten­sibly
were for the purpose of buying drafts
to be sent for deposit in other banks at out­side
points. The checks were entered
regularly in the cash book, being charged to
"Funds in Transit." Instead of actually
buying the drafts, however, the comptroller
deposited the checks in the home office
bank to the credit of another business con­cern
which he owned and operated.
In cases of such manipulations, there
were of course no advices received by the
company from the banks to which the
diverted funds were supposed to have been
transferred. The items were allowed to
remain in the "Funds in Transit" account
for a number of days, but not over the end
of a month.
Near the end of the month the comp­troller
concealed the shortage by "kiting"
checks. He drew checks on the home office
bank aggregating the amount of the short­age,
and forwarded them for deposit in the
banks where the original transfers were
supposed to have been deposited. The
checks were not entered in the records until
the following month. They were mailed
at such times as to reach the payee banks
before the close of the month, but not to
reach the home office bank, on which they
were drawn, until after the close of the
month, so that they would not be included
in the current settlement of the latter.
At the same time the comptroller put
through an entry clearing the "Funds in
Transit" account and charging the banks
in which deposits of unentered checks had
been made. The same process was re­peated
at the end of each month. The
amounts involved gradually increased as
the shortage became greater.
At the end of the month, after the un-