Kingston Cotton Mill

A landmark British Common law case of 1896 that had repercussions for external auditors throughout the English-speaking world. In the rather quaint language of the day, the case’s judicial description of external auditors as "watchdogs" rather than "bloodhounds" established the principle that auditors’ duties involve the exercising of reasonable professional care: "What is reasonable skill, care and caution must depend on the particular circumstances of each case. An auditor is not bound to be a detective." The case determined that it was reasonable for the external auditor of the Kingston Cotton Mill to rely on a *management representation of inventory balances, and the auditor was not held to be liable for failing to detect a *fraud. The legal framework of external auditing has changed significantly since the Kingston Cotton Mill case, but its judicial reasoning can be interpreted as an early articulation of the existence of the expectations gap. Further reading: Re Kingston Cotton Mill Company (No. 2) (1896) 2 Ch 279 at 288, UK Court of Appeal.