Court Opinion

ID: 3852791
Source: CourtListenerOpinion
Date Created: 2016-07-06 08:35:07.55383+00
Date Added: 2024-06-11T10:53:41.933749
License: Public Domain

There is no doubt that the conclusion reached by the majority is right. I cannot agree, however, with the reasoning used in reaching that conclusion. The premise *Page 174 
adopted by the majority is that it is no part of the borough auditors' duties to examine into and report the amount of cash and credit actually in the treasurer's possession. That premise is clearly false. It is admitted in appellee's brief, and in fact it could not be denied, that "a business auditor takes into consideration a verification of the bank balance," and that his report therefore reflects the cash and credit actually on hand. I see no reason for supposing a borough auditor's duty to be different from that of a business or commercial auditor. It is argued by appellee that section 1035 of article X of the Act of May 4, 1927, P. L. 519, furnishes a ground for distinguishing between borough auditors and other auditors. That section provides that "the auditors of the borough . . . shall audit, adjust and settle the accounts of . . . all officers of the borough. . . . The amount of any balance or shortage . . . shall be a surcharge against any officer against whom such balance or shortage shall appear." A "balance or shortage" surely can mean nothing but the difference between the amount which an officer ought to have on hand and the amount which he actually does have on hand. I cannot see, therefore, how a balance or shortage, within the language of the act, could possibly appear against an officer in an auditor's report unless that report disclosed the cash and credit actually in the officer's hands at the time of the audit. Nor, indeed, do I understand how the auditors could, in any ordinary and natural sense of the words, "audit, adjust and settle the accounts of" a borough officer without discovering and reporting the amount of funds actually in his possession. It is stated in the majority opinion that the auditors, in reporting that the treasurer had the moneys "on hand," meant "that he should have them in hand." This is in truth a novel proposition. To say that the phrase "cash on hand" in the auditors' report means nothing more than the cash whichought to be on hand is to distort the *Page 175 
natural meaning of the phrase and to take from it the sense given it by settled business usage.
It may well be that the auditors in the present case did not in fact attempt to discover the amount of cash and credit actually on hand. It seems to me none the less clear that it was their duty to do so, and their report of "cash on hand" must be construed to be a representation of the funds found by them to be actually in the treasurer's possession.
It does not follow, however, that the borough is barred in the present suit. It is true that an auditor's or controller's report, unappealed from, is ordinarily conclusive, even though erroneous: Skelton v. Lower Merion Twp., 318 Pa. 356; Riehl v. Miller, 319 Pa. 201, and cases there cited. In O'Gara v. Phillips, 297 Pa. 526, we stated, at page 532: "The report of a controller, however, is not conclusive as to assets which the accounting officer conceals or of which no return is made or which are not officially brought to the attention of the auditing officer." An express exception to the conclusiveness of an auditor's report in the case of fraud was recognized in Riehl v. Miller, supra, at page 207, where an audit is said to be conclusive "in the absence of fraud." Clearly, a fraudulent official should not be permitted to set up an erroneous auditor's report in defense of his own fraud. In Lackawanna County's Appeals, 296 Pa. 271, Mr. Justice SIMPSON, referring to the conclusiveness of a controller's report which failed to show the misappropriation of funds by the county treasurer, pointed out, at page 276, that "It cannot be too strongly stated that 'An officer mismanaging funds may not defend by pleading knowledge and approval of his unlawful conduct by other officers, nor his own good faith.' " The rule of conclusiveness of an audit was never intended to protect an embezzling official, such as was the borough treasurer in the instant case, and he will not be heard to invoke that rule in his own defense. So, too, the surety on his official bond, standing *Page 176 
in its principal's stead, cannot plead the auditor's report in its defense. The treasurer's embezzlement was a failure faithfully to perform the duties of his office, and was therefore clearly a breach of the condition of the bond executed by him and his surety. If the surety could show reliance upon the auditors' report to its detriment, or prejudice of any kind as a result of the erroneous audit, a different situation would be presented. No attempt to show such prejudice is here made, and, indeed, the record discloses no facts indicative of any prejudice as a result of the audit. The surety's case is therefore no better than that of its coöbligor and codefendant, the embezzling treasurer. Neither is it shown that the borough officials knew and fraudulently concealed the treasurer's misappropriations from the surety at any time. In fact it is a fair inference from the record that they did not know of the embezzlements until his discharge in April, 1930. Where the obligee of a bond for the faithful performance of duties by his employee is himself ignorant of the employee's prior default, nondisclosure of the default will not excuse the surety (see Park Paving Co. v. Kraft, 262 Pa. 178, 181), even though the obligee or officers or employees of the obligee were negligent in failing to know: Wayne v. Commercial National Bank, 52 Pa. 343; see 2 Williston on Contracts, section 1249. To hold, as appellant would have done, that plaintiff is barred from setting up facts inconsistent with the report of its auditors, and therefore from showing the embezzlement, would be to shield the fraudulent official in every similar case with the chance erroneousness of an audit.
It may be noted that in Commonwealth v. Sweigart, 9 Pa. Super. 455, Judge RICE recognized, at page 460, that the rule of conclusiveness of an audit was capable of exception: "Possibly, we do not say positively that it would be so, it might be competent in defense to an action on the bond, to show that the 'balance upon last year' referred to in the auditors' report, was *Page 177 
not actually in the officer's hands at the beginning of the term covered by the audit, but had been embezzled or otherwise misappropriated before that time." If a surety could thus show, in defense to a surcharge, that the "cash on hand" reported in the audit was not in fact in the officer's hands at the beginning of his term, it would seem clear that the borough likewise should be able to show, in aid of an action on the bond, that the reported "cash on hand" was not actually on hand at the end of the term, but had previously been embezzled by the officer.