History of Auditing

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| | |The History of Auditing | |A detailed overview | | | | | | |

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Auditing has a rich history within the United States. There have always been various rudimentary forms of auditing when the first businesses were started; however the focus of this paper will be on auditing standards within the twentieth century. To look beyond that departs from what would typically be termed as “modern accountancy” and its relevant roots. Author Bruce Marshall helps describes why this historic perspective is so important of our field: “Accountancy is a recognized profession like those of law and medicine. ... In fact it might not be too much to say that it is regarded as the most important of all the professions. Indeed it is the cornerstone upon which the whole industry of our Empire is built.”[1] Establishing a Need for Auditing

In one of the earliest forms of organized auditing, the American Institute of Certified Public Accountants issued a series of pamphlets to the accounting profession in 1917. The pamphlets were designed to guide financial statement analysis and auditing in general, offering more transparency to the emerging corporations that were springing up around the country. Strong motivation for this release came from the Federal Trade Commission and the Federal Reserve Board, stemming from a panic in the previous decade that had sent chills through the investment community. Both entities wanted to offer a stabilizing force to help guide the United States’ corporate growth. An early accounting journal discusses the pamphlets: “The memorandum is of such importance that it has been reprinted in full in this issue of The Journal of Accountancy and we are confident it will appeal to all readers. To the members of the institute it will serve as a guide in all their audits for credit purposes, and they will understand that the burden of proof will be upon them if they omit any of the procedure laid down in the memorandum.”[2] The pamphlets were an adequate start, yet lacked the authority to be the final solution for stability. Federal Trade Commission Chairman W.E. Humphrey delivered a well timed statement on the progress the FTC had made, but also addressed some of the limitations: “I am constrained to believe that the business of this country, and particularly big business, is more and more forced to the conclusion that honesty is not only the best policy, but that it pays the highest dividends. I feel that there has been a tremendous improvement in the conduct of the business of the country over the last few years, but the time has not come, and I regret to say that it seems far off, when the strong arm of the government will not be needed to protect the public from greed, monopoly, fraud, and unfair practices.”[3] Humphrey however, could not foresee how right he actually was. After an especially lucrative decade for investors in the roaring twenties, one of the most devastating financial crises struck the United States...
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