History of Auditing

Question 1

Where did the need for auditing come from?

Answer 1

1830’s England - modern corporations started during the Industrial Revolution (need to monitor management)

Question 2

Where did the first public accounting firms begin?

Answer 2

1830’s England had the first public accounting firms

1844 - English government requires audits of corporations (Companies Acts)

Question 3

What happened in the 1920’s regarding investment?

Answer 3

Investment exploded (Roaring 20’s) and was no longer just the rich, also included middle class

Speculation started to rise

Audits are free market in US, no federal mandate

Question 4

Securities Acts of 1933 and 1934

Answer 4

• Require audits for publicly traded companies
• Trying to restore investor confidence
• Initially NY Society CPAs resists
• No formal audit or accounting standards at this point - pure free market

Question 5

When did the first financial reporting standards appear?

Answer 5

1937

Question 6

In 1937, who hired the auditor?

Answer 6

Effectively, management

Question 7

When did the AICPA Self-regulation step in?

Answer 7

1980s (enhanced in 1990s)

Question 8

When did SOX get put in place?

Answer 8

2002

Question 9

Who set the standards in the early 1940s?

Answer 9

The AICPA set the standards, ASB (audit standard board)

However, there was no government oversight of the audit profession

Question 10

Who was appointed in 2002 to oversee public company auditors?

Answer 10

2002 Sarbanes Oxley appointed PCAOB to oversee public company auditors.

PCAOB inspects the auditors on a regular basis

Question 11

What are some of the remaining problems with the auditor?

Answer 11

Who do they work for?

• the management or the public?
• shareholders (audit committee or the public?)
• who is the public, and if they want public auditors, why not make public auditors?

Question 12

Why do private companies hire auditors?

Answer 12

• Similar reasons to public companies
• Need reliable information for users
• Most banks require audits when providing loans to private companies (yet the company hires the audtior, not the bank.. sometimes the bank requires a certain auditor)
• owners want to be sure management information is reliable

Question 13

Who oversees private company auditors?

Answer 13

• AICPA peer review covers private company auditors
• reviewed every three years by peer audit company
• report issued to AICPA
• auditors of public companies now overseen by PCAOB but private audits continue without government oversight