Home > Free Essays > History > United States > The History of Auditing in the United States and the Industrial Revolution

The History of Auditing in the United States and the Industrial Revolution Term Paper

Exclusively available on IvyPanda Available only on IvyPanda
Updated: Mar 13th, 2022

The initiative to inspect the financial activity of a huge company in order to decrease the levels of fraud and increase the extent of pure accountability contemplates the use of auditing. The history of auditing is first indicated with the advent of the Industrial Revolution in the middle of the eighteenth century (Moeller 2009). To be precise, the emergence of the auditing in England was mentioned first in the thirteenth century (Brown 2006). However, auditing was shaped and developed into a separate financial discipline for clearer accounts. In fact, the growth of the economical and financial turnover among the major countries in the world arena at that time was intensive. Thus, there should be special incentives to provide constant verification of every financial procedure and action of a company. Thereupon, starting with Great Britain, the history of auditing began spreading around the world. Its influence as well as its use is enormous for the contemporary business. However, at the beginning, the emergence of auditing was reckoned with the extreme necessity in regulating the movements of the capital integrated in terms of the accounting. Thus, the history of auditing began with the industrial growth in the world major economies.

The history of auditing in the United States went through different stage in its development. It means that historically the US got through the somewhat dispersed but appropriately verified continuum of different factors having reasoned the extra-ordinary role of auditing in the country. To make it clear, first stage in auditing elaboration across the US points out the arrival of British auditors who assisted British investors on newly established corporations (Coffee 2006). The second, auditing became a forcing instrument of corporate verifications for the presence of frauds in different companies. In this respect auditing became a somehow institutionalized in the markets having emerged in the US. The third stage of auditing in the US is concerned with the twentieth century when auditing served and continues serving to cover the needs of the senior management (Coffee 2006).

The case of the first fraud in the United States was in the early eighteenth century when trading was at its height. In fact, the case known as the South Sea Bubble was quite ostensive for auditors to come closer to the accounting done in an organization. It was during the South Sea Company and when it made actual profit to offset £10 million of assumed government bonds (Singleton, Singleton and Bologna 2006). However, even with £2 million more the tension on the financial system in the newly created country was really high and was a storm warning. On grounds of financial misbalance between the governmental perspective for trading and private interests of traders and toppers at that time could not fail to implement the “eagle eye” of independent auditors.

Particular cases of frauds, such as railroad fraud and financial schemes, inflicted the reaction of the US government to pay more attention to the auditing services. The history of auditing was preliminary patterned with different cases of fraud which could not be prevented at the time. Hence, the capitalist society and form of provision of relations in it made it possible to encourage auditors. Participating with the government and, then, with private investors, auditing became a separate significant part of financial development in the United States. In case with the South Sea Bubble, the history of auditing encounters the emergence of external auditors to be hired. Charles Snell was the first to audit books as an external auditor who marked the beginning of the Certified Public Accountants (CPAs) (Singleton, Singleton and Bologna 2006).

The advantages of the civilized and highly developed (in comparison with previous centuries) society imposed the need for someone to count the treasures and the financial stability of a company. In this respect the history of auditing is younger than the history of accounting. Hence, in Great Britain so-called Exchequer officials and the Royal Wardrobe were responsible for keeping records on the financial activity of different trade organizations (Brown 2006). This tradition would further be evaluated and used by the newly created American state power. To say more, to decrease and eliminate the cases of fraud, auditing was needful in the US at its very beginning, as a young country. Thus, in the United States the fraudulent intentions of individuals had started since the Pilgrims and early settlers came here (Singleton, Singleton and Bologna 2006). The central part of the economical relationships where the fraud took place referred to the agriculture at large.

The land schemes and their sharing among the first Americans gave grounds to the emergence of con artists and cheaters who threw their weight about the new lands and territories. First of all, it touched upon the East coast of a newly discovered America. Second, it presupposes the drive of Americans to the Wild West. In fact, the current predominant position of the United States in the world arena is predetermined by the preliminary actions to fight with fraud. It was needful to guarantee the true information on the position of different firms at the time (Don A., et al. 2006). Thus, the capital markets and stock exchange could work efficiently if only command services of some auditing firms. In this respect one should lay emphasis on auditing as an instrument for capitalist development of the American society.

Auditors were highly motivated to cope with their clients in terms of privacy of information on real condition of a firm and its development at a definite stage of corporate growth. Hence, publicly trade firms were at stake for the independent auditors who were hired at the firm’s expense (Don A., et al. 2006). This did not contradict neither legal, nor political situation in the country. By contrast, auditors had several instances/organizations which provided a code of principles and norms according to which an auditor should promote an inspection. Hence, such institutions as the American Institute of Certified Public Accountants (AICPA) and the code of principles known as generally accepted accounting principles (GAAP) appeared (Don A., et al. 2006). Thereafter, these organizations were considered to be he main source for the state financial efficiency.

The beginning of the twentieth century was a challenge for the auditing. The thing is that many companies were at their top when the World War I started. The economical plans launched by Woodrow Wilson and other statesmen in the United States gave more opportunities for the American auditing to surpass new areas. It is no surprise that after the war the US began dominating over the European countries for being quite less injured by the war. Notwithstanding, the crisis (known as the Great Depression) crashed the economy and financial firmness of the United States. In this time auditing was a governmental instrument (with Roosevelt in office) to provide regulations in the country. “The Securities and Exchange Commission (SEC) was established by the Securities Act of 1933 and the Securities Exchange Act of 1934” (Bateman & Co 2010). This is why auditing standards were determined to be much higher in contrast to the previous practice.

However the US government tried to prevent fraud, the systematic lack of external auditing inspections was a way for making schemes possible. In this respect one should bear it in mind that the beginning of 1920s demonstrated the shocking fraudulent outcomes of many companies. The most indicative example, as might be suggested, is the case of Charles Ponzi and the US postal Service in 1920 (Singleton, Singleton and Bologna 2006). It was the era of leading position of the US in car industry. Hence, people worldwide need to have information about breakthroughs and other know-how that were invented in the United States. Ponzi’s put-up affair, owing to his scheme of sending postal coupons, defrauded 40,000 of $15 million (Singleton, Singleton and Bologna 2006). There were also other great schemes in 1920s which could have been prevented if only auditing services had more privileges and incentives both on the part of the government and public investors.

With the emergence of SEC public investors could be on the safe side from their managers. This idea was predominant in 1920s and it surpassed the period of the Great Depression up to the beginning of the World War II (Coffee 2006). To prevent excessive deficiencies and other financially-harmful effects, the Director of the Budget was appointed to audit the capital fluctuations in terms of such a great crisis in the history of the US (Studenski and Krooss 2003). The auditing was expressed by several agencies, the lion share of which was initiated b the government. What is more, in time of the Depression the example of Kreuger & Toll great bankruptcy was more significant than the whole discussion of the market crash (Singleton, Singleton and Bologna 2006). It was the result of an enormous fraud came out to be in terms of auditing lack. SEC served to stabilize and strengthen the economical alignment preventing the US Treasury from any kind of fraud. A new governmental formation emerged in the American financial arena, namely General Auditing Office to advice the Congress (Studenski and Krooss 2003).

The period of time in 1930s gives birth to the internal auditing practice. Due to the emergence of SEC and Act of 1934 stimulated different corporations to establish own internal auditing departments. It was done to put forward the signals of personal assurance for the senior team in terms of crashing situation in the beginning of 1930s. Furthermore, the emergence of such a type of auditing services needed appropriate training of auditors for corporate obligations. In other words, the SEC rules and principles precipitated greater reliance on internal control procedures (Moeller 2009). Thus, the companies came closer to the auditing practice at that time up to contemporary reality.

Once again, internal auditors were limited in their mandatory duties. The main features of their work included checking irregularities and financial mistakes done during the intensive process of financial turnover. To say more, internal auditors do not have capacity to go over the higher tasks of corporate auditing. One of the observers wrote about the destination of the internal auditors: “Internal auditors were either clerks assigned to the routine task of a perpetual search for clerical errors in accounting documents, or they were travelling representatives of corporations having branches in widely scattered locations” (Moeller 2009, 5). Hence, auditing practiced improved in its iumpact on economical and financial operations among various companies in the United States.

The improvement of accounting and auditing practices was continued in 1940s. It is the period in the history of the American auditing that was impacted mainly by the initiatives coming from Leonard Spacek (Knapp 2008). Thus, the development of the profession ran into the formation of different organizations stimulating the appearance of basically new standards in auditing. This flow of reactive policy by Leonard Spacek was felt in the creation of the Accounting Principles Board (APB) (Knapp 2008). The independent auditors were highly guided by AICPA and were also consolidated in the provision of qualitatively improved standards of auditing (Bateman & Co 2010). The profession of an auditor got through the line of reforms initiated by the government and motivated by the new stage of human development in post-war reality.

The ‘Golden Age’ in the history of auditing can be fairly considered with the period of time between 1940s and 1960s (Coffee 2006). It was a time when the corporate culture and intentions in the US prepared themselves for the advent of globalization. Moreover, the largest auditing companies were striving greatly in order to embrace the part of internal and external areas of business activity. It means that American auditing companies supported by the guarantees of the US government provided not solely the internal but the external expansion as well. The reputation of each auditing firm was valuable in the US. In turn it caused prerequisites for competition between the companies for target clients and target markets.

The sphere of franchising in the beginning of 1950s and up to the late 1960s was rich in cases of frauds. Thus, auditors were likely to promote the best quality of accounting and auditing they could in order to stabilize the economical wealth. However, it is not national motives which drove auditors toward successful and competing work in their field. One should realize that corporate and capitalistic relations were the part of “auditing philosophy,” so to speak. In 1960s small investors especially needed the help of auditors in providing control over the capital use. On the other hand, companies’ upbeat reports were highly anticipated among groups of individual auditors (Don A., et al. 2006). Thus, the auditing reached its apogee in the post-war period up to 1960s.

The new era of market relations after the Breton-Woods conference proclaimed more significance of the figure of an auditor. This idea contemplates that starting in 1970s, client-auditor relationships attained more points on beneficial incentives lucrative for both parties. In turn such relationships provoke conflict of interest being cornerstone in terms of markets (Don A., et al. 2006). Such conditions served to be precursors for the new circle of market relations. However, it meant that auditing companies kept a strict eye on quite spread cases of corporate fraud. It even fell into the situation in 1980s when fraud and greed were bordering in corporate relations when Reagan was in office. One of the most outstanding auditing companies in the US in the post-war period was, perhaps, Arthur Andersen & Co. This company that was headed by Arthur Andersen and then Leonard Spacek grew into a worldwide corporation with subsidiaries in 80 countries and with annual income approaching $10 billion (Knapp 2008). Moreover, the field of auditing in the US is also represented by such giants as Price Waterhouse Coopers, Ernst & Young, KPMG and some others.

After the crash of Enron, the Congress adopted Sarbanes-Oxley Act of 2002 to help auditors prevent more cases of frauds among the highest echelons of administration (Don A., et al. 2006). Since that act was proclaimed and came in force, the auditing practice in the US touched upon the accuracy in work of CEOs and CFOs. The act increased civil and criminal sanctions for the corporations and their financial performance as concerned directly with the directors or managers accused of fraud (Don A., et al. 2006). Hence, the historical database of the auditing in the United States was advanced with more support on the part of the government.

The overall development of auditing firms in the period of 1980s, however, was merely colored with desires of companies to integrate globally. A new tactics that was noticed concerned the reliability of auditing companies to consolidate powers on more growing up (Coffee 2006). Thereupon, the era of corporate greed was lack of competitive strategies on the part of auditing firms. On this stage of auditing evolution professional autonomy and gatekeeping responsibilities were achieved mainly due to implementation of new accounting principles and techniques.

The historical record in auditing proves an idea that the circle of positive and negative events is constantly going on. In this respect it is vital to highlight the aforementioned case with Kreuger & Toll and negative consequences of its bankruptcy. On the other hand, the question is about the destiny of auditors on the background of Enron crisis in 2001. Since this harmful event in the economical conditions of the United States, the auditing profession got through the main points on reconstruction of its vision. The idea is that the auditors began incorporating the function of so-called assistants as pertaining to corporate management and its attractiveness to investors (Coffee 2006). Hence, the innovative touches in the profession of auditing were realized through encompassing the continuum of mutual interests of both, a client and an auditor. What is more, the historical approach as for the auditing as such constitutes an easy-to-embrace feature of the profession in business circles.

Contemporary auditing practice is taken for granted as the recipe for success among global corporations. In this respect auditing is known to blend with forensic accounting. This makes the standards and quality of the main auditing companies, such as Big Four, go well for the main players in the client base. Marketing business ventures to clients, auditing firms still take great responsibility for detecting possible cases of fraud. The history of auditing is going on constantly. With the emergence of the world economic crisis, internal and external auditing firms became sought-after as the sales were down and the revenues decreased eventually. All in all, a strict eye of an auditor will always be that popular as the high tempos of financial relations inside the US and in the international arena seem to get even higher.

Bibliography

Bateman & Co. A History of Accounting & Auditing Standards. 2010. Web.

Brown, Richard. A History of Accounting and Accountants. New York, NY: Cosimo, Inc., 2006.

Coffee, John C. Gatekeepers: the professions and corporate governance. Oxford: Oxford University Press, 2006.

Don A., Moore, Phillip E. Tetlock, Loyd Tanlu, and Max H. Bazerman. “CONFLICTS OF INTEREST AND THE CASE OF AUDITOR INDEPENDENCE: MORAL SEDUCTION AND STRATEGIC ISSUE CYCLING.” Academy of Management Review 31, no. 1 (2006): 1-20.

Knapp, Michael C. Contemporary Auditing: Real Issues and Cases. 7. Stanford, CT: Cengage Learning, 2008.

Moeller, Robert. Brink’s Modern Internal Auditing: A Common Body of Knowledge. 7. Hobboken, NJ: John Wiley and Sons, 2009.

Singleton, Tommie, Aaron Singleton, and Jack Bologna. Fraud auditing and forensic accounting. 3. Hobboken, NJ: John Wiley and Sons, 2006.

Studenski, Paul, and Herman Edward Krooss. Financial History of the United States. 3. Frederick, MD: Beard Books, 2003.

This term paper on The History of Auditing in the United States and the Industrial Revolution was written and submitted by your fellow student. You are free to use it for research and reference purposes in order to write your own paper; however, you must cite it accordingly.
Removal Request
If you are the copyright owner of this paper and no longer wish to have your work published on IvyPanda.
Request the removal

Need a custom Term Paper sample written from scratch by
professional specifically for you?

801 certified writers online

Cite This paper
Select a referencing style:

Reference

IvyPanda. (2022, March 13). The History of Auditing in the United States and the Industrial Revolution. https://ivypanda.com/essays/the-history-of-auditing-in-the-united-states/

Reference

IvyPanda. (2022, March 13). The History of Auditing in the United States and the Industrial Revolution. Retrieved from https://ivypanda.com/essays/the-history-of-auditing-in-the-united-states/

Work Cited

"The History of Auditing in the United States and the Industrial Revolution." IvyPanda, 13 Mar. 2022, ivypanda.com/essays/the-history-of-auditing-in-the-united-states/.

1. IvyPanda. "The History of Auditing in the United States and the Industrial Revolution." March 13, 2022. https://ivypanda.com/essays/the-history-of-auditing-in-the-united-states/.


Bibliography


IvyPanda. "The History of Auditing in the United States and the Industrial Revolution." March 13, 2022. https://ivypanda.com/essays/the-history-of-auditing-in-the-united-states/.

References

IvyPanda. 2022. "The History of Auditing in the United States and the Industrial Revolution." March 13, 2022. https://ivypanda.com/essays/the-history-of-auditing-in-the-united-states/.

References

IvyPanda. (2022) 'The History of Auditing in the United States and the Industrial Revolution'. 13 March.

Powered by CiteTotal, citation service
More related papers