The auditing profession

The term ‘audit’ comes from the Latin verb ‘audire’, which means ‘to hear’. In the ancient civilizations of Egypt, Greece and Rome, checking activities were performed to make sure that public revenues and expenditures were properly accounted for. The regimes were worried about corrupt officers committing fraud and incompetent officers making book keeping errors. Checking clerks were therefore appointed to check the public accounts, by hearing verbal explanations from those responsible for keeping the books, judging their explanations and after an examination announcing the results of their audit. Hence, in ancient days, auditing existed primarily as a method to maintain and check public or government accounts. Modern day auditing originated from the Industrial Revolution in the United Kingdom. Businesses expanded during this period, and the ongoing development of the separation of ownership and control led to the passing of the Joint Stock Companies Act by the British parliament in 1844. This Act required directors of joint stock companies to provide balance sheet accounts to their shareholders and stipulated the appointment of auditors to check these accounts. At that time, however, auditors were not required to be independent from the company or licensed in any way. A couple of scandals at the end of the nineteenth century (Afrikaanse handelsvereeniging, 1879; City of Glasgow Bank, 1883; Kingston Cotton Mill, 1896) changed this situation. In 1900, a new Companies Act required companies to appoint an independent auditor. This reinforced that the main objective of the audit was the detection by an independent individual of errors and fraud, and actually led to the start of modern day auditing. In these early days of modern day auditing, the first professional bodies and accounting firms were also established. In 1854, the Royal Charter of the Society of Accountants in Edinburgh - the predecessor of the current Institute of Chartered Accountants of Scotland - became the first officially recognized association of accountants. At the same time, several accountants established themselves in London and opened accountancy offices which form the origins of some of the global Big 4 audit firms that we know nowadays (e.g. Samuel Lowell Price in 1849, William Deloitte in 1845, William Cooper in 1854, and William Barclay Peat in 1870). With the inception of the Society of Accountants, Scotland also formally recognizes the title of ‘chartered accountant’. In 1880, the title ‘chartered accountant’ was also adopted by the newly formed Institute of Chartered Accountants in England and Wales. This institute was formed by a merger of five associations (the Incorporated Society of Liverpool Accountants, the Institute of Accountants in London, the Manchester Institute of Accountants, the Society of Accountants in England, and the Shefield Institute of Accountants), which were founded between 1870 and 1877. Also outside the UK, the auditing profession was developing rapidly by the end of the nineteenth century. In the Netherlands, the first independent audit was carried out in 1879 (at the Nieuwe Afrikaansche Handelsch Vereeniging in Rotterdam; see Metzemaekers and van Maastrigt, 1983: 53). The first Dutch professional body auditors, the Nederlandsch Instituut van Accountants, was founded in 1895. Outside Europe, professional bodies of auditors were established, predominantly in commonwealth countries, according to the British model: the Institute of Accountants of New Zealand was incorporated in 1894; the first professional body of auditors in South Africa was the Institute of Accountants and Auditors, formed in Johannesburg in 1894; while the Canadian Institute of Chartered Accountants was established in 1902. Simultaneously, large amounts of British capital were flowing to the rapidly growing economy of the United States. Scottish and British accountants travelled to the United States to audit these investments, a number of whom stayed on and set up practice. Several existing international and national audit firms can trace their origins to one or more of these visiting Scottish or British chartered accountants. The Scottish-born Arthur Young, for example, immigrated to the United States in 1890 and formed several accounting firms, starting with Stuart & Young in 1894 and Arthur Young & Company in 1906. The New York based James Marwick founded the accounting firm Marwick, Mitchell & Co. with Roger Mitchell in New York City in 1897; and Alwin Ernst formed the Cleveland accounting firm Ernst & Ernst with his brother Theodore in 1903. In 1887, the first professional accounting body was formed, the American Association of Public Accountants, predecessor to the American Institute of Certified Public Accountants. The growth of the stock market in the following years led to widespread development of the accounting profession in the United States. It was nevertheless only after the stock market crash of 1929 that audits became mandatory in the United States. In particular, the Securities and Exchange Act of 1934 created the Securities and Exchange Commission (SEC). Among other responsibilities, the SEC was entitled to issue accounting standards and to enforce that publicly traded companies should submit audited financial statements. The principal role of auditors was to ensure that these reports were created in accordance with generally accepted accounting principles. The further growth of the US economy in subsequent years caused a shift of auditing development from the UK - where modern day auditing started - to the United States. To provide an overview of the start of the audit profession in some audit markets, Table 2.1 shows the first professional body of accountants for ten audit markets (the current name of the professional body) and year of inception. In the following three sections, we will discuss current issues in the auditing profession and the major research findings in these areas. The first section will expand on the development of the auditing profession, including the professional bodies of accountants and their regulatory roles. The following section, ‘The supply of auditing’, will provide an overview of the supply of audit services. The final section will present the conclusions.1.