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Audit History

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Submitted By clanca2
Words 1007
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Memorandum

To: DeLaune/Simonov

From: Courtney Lancaster

Date: October 15, 2013

Subject: History of the Auditing Profession

Similar to all aspects of the accounting profession, the auditing focus in the business world has evolved considerably over its history. The main drive behind the changes has been new legislation and a strict enforcement standard which more times then not was influenced by the fraudulent activity delivered by corporate management. By the creation of oversight policies and standard setting entities, these countless scandals have shaped the accounting and auditing profession into what we know today.
In 1986 the state of New York passed legislation in which the credentials regarding a Certified Public Accountant were formally acknowledged and recognized, thus creating the accounting profession itself. In 1913 the United State of America ratified the 16th amendment leading to the creation of income tax causing a spike in demand for accountants. While these changes in legislation were coming about and the profession itself was growing rapidly there was still no entity in the US that regulated the profession. In 1917 the first step to set a standard for the profession was put into action. The Federal Reserve Board and Federal Trade Commission requested that American Institute of Accountants produce a bulletin for a standardization of auditing procedures. A publication titled “Uniformed Accounting” was released shortly after as a first set of published standards. While it was still not required for companies to release a set of audited financial statements, those who were publically traded began to embrace the idea as a way to prove good standing to their loyal shareholders. It wasn’t until the stock market crash in 1929 did people really begin to show concern for the improvement and validity of published financial statements. The New York Stock Exchange sought assistance from the AIA regarding financial disclosure and soon after the institute published a set of six principles that they encouraged to be implemented by all publically traded companies. Any governing body never mandated these principles. During this time congress also began looking at the first standardization for the profession as a whole. In 1933 congress brought about the Securities Act of 1933 and soon after the Securities Exchange Act of 1934, which also brought about the Securities and Exchange Commission. The greatest growth the accounting profession ever saw was when the SEC made it required that all publically traded companies bring in internal CPA firms to audit their financial statements. As we continue to travel down the auditing profession timeline you will see that while auditing financial statements became a requirement before there was standardized auditing procedures by which to conduct an audit by. Auditing firms were left without regulation by which to evaluate a company’s accounting practices, and without any form of assessment standards, which ultimately limited the effectiveness, and reliability of any audit. In the years after the AIA continued to publish bulletins on what was believed to be “substantial authoritative support” in regards to auditing procedures. The first set of standards concerning the professional requirements of an auditor during an engagement was published in 1947 under the title “Generally Accepted Auditing Standards.” It is important to make note that while these standards were wildly accepted by the CPA community they were still only advisory, never authoritative and there was no follow up in place to hold auditors accountable.
It has been said that a large part of the standard setting problem can be traced back to audit firms (formerly known as the Big 8) that had voting power within the AIA. As a result of this the Committee on Accounting Procedures was abandoned and the Accounting Principles Board was formed. While some of the outside influence problem was eliminated with its creation, the APB still was not completely successful in standard setting. In 1971 the AICPA formed a group referred to as the Wheat commission. This “study group” which was under the direction of former SEC commissioner Francis Wheat was in charge of analyzing the APB and whether the best solution to the standard setting problem was to let the government regulate or bring in a private sector to establish auditing standards. By suggestion of the Wheat Commission the Financial Accounting Foundation was formed. This foundation was responsible to for nominating members to the Financial Accounting Standards Board as well as collecting donations to fund the board. On December 20, 1973 the SEC issued the Accounting Series Release No. 150 which formally required all companies that were publically traded on the stock markets prepare their financial statements in compliance with the FASB standards. If a company failed to comply with this regulation they would be considered “lacking substantial authoritative support.” It is no secret that even after some type of regulation the auditing profession has failed to escape scrutiny from many accounting scandals. The AICPA has responded to these crimes with new oversight framework, and new Accounting Standards Board, peer review for auditing work and disciplinary action for non-compliance. It wasn’t until after the Enron and WorldCom scandal in the early 2000’s that there was major change to the standards within the professions. The Sarbanes-Oxley Act was created in 2002 and with it came the end to independent standard setting. The SOX Act called for the formation of a completely independent standard setting board. There was also a large change in the funding of this new board. Rather then running off of donations, public companies were assessed fees based on their market caps. This was thought to be the final solution in eliminating all outside influence in regards to standard setting.
While there is no doubt that the accounting profession, very similarly to the economy as a whole has seen its ups and downs. The many changes implemented after every fraudulent encounter has in no doubt assisted to the evolvement of the profession that sees so much respect today. Through legislation the profession has emerged from being a standard setting body within itself to completely overseen and regulated by an independent outside board.

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