The Growth of Auditing
In the world of finance, auditing serves a critical role in ensuring data accuracy and maintaining procedural integrity. Over the years, auditing has evolved from a limited basis practice to more widespread adoption. Join us as we review auditing’s history, evolution, and the direction this practice may be headed in the future.
1760-1840 – Industrial Revolution Leads to Auditing Adoption
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Before businesses adopted auditing as a way to share their financial data with the public, auditing was most closely associated with governments. As the American Institute of CPAs (AICPA) explains, the Industrial Revolution promoted increasingly widespread adoption of auditing.
As businesses grew rapidly in the late 18th and early 19th centuries, individual business owners could no longer manage operations themselves. Instead, they hired employees to handle finances and auditors to help with fraud detection and accountability, according to an AICPA report “Evolution of Auditing.”
1929 – Stock Market Crash Prompts Obligatory Auditing
Soon after the Industrial Revolution, according to the AICPA, the 1929 stock market crash led to obligatory auditing. The Securities and Exchange Commission’s(SEC) establishment in 1934 introduced accounting standards and auditor oversight.
For the first time in United States history, the SEC required publicly traded companies to offer regular financial reports, according to the AICPA. During the early period of obligatory auditing, much of the checks and balances included inspecting inventory and compiling finances by hand, since auditors couldn’t necessarily rely on financial information gathered by business managers or operators.
1900s – Automated Auditing Simplifies Accounting
As auditing began to become a normal part of business accounting in the early 20th century, the practice experienced several standardization measures. AICPA explains that toward the mid-20th century, automated auditing systems began to appear, although they didn’t become commonplace until the late 20th century.
2000s – Negative Reactions Change to Proactive Approaches
During the initial days of auditing, most new policies and procedures resulted from responses to scandals and other negative events. After the turn of the 21st century, however, the focus of auditing changed from reactions to past events and instead took a proactive approach to shape future happenings.
Since many of these proactive systems are still under development, professionals who receive an online master’s-level degree in accounting can continue to direct the field of auditing in a forward-thinking direction.
The Future of Auditing Will Offer New Insights
As finance and accounting professionals look into the future, experts propose a number of potential developments. Writing for Forbes, James P. Liddy explains that the auditing process must do more in the future than it has in the past. Instead of simply confirming the accuracy of an organization’s financial data, an audit should be able to offer insights and new information about how businesses record profits and losses, and how businesses manage assets and debts.
As Liddy explains, by providing more extensive information, new advancements in auditing will improve operations and better inform investors.
Over a 200-year period, the role of auditing has developed from an informal, voluntary process to a regulated, obligatory one. As more professionals gain experience with an understanding of auditing practices, auditing has the capability to further evolve in the future.
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