Synopsis

For the first 5,000 years of recorded history, most auditors worked for the government. Auditors helped emperors, pharaohs and kings maintain control of their realms. Deterring and detecting theft were the auditor’s main responsibilities. The first widespread demand for audits of private enterprises arose during the industrial revolution. The British Companies Act of 1845 required corporations to undergo an annual audit to ensure that directors were not stealing or misusing investors’ funds. During the twentieth century, American auditors began disclaiming responsibility for detecting fraud. The debate over auditors’ responsibility for detecting their clients’ frauds continues to this day.

Discussion Questions

1. What was the primary purpose of auditing from antiquity through the early twentieth century?
2. How did the auditor’s responsibility for detecting financial statement fraud evolve during the twentieth century?
3. What reasons did auditors give for wanting to limit their responsibility for detecting and reporting financial statement fraud?
4. According to a survey commissioned by Arthur Andersen in 1974, what did 66 percent of investors say was the most important function of auditors?
5. What reasons did auditors and the SEC give for opposing Representative Ron Wyden’s 1986 bill that would have required auditors to report suspicions of fraud to the SEC?