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October 1, 2018

Auditing evolved as a business practice as owners began to realize a standardized form of accounting must exist to prevent fraud. Financial audits made their way into businesses during the late 1700s. The industrial revolution brought about the separation of job duties beyond what a sole proprietor or family could oversee. Managers were hired to supervise the employees and the business processes. Businesses began to expand geographically where previously they were all local. Owners, who could not be in more than one place at a time or chose to be absent, found an increasing need to monitor the accuracy of the financial activities of their growing businesses. Owners responded by hiring people to check their financial results for accuracy, resulting in the process of financial auditing. In the early 1900s and at the request of the Securities and Exchange Commission, the auditors’ reports of duties and findings were standardized. Financial auditors developed methods of reporting on selected key business cases as an affordable alternative to examining every detailed transaction. It was found with auditing that the evaluation of both financial risk and financial opportunity was improved.

The fingers of the financial audit eventually began to reach into other areas of business operations. Owners became interested in the integrity of the financial transactions and began to look at the values used to generate them. Business owners began to understand that not only are the numbers important, the neutrality and consistency of their derivation is important as well. This most recent wave of fraud protection in auditing practices culminated in the Sarbanes-Oxley Act (SOX), which the United States federal government implemented in 2002. This federal law is also known as the “Public Company Accounting Reform and Investor Protection Act” (i.e., the U.S. Senate version of the act) and the “Corporate and Auditing Accountability and Responsibility Act” (i.e., the U.S House of Representatives version of the act).

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