The 19th century: when did audit become mandatory and where was the first society of accountants founded?
As joint-stock companies multiplied, owners and managers grew further apart. Who guarantees the trust between them? 19th-century Britain answered this question with law and professional institutions.
If you run a shop yourself, you know what is in the till. But what if the money of hundreds of shareholders is pooled in one company? The owners cannot see the managers' work every day. In the 19th century it was precisely this problem that gave birth to modern audit.
Key facts
- 1844. In Britain the Joint Stock Companies Act 1844 required that one or more auditors be appointed in the deed of settlement and that the directors prepare a "full and fair balance sheet". This Act introduced a mandatory audit requirement for companies for the first time; it applied only to the balance sheet.
- 1856: a step back. The Joint Stock Companies Act of 1856 abandoned the mandatory audit requirement: audit became voluntary.
- 1900: the return. The mandatory audit requirement was reintroduced in Britain by the Companies Act of 1900.
- Edinburgh, 1853–1854. The accountants of Edinburgh joined together in 1853. On 23 October 1854 the Society of Accountants in Edinburgh received a royal charter. It is known as the world's first accountancy body with a royal charter.
- Glasgow, Aberdeen and ICAS. The Glasgow accountants received a charter in 1855, and later the Society of Accountants in Aberdeen also obtained a charter. In 1951 these three bodies merged to form the Institute of Chartered Accountants of Scotland (ICAS).
- London, 1880. On 11 May 1880 the Institute of Chartered Accountants in England and Wales (ICAEW) received a royal charter. The charter united the members of five societies of accountants in England in a single body.
- What changed? The "auditor" now began to turn from simply a trusted acquaintance into a specialist who had passed examinations and was a member of a professional body.
Example (prepared by the author, hypothetical)
"Chorsu savdo uyi" has 60 shareholders, and the company is run by a hired director. At the end of the year the director presented a report stating "profit of 800 000 000 soum".
| Question | Without an audit | With an independent auditor |
|---|---|---|
| Who prepared the report? | The director | The director |
| Who checked it? | No one, or the director himself | A specialist independent of the company |
| The shareholder's confidence | Relies only on the director's word | Relies on an independent opinion |
19th-century legislation and professional institutions emerged precisely to fill the gap between these columns.
See also
Sources
- Cardiff University (ORCA): book chapter on the history of audit · the 1844 Act: appointment of an auditor in the deed of settlement, the requirement for an audited balance sheet; the abandonment of mandatory audit in 1856
- UK Government: Development of the statutory financial audit · mandatory audit was abolished in 1856 and reintroduced in 1900
- ICAS: 165 years of public purpose · the first royal charter, 23 October 1854
- ICAS CA Magazine: From 1854 to 2024, ICAS timeline · the Edinburgh society 1853; the Glasgow charter 1855
- ICAS: Charter · the 1951 supplemental charter: the Edinburgh, Glasgow and Aberdeen bodies merged to form ICAS
- ICAEW: Royal Charter of the 11th May 1880 · the charter that united five societies of accountants in England
- The "Chorsu savdo uyi" example · prepared by the author, hypothetical