external audit

An *audit of *financial statements by independent individuals or organizations. *Robert Khun Mautz has suggested that "the role of external auditing in an advanced economic society can be and has been stated in very simple terms - to add credibility to financial statements" (quoted in Flint, 1988, 6), while *Tom A. Lee has described external auditing as a "technical process to independently *verify and attest the quality of externally reported... financial statements" (1993, 115). Another definition has been offered by the American Accounting Association: "Auditing is a systematic process of objectively obtaining and *evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested parties" (American Accounting Association, 1973). Modern external auditing is the result of almost two centuries of continuous evolution. It emerged as a *professional discipline in the United Kingdom in the nineteenth century, when the creation of limited liability *corporations resulted in separation of the providers of *capital from the managers who administered it. To monitor that investments were appropriately managed and controlled, the external auditing profession offered providers of capital an independent and objective opinion on published financial statements, traditionally the primary record of corporate accountability. As has been suggested, "capitalism is a complicated enterprise, and the system won’t work without referees" (Fox, 2003, 313). The early emphasis of external auditing was on the detection of *errors and *fraud, but it gradually developed into an assessment of the *fair presentation of financial statements. With the establishment of the *American Institute of Certified Public Accountants in 1887, external auditing’s center of gravity shifted from the United Kingdom to the United States, where it has since remained. A notable feature of the external auditing profession is the existence of powerful auditing firms of astonishing longevity. The auditing firms of nineteenth century London included the forerunners of today’s global auditing and accounting firms. Among the names of London auditing firms in 1886 were several that have survived, in various combinations, to the modern era: Price, Waterhouse, and Cooper Brothers (now *PricewaterhouseCoopers) and Deloitte, Dever, Griffiths (now *Deloitte Touche Tohmatsu). See also *agency theory and *internal auditing. Further reading: Flint (1988); Lee (1993); Porter et al. (2003); Power (1997); Schandl (1978); Wolnizer (1987)