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How Technology Has and Is Changing the Art of the Audit
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Though the Stock Market Crash of 1929 and the Securities and Exchange Act of
1934 are the primary catalysts of why audits are essential, auditing practices date back to
the days of the Industrial Revolution. Companies wanted to adopt standards to control
costs and avoid fraud as well as investors wanting to be able to rely on financial
statements. The history of the audit has been rather reactionary, after a large case of
fraud in the late 1930s the AICPA released Audit Procedure No. 1, requiring auditors to
physical inventory counts. Shortly after they found themselves having to audit entire
businesses, discrediting management’s validity. Thanks to technological developments
auditing has been revolutionized and is more efficient and effective than ever, but how
did it get to this point and where could it go from this point on?
In the early 1950’s the Univac computer was being utilized as the first computer
for accounting based purposes only, but manual auditing tactics were still utilized. The
first Univac used for accounting purposed only was at General Electric, they used it to
calculate payroll. In 1964 auditing would see it biggest change since the Securities and
Exchange Act.
April 7, 1964, International Business Machines releases the IBM System 360, also
know as the S/360. This was one of the first computers that could work with others in its
product line. This was instrumental for the audit practice because it allowed auditors to
examine businesses, their processes, and their financial results on the same platform, in
one medium. Imagine being able to get years or even decades of information and being
able to enter and review them on a single platform and shares those results with others all
around the world. A lot of valuable time and effort was saved at an instant. IBM had had
other models before, but the S/360 was able to replace all of them and get everything on
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one plain. Auditors were able to verify everything from bank confirmations to warranty
receipts all on one solitary machine. There were 6 different S/360 models that, the
largest and best model was roughly 25 times more powerful than the smallest. Today, it
could be comparable to someone buying an iPhone 5 with eight gigabytes of data storage
or buying the best, the iPhone X with 256 gigabytes of storage. Over the next handful of
years IBM would continue to release more System 360s, each more powerful than the
last. Firms developed hundreds of auditing programs on the S/360. These programs were
very helpful were very helpful, but most of them would have to be reconstructed year
after year because in changes in the computer systems and more importantly, changes in
the law.
All of these miraculous machines were becoming available for use and could
make ones job much easier, the only problem is; auditors were not taking advantage of
the technological advancements. It wasn’t until the late 1970s that the large majority of
auditors adopted the tool of AUDITAPE. This tool would help auditors test how effective
their client’s internal controls were.
There were many events following the launches of a multitude of computers and
computer programs; one event would shake not only the audit practice, but also the free
enterprise of the United States as a whole.
In Omaha, Nebraska during the summer of 1985 an energy company named
Enron was formed following a merger of Houston Natural Gas Company and InterNorth
Incorporated. Enron was an energy company thriving in the .com era, their stocks
reached ludicrous levels and investors didn’t bat an eye because of the upward trends
throughout the stock market.
Enron employed then Big Five firm, Arthur Andersen to do their audit. During the
fall of the stock market in 2000 Enron opted to turn to the mark-to-market accounting
method in order to try to hide losses through the development of a new asset’s book
value. If this new asset operated at a loss they would record the asset and loss on a
burner corporation so nothing bad of note would go on their books. This tactic only
worked for so long. Enron continued to record their losses on phony accounts and
through fake businesses. Eventually everything illegitimate journal entry they recorded
resurfaced. Arthur Andersen had signed off on and approved of everything Enron had
done. Things didn’t start to go south until the summer of 2001. In a desperate last
attempt to maintain relevancy Enron closed one of its accounts, relinquishing their
obligation to distribute over 50 million shares of their, at the time, toxic stocks. Shortly
after the closure of the account Enron altered their pension plan so employees could not
