The Roots of Internal Auditing

Ancient Time

Internal auditing has its roots in antiquity. Only recently has the tree began to blossom. The story of modern internal auditing bespeaks a painfully growth since its ancient beginnings. The buds did not begin to show until 1941 when The Institute of Internal Auditors, Inc., was formed; then a distinctive discipline began to flower.

Evidence of verification of transactions - now only one of internal auditing’s activities - goes back over 5,500 years. The records of a Mesopotamian civilization about 3600 B. C. show tiny marks at the side of numbers relating to financial transactions. The dots, checks, and tick marks portray a system of verification. One scribe prepared summaries of transactions; another verified them. It was probably here that the control systems of verification and division of duties originated.

Early Egyptian, Persian, and Hebrew records show similar systems. The Egyptians, for example, required the actual witnessing of corn brought to the granaries and demanded that receipts of corn be certified.

The Greeks were strong believers in control over finances. Their records show that transactions required authorization and verification. Their systems of control included peculiarly direct methods. They preferred slaves over freemen as record keepers since slaves could be tortured to reveal the truth. With brutal logic, the Greeks regarded torture as a more trustworthy means of extracting information than questioning a freeman under oath.

Ancient Rome employed the "hearing of accounts." One official would compare his records with those of another. This oral verification was designed to keep officials in charge of monies from committing fraudulent acts. Indeed the task of hearing accounts gave rise to the term audit, from the Latin auditus ("a hearing"). Quaestors ("one who inquires") would examine the accounts of provincial governors, seeking to detect fraud and the misuse of funds.

The Middle Ages

When Rome fell, so did monetary systems and controls. Not until the end of the Dark Ages did rulers demand proof that they were obtaining the revenues owed them. Barons and justices made the first audits; appointed officials made them later.

An expanding Italian commerce during the 13th century demanded more sophisticated record keeping. Thus was born the double-entry system of bookkeeping - an answer to an essential need. This system helped merchants control transactions with customers and suppliers and check on the work of employees. Auditing was taken seriously. An auditor representing Queen Isabella accompanied Columbus to the New World.

The Industrial Revolution

Auditing, as we now know it, began during the industrial revolution in England. Companies hired accountants to check the records. Audit verification became less a matter of personal accountability and stewardship. It became more a matter of scrutinizing written records and comparing entries in the books of account with documentary evidence. The concern was with the records rather than with the people who prepared them.

Recent Times

Auditing crossed the seas to the United States during the 19th century along with British investments. Wealthy Englishmen invested substantial amounts in United States corporations, especially breweries. They wanted an independent check on their investments. The English auditors brought with them methods and procedures which the Colonials adapted to their own needs. The British requirements arose under the statutory dictates of the British Companies Act calling for accountability to investors. The United States had no such dictates; hence, auditing served the needs of the entrepreneur. These needs gave rise to the balance-sheet audit, stressing a more analytical approach to accounts.

Auditing in the United States

After World War I, the United States' economy escalated. Many corporations, although not required to do so, published audited financial statements. But, by and large, auditing was for the benefit of the bankers who feared the overly optimistic balance sheets and needed an independent verification on which they could rely. The railroads were among the first to adopt a far-flung internal auditing program. Railroad executives needed assurances that their station masters across the country were handling receipts properly.

Congressional Action

Auditing received a great push forward when the United States Congress enacted the Securities Act in 1933, the Securities and Exchange Act in 1934, the Public Holding Company Act in 1935, and the Investment Company Act in 1940. The purpose of this legislation was to regulate publicly traded securities and to use accounting and auditing as a means toward that end. Corporations could not rely entirely on the external accountants because they needed in-depth analyses that those accountants were not always in a position to give. Therefore, they hired internal auditors to help in the verification of accounting records and to determine compliance with accounting controls.

The Internal Auditor's Struggle for Identity

The outside auditors usually controlled the internal auditors. The latter were shadows of the former, shadows with little prestige or identity.

Modern internal auditing began to evolve in 1941 when The Institute of Internal Auditors, Inc., was formed. Only then did the shackles that bound it to the books of account start to break down. Only then did it assume an upright posture, no longer genuflecting to the professional outside accountant.

The terms internal auditor and internal auditing had a pettifogging, nitpicking connotation to some of the founders of The Institute. They sought for a term or phrase that would better describe the expanding role of the internal auditor, but none emerged. And so John B. Thurston, one of The Institute’s founders, said in 1941:

You will all recognize the unhappy inadequacy of the phrase "internal auditor." Years ago it was probably satisfactorily descriptive of our earlier predecessors in the profession. But today, auditing, in the precise meaning of the word, is only one of the functions of the internal auditor. Your organizing committee gave much thought to the possibility of using some other phrase or term, and finally reached the conclusion that we must bow to historical precedent.

The founders hoped that the actions rather than the description of the profession would help it achieve its separate identity. But 1941 did not give birth to an Athena springing fully formed from the brow of Zeus. Rather it sparked the glint in the eyes of the founders who dreamed of a profession concerned more with assisting management in all its activities, not merely verifying accounting transactions. The glint presaged a lusty infant – management-oriented auditing – and the infant has made steady progress.

That progress is depicted in the various changes the Statement of Responsibilities of the Internal Auditor underwent from 1947 to 1976.


And continues to evolve today to keep up with the changes in global operations and technology in the 21st Century...


Reprinted from:

The Practice of Modern Internal Auditing 1981 Edition

by Lawrence B. Sawyer



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