The Early Evolution of Corporate Auditing: The English East India Company (1600-1640)

Abstract

The purpose of this paper is to examine the emergence of auditing in a sixteenth century business organization and to link these developments to the evolution of the organizational structure and accounting. More specifically, the paper introduces into the debate material, which documents the evolution of the auditing practice over a period of 40 years in a single case of the English East India Company (EIC).

During the first stage of the organization’s development (1600–1640), auditing in the EIC evolved from ex ante to ex post verification of transactions, and from volunteer to paid shareholder auditors. At the beginning, the company was organized into as a series of separate, terminable stock, and the oral from of ex ante verification by volunteer auditors picked from shareholders was enough to secure the latter’s interests. When the increasing number, size and complexity of the EIC’s transactions rendered the ex ante approach insufficient, ex post verification of the financial transactions was added. This called for more work than volunteers were willing or able to perform. With clearer separation of ownership and control at the time of introduction of permanent joint stock the audit function gradually evolved towards a more professional form by shareholders who began to be compensated for their work.

Keywords: accounting history, auditing, corporate control, East India Company

JEL Classification: M41, N23