This article introduces the auditing function in historical perspective as a solution to principal-agent problems that emerged as commercial partnerships grew and as corporations arose later. The early history of modern accounting coincides with the rise of international business in Europe and public accounting emerges after the rise of the corporate form of business. The treatment herein focuses first on the history of mainly private late-medieval accounting to assess the profitability of a privately owned company and then on the more recent role of accounting in assuring the accuracy of the financial reports of publicly traded corporations. The article highlights the economic value and the social function of private financial accounting and public auditing. While closely related in form, public accounting is distinctly different in philosophy and in its key purpose of reconciling diverse investing interests. This article compares the different frames of mind between purely private accounting and public accounting, while recognizing the social contributions of each. It also responds to objections to including accounting programs in the liberal-arts tradition by explaining why accounting fits well in the history of economic progress and in a program of instruction in civic and moral virtues. It concludes that the auditing function of public accounting plays an essential role in modern free-enterprise economies with their large publicly owned corporations.
Robert A. Black, "Accounting and the Auditing Function in Economic History: Transaction Costs, Trust, and Economic Progress," Journal of Markets & Morality 22, no. 1 (Spring 2019): 41-65.