by Robert Stoumbos
, 07.01.26
With ESSEC Knowledge Editor-in-chief
How has public company auditing changed as society changes? In a recent article published in The Accounting Review, Robert Stoumbos, ESSEC associate professor of accounting and management control, along with co-authors Thomas Bouvreau (Oxford University), Matthias Breuer (Goethe University Frankfurt), Jeroen Koenraadt (London School of Economics and Political Science), explored the evolution of auditing practices in the United States over forty years in the early 20th century to understand how current standards came to be.
Their work also sheds light on what the future holds for ESG assurance. Recent years have seen a rise in calls for sustainable business practices, including more sustainable investing. This is when investors prioritize companies based on their environmental, social, and governance (ESG) metrics. However, this is complicated by a lack of clear frameworks for judging ESG metrics and comparing them between companies, leading to calls for a more stringent assurance framework in the style of financial audits.
Public company auditing: a brief history
To better understand the rise of public company auditing, the researchers combined historical accounts with data from a selection of companies. They analyzed over 16k annual reports of all American public companies, with data from 1517 companies and 118 audit firms over those 40 years. The companies were primarily traded on the stock exchange (94%), with a smaller amount trading on the over-the-counter market (6%). The audit firms included both US and UK-based companies and a range of company sizes, and included predecessors of today’s powerful firms like PwC.
The researchers found that the number of audit firms and of certified public accountants (CPAs) grew over the time frame, coinciding with the rise of capital markets. Companies were not required to conduct audits by law until the 1930s, leading to low audit rates at the outset of the 20th century. The proportion of firms obtaining audits grew steadily over time, from 25% in 1900 to almost 90% in 1940. Companies that chose audits (as opposed to being told to obtain one) tended to be smaller and less profitable, and these firms tended to hire more established firms to conduct the audit.
Differences came out, however, in the audit statements produced. From 1900 to 1930, approximately, these statements contained varying information depending on the company, and were not presented in a standardized way. Additionally, audit firms often certified the correct nature of the statements - a level of confidence we rarely see today.
The profession started to change with the publication of guidance by the Association of International Accountants, leading to increased standardization among statements. Regulation, even that from the Securities and Exchange Commission, however, had a more limited role - the standardization of statements seemed driven more by the accounting profession itself. A range of fraud cases, combined with the concern of government overreach, led the AIA to provide more specific guidance.
The road to regulation
Taken together, the evolution of public company accounting took place steadily over the span of a few decades - rather than following a key event in particular. We can apply these learnings to the developments in ESG assurance. As a nascent field, it finds itself in a similar position to auditing one hundred years ago. Just like the rise of audits, it’s been spurred along by a boom in financial capital that investors are seeking to place. This means that investors are clamoring for information about companies’ ESG performance, instead of just their financial performance.
This creates an opportunity for businesses, just like it did for new audit firms back in the day. While the field of ESG assurance is often criticized for its heterogeneity, the history of auditing suggests that this might just be a necessary phase as it becomes more established. Indeed, various entities like the Sustainability Accounting Standards Board in the US and the International Auditing and Assurance Standards Board, to name but a few, are currently working on global standards for ESG assurance. And just like when the SEC stepped in with regulations in the 1930s, they have mandated the reporting and assurance of greenhouse gas emissions in the US, to be phased in from 2026.
The researchers also highlight that the road to regulation can be a bumpy one. They point out that early guidance was not always followed, and that regulators can be misguided in early iterations. For ESG regulators, this means taking the time to learn what will work best organically over time, and allowing best practices to be adopted organically before imposing rules. Given the role that the audit profession played in the success of regulation, the development of ESG expertise will likely play an important role in the establishment of ESG assurance regulations.
The state of public company auditing came to be as a result of three trends: the growth of auditing from 1900 to 1940, the increase of standardized practices, and the interaction of public and private actors over decades. From these patterns, we can deduce that ESG assurance is in a necessary part of its life stage: the test-and-learn stage. This means that professionals in that space must continue to work together to establish expertise and grow the field to produce a set of standard best practices moving forward - and that this stage will take patience.
Robert Stoumbos received funding from France 2030.
Réference
Bourveau, T., Breuer, M., Koenraadt, J. K., & Stoumbos, R. (2025). Public company auditing around the securities exchange act: historical lessons for ESG assurance. The Accounting Review, 100(3), 107-138.
