Public Company Auditing Around the Securities Exchange Act

Abstract

We explore the landscape of public company auditing around the introduction of the Securities and Exchange Commission (SEC) in 1934. Using a broad sample of historical annual reports spanning several decades, we document that most public companies obtained audits even before the SEC’s audit mandate, which limited the mandate’s impact on audit rates. We further document that these companies selected their auditors based on characteristics reflecting independence and competence, even before the SEC’s mandate. While changes in audit rates and auditor choices were limited, we observe significant changes in the content of audit statements around the introduction of the SEC. These changes, however, appear to reflect concurrent standardization efforts initiated and driven by private-sector actors rather than the SEC. Finally, we do not find any significant impact of the SEC’s audit mandate on capital-market outcomes. Collectively, our descriptive evidence suggests that the introduction of the SEC, while widely viewed as a sea-change in public company auditing, had a limited impact on companies’ reliance on audits and investors’ trust in companies’ reports, at least initially.