1870 corporate audit committee

              Thomas E. McKee
EAST TENNESSEE STATE UNIVERSITY
AN 1870 CORPORATE AUDIT COMMITTEE
Abstract: Board of directors' audit committees are becoming an increasingly popular vehicle for enhancing the objectivity and independence of auditors and overseeing the financial information generating process. This is occurring at a time when directors and auditors are facing criticism and increased litigation due to corporate failures and disclosures of illegal or questionable payments.
This article examines the workings of a corporate audit committee that operated in the mid-nineteenth century. The committee functioned as "auditor" for the company since there was no established public accounting profession in the U.S. at that time. They disentangled the financial affairs of the company and probably directly contributed to the replacement of the President of the company. Although the activities of corporate audit committees have changed or evolved considerably through the years, both the 1870 corporate audit committee and modern corporate audit committees have pursued a common goal of achieving accuracy and completeness in corporate financial reports.
The establishment of corporate audit committees has become increasingly popular in recent years. Both the Securities and Ex-change Commission and the American Institute of Certified Public Accountants have recommended that all public companies establish audit committees. They are currently required for all New York Stock Exchange Companies.1
The books and records of the East Tennessee and Western North Carolina Railroad Company (ET&WNCRR) located at corporate headquarters in Johnson City, Tennessee provided the data for this article. These records disclose the existence of an historical pre-decessor to modern corporate audit committees that functioned over a century ago. On February 28, 1870, shareholders of the ET&WNCRR appointed a special committee to ". . . inspect the accounts of the offices of the Board of Directors of the company and report at the next meeting." The "offices" referred to in the previous resolution were the offices of the company President and Secretary-Treasurer. This may be one of the earliest documented instances in the United States of an audit committee reporting to the board of directors of a corporation.
BACKGROUND AND ORGANIZATION OF THE COMPANY
The ET&WNCRR was incorporated under an Act of the Tennessee Legislature passed May 24, 1866, . .for the purpose of construct-