The Role of Auditing Standards in Enhancing Financial Reporting Credibility

Abstract

This research investigates the evolving role of auditing standards in enhancing financial reporting credibility through a novel computational framework that models
the interaction between regulatory frameworks, auditor behavior, and market perception. While traditional accounting literature has examined auditing standards from
qualitative and compliance perspectives, this study introduces an original methodology
combining agent-based modeling, natural language processing of audit reports, and network analysis of disclosure patterns to quantify the credibility-enhancing mechanisms
of auditing standards. We develop a multi-agent simulation environment where auditors, corporate management, regulators, and investors interact under varying standard
regimes, allowing us to test how specific provisions of standards (such as ISA 700 or
AS 3101) influence reporting outcomes. Our NLP analysis of 10,000 audit reports from
2015-2023 reveals previously undocumented linguistic patterns associated with higher
perceived credibility, including specific modal verb usage and disclosure structure characteristics that correlate with market trust. The network analysis demonstrates how
auditing standards create cascading credibility effects through financial statement note
linkages. Results indicate that principles-based standards with clear communication
requirements generate 37