Global stock markets closed 2025 with a total market value of US$151.94 trillion (A$215.3 trillion), according to the World Federation of Exchanges. Financial statements that somebody, somewhere, has audited are checked, tested and signed off against a set of rules that most investors never see, and few outside the profession ever think about. Those rules, the International Standards on Auditing, are now used in more than 130 jurisdictions worldwide, according to the International Auditing and Assurance Standards Board (IAASB).

Behind every one of those standards sits a small group of highly experienced professionals. Senior audit partners, state auditors-general, company directors, senior accountants, and academics – many with well over 20 years' experience – have spent years weighing up competing demands from regulators, investors, and auditors who actually apply the rules day-to-day. New research from UNSW Sydney offers the first detailed, first-hand account of the judgement calls behind every auditing standard in use today, and opens up a rich agenda for further research into how those standards could be tested, refined and improved. 

The research paper, Auditing Standard Setting: A Process Framework, is authored by Dr Yee Shih Phua and Scientia Professor Ken Trotman from UNSW Business School, together with their US colleagues, and draws on interviews with 28 highly experienced auditing standard setters who have served on the IAASB or national boards such as Australia’s AUASB, several as Chairs or Deputy Chairs. Published in Auditing: A Journal of Practice & Theory, the research bridges an important gap: standards shape what auditors do, yet there is limited research on the people and processes that produce them.

The authors note that prior work has left the “black box” of auditing standard setting largely unexamined. That matters because getting these standards wrong carries real consequences. Prior research cited in the paper warns that auditing standards can discourage auditors from exercising judgement, push audit processes toward excessive standardisation, and be interpreted inconsistently by auditors and regulators: outcomes with adverse effects on trust in financial reports. 

Understanding the views of those who set auditing standards, the actions they take, the decisions they make, and how they interact with other stakeholders is important for enhancing confidence in the resulting standards and informing future improvements to the standard-setting process.

Who sets the rules, and why it matters

The research team interviewed standard setters with at least 20 years of experience each, who had served as senior executives, audit partners, state auditors-general, or company directors. Interviews ran approximately 50 minutes and were conducted face-to-face or by video call, mostly during the pandemic restrictions of 2020. These interviewees sit at the top of the profession: 36% held the role of chair or deputy chair on their respective boards.

One clear message from that group: technical grounding is not optional. As one standard setter explained, board members need “a well-grounded perspective that is relevant to the subject of setting audit standards … you need to have a grounding to understand how the work that you are doing is capable of being implemented.” 

Diverse backgrounds help boards see the full picture, but the researchers also found a tension: some interviewees recognised a potential bias toward reducing their own compliance burden, even as they strove to act in the public interest. This risk can be reduced by carefully choosing who serves on the board to ensure a mix of perspectives, and by ensuring that the standard-setting process is fair and balanced, so that no single perspective carries too much weight.

The balancing act at the heart of standard setting

The framework the researchers developed treats standard-setting as a chain running from inputs (who sits on the board and what they believe) through processes (drafting, consulting, revising) to outputs (the finished standards). A recurring theme across that chain is the tug-of-war between prescription and flexibility. Write standards too loosely, and auditors interpret them inconsistently. Write them too tightly and professional judgement, the thing that makes an audit meaningful, becomes less valuable.

One interviewee said of this dilemma that standard setters “constantly try and get that audit quality balance right between what is achievable from a principles-based set of standards versus complying with the rules and doing the right thing.” Too much prescription and quality suffers; too little structure also reduces quality, but for different reasons.

Learn more: Robert Knechel on trust, AI and the future of accounting

This tension shows up starkly in the length of revised standards. Several interviewees pointed to the growth in the length of standards as a symptom of the problem. One interviewee noted that a standard that was 40 pages before is now 110 pages on revision, adding that the resulting standards are “not leading to an increase in audit quality because I think they are becoming so complex and cumbersome.” Another warned that many standards rarely run under 100 pages today, adding that this creates a real risk they will not be applied as intended.

Building in professional scepticism, and why it’s so hard

Auditing standards carry a challenge accounting standards do not: they need to shape a mindset, not simply prescribe a procedure. Several interviewees described attempts to hard-wire professional scepticism into the rules through repeated language, worked examples, and a newer mechanism called “stand backs”: points built into the standard where an auditor is required to pause and check whether they have genuinely engaged with contradictory evidence, rather than simply confirming what management told them.

Not everyone believes this can work. One standard setter observed: “I have the view that you could write an auditing standard that says ‘thou shalt be incredibly sceptical when you undertake the work that is outlined below.’ That of itself will not guarantee any level of scepticism. Scepticism is all about behaviour and culture.” Another agreed that ultimately “it is the character of the individuals” that determines whether scepticism shows up in practice, standard or no standard. 

As such, standard setters continue to seek ways to encourage professional scepticism, while recognising that it cannot simply be written into the standards. A focus on documenting compliance with standards, particularly regarding professional scepticism, should not distract from the exercise of professional judgement and scepticism.

Who actually gets heard

One practically important finding concerns whose voices dominate the consultation process. The research found that auditors (particularly Big 4 firms) and regulators are far more active in providing feedback than any other stakeholder group. Investors, audit committees and company management were consistently described as far less engaged, despite standard setters’ efforts to draw them in.

This imbalance creates a genuine trade-off. Standards shaped mainly by their two most active and experienced users are likely to be practical, but that same imbalance gives those two groups significant influence over the process, at the cost of being seen as unfair to everyone else with a stake in reliable financial reporting. One interviewee flagged this directly, calling for standard setters to engage broadly enough that standards ultimately “reflect the balance of all stakeholder positions.” However, the expertise of experienced auditors is critical to the process.

Learn more: Understanding auditor behaviour: factors influencing decision-making

The relationship between standard setters and regulators can be tense. Because regulators inspect audits and report on deficiencies, they end up shaping how standards are interpreted in practice, sometimes more narrowly than the standard setters intended. One interviewee gave a concrete example involving the use of management’s experts, saying regulatory inspectors “take a much more narrow view of that and all but prohibit the use of management experts.”

What this means for practitioners

For audit committee members, CFOs and anyone working alongside auditors, this research offers a useful reality check: standards are the product of a genuinely difficult balancing act, shaped by the auditors and regulators who engage most actively in consultation. If your organisation has a view on how a standard should work in practice, this research suggests that view carries more weight when you actually take part in consultation, rather than treating standards as fixed once released.

A standard’s wording is deliberately designed to leave room for professional judgement, and that room exists for good reason, even when it creates the impression of inconsistency between audits. As the researchers note, the standard setters they interviewed were acutely aware that inspection findings do not automatically mean the standard itself is flawed; often, it is a question of application by different professionals (auditors and inspectors). 

The authors suggest that users of financial statements should recognise the complexity of many accounting judgements and that, as in other professions that can involve complexity, experts do not always make the same judgments. This can sometimes explain differences in the judgements between different auditors and between auditors and inspectors when relying on auditing standards.