Measuring Stockholder Materiality

The Securities and Exchange Commission (SEC) has recently expressed concern that auditors' use of materiality allows misstatements to go uncorrected. Auditors do not require their clients to correct the financial statements for immaterial misstatements. According to the professional standards,...

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Bibliographic Details
Published in:Accounting horizons 2003-01, Vol.17 (s-1), p.63-76
Main Authors: Cho, Seong-Yeon, Hagerman, Robert L, Nabar, Sandeep, Patterson, Evelyn R
Format: Article
Language:English
Subjects:
Accounting and auditing
Analysis
Auditors
Beliefs, opinions and attitudes
Earnings
Earnings trends
Errors & omissions
Financial statements
Investments
Materiality
Net income
Research design
Staff accounting bulletins
Stockholders
Studies
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Summary:The Securities and Exchange Commission (SEC) has recently expressed concern that auditors' use of materiality allows misstatements to go uncorrected. Auditors do not require their clients to correct the financial statements for immaterial misstatements. According to the professional standards, an immaterial misstatement is defined as one that has no effect on a typical or average user's decisions. However, little is known about users' materiality perceptions, especially in relation to common materiality measures used by auditors, such as the percentage effect on earnings or the percentage effect on sales. To help clarify what is considered to be material from the stockholder's point of view, we investigate empirically various quantitative factors that stockholders consider important in assessing whether earnings are materially misstated. For each factor, we identify a materiality threshold where potential misstatements exceeding the threshold are material. [PUBLICATION ABSTRACT]
ISSN:0888-7993
1558-7975
DOI:10.2308/acch.2003.17.s-1.63