Materiality Thresholds: Empirical Evidence from Change in Accounting Estimate Disclosures

This paper provides empirical evidence on the materiality thresholds adopted in "change in accounting estimate" (CAE) disclosures. We also investigate the characteristics of the disclosing firms and their auditors, as well as the characteristics of the CAEs, such as the effect on income, the accounts affected, and disclosure venue. U.S. GAAP requires firms to disclose a CAE if its effect on the financial statements is deemed to be "material" (ASC 250-50-4). We analyze 4,335 CAE disclosures from 2006 to 2016 and provide the first descriptive evidence of the actual materiality thresholds used for CAE disclosures in practice. Our main finding is that quantitative materiality thresholds for CAE disclosures are significantly lower than conventional materiality thresholds, such as 5 percent of pretax income, and that firms may not only apply quantitative materiality thresholds more conservatively, but that other qualitative considerations play an important role in determining CAE materiality. Our results also show that there exists considerable variation in CAE disclosure across firm size, industry membership, auditor, financial statement account effected and the direction of the effect on income.

Asymmetric Investor Materiality and the Effects of Disclosure

SUMMARY We broaden our understanding of investor materiality, finding it to be asymmetrical for good and bad news. Motivated by legal and standards-based materiality definitions, we consider both participants' stated materiality limits and investment judgments, as well as the effect of auditors' materiality disclosures on those judgments. The study employs a 3 × 2 experiment manipulating materiality disclosure (high or low materiality number or no disclosure) and gain or loss subsequent events of equal magnitude. Absent disclosure, non-professional investors report lower materiality thresholds than typical auditor limits, and they exhibit lower materiality levels for bad news relative to good news both in their stated preferences and investment decisions. We find that disclosure reduces the distance between user and auditor materiality and eliminates the asymmetry in investors' stated materiality levels. However, disclosure fails to attenuate asymmetry in investment decisions, suggesting materiality preferences are “sticky” and difficult to affect through disclosure.

Audit of Financial Reporting Documents: Analysis of Process of Determining Materiality

During audit of the financial statements of companies, the auditors use a certain level of materiality to determine both the scope of the procedures and the impact of errors on the representation of the true and fair view of the financial statements. International auditing standards leave wide range of possibilities for interpretation of the materiality process, which often raises the question of how the auditor determines materiality. The purpose of the study is to analyze the materiality process and to create a model of the materiality determination process. Methods of information gathering, comparative analysis, critical evaluation, systematization and interpretation of scientific literature and normative acts of audit are used in this article. After analyzing the materiality determination process, it was found that the materiality process consists of four steps: assessment of determining factors of materiality thresholds, determination of planning materiality, determination of performance materiality and determination of clearly trivial misstatement. Based on the analyzed literature, a model of materiality determination process was developed.

The Principle of Materiality and Its Practical Implementation in the Integrated Reporting of Corporate Enterprises

The materiality principle of materiality is central to the integrated reporting system of corporate enterprises, because, international practices confirm that to be informative, reports have to contain essential information defined by stakeholders and by company itself for taking effective management decisions. Yet, the materiality principle is not subject of much concern by the Ukrainian corporate sector when preparing, compiling, submitting and publishing integrated report. This raises the importance of studies on this principle implementation in integrated reports of Ukrainian corporate enterprises. The objective of the study is to analyze implementation of the materiality principle in integrated reports of Ukrainian corporate enterprises by addressing the problems: (i) to give the characteristics of the materiality principle for financial reporting purposes; (ii) to show objects and materiality thresholds for individual forms of financial reporting; (iii) to describe the procedure of determining the materiality for integrated reporting purposes; (iv) to analyze the materiality aspects of integrated reports made by Ukrainian corporate enterprises; (v) to offer recommendations on implementing the materiality principle in integrated reporting of Ukrainian companies in keeping with international principles of integrated reporting. Practical use of the materiality principle in integrated reporting of Ukrainian corporate enterprises is illustrated by the sample of three companies: “NAKNAFTOGAS of Ukraine”, “DTEK”, and “BDO” Ltd. Recommendations for Ukrainian corporate enterprises on practical use of the materiality principle in integrated reporting are (i) to include the materiality principle in the main part of integrated reporting, with its description in the element “main principles of preparation and presentation”, which has been missing by far in integrated reporting of Ukrainian corporate enterprises; (ii) to use this principle for describing integrated reporting elements specified in the International Guidelines of Integrated Reporting: review of organization and external environment, management, business model, risk management, resource allocation strategy, operative results, future perspectives etc.

The Role of Audit Firm Expertise and Knowledge Spillover in Mitigating Earnings Management through the Tax Accounts

ABSTRACT Tax-related accounts are complex and often the last accounts finalized in the financial reporting process. Accordingly, these accounts can be used as a “last-chance” earnings management tool (Dhaliwal, Gleason, and Mills 2004). We investigate the extent to which an audit firm's industry expertise constrains earnings management through the tax accounts. We find that national industry audit experts constrain earnings management through the tax accounts. We also find that audit firm tax expertise constrains earnings management through the tax accounts when the audit firm is not considered an industry audit expert. Finally, we find evidence that providing both audit and tax services facilitates a nonexpert firm's ability to constrain earnings management through the tax accounts, which suggests that knowledge spillover plays an important role in reducing “last-chance” earnings management. All findings hold among smaller clients and when the extent of earnings management is below quantitative materiality thresholds. Data Availability: All data are publicly available as noted in the text.