The Accounting Historians Journal Vol. 17, No. 2 December 1990
Ann Bean WICHITA STATE UNIVERSITY and
Deborah W. Thomas UNIVERSITY OF ARKANSAS
THE DEVELOPMENT OF THE JUDICIAL DEFINITION OF MATERIALITY
Abstract: Determining what should be considered a material item has been a problem for both the accounting profession and the courts. By reviewing the court cases involving the issue of materiality, the au-thors have determined where differences in the materiality standard as applied by the courts exist. The judicial definition of materiality has developed over time, and current trends with important variations are observed. Based upon the authors' analysis, the following judicial defi-nition of materiality, with its possible variations, is suggested: Would the reasonable (or speculative) investor (or layman) consider impor-tant (or be influenced by) this information in determining his course of action?
Finding a general definition for materiality has been difficult for both the accounting profession and the courts of the United States. The courts have been criticized for not developing a con-cise definition of materiality. [Reckers, et. al., 1985; Jeffries, 1981]. However, the accounting profession itself has not been able to precisely define what is or is not material. Without an all-purpose definition of materiality, the courts have grappled with its mean-ing on a case-by-case basis. The result has been confusion over some elements of the definition. This paper will review the cases involving materiality and the evolution of the definition of materi-ality in the courts. Based upon an analysis of the court opinions, the varying standards which have been applied by the courts will be explained.
THE ACCOUNTANTS VIEW OF MATERIALITY
Accountants have recognized that the profession would ben-efit if a general definition of materiality could be developed. In 1973, the issue of materiality was one of the original items for consideration by the newly-formed Financial Accounting Stan-