Toward standards for materiality(?);

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Toward Standards for Materiality(?)
William Holmes
Peat, Marwick, Mitchell & Co.
The term "materiality" in accounting and auditing literature is variously used in relation to misrepresentation, disclosure, segregation of extraordinary items, and audit requirements. The original use in accounting was in relation to misrepresentation and disclosure. If we can concentrate on these aspects of materiality, I believe the findings will apply equally well to the remaining aspects. This is the approach that has been adopted throughout this paper.
Some History of Materiality
In an artictle I recently wrote for the February, 1972 Journal of Accountancy, entitled "Materiality Through the Looking Glass," I traced the history of the use of the term materiality in American accounting and quoted examples to show that the concept was already well established in the early 1900's. I pointed out that the English Chartered Accountants who arrived in the 1880's and 1890's had brought the concept with them, and I showed that the concept was inherent in the provisions of the early British Companies Acts. I quoted the definition of Lord Davey's committee relative to an 1895 updating of these acts that—
Every contract or fact is material which would influence the judgment of a prudent investor in determining whether he would subscribe for the shares or debentures offered by the prospectus.1
The article pointed out that this type of definition was merely the old com­mon
law doctrine governing cases of misrepresentation and deceit applied to the sale of securities, and Oliver Wendell Holmes was quoted to show that the American Common Law paralleled the English Common Law in this respect.
The article also reviewed the accounting literature in America on the subject of materiality, pointing out that the earliest articles on the subject date from the 1930's. I surmised that prior to the 1930s accountants generally re­garded
the term in its legal context; as something for the courts to interpret and not something over which accountants could claim jurisdiction.
The term materiality was increasingly used in "official" accounting literature beginning with the 1930's. An "official" definition from the Securities Acts was incorporated in the S-X Regulations published in 1940, and the term was also used extensively in the early Bulletins of the American Institute. Despite this, writers in the 1930's and 1940's still seem to have regarded the concept as a child of law and only a foster child of accounting and asked for, at most, "a part in any final determination of its meaning."
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