Some thoughts on materiality;

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Some Thoughts on Materiality
Kenneth W. Stringer
New York University
Deloitte, Haskins & Sells, Retired
Introduction
The invitation for this paper resulted from discussions with Professor Stettler at and subsequent to the 1981 Deloitte Haskins & Sells AuditSCOPE Update Seminar. The purpose of that seminar was to stimulate academic interest and research on the subject of materiality. That subject was chosen because the author and his associates involved in planning the seminar believe materiality is a pervasive problem that needs further attention by those who have responsibilities for financial reporting.
Management is forced to make decisions about materiality in preparing financial statements and auditors are forced to make similar decisions in planning, performing and reporting on audits of such statements. Both management and auditors face the potential need to defend their decisions in the event of challenges by those who use financial statements and audit reports as one of the various sources of information used in making investment decisions. Although not a pleasing prospect to either management or auditors, this potential is reasonable because the underlying concept of materiality is oriented toward the influence of financial information on users' decisions.
Yet no quantitative standards or guidelines have been developed by professional organizations in the U.S. and, in my view, relatively little useful results have been provided by user-oriented academic research. Research to date that relates, directly or indirectly, to materiality has consisted largely of behavioral experiments and opinion surveys based on hypothetical situations, and studies of the impact of accounting information on stock market prices. The latter, however, have been concerned more directly with the efficient market hypothesis and with policy questions concerning the establishment of account­ing
principles than with questions about materiality with reference to the financial statements of individual companies. Therefore, I believe management and auditors are sailing the uncharted waters of investors decisions without taking soundings to map the decision-making process and the parameters that lie below the surface.
I think the hazard and the challenge arising from this situation are obvious. From this perspective, I will comment briefly on the efforts of the FASB to deal with materiality, and make a few observations and suggestions for considera­tion
by others.
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