Financial Statement Disaggregation Decisions and Auditors’ Tolerance for Misstatement

45 Pages Posted: 10 Aug 2011 Last revised: 4 Mar 2014

See all articles by Robert Libby

Robert Libby

Cornell University - Samuel Curtis Johnson Graduate School of Management

Tim Brown

University of South Carolina - Department of Accounting

Date Written: February 21, 2012

Abstract

Current IFRS requires significant disaggregation of income statement numbers while such disaggregation is voluntary and much less common under U.S. GAAP. We examine whether voluntary disaggregation of income statement numbers increases the reliability of income statement subtotals because auditors permit less misstatement in the disaggregated numbers. In our experiment, experienced auditors require correction of smaller errors in disaggregated numbers. Auditors also believe that greater disaggregation will increase SEC scrutiny of uncorrected financial statement errors in the disaggregated numbers. However, the effects are substantially reduced if the disaggregated numbers are presented in the notes. Furthermore, there is significant disagreement among participants on whether disaggregated numbers are relevant materiality benchmarks, and on what current auditing guidance requires. These results suggest a potential deficiency in current audit guidance, which traditionally has been aimed at promoting consensus in practice among auditors. They also suggest an unintended positive consequence of voluntary disaggregation for the reliability of income statement subtotals. Possible effects of management behavior and required disaggregation resulting from U.S. adoption of IFRS or the recommendations of the joint FASB/IASB financial statement presentation project are also discussed.

Keywords: disaggregation, materiality, IFRS vs. U.S. GAAP, disclosure location, audit guidance

JEL Classification: M41, K20

Suggested Citation

Libby, Robert and Brown, Tim, Financial Statement Disaggregation Decisions and Auditors’ Tolerance for Misstatement (February 21, 2012). Accounting Review, Vol. 88, No. 2, 2013, Available at SSRN: https://ssrn.com/abstract=1907839 or http://dx.doi.org/10.2139/ssrn.1907839

Robert Libby (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States
607-255-3348 (Phone)
607-254-4590 (Fax)

Tim Brown

University of South Carolina - Department of Accounting ( email )

The Francis M. Hipp Building
1705 College Street
Columbia, SC 29208
United States

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