Materiality Decisions and the Correction of Accounting Errors

Posted: 13 Sep 2007 Last revised: 29 Jul 2011

Andrew Acito

Michigan State University

Jeffrey J. Burks

University of Notre Dame

W. Bruce Johnson

University of Iowa - Department of Accounting

Date Written: January 7, 2008

Abstract

We test conjectures about the determinants of materiality judgments by examining a financial reporting choice made by firms that depends on an underlying materiality assessment. Specifically, from late 2004 to mid 2006, over 250 firms were required to correct errors in their accounting for operating leases. The method chosen to correct the errors reflects the assessed materiality of the errors, as restatements are required to correct material errors while catch-up adjustments can be used to correct immaterial errors. We test the role of materiality considerations outlined in authoritative guidance as well as factors outside the guidance in explaining the correction method chosen. We find that quantitative and qualitative materiality considerations cited in authoritative guidance explain a large portion of the variation in firms' error correction decisions. We also find that firms base their decisions on those of other firms.

Keywords: Materiality, accounting errors, restatements, leases

JEL Classification: M41, M43, M44

Suggested Citation

Acito, Andrew and Burks, Jeffrey J. and Johnson, W. Bruce, Materiality Decisions and the Correction of Accounting Errors (January 7, 2008). Accounting Review, Vol. 84, No. 3, 2009. Available at SSRN: https://ssrn.com/abstract=1014173

Andrew Acito (Contact Author)

Michigan State University ( email )

East Lansing, MI 48823
United States

Jeffrey J. Burks

University of Notre Dame ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States

W. Bruce Johnson

University of Iowa - Department of Accounting ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States
319-335-1048 (Phone)
319-335-1956 (Fax)

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