The Materiality of Accounting Errors: Evidence from SEC Comment Letters

Posted: 15 May 2015 Last revised: 11 Jan 2019

See all articles by Andrew Acito

Andrew Acito

Michigan State University

Jeffrey J. Burks

University of Notre Dame

W. Bruce Johnson

University of Iowa - Department of Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: January 25, 2018

Abstract

We gain unique insights into materiality judgments about accounting errors by examining SEC comment letter correspondence. We document that managers typically use multiple quantitative benchmarks in their materiality analyses, with earnings being the most common benchmark. In most of the cases we review, managers deem the error immaterial despite exceeding the traditional “5 percent of earnings” rule of thumb, often in multiple periods and by a large degree. Instead of attempting to conceal these overages, managers tend to forthrightly acknowledge them, often asserting that the benchmark is abnormally low during the violation period. We find that 17 to 26 percent of these “low benchmark” assertions are suspect. We also document substantial variation in the extent to which qualitative factors are mentioned as considerations. The SEC generally is deferential toward managers’ arguments and judgments, but is more likely to challenge immateriality claims when managers admit violation of SAB No. 99 qualitative criteria.

Keywords: Materiality, errors, restatements, SEC comment letters

JEL Classification: M40, M41

Suggested Citation

Acito, Andrew and Burks, Jeffrey J. and Johnson, W. Bruce, The Materiality of Accounting Errors: Evidence from SEC Comment Letters (January 25, 2018). Available at SSRN: https://ssrn.com/abstract=2605993 or http://dx.doi.org/10.2139/ssrn.2605993

Andrew Acito

Michigan State University ( email )

East Lansing, MI 48823
United States

Jeffrey J. Burks (Contact Author)

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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