Materiality Guidance of the Major Public Accounting Firms

Abstract

SUMMARY This paper examines the materiality guidance for eight of the largest U.S. public accounting firms. Knowledge of how materiality guidance is integrated into a firm's methodology is important for accounting and auditing researchers as well as for practitioners, regulators, and educators. Our results show a high level of consistency across the firms in terms of the quantitative benchmarks (e.g., income before taxes, total assets or revenues, and total equity) used to determine overall materiality, the related percentages applied to those benchmarks, the percentages applied to overall materiality for determining tolerable misstatement, and what constitutes a clearly trivial misstatement. We also find that the firms' guidance for evaluating detected misstatements, including qualitative factors and firm guidance for group audits, is consistent across firms. However, there are differences in how the firms consider the possibility of undetected misstatements when evaluating detected misstatements. The results of this study provide important insights into implementation of standards and valuable information for future research and education. Data Availability: The data used are proprietary to the firms and are not available for distribution.

Do Canadian Companies Employ Big Bath Accounting When Recording Goodwill Impairment?

“…The median amount of the impairment to the absolute value of income from continuing operations was 26.29%. Eilifsen and Messier (2015) examined the materiality guidance of eight of the largest public accounting firms and found that for determining the overall materiality of an item, the majority of the firms expect or require the use of 5% of income before taxes. Clearly, the goodwill impairments recorded by the Canadian companies in 2013 would be considered material (i.e., median impairment to income of 26.29%).…”

“…7, No. 9;2015 below-the-line item), companies with greater net worth covenant slack were more likely to record an impairment in the transition year than were firms with more binding covenants, who instead preferred to delay the expense recognition. In addition, they found evidence suggesting that the closer a company was to falling below the delisting threshold for its respective stock exchange, the less likely a goodwill impairment loss would be recorded.…”

“…7, No. 9;2015 be indicated if firms recording goodwill impairments have earnings significantly below that of non-impairment companies in the year of impairment but not in the years immediately preceding the impairment year. The notion here is that the impairment loss was taken in the current period not because of declining performance over time but rather because the company would be punished relatively little for reducing its already low current-year earnings even further.…”

Are Commercial Financial Databases Reliable? New Evidence from Korea

“…The ANCOVA results in Panel A of Table 8 indicate significant main effects for ITEM (F (17,62237) = 146.82, p = 0.001) and SOURCE (F (2, 62237) = 2595.67, p = 0.001), indicating that data inconsistences among financial items and aggregators were significantly different. The results also show a significant interaction effect between SOURCE and ITEM (F (34,62237) = 222.41, p = 0.001), suggesting that the data differences for financial items differed in DataGuide, KisValue, and TS2000.…”

“…Based on Leslie [33] and Eilifsen and Messier [34], we define "material differences" as the degree to which absolute value differences are larger than 0.5% of Total Assets for balance sheet items and 5% of Earnings Before Interest and Taxes (EBIT) for income statement items except EPS; therefore, if the absolute value difference was larger than 0.5% of Total Assets or 5% of EBIT, then the variable was coded as 1; otherwise, it was coded as 0. For Earnings Per Share (EPS), we applied a materiality of 50 Korean Won (KRW); that is, if the material difference for EPS was greater than 50 KRW, then the variable was coded as 1; otherwise, it was coded as 0.…”