SEC top accountant discusses materiality in reporting errors

Posted on March 18, 2022 by Editor

Paul Munter, Acting Chief Accountant at the US Securities and Exchange Commission (SEC), has published commentary on restatements and when errors should be considered material.

As he begins by emphasising, the focus of financial reporting should be to provide investors with high-quality data and enable them to make informed decisions. The materiality of such errors is therefore assessed according to “whether there is a substantial likelihood it is important to the reasonable investor.”

Restatements are required when material errors are discovered in filings to the SEC. Reissuance, or ‘Big R,’ restatements are required to correct errors determined to be material to previously-issued financial statements. Revision, or ‘little r,’ restatements may be made in the current period where errors are considered immaterial to prior statements, but where either correcting them or allowing them to go uncorrected without comment would cause a material error. Filers, auditors and audit committees are tasked with making an objective assessment of the materiality of errors based on the “total mix” of information available, regardless of the possible impacts of restatements – particularly Big R – such as reputational harm.

Munter observes the interesting phenomenon that the proportion of little r restatements has risen from 35% of the total in 2005 to 76% in 2020. While this may be down to improvements in internal controls over financial reporting and audit quality, there is a concern that it may reflect a growing bias towards preferable outcomes. The SEC is therefore continuing to monitor this issue. Munter refutes the arguments often made that financial statements or specific line items are irrelevant to investors’ decisions, or that widespread errors should not be considered material because of a lack of intention to misstate. He also touches on other concerns, including the distinction between material error and material weakness, and the need for effective quality control systems.

It is clear that he considers the correction of errors an essential aspect of the reporting process, and, he concludes: “When investor needs are not adequately considered, investors can lose confidence in financial reporting, threatening a foundational principle upon which our capital markets system is built.”

Read more here.

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