SEC Acting Chief Accountant Provides Insight Regarding Material Misstatements
The SEC’s Acting Chief Accountant recently issued a statement that addressed materiality analyses conducted in the context of financial statement errors and reemphasized that “providing investors with high quality financial information, including financial statements prepared in compliance with [GAAP] should be the focus of all those involved in financial reporting.” Through its monitoring of restatements, the SEC has observed that:
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Some materiality analyses appear to be biased toward supporting an outcome that an error is not material to previously-issued financial statements, resulting in “little r” revision restatements;
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Companies argue that an error is not material to previously-issued financial statements because the error was also made by other companies and, therefore, reflects a widely-held view rather than an intention to misstate; and
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Registrants advocate that an error is not material because its effect is offset by other errors in the financial statements (now that’s a novel way to lose an argument!).
The Acting Chief Accountant went on to state that investors have a right to financial statements prepared in accordance with GAAP and that, when “an error is identified, it is important for companies, auditors, and audit committees to carefully assess whether the error is material by applying a well-reasoned, holistic, objective approach from a reasonable investor’s perspective based on the total mix of information.” Accordingly, companies should be aware that that SEC will carefully evaluate little “r” restatements and their underpinnings going forward.
