Materiality and Sox
Materiality and Sox
Since the passing of SOX, materiality has become an important issue for accountant and auditors alike. Sarbanes-Oxley has placed a high need for these professionals to be able to identify key control exceptions, while also making them must apply a stricter familiar concept materiality to determine the financial impact of such exceptions.
Under the Securities and Exchange Commission, The SEC references the U.S. GAAP definition of materiality in its Codification of Staff Accounting Bulletins. The materiality section of the codification points out that this definition of materiality is in substance identical to the formulation used by the courts in interpreting the federal securities laws. The Supreme Court has held that a fact is material if there is a substantial likelihood that the fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available (Reyhl, 2006).
In my initial research, I found 4 perspectives of working materiality that keeping in with the guidelines of SOX, each with its own distinct calculations and limits. To know what materiality limit to even apply to these, an auditor first must determine the type of financial statement would be affected or exception would be at hand.
The first perspective is one that we are most familiar with, the financial statement misstatement or error. It usually is a dollar amount that can be calculated to an exact amount. The second is usually considered an internal control deficiency caused by the failure of an AIS design or operational control. The third is a large variance in an estimate compared with the actual determined amount (Vorhies, 2005). The last and the one that cause SOX to be passed is financial fraud by management or other employees to enhance a companys reported financial position and operating results.
Under the new terms for materiality, auditors and accountants must determine which internal control deficiencies are, assess each deficiencys impact on the fair presentation of their financial statement and be able to identify