Measuring stockholder materiality.

Accounting Horizons, January, 2003 by Seong-Yeon Cho

SYNOPSIS: The Securities and Exchange Commission (SEC) has recently expressed concern that auditors' use of materiality allows misstatements to go uncorrected. Auditors do not require their clients to correct the financial statements for immaterial misstatements. According to the professional standards, an immaterial misstatement is defined as one that has no effect on a typical or average users decisions. However, little is known about users' materiality perceptions, especially in relation to common materiality measures used by auditors, such as the percentage effect on earnings or the percentage effect on sales. To help clarify what is considered to be material from the stockholders point of view, we investigate empirically various quantitative factors that stockholders...