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The Impact of Materiality: Accounting's Best Kept Secret

Author

Listed:
  • Niamh Brennan

    (School of Business, University College Dublin)

  • Sidney J. Gray

    (School of Business, University of Sydney)

Abstract

This paper comprises a review of the literature on materiality in accounting. The paper starts by examining the context in which materiality is relevant, and the problems arising from applying the concept in practice. Definitions of materiality from legal, accounting and stock exchange sources are compared. The relevance of materiality to various accounting situations is discussed. Methods of calculating quantitative thresholds are described and illustrated. Prior research is reviewed, focusing on materiality thresholds, and on the materiality judgments of auditors, preparers and financial statement users. The paper concludes with some suggestions for future research and for policy makers concerning this best kept accounting secret.

Suggested Citation

  • Niamh Brennan & Sidney J. Gray, 2005. "The Impact of Materiality: Accounting's Best Kept Secret," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 1(1), pages 1-30.
    • Handle: RePEc:usm:journl:aamjaf00101_1-30
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    References listed on IDEAS

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    1. Langevoort, Donald, 2002. "Taming the Animal Spirits of the Stock Market: A Behavioral Approach to Securities Regulation," Berkeley Olin Program in Law & Economics, Working Paper Series qt6th0728d, Berkeley Olin Program in Law & Economics.
    2. William Kinney & David Burgstahler & Roger Martin, 2002. "Earnings Surprise “Materiality” as Measured by Stock Returns," Journal of Accounting Research, Wiley Blackwell, vol. 40(5), pages 1297-1329, December.
    3. Peter Huang, "undated". "Moody Investing and the Supreme Court: Rethinking the Materiality of Information and the Reasonableness of Investors," Scholarship at Penn Law upenn_wps-1008, University of Pennsylvania Law School.
    4. Petroni, K & Beasley, M, 1996. "Errors in accounting estimates and their relation to audit firm type," Journal of Accounting Research, Wiley Blackwell, vol. 34(1), pages 151-171.
    5. Moriarity, S & Barron, Fh, 1976. "Modeling Materiality Judgments Of Audit Partners," Journal of Accounting Research, Wiley Blackwell, vol. 14(2), pages 320-341.
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    Cited by:

    1. Edgley, Carla, 2014. "A genealogy of accounting materiality," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 25(3), pages 255-271.
    2. NIAMH M. BRENNAN & MARY McGRATH, 2007. "Financial Statement Fraud: Some Lessons from US and European Case Studies," Australian Accounting Review, CPA Australia, vol. 17(42), pages 49-61, July.
    3. Prerana Agrawal & Jacqueline Birt & Lyndie Bayne & Nikki Schonfeldt, 2022. "The use of case studies in developing students’ understanding of the concept ‘material misstatement’," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(S1), pages 1307-1338, April.
    4. Marco Venuti, 2012. "The proposal for updating the EU Accounting Directives: The adequacy of the proposal versus the legislative targets," FINANCIAL REPORTING, FrancoAngeli Editore, vol. 2012(4), pages 65-85.
    5. Edgley, Carla & Jones, Michael J. & Atkins, Jill, 2015. "The adoption of the materiality concept in social and environmental reporting assurance: A field study approach," The British Accounting Review, Elsevier, vol. 47(1), pages 1-18.
    6. Riccardo Torelli & Federica Balluchi & Katia Furlotti, 2020. "The materiality assessment and stakeholder engagement: A content analysis of sustainability reports," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 27(2), pages 470-484, March.
    7. Roberto Aprile & David Alexander & Federica Doni, 2023. "Enhancing the materiality principle in integrated reporting by adopting the General Systems Theory," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 30(5), pages 2219-2233, September.
    8. Jordan Famularo, 2023. "Corporate social responsibility communication in the ICT sector: digital issues, greenwashing, and materiality," International Journal of Corporate Social Responsibility, Springer, vol. 8(1), pages 1-25, December.
    9. James Ndegwa, 2018. "An Evaluation of Quantitative Audit Materiality of Corporate Philanthropy by Kenyan Listed Firms," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 10(8), pages 1-84, August.

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