An Analyst Reviewed Blunt Companys Note Disclosures for Its

SEC Staff Accounting Message:
No. 99 – Materiality

SECURITIES AND EXCHANGE Committee
17 CFR Office 211
[Release No. SAB 99]
Staff Bookkeeping Bulletin No. 99

Bureau: Securities and Exchange Commission

ACTION: Publication of Staff Accounting Bulletin

SUMMARY: This staff bookkeeping bulletin expresses the views of the staff that sectional reliance on certain quantitative benchmarks to assess materiality in preparing fiscal statements and performing audits of those fiscal statements is inappropriate; misstatements are non immaterial simply because they fall below a numerical threshold.

DATE: August 12, 1999

FOR FURTHER Information CONTACT: Due west. Scott Bayless, Associate Chief Accountant, or Robert Eastward. Burns, Chief Counsel, Office of the Chief Accountant (202-942-4400), or David R. Fredrickson, Office of Full general Counsel (202-942-0900), Securities and Exchange Committee, 450 5th Street, N.Westward., Washington, D.C. 20549-1103; electronic addresses: BaylessWS@sec.gov; BurnsR@sec.gov; FredricksonD@sec.gov.

SUPPLEMENTARY Information: The statements in the staff accounting bulletins are non rules or interpretations of the Commission, nor are they published equally begetting the Committee'south official approval. They correspond interpretations and practices followed by the Division of Corporation Finance and the Part of the Principal Accountant in administering the disclosure requirements of the Federal securities laws.

Jonathan G. Katz

Secretary

Date: Baronial 12, 1999

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Part 211 - (Amend) Accordingly, Role 211 of Title 17 of the Lawmaking of Federal Regulations is amended past calculation Staff Accounting Message No. 99 to the table establish in Subpart B.

STAFF Accounting BULLETIN NO. 99

The staff hereby adds Department M to Topic 1 of the Staff Accounting Bulletin Series. Section 1000, entitled "Materiality," provides guidance in applying materiality thresholds to the preparation of financial statements filed with the Commission and the performance of audits of those financial statements.

STAFF ACCOUNTING BULLETINS

TOPIC 1: Financial STATEMENTS

* * * * *

One thousand. Materiality

ane. Assessing Materiality

Facts: During the course of preparing or auditing twelvemonth-end fiscal statements, fiscal management or the registrant'southward contained auditor becomes enlightened of misstatements in a registrant's financial statements. When combined, the misstatements result in a 4% overstatement of internet income and a $.02 (iv%) overstatement of earnings per share. Because no particular in the registrant's consolidated financial statements is misstated by more than than 5%, management and the independent auditor conclude that the deviation from generally accepted bookkeeping principles ("GAAP") is immaterial and that the accounting is permissible.¹

Question: Each Argument of Financial Accounting Standards adopted by the Financial Bookkeeping Standards Board ("FASB") states, "The provisions of this Statement need not be applied to immaterial items." In the staff's view, may a registrant or the auditor of its financial statements presume the immateriality of items that fall beneath a per centum threshold set by direction or the accountant to determine whether amounts and items are material to the financial statements?

Interpretive Response: No. The staff is aware that certain registrants, over time, take developed quantitative thresholds as "rules of pollex" to help in the preparation of their fiscal statements, and that auditors also have used these thresholds in their evaluation of whether items might exist considered material to users of a registrant'southward financial statements. Ane dominion of thumb in particular suggests that the misstatement or omission² of an item that falls under a five% threshold is not material in the absence of particularly egregious circumstances, such as self-dealing or misappropriation by senior management. The staff reminds registrants and the auditors of their financial statements that exclusive reliance on this or any percentage or numerical threshold has no basis in the accounting literature or the law.

The apply of a percentage every bit a numerical threshold, such as 5%, may provide the basis for a preliminary assumption that – without considering all relevant circumstances – a deviation of less than the specified percentage with respect to a detail item on the registrant'southward financial statements is unlikely to be cloth. The staff has no objection to such a "rule of thumb" as an initial stride in assessing materiality. Merely quantifying, in percentage terms, the magnitude of a misstatement is just the beginning of an assay of materiality; it cannot appropriately be used as a substitute for a full assay of all relevant considerations. Materiality concerns the significance of an detail to users of a registrant's financial statements. A affair is "material" if there is a substantial likelihood that a reasonable person would consider it important. In its Argument of Financial Accounting Concepts No. 2, the FASB stated the essence of the concept of materiality as follows:

The omission or misstatement of an item in a financial study is material if, in the lite of surrounding circumstances, the magnitude of the item is such that it is likely that the judgment of a reasonable person relying upon the report would have been changed or influenced past the inclusion or correction of the particular.³

This formulation in the accounting literature is in substance identical to the conception used by the courts in interpreting the federal securities laws. The Supreme Courtroom has held that a fact is textile if in that location is –

a substantial likelihood that the . . . fact would have been viewed past the reasonable investor equally having significantly altered the "total mix" of information fabricated bachelor. ⁴

Nether the governing principles, an cess of materiality requires that one views the facts in the context of the "surrounding circumstances," every bit the accounting literature puts information technology, or the "full mix" of information, in the words of the Supreme Court. In the context of a misstatement of a financial statement item, while the "total mix" includes the size in numerical or pct terms of the misstatement, information technology also includes the factual context in which the user of financial statements would view the fiscal statement item. The shorthand in the accounting and auditing literature for this analysis is that fiscal direction and the auditor must consider both "quantitative" and "qualitative" factors in assessing an item'due south materiality.⁵ Court decisions, Commission rules and enforcement actions, and accounting and auditing literature^{half dozen} take all considered "qualitative" factors in diverse contexts.

The FASB has long emphasized that materiality cannot be reduced to a numerical formula. In its Concepts Statement No. 2, the FASB noted that some had urged it to promulgate quantitative materiality guides for apply in a diverseness of situations. The FASB rejected such an arroyo as representing only a "minority view," stating –

The predominant view is that materiality judgments tin can properly exist fabricated but by those who have all the facts. The Board's nowadays position is that no full general standards of materiality could be formulated to accept into account all the considerations that enter into an experienced human judgment. ⁷

The FASB noted that, in certain limited circumstances, the Committee and other authoritative bodies had issued quantitative materiality guidance, citing as examples guidelines ranging from one to ten percent with respect to a variety of disclosures.^eight And information technology took account of contradictory studies, 1 showing a lack of uniformity among auditors on materiality judgments, and another suggesting widespread apply of a "rule of thumb" of 5 to ten percent of net income.⁹ The FASB as well considered whether an evaluation of materiality could be based solely on anticipating the market place'south reaction to accounting data.¹⁰

The FASB rejected a formulaic approach to discharging "the onerous duty of making materiality decisions"^xi in favor of an approach that takes into account all the relevant considerations. In so doing, it made clear that –

[G]agnitude by itself, without regard to the nature of the item and the circumstances in which the judgment has to be made, will non mostly be a sufficient basis for a materiality judgment.¹²

Evaluation of materiality requires a registrant and its auditor to consider allthe relevant circumstances, and the staff believes that there are numerous circumstances in which misstatements beneath five% could well exist material. Qualitative factors may cause misstatements of quantitatively pocket-sized amounts to be material; as stated in the auditing literature:

As a result of the interaction of quantitative and qualitative considerations in materiality judgments, misstatements of relatively small amounts that come to the auditor's attending could have a textile result on the fiscal statements.^thirteen

Amid the considerations that may well render material a quantitatively small misstatement of a financial statement item are –

• whether the misstatement arises from an item capable of precise measurement or whether it arises from an estimate and, if so, the degree of imprecision inherent in the approximate^fourteen
• whether the misstatement masks a change in earnings or other trends
• whether the misstatement hides a failure to run across analysts' consensus expectations for the enterprise
• whether the misstatement changes a loss into income or vice versa
• whether the misstatement concerns a segment or other portion of the registrant'southward business that has been identified every bit playing a significant role in the registrant's operations or profitability
• whether the misstatement affects the registrant's compliance with regulatory requirements
• whether the misstatement affects the registrant'south compliance with loan covenants or other contractual requirements
• whether the misstatement has the effect of increasing management's compensation – for example, by satisfying requirements for the award of bonuses or other forms of incentive compensation
• whether the misstatement involves concealment of an unlawful transaction.

This is not an exhaustive list of the circumstances that may bear upon the materiality of a quantitatively small misstatement.¹⁵ Among other factors, the demonstrated volatility of the cost of a registrant'south securities in response to certain types of disclosures may provide guidance equally to whether investors regard quantitatively pocket-sized misstatements as material. Consideration of potential market reaction to disclosure of a misstatement is by itself "too blunt an instrument to exist depended on" in considering whether a fact is material.¹⁶ When, yet, management or the independent auditor expects (based, for example, on a pattern of marketplace performance) that a known misstatement may outcome in a significant positive or negative market reaction, that expected reaction should exist taken into account when considering whether a misstatement is cloth.¹⁷

For the reasons noted above, the staff believes that a registrant and the auditors of its fiscal statements should not assume that fifty-fifty small intentional misstatements in fiscal statements, for example those pursuant to deportment to "manage" earnings, are immaterial.¹⁸ While the intent of management does not render a misstatement material, information technology may provide significant evidence of materiality. The evidence may exist particularly compelling where direction has intentionally misstated items in the financial statements to "manage" reported earnings. In that instance, it presumably has washed so believing that the resulting amounts and trends would exist significant to users of the registrant's fiscal statements.^nineteen The staff believes that investors mostly would regard as significant a direction do to over- or under-state earnings upwards to an amount just brusque of a percentage threshold in social club to "manage" earnings. Investors presumably also would regard as significant an bookkeeping practice that, in essence, rendered all earnings figures subject to a management-directed margin of misstatement.

The materiality of a misstatement may plow on where it appears in the financial statements. For example, a misstatement may involve a segment of the registrant's operations. In that instance, in assessing materiality of a misstatement to the financial statements taken equally a whole, registrants and their auditors should consider not merely the size of the misstatement merely also the significance of the segment information to the fiscal statements taken equally a whole.^xx "A misstatement of the acquirement and operating profit of a relatively pocket-size segment that is represented past management to be important to the future profitability of the entity"²¹ is more likely to be cloth to investors than a misstatement in a segment that management has not identified every bit specially of import. In assessing the materiality of misstatements in segment data - as with materiality generally -

situations may arise in practice where the accountant will conclude that a matter relating to segment information is qualitatively material fifty-fifty though, in his or her judgment, it is quantitatively immaterial to the fiscal statements taken as a whole.²²

Aggregating and Netting Misstatements

In determining whether multiple misstatements cause the fiscal statements to exist materially misstated, registrants and the auditors of their financial statements should consider each misstatement separately and the aggregate issue of all misstatements.²³ A registrant and its auditor should evaluate misstatements in light of quantitative and qualitative factors and "consider whether, in relation to individual line item amounts, subtotals, or totals in the fiscal statements, they materially misstate the fiscal statements taken as a whole."²⁴ This requires consideration of -

the significance of an detail to a particular entity (for example, inventories to a manufacturing company), the pervasiveness of the misstatement (such every bit whether it affects the presentation of numerous financial statement items), and the issue of the misstatement on the financial statements taken as a whole ....²⁵

Registrants and their auditors first should consider whether each misstatement is cloth, irrespective of its result when combined with other misstatements. The literature notes that the assay should consider whether the misstatement of "individual amounts" causes a cloth misstatement of the fiscal statements taken as a whole. Every bit with materiality generally, this analysis requires consideration of both quantitative and qualitative factors.

If the misstatement of an individual corporeality causes the financial statements equally a whole to be materially misstated, that result cannot be eliminated by other misstatements whose issue may be to diminish the impact of the misstatement on other fiscal argument items. To accept an obvious example, if a registrant's revenues are a material financial statement item and if they are materially overstated, the fiscal statements taken as a whole volition be materially misleading even if the effect on earnings is completely kickoff past an equivalent overstatement of expenses.

Fifty-fifty though a misstatement of an individual amount may not crusade the financial statements taken as a whole to be materially misstated, it may nonetheless, when aggregated with other misstatements, return the financial statements taken as a whole to be materially misleading. Registrants and the auditors of their financial statements accordingly should consider the issue of the misstatement on subtotals or totals. The accountant should aggregate all misstatements that affect each subtotal or full and consider whether the misstatements in the aggregate affect the subtotal or total in a way that causes the registrant'southward financial statements taken as a whole to be materially misleading.²⁶

The staff believes that, in considering the aggregate effect of multiple misstatements on a subtotal or full, registrants and the auditors of their fiscal statements should exercise particular care when considering whether to offset (or the appropriateness of offsetting) a misstatement of an estimated amount with a misstatement of an particular capable of precise measurement. As noted above, assessments of materiality should never be purely mechanical; given the imprecision inherent in estimates, at that place is by definition a respective imprecision in the aggregation of misstatements involving estimates with those that exercise non involve an estimate.

Registrants and auditors as well should consider the effect of misstatements from prior periods on the current financial statements. For case, the auditing literature states,

Matters underlying adjustments proposed by the auditor but not recorded by the entity could potentially crusade future financial statements to be materially misstated, even though the auditor has concluded that the adjustments are not material to the electric current financial statements.²⁷

This may be specially the case where immaterial misstatements recur in several years and the cumulative effect becomes material in the current year.

2. Immaterial Misstatements That are Intentional

Facts: A registrant's management intentionally has fabricated adjustments to various fiscal statement items in a manner inconsistent with GAAP. In each accounting period in which such deportment were taken, none of the individual adjustments is by itself material, nor is the aggregate consequence on the financial statements taken every bit a whole textile for the period. The registrant's earnings "management" has been effected at the management or acquiescence of management in the belief that any deviations from GAAP have been immaterial and that accordingly the accounting is permissible.

Question: In the staff'south view, may a registrant make intentional immaterial misstatements in its financial statements?

Interpretive Response: No. In certain circumstances, intentional immaterial misstatements are unlawful.

Considerations of the Books and Records Provisions Under the Exchange Act

Even if misstatements are immaterial,²⁸ registrants must comply with Sections 13(b)(ii) - (vii) of the Securities Exchange Act of 1934 (the "Commutation Deed").²⁹ Under these provisions, each registrant with securities registered pursuant to Department 12 of the Exchange Act,³⁰ or required to file reports pursuant to Department 15(d),³¹ must make and go along books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the registrant and must maintain internal accounting controls that are sufficient to provide reasonable assurances that, among other things, transactions are recorded as necessary to let the training of fiscal statements in conformity with GAAP.³² In this context, determinations of what constitutes "reasonable assurance" and "reasonable detail" are based not on a "materiality" assay but on the level of detail and degree of balls that would satisfy prudent officials in the acquit of their own affairs.³³ Accordingly, failure to record accurately immaterial items, in some instances, may upshot in violations of the securities laws.

The staff recognizes that at that place is limited administrative guidance³⁴ regarding the "reasonableness" standard in Section 13(b)(2) of the Exchange Act. A principal statement of the Committee'southward policy in this area is set forth in an address given in 1981 by and then Chairman Harold One thousand. Williams.³⁵ In his address, Chairman Williams noted that, like materiality, "reasonableness" is not an "accented standard of exactitude for corporate records."³⁶ Unlike materiality, however, "reasonableness" is not solely a measure of the significance of a financial statement item to investors. "Reasonableness," in this context, reflects a judgment equally to whether an issuer's failure to correct a known misstatement implicates the purposes underlying the bookkeeping provisions of Sections 13(b)(2) - (vii) of the Exchange Human activity.³⁷

In assessing whether a misstatement results in a violation of a registrant's obligation to continue books and records that are accurate "in reasonable detail," registrants and their auditors should consider, in addition to the factors discussed higher up concerning an evaluation of a misstatement's potential materiality, the factors set up along below.

• The significance of the misstatement. Though the staff does not believe that registrants need to make finely calibrated determinations of significance with respect to immaterial items, patently it is "reasonable" to treat misstatements whose effects are conspicuously inconsequential differently than more significant ones.
• How the misstatement arose. It is unlikely that information technology is always "reasonable" for registrants to record misstatements or non to right known misstatements – fifty-fifty immaterial ones – equally role of an ongoing endeavor directed past or known to senior management for the purposes of "managing" earnings. On the other hand, insignificant misstatements that ascend from the operation of systems or recurring processes in the normal course of business generally volition not cause a registrant's books to be inaccurate "in reasonable item."³⁸
• The cost of correcting the misstatement. The books and records provisions of the Exchange Act do non require registrants to brand major expenditures to correct minor misstatements.³⁹ Conversely, where there is little toll or delay involved in correcting a misstatement, failing to do then is unlikely to exist "reasonable."
• The clarity of authoritative accounting guidance with respect to the misstatement. Where reasonable minds may differ most the appropriate bookkeeping treatment of a financial statement item, a failure to correct it may not render the registrant's financial statements inaccurate "in reasonable detail." Where, notwithstanding, there is little basis for reasonable disagreement, the case for leaving a misstatement uncorrected is correspondingly weaker.

There may be other indicators of "reasonableness" that registrants and their auditors may ordinarily consider. Because the judgment is not mechanical, the staff volition be inclined to continue to defer to judgments that "allow a business, acting in good faith, to comply with the Act's accounting provisions in an innovative and cost-effective way."^xl

The Accountant's Response to Intentional Misstatements

Section 10A(b) of the Substitution Human action requires auditors to take sure deportment upon discovery of an "illegal human activity."⁴¹ The statute specifies that these obligations are triggered "whether or not [the illegal acts are] perceived to accept a material event on the financial statements of the issuer . . . ." Among other things, Section 10A(b)(1) requires the auditor to inform the appropriate level of management of an illegal deed (unless clearly inconsequential) and assure that the registrant's audit commission is "adequately informed" with respect to the illegal deed.

As noted, an intentional misstatement of immaterial items in a registrant's financial statements may violate Section 13(b)(two) of the Commutation Human activity and thus be an illegal deed. When such a violation occurs, an auditor must take steps to meet that the registrant'southward inspect committee is "adequately informed" about the illegal human action. Considering Department 10A(b)(i) is triggered regardless of whether an illegal human action has a fabric effect on the registrant's fiscal statements, where the illegal human action consists of a misstatement in the registrant'south financial statements, the auditor volition be required to report that illegal human activity to the audit committee irrespective of whatever "netting" of the misstatements with other financial statement items.

The requirements of Section 10A repeat the auditing literature. See, for example, Statement on Auditing Standards No. ("SAS") 54, "Illegal Acts by Clients," and SAS 82, "Consideration of Fraud in a Financial Statement Audit." Pursuant to paragraph 38 of SAS 82, if the accountant determines there is evidence that fraud may exist, the auditor must discuss the thing with the appropriate level of management. The auditor must report directly to the audit committee fraud involving senior management and fraud that causes a material misstatement of the financial statements. Paragraph four of SAS 82 states that "misstatements arising from fraudulent financial reporting are intentional misstatements or omissions of amounts or disclosures in fiscal statements to deceive fiscal statement users."⁴² SAS 82 further states that fraudulent financial reporting may involve falsification or alteration of accounting records; misrepresenting or omitting events, transactions or other information in the fiscal statements; and the intentional misapplication of accounting principles relating to amounts, classifications, the manner of presentation, or disclosures in the financial statements.⁴³ The clear implication of SAS 82 is that immaterial misstatements may exist fraudulent fiscal reporting. ⁴⁴

Auditors that learn of intentional misstatements may also be required to (1) re-evaluate the degree of audit risk involved in the audit engagement, (2) determine whether to revise the nature, timing, and extent of audit procedures accordingly, and (3) consider whether to resign.⁴⁵

Intentional misstatements too may bespeak the existence of reportable conditions or fabric weaknesses in the registrant's system of internal bookkeeping command designed to detect and deter improper accounting and financial reporting.⁴⁶ Equally stated by the National Commission on Fraudulent Financial Reporting, also known as the Treadway Commission, in its 1987 report,

The tone gear up past acme management - the corporate environment or civilisation within which financial reporting occurs - is the almost important factor contributing to the integrity of the financial reporting process. Notwithstanding an impressive ready of written rules and procedures, if the tone set by management is lax, fraudulent financial reporting is more likely to occur.⁴⁷

An auditor is required to report to a registrant'southward audit committee whatsoever reportable weather or material weaknesses in a registrant's system of internal accounting control that the accountant discovers in the class of the examination of the registrant's fiscal statements. ⁴⁸

GAAP Precedence Over Industry Exercise

Some take argued to the staff that registrants should exist permitted to follow an industry accounting exercise even though that practice is inconsistent with authoritative bookkeeping literature. This situation might occur if a practice is developed when there are few transactions and the accounting results are clearly inconsequential, and that do never changes despite a subsequent growth in the number or materiality of such transactions. The staff disagrees with this statement. Administrative literature takes precedence over manufacture exercise that is contrary to GAAP.⁴⁹

General Comments

This SAB is non intended to modify electric current law or guidance in the bookkeeping or auditing literature.⁵⁰ This SAB and the authoritative accounting literature cannot specifically accost all of the novel and complex business organisation transactions and events that may occur. Appropriately, registrants may account for, and make disclosures about, these transactions and events based on analogies to similar situations or other factors. The staff may non, however, always exist persuaded that a registrant's determination is the most appropriate nether the circumstances. When disagreements occur after a transaction or an consequence has been reported, the consequences may be severe for registrants, auditors, and, most chiefly, the users of financial statements who have a right to expect consequent bookkeeping and reporting for, and disclosure of, similar transactions and events. The staff, therefore, encourages registrants and auditors to hash out on a timely basis with the staff proposed bookkeeping treatments for, or disclosures about, transactions or events that are not specifically covered by the existing accounting literature.

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Footnotes

ane	American Establish of Certified Public Accountants ("AICPA"), Codification of Statements on Auditing Standards ("AU") � 312, "Audit Risk and Materiality in Conducting an Audit," states that the auditor should consider audit risk and materiality both in (a) planning and setting the telescopic for the inspect and (b) evaluating whether the financial statements taken as a whole are fairly presented in all fabric respects in conformity with generally accepted accounting principles. The purpose of this Staff Accounting Message ("SAB") is to provide guidance to fiscal management and independent auditors with respect to the evaluation of the materiality of misstatements that are identified in the inspect process or preparation of the financial statements (i.e., (b) higher up). This SAB is not intended to provide definitive guidance for assessing "materiality" in other contexts, such every bit evaluations of auditor independence, as other factors may apply. There may be other rules that address financial presentation. See, e.k., Dominion 2a-four, 17 CFR 270.2a-4, under the Investment Company Act of 1940.
2	As used in this SAB, "misstatement" or "omission" refers to a financial argument assertion that would not be in conformity with GAAP.
3	FASB, Statement of Financial Bookkeeping Concepts No. two, Qualitative Characteristics of Bookkeeping Information ("Concepts Statement No. two"), 132 (1980). Come across also Concepts Statement No. 2, Glossary of Terms - Materiality.
iv	TSC Industries v. Northway, Inc., 426 U.Due south. 438, 449 (1976). Come across also Basic, Inc. five. Levinson, 485 U.Due south. 224 (1988). As the Supreme Court has noted, determinations of materiality require "delicate assessments of the inferences a 'reasonable shareholder' would draw from a given prepare of facts and the significance of those inferences to him . . . ." TSC Industries, 426 U.S. at 450.
5	See, east.g., Concepts Statement No. 2, 123-124; AU � 312.10 (" . . . materiality judgments are fabricated in low-cal of surrounding circumstances and necessarily involve both quantitative and qualitative considerations."); AU � 312.34 ("Qualitative considerations also influence the accountant in reaching a conclusion as to whether misstatements are textile."). As used in the accounting literature and in this SAB, "qualitative" materiality refers to the surrounding circumstances that inform an investor'south evaluation of fiscal statement entries. Whether events may exist material to investors for non-financial reasons is a affair non addressed by this SAB.
6	See, e.g., Dominion 1-02(o) of Regulation Due south-X, 17 CFR 210.1-02(o), Rule 405 of Regulation C, 17 CFR 230.405, and Dominion 12b-2, 17 CFR 240.12b-ii; AU �� 312.x - .xi, 317.13, 411.04 northward. i, and 508.36; In re Kidder Peabody Securities Litigation, 10 F. Supp. second 398 (S.D.North.Y. 1998); Parnes v. Gateway 2000, Inc., 122 F.3d 539 (8th Cir. 1997); In re Westinghouse Securities Litigation, 90 F.3d 696 (3d Cir. 1996); In the Matter of W.R. Grace & Co., Accounting and Auditing Enforcement Release No. ("AAER") 1140 (June 30, 1999); In the Matter of Eugene Gaughan, AAER 1141 (June 30, 1999); In the Matter of Thomas Scanlon, AAER 1142 (June xxx, 1999); and In re Sensormatic Electronics Corporation, Sec. Human activity Rel. No. 7518 (March 25, 1998).
7	Concepts Statement No. 2, 131 (1980).
8	Concepts Statement No. two, 131 and 166.
9	Concepts Statement No. 2, 167.
10	Concepts Statement No. 2, 168-69.
xi	Concepts Statement No. two, 170.
12	Concepts Argument No. 2, 125.
xiii	AU � 312.11.
14	Every bit stated in Concepts Statement No. two, 130: Some other factor in materiality judgments is the caste of precision that is attainable in estimating the judgment item. The amount of deviation that is considered immaterial may increase as the attainable degree of precision decreases. For example, accounts payable usually can be estimated more accurately than tin contingent liabilities arising from litigation or threats of it, and a deviation considered to be material in the first case may be quite picayune in the second. This SAB is not intended to alter current police force or guidance in the accounting literature regarding accounting estimates. See, e.grand., Accounting Principles Board Opinion No. 20, Bookkeeping Changes x, 11, 31-33 (July 1971).
15	The staff understands that the Big Five Audit Materiality Task Forcefulness ("Task Strength") was convened in March of 1998 and has made recommendations to the Auditing Standards Board including suggestions regarding communications with audit committees about unadjusted misstatements. Run into generally Big Five Audit Materiality Chore Strength, "Materiality in a Financial Statement Audit – Considering Qualitative Factors When Evaluating Audit Findings" (August 1998). The Task Strength memorandum is available at www.aicpa.org.
16	See Concepts Statement No. two, 169.
17	If management does not look a significant marketplace reaction, a misstatement nonetheless may exist material and should exist evaluated nether the criteria discussed in this SAB.
18	Intentional management of earnings and intentional misstatements, every bit used in this SAB, do not include insignificant errors and omissions that may occur in systems and recurring processes in the normal grade of business. See notes 38 and fifty infra.
19	Assessments of materiality should occur not only at year-end, but also during the preparation of each quarterly or interim financial statement. Encounter, e.thou., In the Affair of Venator Group, Inc., AAER 1049 (June 29, 1998).
20	See, eastward.grand., In the Thing of Due west.R. Grace & Co., AAER 1140 (June thirty, 1999).
21	AUI � 326.33.
22	Id.
23	The auditing literature notes that the "concept of materiality recognizes that some matters, either individually or in the amass, are of import for off-white presentation of financial statements in conformity with generally accepted accounting principles." AU � 312.03. Run across likewise AU � 312.04.
24	AU � 312.34. Quantitative materiality assessments oftentimes are made past comparing adjustments to revenues, gross profit, pretax and net income, full assets, stockholders' equity, or individual line items in the financial statements. The detail items in the fiscal statements to be considered as a ground for the materiality determination depend on the proposed adjustment to be made and other factors, such every bit those identified in this SAB. For case, an adjustment to inventory that is immaterial to pretax income or internet income may exist textile to the fiscal statements considering information technology may affect a working capital ratio or cause the registrant to be in default of loan covenants.
25	AU � 508.36.
26	AU � 312.34
27	AU � 380.09.
28	FASB Statements of Financial Accounting Standards ("Standards" or "Statements") mostly provide that "[t]he provisions of this Statement need non be applied to immaterial items." This SAB is consistent with that provision of the Statements. In theory, this language is discipline to the interpretation that the registrant is free intentionally to set forth immaterial items in financial statements in a manner that obviously would be opposite to GAAP if the misstatement were material. The staff believes that the FASB did not intend this result.
29	xv United statesC. �� 78m(b)(two) - (7).
xxx	15 U.Southward.C. � 78l.
31	fifteen U.Due south.C. � 78o(d).
32	Criminal liability may be imposed if a person knowingly circumvents or knowingly fails to implement a system of internal accounting controls or knowingly falsifies books, records or accounts. fifteen The statesC. �� 78m(iv) and (5). See as well Dominion 13b2-1 nether the Exchange Act, 17 CFR 240.13b2-1, which states, "No person shall, direct or indirectly, falsify or crusade to be falsified, any volume, record or business relationship field of study to Section thirteen(b)(ii)(A) of the Securities Exchange Deed."
33	15 U.Southward.C. � 78m(b)(7). The books and records provisions of section 13(b) of the Substitution Human activity originally were passed as role of the Foreign Decadent Practices Act ("FCPA"). In the conference committee report regarding the 1988 amendments to the FCPA, the committee stated, The conference committee adopted the prudent man qualification in gild to clarify that the electric current standard does not connote an unrealistic caste of exactitude or precision. The concept of reasonableness of necessity contemplates the weighing of a number of relevant factors, including the costs of compliance. Cong. Rec. H2116 (daily ed. April 20, 1988).
34	And then far as the staff is aware, there is just one judicial determination that discusses Department xiii(b)(2) of the Substitution Human activity in any particular, SEC five. Globe-Wide Coin Investments, Ltd., 567 F. Supp. 724 (N.D. Ga. 1983), and the courts generally take found that no private right of activeness exists under the accounting and books and records provisions of the Substitution Act. See due east.g., Lamb v. Phillip Morris Inc., 915 F.second 1024 (sixth Cir. 1990) and JS Service Centre Corporation five. General Electrical Technical Services Company, 937 F. Supp. 216 (S.D.N.Y. 1996).
35	The Commission adopted the address as a formal statement of policy in Securities Exchange Deed Release No. 17500 (January 29, 1981), 46 FR 11544 (Feb 9, 1981), 21 SEC Docket 1466 (February 10, 1981).
36	Id. at 46 FR 11546.
37	Id.
38	For case, the conference report regarding the 1988 amendments to the FCPA stated, The Conferees intend to codify current Securities and Exchange Committee (SEC) enforcement policy that penalties not be imposed for insignificant or technical infractions or inadvertent bear. The amendment adopted by the Conferees [Department 13(b)(iv)] accomplishes this by providing that criminal penalties shall not be imposed for failing to comply with the FCPA's books and records or accounting provisions. This provision [Section thirteen(b)(5)] is meant to ensure that criminal penalties would be imposed where acts of committee or omission in keeping books or records or administering accounting controls have the purpose of falsifying books, records or accounts, or of circumventing the bookkeeping controls set forth in the Act. This would include the deliberate falsification of books and records and other conduct calculated to evade the internal accounting controls requirement. Cong. Rec. H2115 (daily ed. Apr 20, 1988).
39	Equally Chairman Williams noted with respect to the internal control provisions of the FCPA, "[t]housands of dollars unremarkably should non be spent conserving hundreds." 46 FR 11546.
twoscore	Id., at 11547.
41	Section 10A(f) defines, for purposes of Section 10A, an "illegal act" as "an act or omission that violates whatever police, or any rule or regulation having the force of constabulary." This is broader than the definition of an "illegal act" in AU � 317.02, which states, "Illegal acts by clients do not include personal misconduct by the entity'southward personnel unrelated to their business organization activities."
42	AU � 316.04. See likewise AU � 316.03. An unintentional illegal act triggers the same procedures and considerations past the auditor every bit a fraudulent misstatement if the illegal act has a direct and material effect on the financial statements. See AU �� 110 n. one, 316 n. 1, 317.05 and 317.07. Although distinguishing between intentional and unintentional misstatements is often hard, the auditor must program and perform the inspect to obtain reasonable assurance that the fiscal statements are free of material misstatements in either instance. See AU � 316 notation 3.
43	AU � 316.04. Although the accountant is not required to plan or perform the audit to detect misstatements that are immaterial to the financial statements, SAS 82 requires the auditor to evaluate several fraud "risk factors" that may bring such misstatements to his or her attending. For example, an analysis of fraud risk factors under SAS 82 must include, amidst other things, consideration of direction'south involvement in maintaining or increasing the registrant's stock cost or earnings trend through the apply of unusually aggressive accounting practices, whether management has a do of committing to analysts or others that information technology will attain unduly aggressive or clearly unrealistic forecasts, and the existence of avails, liabilities, revenues, or expenses based on significant estimates that involve unusually subjective judgments or uncertainties. Encounter AU �� 316.17a and .17c.
44	AU �� 316.34 and 316.35, in requiring the auditor to consider whether fraudulent misstatements are fabric, and in requiring differing responses depending on whether the misstatement is material, brand clear that fraud can involve immaterial misstatements. Indeed, a misstatement tin can be "inconsequential" and still involve fraud. Under SAS 82, assessing whether misstatements due to fraud are material to the financial statements is a "cumulative procedure" that should occur both during and at the completion of the inspect. SAS 82 farther states that this aggregating is primarily a "qualitative thing" based on the accountant'due south judgment. AU � 316.33. The staff believes that in making these assessments, management and auditors should refer to the discussion in Part 1 of this SAB.
45	AU �� 316.34 and 316.36. Auditors should certificate their determinations in accordance with AU �� 316.37, 319.57, 339, and other appropriate sections.
46	Run into, e.g., AU � 316.39.
47	Report of the National Commission on Fraudulent Fiscal Reporting at 32 (October 1987). Come across also Report and Recommendations of the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees (February 8, 1999).
48	AU � 325.02. See also AU � 380.09, which, in discussing matters to be communicated past the auditor to the audit committee, states, The auditor should inform the audit commission virtually adjustments arising from the audit that could, in his judgment, either individually or in the aggregate, have a significant effect on the entity's fiscal reporting process. For purposes of this section, an inspect adjustment, whether or not recorded by the entity, is a proposed correction of the financial statements....
49	Run into AU � 411.05.
50	The FASB Give-and-take Memorandum, Criteria for Determining Materiality, states that the financial bookkeeping and reporting procedure considers that "a great deal of the time might be spent during the bookkeeping process considering insignificant matters . . . . If presentations of financial data are to exist prepared economically on a timely basis and presented in a concise intelligible form, the concept of materiality is crucial." This SAB is not intended to crave that misstatements arising from insignificant errors and omissions (individually and in the amass) arising from the normal recurring accounting close processes, such equally a clerical error or an adjustment for a missed accounts payable invoice, ever be corrected, even if the error is identified in the audit procedure and known to management. Direction and the auditor would demand to consider the various factors described elsewhere in this SAB in assessing whether such misstatements are material, demand to be corrected to comply with the FCPA, or trigger procedures under Section 10A of the Exchange Human activity. Because this SAB does not change current police force or guidance in the accounting or auditing literature, adherence to the principles described in this SAB should non raise the costs associated with recordkeeping or with audits of fiscal statements.

http://www.sec.gov/rules/acctrps/sab99.htm

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Source: https://www.sec.gov/interps/account/sab99.htm

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