Auditing Standards Board Issues Exposure Draft to Modify Definition of Materiality

The Auditing Standards Board has issued an exposure draft for both a proposed Statement on Auditing Standards (SAS) and Statement on Standards for Attestation Engagements (SASE) which would modify the definition of materiality.

The reason given for the change by the ASB is:

The ASB’s current definition of materiality is consistent with the definition of materiality used by the International Accounting Standards Board (IASB) and the IAASB. The ASB is proposing amendments to align the materiality concepts discussed in AICPA Professional Standards with the definition of materiality used by the U.S. judicial system, the auditing standards of the PCAOB, the U.S. Securities and Exchange Commission (SEC), and the Financial Accounting Standards Board (FASB) (hereinafter referred to as “U.S. judicial system and other U.S. standard setters and regulators”). FASB amended its definition of materiality in August 2018 to be consistent with the U.S. judicial system and other U.S. standard setters and regulators. The ASB believes it is in the public interest to eliminate inconsistencies between the definition of materiality in AICPA Professional Standards and the definition of materiality used by the U.S. judicial system and other U.S. standard setters and regulators.

The Board explains the current difference in definitions as follows in the exposure draft:

The primary difference between the definitions held by the U.S. judicial system and other U.S. standard setters and regulators and the definitions currently held by the ASB, IASB, and IAASB relate to whether a misstatement “would influence the judgment of a reasonable investor” versus “could reasonably be expected to influence the judgment of a reasonable person.” In essence, the U.S. judicial system and other U.S. standard setters and regulators define an omission or misstatement as material if there is a substantial likelihood that a reasonable person would consider it important. The ASB, IASB, and IAASB definitions state that misstatements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.

If approved, the exposure draft provides the SAS would apply to periods ending no earlier than December 15, 2020 and the SASE would apply to reports dated no earlier than December 15, 2020.