Using a Reasonable Investor Perspective When Assessing Whether Errors are Material

Information in financial statements is material when 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 according to the U.S. Supreme Court. When an issuer identifies an error in its previously-issued financial statements, the error will need to be evaluated to determine whether an accounting restatement is needed to correct the error. Depending on the materiality of the error, the issuer may need to withdraw and replace its previously-issued financial statements (a Big R restatement) or it may be able to revise the comparative information in its subsequent issuance of financial statements (a little r restatement). It is critical that a reasonable investor perspective be used when evaluating the consequences of errors. This requires that the evaluation be an objective and impartial one. Staff of the SEC's Office of the Chief Accountant issued a Statement to remind management, auditors and audit committees of their responsibilities when assessing the materiality of an accounting error and when assessing the significance of the related deficiency on the effectiveness of the issuer's internal controls over financial reporting. The staff statement is available at https://www.sec.gov/news/statement/munter-statement-assessing-materiality-030922.