The relevance of the disclosure of materiality criteria of the audit on investor’s decisions
Keywords:
Audit materiality; Disclosure; Relevance of accounting information.
Abstract
Objective: In a context of informational asymmetry, the external audit assumes the role of monitoring the manager's actions and reinforcing confidence in the financial reports presented to investors. In this monitoring process a fundamental concept applied in audit work is materiality. Thus, the financial reports are influenced by the materiality criteria used by the auditors. Therefore, the objective of this paper was to evaluate the relevance of the disclosure of materiality criteria of the audit on investor’s decisions.
Method: For this, a quasi-experiment was performed with 238 individuals (112 with experience and 126 without investment experience) with the aid of Qualtrics® software.
Results and Contributions: Consistent to previous studies, the results indicated that the investor's perception of tolerable (material) differs substantially from what is practiced by the auditors, when the materiality criteria used are non-conservative. Surveyed investors give relevance to audit materiality criteria disclosure as such disclosure has implied a change in investment decisions previously taken without knowledge of this information. The relevance of materiality disclosure is even greater when to materiality criteria exceed tolerable by investors. The results allow us to conclude that investors may be underestimating the materiality used by auditors by failing to incorporate relevant adjustments in their financial analysis. In addition, the materiality criteria disclosure by auditors provides insights to investors about the audit limits as a monitoring mechanism between manager and investor.
Downloads
Download data is not yet available.
References
ARROW, K. J. The economics of agency. In: PRATT, J.W.; ZECKHAUSER, R.J. (Ed.). Principals and agents: The structure of American business. Boston: Harvard Business School Press, 1985.
ASARE, S. K.; WRIGHT, A. M. Investors’, auditors’, and lenders’ understanding of the message conveyed by the standard audit report on the financial statements. Accounting Horizons, v. 26, n. 2, p. 193-217, 2012.
BRAGA, R. Ganhos e perdas em investimentos: um estudo experimental sobre personalidades à luz da teoria do prospecto e do efeito disposição. 2015. 235 p. Tese (Doutorado) – Programa de Pós-Graduação em Ciências Contábeis, Departamento de Contabilidade e Atuária, Faculdade de Economia, Administração e Contabilidade. Universidade de São Paulo. São Paulo, 2015.
BRASIL BOLSA BALCÃO – B3. Informações do portal B3. 2017c. Disponível em:
BRENNAN, N. M.; GRAY, S. J. The impact of materiality: accounting’s best kept secret. Asian Academy of Management Journal of Accounting and Finance, v. 1, p. 1-31, 2005.
BRODY, R. G.; LOWE, D. J.; PANY, K. Could $51 million be immaterial when Enron reports income of $105 million? Accounting Horizons, v. 17, n. 2, p. 153-160, 2003.
CAPES – COORDENAÇÃO DE APERFEIÇOAMENTO DE PESSOAL DE NÍVEL SUPERIOR. Informações da Plataforma Sucupira, Disponível em:
CFC – CONSELHO FEDERAL DE CONTABILIDADE. Resolução CFC nº 1.213, de 27 de novembro de 2009a. Aprova a NBC TA 320 – Materialidade no Planejamento e na Execução da Auditoria.
CFC – CONSELHO FEDERAL DE CONTABILIDADE. Resolução CFC nº 1.216, de 27 de novembro de 2009b. Aprova a NBC TA 450 – Avaliação das Distorções Identificadas durante a Auditoria.
CHEWNING JR, E. G.; HIGGS, J. L. A meta-analysis of materiality studies. Advances in Accounting, v. 17, p. 65-90, 2000.
CHEWNING JR, E. G.; WHEELER, S. W.; CHAN, K. C. Evidence on auditor and investor materiality thresholds resulting from equity-for-debt swaps. Auditing, v. 17, n. 1, p. 39, 1998.
CHO, S.-Y.; HAGERMAN, R. L.; NABAR, S.; PATTERSON, E. R. Measuring stockholder materiality. Accounting Horizons, v. 17, p. 63-76, 2003.
CHRISTENSEN, B. E.; GLOVER, S. M.; WOLFE, C. J. Do critical audit matter paragraphs in the audit report change nonprofessional investors’ decision to invest?. Auditing: A Journal of Practice & Theory, v. 33, n. 4, p. 71-93, 2014.
CHURCH, B. K.; DAVIS, S. M.; MCCRACKEN, S. A. The Auditor’s Reporting Model: A literature overview and research synthesis. Accounting Horizons, v. 22, p. 69-90, 2008.
COX, R. A. K.; DAYANANDAN, A.; DONKER, H. Materiality disclosure and litigation risks: A Canadian perspective. International Journal of Disclosure & Governance, v. 11, p. 284-298, 2014.
CPC – COMITÊ DE PRONUNCIAMENTOS CONTÁBEIS. Pronunciamento Conceitual Básico (R1), de 02 de dezembro de 2011. Estrutura Conceitual para Elaboração e Divulgação de Relatório Contábil-Financeiro. Disponível em:. Acesso em: 26 nov. 2014.
DAVIS, S. M. Market response to auditor’s reports: A reexamination of auditor materiality thresholds. In: AUDITING SECTION MIDYEAR CONFERENCE, 2003, [S.l.] Anais... [S.l.: s.n.], 2003. Disponível em:. Acesso em: 30 jan. 2015.
DEANGELO, L. E. Auditor size and audit quality. Journal of accounting and economics, v. 3, n. 3, p. 183-199, 1981.
DUTRA, M. H. Modelo de referência para o relatório final da auditoria independente baseado na abordagem de expectations gap. 2011. 275 p. Tese (Doutorado em Engenharia de Produção) – Programa de Pós-Graduação em Engenharia de Produção, Centro Tecnológico, Universidade Federal de Santa Catarina. Florianópolis, 2011.
EILIFSEN, A; MESSIER JR., WF. Materiality guidance of the major public accounting firms. Auditing: A Journal of Practice & Theory. v. 34, n. 2, p. 3-26, May 2015.
FASB – FINANCIAL ACCOUNTING STANDARDS BOARD. Materiality – Discussion Memorandum. Stamford, CT: FASB, 1975.
FASB – FINANCIAL ACCOUNTING STANDARDS BOARD. Statement of Financial Accounting Concepts nº 2, Qualitative Characteristics of Accounting Information, 1980.
FIRTH, M. Consensus views and judgment models in materiality decisions. Accounting, Organizations and Society, v. 4, n. 4, p. 283-295, 1979.
FISHER, M. H. The effects of reporting auditor materiality levels publicly, privately, or not at all in an experimental setting. Auditing: A Journal of Practice & Theory, v. 9, sup., p. 184-223, 1990.
FRANCIS, J.; SCHIPPER, K. Have financial statements lost their relevance? Journal of Accounting Research, v. 37, n. 2, p. 319-352, 1999.
GOMES, F. B. Processo de tomada de decisão do investidor individual brasileiro no mercado acionário nacional: um estudo exploratório enfocando o efeito disposição e os vieses da ancoragem e do excesso de confiança. 2007. 124 p. Dissertação (Mestrado em Administração) - Universidade Presbiteriana Mackenzie, São Paulo, 2007.
GRAY, G. L.; TURNER, J. L.; CORAM, P. J.; MOCK, T. J. Perceptions and misperceptions regarding the unqualified auditor's report by financial statement preparers, users, and auditors. Accounting Horizons, v. 25, p. 659-684, 2011.
HEALY, P. M.; PALEPU, K. G. Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature. Journal of Accounting and Economics, v. 31, n. 1, p. 405-440, 2001.
HOLSTRUM, G. L.; MESSIER JR., W. F. A review and integration of empirical research on materiality. Auditing: A Journal of Practice & Theory, v. 2, n. 1, p. 45-63, 1982.
HOUGHTON, K. A.; JUBB, C.; KEND, M. Materiality in the context of audit: The real expectations gap. Managerial Auditing Journal, v. 26, p. 482-500, 2011.
IFAC – INTERNATIONAL FEDERATION OF ACCOUNTANTS. International Standard on Auditing (ISA) nº 320, Materiality in planning and performing an audit, 2009.
JENNINGS, M.; KNEER, D. C.; RECKERS, P.M.J. A reexamination of the concept of materiality-views of auditors, users, and officers of the court. Auditing: A Journal of Practice & Theory, v. 6, n. 2, p. 104-115, 1987.
JENSEN, M.C.; MECKLING, W.H. Theory of the firm: managerial behavior, agency costs and ownership structure. Journal of Financial Economics, v. 3, n. 4, p. 305-360, out. 1976.
KNECHEL, W. R.; SALTERIO, S. E. Auditing: Assurance and risk New York: Routledge, 4nd ed., 2016.
LENNOX, C. Management ownership and audit firm size. Contemporary Accounting Research, v. 22, n. 1, p. 205-227, 2005.
LIBBY, R.; BLOOMFIELD, R.; NELSON, M. W. Experimental research in financial accounting. Accounting, Organizations and Society, v. 27, n. 8, p. 775-810, 2002.
LOPES, A. B.; ALENCAR, R. C. Disclosure and cost of equity capital in emerging markets: the Brazilian case. The International Journal of Accounting, v. 45, n. 4, p. 443-464, 2010.
LOPES, A. B.; MARTINS, E. Teoria da contabilidade: uma nova abordagem. Atlas, 2005.
MANSON, S.; ZAMAN, M. Auditor communication in an evolving environment: Going beyond SAS 600 auditors' reports on financial statements. British Accounting Review, v. 33, p. 113-136, 2001.
MESSIER JR, W. F.; MARTINOV-BENNIE, N.; EILIFSEN, A. A review and integration of empirical research on materiality: Two decades later. Auditing: A Journal of Practice & Theory, v. 24, n. 2, p. 153-187, 2005.
MOCK, T. J.; BÉDARD, J.; CORAM, P. J.; DAVIS, S. M.; ESPAHBODI, R.; WARNE, R. C. The audit reporting model: Current research synthesis and implications. Auditing: A Journal of Practice & Theory, v. 32, sup. 1, p. 323-351, 2013.
OMER, T. C.; SHELLEY, M. K.; THOMPSON, A. M. Investors’ response to revelations of prior uncorrected misstatements. Auditing: A Journal of Practice & Theory, v. 31, p. 167-192, 2012.
PINSKER, R.; PITRE, T. J.; DAIGLE, R. An investigation of nonprofessional investors' qualitative materiality judgments incorporating SEC listed vs. non-listed events. Journal of Accounting and Public Policy, v. 28, p. 446-465, 2009.
SHAFER, W. E. Qualitative financial statement disclosures: Legal and ethical considerations. Business Ethics Quarterly, v. 14, p. 433-451, 2004.
SMITH, M. Research methods in accounting. London: Sage, 2003.
SUBRAMANIAM, N. Agency theory and accounting research: an overview of some conceptual and empirical issues. In: HOQUE, Z. Methodological issues in accounting research: theories, methods and issues. Londres: Spiramus, p. 55-82, 2006.
TUTTLE, B.; COLLER, M.; PLUMLEE, R. D. The effect of misstatements on decisions of financial statement users: An experimental investigation of auditor materiality thresholds. Auditing: A Journal of Practice & Theory, v. 21, p. 11-27, 2002.
VANCE, D. E. A meta-analysis of empirical materiality studies. Journal of Applied Business Research, v. 27, n. 5, p. 53-72, 2011.
WATTS, R. L.; ZIMMERMAN, J. L. Positive accounting theory. Prentice Hall: New Jersey, 1986.
WOOLSEY, S. M. Development of criteria to guide the accountant in judging materiality. Journal of Accountancy, v. 97, n. 2, p. 167-173, feb., 1954a.
WOOLSEY, S. M. Judging materiality in determining requirements for full disclosure. Journal of Accountancy, v. 98, n. 6, p. 745-750, dec., 1954b.
WOOLSEY, S. M. Materiality survey. Journal of Accountancy, v. 136, n. 3, p. 91-92, sep., 1973.
ASARE, S. K.; WRIGHT, A. M. Investors’, auditors’, and lenders’ understanding of the message conveyed by the standard audit report on the financial statements. Accounting Horizons, v. 26, n. 2, p. 193-217, 2012.
BRAGA, R. Ganhos e perdas em investimentos: um estudo experimental sobre personalidades à luz da teoria do prospecto e do efeito disposição. 2015. 235 p. Tese (Doutorado) – Programa de Pós-Graduação em Ciências Contábeis, Departamento de Contabilidade e Atuária, Faculdade de Economia, Administração e Contabilidade. Universidade de São Paulo. São Paulo, 2015.
BRASIL BOLSA BALCÃO – B3. Informações do portal B3. 2017c. Disponível em:
BRENNAN, N. M.; GRAY, S. J. The impact of materiality: accounting’s best kept secret. Asian Academy of Management Journal of Accounting and Finance, v. 1, p. 1-31, 2005.
BRODY, R. G.; LOWE, D. J.; PANY, K. Could $51 million be immaterial when Enron reports income of $105 million? Accounting Horizons, v. 17, n. 2, p. 153-160, 2003.
CAPES – COORDENAÇÃO DE APERFEIÇOAMENTO DE PESSOAL DE NÍVEL SUPERIOR. Informações da Plataforma Sucupira, Disponível em:
CFC – CONSELHO FEDERAL DE CONTABILIDADE. Resolução CFC nº 1.213, de 27 de novembro de 2009a. Aprova a NBC TA 320 – Materialidade no Planejamento e na Execução da Auditoria.
CFC – CONSELHO FEDERAL DE CONTABILIDADE. Resolução CFC nº 1.216, de 27 de novembro de 2009b. Aprova a NBC TA 450 – Avaliação das Distorções Identificadas durante a Auditoria.
CHEWNING JR, E. G.; HIGGS, J. L. A meta-analysis of materiality studies. Advances in Accounting, v. 17, p. 65-90, 2000.
CHEWNING JR, E. G.; WHEELER, S. W.; CHAN, K. C. Evidence on auditor and investor materiality thresholds resulting from equity-for-debt swaps. Auditing, v. 17, n. 1, p. 39, 1998.
CHO, S.-Y.; HAGERMAN, R. L.; NABAR, S.; PATTERSON, E. R. Measuring stockholder materiality. Accounting Horizons, v. 17, p. 63-76, 2003.
CHRISTENSEN, B. E.; GLOVER, S. M.; WOLFE, C. J. Do critical audit matter paragraphs in the audit report change nonprofessional investors’ decision to invest?. Auditing: A Journal of Practice & Theory, v. 33, n. 4, p. 71-93, 2014.
CHURCH, B. K.; DAVIS, S. M.; MCCRACKEN, S. A. The Auditor’s Reporting Model: A literature overview and research synthesis. Accounting Horizons, v. 22, p. 69-90, 2008.
COX, R. A. K.; DAYANANDAN, A.; DONKER, H. Materiality disclosure and litigation risks: A Canadian perspective. International Journal of Disclosure & Governance, v. 11, p. 284-298, 2014.
CPC – COMITÊ DE PRONUNCIAMENTOS CONTÁBEIS. Pronunciamento Conceitual Básico (R1), de 02 de dezembro de 2011. Estrutura Conceitual para Elaboração e Divulgação de Relatório Contábil-Financeiro. Disponível em:
DAVIS, S. M. Market response to auditor’s reports: A reexamination of auditor materiality thresholds. In: AUDITING SECTION MIDYEAR CONFERENCE, 2003, [S.l.] Anais... [S.l.: s.n.], 2003. Disponível em:
DEANGELO, L. E. Auditor size and audit quality. Journal of accounting and economics, v. 3, n. 3, p. 183-199, 1981.
DUTRA, M. H. Modelo de referência para o relatório final da auditoria independente baseado na abordagem de expectations gap. 2011. 275 p. Tese (Doutorado em Engenharia de Produção) – Programa de Pós-Graduação em Engenharia de Produção, Centro Tecnológico, Universidade Federal de Santa Catarina. Florianópolis, 2011.
EILIFSEN, A; MESSIER JR., WF. Materiality guidance of the major public accounting firms. Auditing: A Journal of Practice & Theory. v. 34, n. 2, p. 3-26, May 2015.
FASB – FINANCIAL ACCOUNTING STANDARDS BOARD. Materiality – Discussion Memorandum. Stamford, CT: FASB, 1975.
FASB – FINANCIAL ACCOUNTING STANDARDS BOARD. Statement of Financial Accounting Concepts nº 2, Qualitative Characteristics of Accounting Information, 1980.
FIRTH, M. Consensus views and judgment models in materiality decisions. Accounting, Organizations and Society, v. 4, n. 4, p. 283-295, 1979.
FISHER, M. H. The effects of reporting auditor materiality levels publicly, privately, or not at all in an experimental setting. Auditing: A Journal of Practice & Theory, v. 9, sup., p. 184-223, 1990.
FRANCIS, J.; SCHIPPER, K. Have financial statements lost their relevance? Journal of Accounting Research, v. 37, n. 2, p. 319-352, 1999.
GOMES, F. B. Processo de tomada de decisão do investidor individual brasileiro no mercado acionário nacional: um estudo exploratório enfocando o efeito disposição e os vieses da ancoragem e do excesso de confiança. 2007. 124 p. Dissertação (Mestrado em Administração) - Universidade Presbiteriana Mackenzie, São Paulo, 2007.
GRAY, G. L.; TURNER, J. L.; CORAM, P. J.; MOCK, T. J. Perceptions and misperceptions regarding the unqualified auditor's report by financial statement preparers, users, and auditors. Accounting Horizons, v. 25, p. 659-684, 2011.
HEALY, P. M.; PALEPU, K. G. Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature. Journal of Accounting and Economics, v. 31, n. 1, p. 405-440, 2001.
HOLSTRUM, G. L.; MESSIER JR., W. F. A review and integration of empirical research on materiality. Auditing: A Journal of Practice & Theory, v. 2, n. 1, p. 45-63, 1982.
HOUGHTON, K. A.; JUBB, C.; KEND, M. Materiality in the context of audit: The real expectations gap. Managerial Auditing Journal, v. 26, p. 482-500, 2011.
IFAC – INTERNATIONAL FEDERATION OF ACCOUNTANTS. International Standard on Auditing (ISA) nº 320, Materiality in planning and performing an audit, 2009.
JENNINGS, M.; KNEER, D. C.; RECKERS, P.M.J. A reexamination of the concept of materiality-views of auditors, users, and officers of the court. Auditing: A Journal of Practice & Theory, v. 6, n. 2, p. 104-115, 1987.
JENSEN, M.C.; MECKLING, W.H. Theory of the firm: managerial behavior, agency costs and ownership structure. Journal of Financial Economics, v. 3, n. 4, p. 305-360, out. 1976.
KNECHEL, W. R.; SALTERIO, S. E. Auditing: Assurance and risk New York: Routledge, 4nd ed., 2016.
LENNOX, C. Management ownership and audit firm size. Contemporary Accounting Research, v. 22, n. 1, p. 205-227, 2005.
LIBBY, R.; BLOOMFIELD, R.; NELSON, M. W. Experimental research in financial accounting. Accounting, Organizations and Society, v. 27, n. 8, p. 775-810, 2002.
LOPES, A. B.; ALENCAR, R. C. Disclosure and cost of equity capital in emerging markets: the Brazilian case. The International Journal of Accounting, v. 45, n. 4, p. 443-464, 2010.
LOPES, A. B.; MARTINS, E. Teoria da contabilidade: uma nova abordagem. Atlas, 2005.
MANSON, S.; ZAMAN, M. Auditor communication in an evolving environment: Going beyond SAS 600 auditors' reports on financial statements. British Accounting Review, v. 33, p. 113-136, 2001.
MESSIER JR, W. F.; MARTINOV-BENNIE, N.; EILIFSEN, A. A review and integration of empirical research on materiality: Two decades later. Auditing: A Journal of Practice & Theory, v. 24, n. 2, p. 153-187, 2005.
MOCK, T. J.; BÉDARD, J.; CORAM, P. J.; DAVIS, S. M.; ESPAHBODI, R.; WARNE, R. C. The audit reporting model: Current research synthesis and implications. Auditing: A Journal of Practice & Theory, v. 32, sup. 1, p. 323-351, 2013.
OMER, T. C.; SHELLEY, M. K.; THOMPSON, A. M. Investors’ response to revelations of prior uncorrected misstatements. Auditing: A Journal of Practice & Theory, v. 31, p. 167-192, 2012.
PINSKER, R.; PITRE, T. J.; DAIGLE, R. An investigation of nonprofessional investors' qualitative materiality judgments incorporating SEC listed vs. non-listed events. Journal of Accounting and Public Policy, v. 28, p. 446-465, 2009.
SHAFER, W. E. Qualitative financial statement disclosures: Legal and ethical considerations. Business Ethics Quarterly, v. 14, p. 433-451, 2004.
SMITH, M. Research methods in accounting. London: Sage, 2003.
SUBRAMANIAM, N. Agency theory and accounting research: an overview of some conceptual and empirical issues. In: HOQUE, Z. Methodological issues in accounting research: theories, methods and issues. Londres: Spiramus, p. 55-82, 2006.
TUTTLE, B.; COLLER, M.; PLUMLEE, R. D. The effect of misstatements on decisions of financial statement users: An experimental investigation of auditor materiality thresholds. Auditing: A Journal of Practice & Theory, v. 21, p. 11-27, 2002.
VANCE, D. E. A meta-analysis of empirical materiality studies. Journal of Applied Business Research, v. 27, n. 5, p. 53-72, 2011.
WATTS, R. L.; ZIMMERMAN, J. L. Positive accounting theory. Prentice Hall: New Jersey, 1986.
WOOLSEY, S. M. Development of criteria to guide the accountant in judging materiality. Journal of Accountancy, v. 97, n. 2, p. 167-173, feb., 1954a.
WOOLSEY, S. M. Judging materiality in determining requirements for full disclosure. Journal of Accountancy, v. 98, n. 6, p. 745-750, dec., 1954b.
WOOLSEY, S. M. Materiality survey. Journal of Accountancy, v. 136, n. 3, p. 91-92, sep., 1973.
Published
2023-11-19
How to Cite
Correa Pepinelli Camargo, R. de C., & Alberton, L. (2023). The relevance of the disclosure of materiality criteria of the audit on investor’s decisions. Enfoque: Reflexão Contábil, 42(3), 52-68. https://doi.org/10.4025/enfoque.v43i3.57249
Section
Original Articles
DECLARATION OF ORIGINALITY AND COPYRIGHTS
I Declare that current article is original and has not been submitted for publication, in part or in whole, to any other national or international journal.
The copyrights belong exclusively to the authors. Published content is licensed under Creative Commons Attribution 3.0 (CC BY 3.0) guidelines, which allows sharing (copy and distribution of the material in any medium or format) and adaptation (remix, transform, and build upon the material) for any purpose, even commercially, under the terms of attribution.
Read this link for further information on how to use CC BY 3.0 properly.
