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A Meta Analysis of Materiality Studies

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  • David E. Vance

Abstract

The Supreme Court and the Public Company Accounting Oversite Board (PCAOB) has said that an amount is material if there is a substantial likelihood it will influence a reasonable investor’s judgment. The American Institute of Certified Public Accountants (AICPA) has said that an amount is material if there is a substantial likelihood it will influence a reasonable user’s judgment. The Financial Accounting Standards Board (FASB) has refused to define materiality. The Securities and Exchange Commission (SEC) has said that qualitative factors can make even small amounts material. Reasonable implies a consensus of opinion. This article is a meta-analysis of 31,155 materiality decisions made by 335 cohorts in 48 studies with the objective of defining what is reasonable. A cohort is a group of like individuals faced with a common materiality decision. Materiality in this study is measured as a percentage of net income. The mean threshold of materiality is 7.84% and the median is 6.81%. Both thresholds are substantially higher than the often-discussed threshold of 5.0%. A quarter of the participants in these studies set the threshold of materiality at 11.90% and the threshold for a statistically significant difference from the consensus is 17.51%. Ultimately, materiality will be decided through civil and criminal litigation. Finders of fact, usually jurors, will be asked to determine what a reasonable investor would conclude. Few jurors have the training and experience of investors, so without context, they can only guess what a reasonable investor would conclude. This study provides that context.

Suggested Citation

  • David E. Vance, 2022. "A Meta Analysis of Materiality Studies," Accounting and Finance Research, Sciedu Press, vol. 11(1), pages 1-1, February.
    • Handle: RePEc:jfr:afr111:v:11:y:2022:i:1:p:1
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    References listed on IDEAS

    as
    1. Petroni, K & Beasley, M, 1996. "Errors in accounting estimates and their relation to audit firm type," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 34(1), pages 151-171.
    2. Chewning, G & Pany, K & Wheeler, S, 1989. "Auditor Reporting Decisions Involving Accounting Principle Changes - Some Evidence On Materiality Thresholds," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 27(1), pages 78-96.
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    Cited by:

    1. Ota Novotný & Václav Adam, 2025. "A Methodological Proposal for Studying Investors' Materiality Perceptions: Evidence from Share Purchase Agreements [Metodologický návrh pro studium vnímání materiality investory: důkazy ze smluv o nákupu akcií]," Český finanční a účetní časopis, Prague University of Economics and Business, vol. 2025(3), pages 4-32.

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    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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