SEC Confirms Review Of Interim Materiality

The staff of the Securities and Exchange Commission confirmed in last week’s open meeting that it is trying to resolve the questions regarding how interim or quarterly materiality should affect annual materiality considerations.

Atkins

In a discussion about the SEC’s guidance for management over how to assess internal controls over financial reporting, Commissioner Paul Atkins tasked the staff to explain why it wanted to retain a reference to interim materiality in its description of material weaknesses when commenters called for its elimination. (Generally Accepted Accounting Principles compel a consideration of interim materiality as it relates to an annual period, not in each individual quarter.)

“The angst around interim as it relates to materiality is largely driven by financial statement materiality considerations,” and not considerations related to internal control over financial reporting, said Zoe-Vonna Palmrose, deputy chief accountant for the SEC. “In other words, issues around interim materiality for financial reporting bleed into ICFR assessment and attestations. In this regard, it might be helpful to note that the staffs of the Office of the Chief Accountant and Corporation Finance are currently considering questions around materiality in the context of financial reporting, including interim materiality.”

Palmrose

Palmrose said the guidance related to ICFR “makes clear that scoping is based on annual materiality; that’s what’s appropriate when making judgments about the nature and extent of evaluation procedures.” Nevertheless, the SEC doesn’t want to telegraph that it doesn’t care about interim materiality, she said, so it has kept interim in the definition of material weakness.

“The staff does not believe it’s appropriate to have management assessments under Section 404 that would tell investors you can’t necessarily count on our quarterlies, but our annual financial statements will be OK,” Palmrose said.

Last month, SEC Chief Accountant Conrad Hewitt told the SEC Regulations Committee of the American Institute of Certified Public Accountants that staffers were working on an update to Staff Accounting Bulletin No. 99, Materiality, which represents the SEC’s most recent view of how companies should assess materiality. Hewitt told the committee the staff is looking at quantitative and qualitative issues, as well as interim materiality.

Questions about materiality started landing on the SEC’s doorstep earlier this year after SEC Associate Chief Accountant Todd Hardiman delivered a speech on the subject at the annual AICPA conference on regulatory issues. His intent was to make clear that the staff was looking for some thoughtful consideration of a company’s individual facts and circumstances when looking at qualitative and quantitative issues.

Hardiman focused on how companies should look at financial reporting errors where the numbers may be small but the implications significant, or where the numbers may be large but the impact on financial reporting small. He also addressed the continued struggle over how interim materiality issues fit into the bigger picture of financial reporting. The staff has given more thought to the issue since the publication last fall of Staff Accounting Bulletin No. 108, he said, which takes a more comprehensive view of how errors in financials statements should be assessed and corrected.

“Simple math says the sum of the four quarters must equal the year,” he said. “But the fact remains that materiality judgments of annual financial statements do not consider quarterly effects. And so long as they don’t, it seems like we’ll struggle with the mechanics of how to account for errors that are immaterial to an annual period, but may be material to a quarterly period.”