Materiality determinations within the context of financial reporting has recently become the subject of intense scrutiny by the SEC. Specifically, Rule 405 provides that "when used to qualify a requirement for the furnishing of information as to any subject," materiality "limits the information required to those matters to which there is a substantial likelihood that a reasonable investor would attach importance in determining whether to purchase the security registered." SEC Rule 12b2, 8 under the Securities Exchange Act of 1934, differs slightly from Rule 405, defining materiality as information "to which there is a substantial likelihood that a reasonable investor would attach importance in determining whether to buy or sell the securities registered."įinancial information that must be disclosed within the various periodic and other disclosure requirements imposed by the Securities and Exchange Commission under the federal securities laws, has been held to be of particular interest to investors. SEC Rule 405, 7 the safe harbor, under the Securities Act of 1933, essentially mirrors the common law definition of materiality.
Similarly, the Private Securities Litigation Reform Act (PSLRA), enacted in 1995, created a statutory safe harbor from liability for forward-looking statements under certain circumstances. For example, courts have routinely held that statements of optimism, belief, or mere puffery may be so vague and such obvious hyperbole that no reasonable investor would rely upon them." 6 Additionally, under the "bespeaks caution" doctrine, forward-looking information will generally be immaterial if accompanied by sufficiently cautionary language. The total mix standard continues to be applied on a casebycase basis, with certain categories of statements or omissions deemed to be immaterial as a matter of law because they present or omit such insignificant data that would not matter to a reasonable investor. he materiality concept is judgmental in nature and it is not possible to translate this into a numerical formula. ideally it would be desirable to have absolute certainty in the application of the materiality concept," the Supreme Court concluded that "such a goal is illusory and unrealistic. Supreme Court acknowledged that the lack of definitive guidelines concerning materiality posed the danger of too much disclosure, namely that "management's fear of subjecting itself to liability may cause it to simply bury the shareholders in an avalanche of trivial information - a result that is hardly conducive to informed decision making." 4 In formulating the total mix standard, the U.S. 3 Put another way, there must be a substantial likelihood that the misstated or omitted fact would have been viewed by the reasonable investor as having significantly altered the "total mix" of information available. The general rule that has judicially evolved for determining the materiality of particular information is whether there is a substantial likelihood that a reasonable investor would have considered the information important in making his or her investment or voting decision.
#Generally accepted auditing standards reclass threshold full
Federal securities laws are driven by the principle that investment and voting decisions "should only be made on the basis of full disclosure of all information necessary 'to bring into full glare of publicity those elements of real and unreal values which lie behind a security.'" 1 These laws make it unlawful to disclose any untrue statement of material fact or to omit a material fact that is necessary to prevent statements already made from becoming misleading, in connection with the purchase or sale of securities.