Guidance traditionally recognizes that the information disclosed can be quantitative, qualitative or partly (non)quantitative…


The norm has been to prefer quantitative information, and complement this with qualitative descriptions. Still the qualitative deserves attention in its own right. An example is reputation, an intangible asset that senior executives often cite as the most important driver for their sustainability investments (despite the woolly nature of “reputation”). Qualitative factors considered range from enterprise specific cases of compliance and business ethics to operating environment factors such as market and regulations, to broader societal factors such as economic trends, political realities and social licence to operate.


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Colour-GraphsEven though accounting guidance recognizes that the information disclosed can be quantitative and qualitative, research has shown that preparers and auditors pay closer attention to quantitative and financial information. Qualitative information tends to be contextual and used to improve (support, complement) the quantitative assessment of materiality. Yet the suggestion in recent years that some 80 percent of the market capitalization of the Global 500 companies is determined by intangible assets has strengthened the interest in non-financial and qualitative information. Clearly, intangible assets such as reputation require both financial and non-financial information to be properly evaluated by investors and other stakeholders.

Quantitative information can involve generic empirical information (e.g. physical metrics) or monetary values (e.g. financial metrics) that signal a certain magnitude of financial effect on the reporting organization. Traditionally accountants and auditors have been most attentive to financial data that show actual or potential impact on cash (liquidity). This can be the effect in one year, but consideration also needs to be given to accumulative impact over a number of years. It considers the interest of the providers of financial capital in the profitability, liquidity and solvency of the reporting organization.

Qualitative factors traditionally considered by the finance community relate to the nature of the enterprise (firm characteristics) and its operating environment (including peer and industry characteristics). Questions are asked about its type of products and services, its size and market position, reputation, labour or capital intensiveness, capital structure, type of institutional ownership, and regulatory risks / opportunities. These factors, in addition to the importance of circumstances under which materiality is decided, have been recognized in the 1970s in a 246-page memorandum by FASB in the USA on “Criteria for Determining Materiality”.

More recent, the ISA 320 Audit Materiality (IFAC 2004) standard refers to consideration of the size of an item, its nature as well as the circumstances of the entity involved. Take the circumstances of the public sector as example. In the USA the Government Accounting Standards Board (GASB) has confirmed that qualitative factors considered in the case of reporting by governmental institutions would be matters such as the possibility of fraud, illegal acts, conflicts of interest and politically sensitive material that may cause quantitatively immaterial items to be determined as material.

The qualitative information considered by financial auditing firms in their audit manuals and materiality guidance tends to be closely related to corporate finance. These include factors such as the potential effect of a misstatement on the company’s compliance with loan covenants, its effect on management’s compensation, the possibility of fraud and illegal acts, as well as the effect of misstatements of earnings when contrasted with investor expectations (analysts’ forecasted earnings).

Clearly, sustainability or CSR experts pursue a broader scope of information when dealing with qualitative factors. This is where the discipline of numbers in determining cause-and-effect relations can be helpful in ensuring that materiality decision-making is appropriately focused and report content sufficiently concise.

Seeking to define a middle way between financial and non-financial reporting, the Materiality Background Paper of the IIRC (2013) described the following quantitative and qualitative information types to consider:

Quantitative factors: financial effects and in addition non-financial measures (e.g., percentage of production or sales volume, percentage of total capacity, percentage yield or efficiency factors).

Qualitative factors: matters that affect the organization’s social and legal licence to operate or matters that affect the availability, quality and affordability of the capitals the organization uses or affects (e.g. matters affecting reputation and credibility such as regulatory infringements, sensitive factors like fatalities, pollution, unemployment, negative economic effects).

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