It can be argued that process is most important, as process drives ownership

From examination of the materiality determination process followed in different types of reporting, a key difference between financial and non-financial reporting is evident. While the latter is mainly concerned with determining report content or what goes in, the former is usually more concerned with what has been left out (factual or error).

In financial accounting, there has traditionally been little requirement for preparers of accounts or for auditors to provide information on their approach to materiality decisions – notably the materiality levels or thresholds they apply. This is significant considering expectations of transparency in accounting policies and their application, as well as investor confidence. The lack of such a disclosure requirement contrasts with sustainability and integrated reporting standards of recent years, which among others require preparers to disclose their materiality determination processes. Some experts would argue that the process is most important, as process drives ownership.Mindful of the role here of (independent) Board Directors and Audit Committee members in discharging their oversight responsibilities effectively, they certainly need to be aware of the materiality approach followed. Their involvement in prioritization and approval is central.

From a broader social responsibility perspective, it can be asked who makes the materiality judgment in the final instance? Is it the board director? The senior manager? The financial accountant? The sustainability accountant? The financial auditor? The social auditor? The corporate lawyer or judge? Both GRI and IIRC expect reporters to disclose who was involved in the materiality decision-making process, including who from senior management in the different steps of the process. Inevitably some are more interested in the “inside out” or business view, and others more in “outside in” or external views.

The process of financial auditing involves the auditor planning and performing the audit; evaluating the effect of identified and uncorrected misstatements; considering the possibility of undetected misstatements; and forming an opinion for the auditor’s report. The auditor can take up misstatements with management and (depending on its significance) the Audit Committee. The auditor eventually decides to book or waive misstatement(s), producing an adverse or unqualified opinion.

The materiality determination process of auditing financial reporting involves:

  1. Establishing a materiality level for the financial statements as a whole (referred to as overall or planning materiality);
  2. Determining an amount less than overall materiality that should be used as a basis for designing audit tests for accounts and disclosures for the purpose of appropriately limiting the sum of undetected misstatements (referred to as tolerable misstatement or performance materiality); and
  3. Evaluating audit results.

In financial accounting and reporting, preparers and auditors are not obliged to disclose details of their materiality determination process, including the materiality thresholds they have applied. In the absence of standard guidance on thresholds, this raises the possibility of high variability and opportunism in the thresholds applied.