Assessing materiality, an important accounting and legal concept, is often a key inquiry in financial accounting investigations and litigation. For years, materiality assessments were considered to be subjective, as the line between financial statement restatements and revisions – or material accounting errors and immaterial accounting errors – can be blurry.
Brattle Principal Bin Zhou, Associate Adrienna Huffman, and Senior Associate Chi Cheng have published a Law360 article that uses a new dataset to show how experts could potentially use data-driven quantitative methods to assess accounting materiality in accounting materiality disputes.
A December 2019 The Wall Street Journal article revealed a decade-long trend that more companies have been revising and fewer companies have been restating their financial statements. The new dataset that the article references now allows accounting professionals and litigators to use quantitative methods, in addition to qualitative methods, to help evaluate materiality. The three methods proposed by the Brattle authors are: a pure comparables approach, a regression-based prediction model of the revision versus restatement decision, and a regression-based model of predicted stock price reaction.
The full article, “How To Assess Accounting Materiality Amid Economic Crisis,” is located below.