2006 Headlines
Cornell University Research Impacts SEC Staff Accounting Bulletin
September 19, 2006 | Ithaca, NY - Research conducted by Johnson School Accounting Professor Mark Nelson and his co-authors Steven D. Smith and Zoe-Vonna Palmrose provided input to the Securities and Exchange Commission's Staff Accounting Bulletin No. 108 issued on September 13, 2006. Prior to SAB 108, firms might evaluate the materiality of financial-statement misstatements using either the "rollover" or "iron-curtain" approaches, with the rollover approach focusing on new misstatement added in the current year, and the iron-curtain approach focusing on the cumulative amount of misstatement present in a firm's balance sheet. Misstatements that would be material under one approach could be viewed as immaterial under another approach, and not be corrected. SAB 108 now requires that firms view financial statement misstatements as material if they are material according to either the rollover or iron curtain approaches.
Professor Nelson and his co-authors support this conclusion in their research entitled "The Effect of Quantitative Materiality Approach on Auditors' Adjustment Decisions" published in The Accounting Review (Vol. 80, No. 3, 2005). They found that, "auditors are more likely to require their client to book the misstatement under the approach that makes the misstatement appear more material" and suggested that "standard setters mandate that auditors require adjustment whenever a misstatement is material under either approach."
