SAB 99 does not present new materiality standards but, instead, reaffirms long-accepted concepts expressed in auditing and accounting literature. It also provides interpretive guidance to ensure those concepts are applied properly in today's complex reporting environment. The bulletin's most important points are that Registrants and auditors may not rely solely on quantitative criteria to evaluate an item's materiality. The materiality of items can be determined reliably only if they are evaluated both individually and collectively. An intentional misstatement may be illegal even if the item it concerns is immaterial.
Materiality concerns the significance of an item to users of a registrant's financial statements.
A matter is 'material' if there is substantial likelihood that a reasonable person would consider it important. For example, it may conceal a failure to meet analysts' expectations or it may convert a loss into a profit. In fact, one of the more widespread abuses the SAB addresses is the intentional recording of immaterial errors in a registrant's financial statements in order to smooth earnings artificially and give a false impression of their stability. SAB 99 thus fulfills a pledge Chairman Arthur Levitt made last fall to clarify the SEC's views on the criteria for evaluating materiality. Toward that end, SAB 99 establishes as an important materiality criterion the effect misstatements can have on investors.