The choice of whether some piece of data is “material or not,” helps dictate whether it is included in state or local financial reports.

This doesn’t just matter to accountants. An early April report from the Government Finance Officers Association points out that “When applied thoughtfully, materiality helps focus effort on information that matters to those who use the information. It also helps avoid effort wasted on low-value detailed accounting. Rethinking materiality does not entail relaxing standards or reducing accountability. It reduces low value work so finance officers can focus on what matters to their communities.”

The report provides an alternative to set-in-stone measures of materiality with a new way of thinking about the concept – part of the GFOA’s efforts to “rethink” a whole host of fiscally oriented topics.

With that in mind, the report recommends a five-step process for re-thinking materiality. In highly summarized form, the following provides a snapshot of some of the key points.

(These can be complex and subject to analysis, and since this management update just scratches the surface, it’s critical that readers consider the entire report for a complete understanding,)

• “Identify the largest potential opportunities for reducing resource consumption and screen for associated risks.”

The concept here is to consider whether an entity takes more time and effort in reporting a single piece of data than will be commensurate with the benefit provided to users. 

• “Quantitatively evaluate the opportunities.” 

This approach recommends distinguishing between three “related but distinct decisions” that consider whether an activity is sufficiently significant to require reporting; to see whether an “individual item within a reportable activity (is) large enough to be included in the report” and to determine “how much measurement effort is warranted once an item is deemed necessary to include in the report.”

• Confirm that identified risks can be sufficiently mitigated, that is, identify if and how qualitative factors should modify purely quantitative analysis.”  

Here, the report recommends several notions. For example, “For legislative or regulatory risks, we ask whether the new approach to materiality is consistent with the legislation as written. The finance officer could share an example of the new approach with regulators to see if they object.”

The same kind of approach to mitigating the risks of this new approach to materiality can be taken with auditor concerns; political risks; and so on.

• “Consider the cumulative impact of individually immaterial items.” 

One of the significant concepts that falls under this step is that “many small exclusions or estimates could accumulate into something that matters for decision-making.  But the GFOA argues that “for most government – and data shapes – the risk of a material cumulative impact is negligible. Low-cost, high assurance checks can verify that the cumulative impact remains within acceptable limits”

• “Validate and communicate decisions to auditors and to internal and external stakeholders.”

The key here is threefold: It’s critical to “Make the logic visible” by maintaining clear internal records; to “make materiality decisions adaptable” so that “once reasonable materiality decisions don’t linger past their useful lives” and to make certain that “external auditors understand the logic and safeguards between materiality decisions.” 

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