Increased Materiality Judgments in Financial Accounting and External Audit. A Critical Comparison between German and International Standard Setting

The materiality principle supports the information function of financial accounting as to what information could usefully be published to enhance investors' decisions. Therefore, materiality guides the entity preparing the accounts to present relevant financial information and to prevent information overload. This decision is mostly subjective and is based primarily on the individual's judgement in applying vague legal concepts. Recent publications and studies, such as those by the European Securities and Markets Authority (ESMA), highlight a wide variation of applications in practice. This could result in a greater expectation gap between management information and individuals' understanding. The new EU accounting directive 2013/34/EU standardizes materiality in order to emphasize its meaning for disclosure purposes and to harmonize with International Financial Reporting Standards (IFRS). However, the German legislator didn't change the German Commercial Code (GCC) and didn't introduce an explicit materiality principle. Moreover, the new audit regulation (EU) No 537/2014 requires the disclosure of the quantitative level of materiality used by the auditors in the audit report. Guidelines offered through principle-based auditing standards remain inadequate, although they are intended to provide clearly defined rules on how to deal with materiality and avoid boilerplate checklists. Our paper focuses on a conceptual comparison of materiality between the GCC and IFRS/ISA for accounting and auditing purposes, and on the implications for eliminating the challenge involved in information overload