Question

the role of materiality as it is related to fraud. Compare and contrast how you think the idea of materiality would impact both civil and criminal cases?

Answer 1

Materiality in accounting or auditing indicates the significance assigned to a factor or matter under consideration. The level of materiality may be high or medium or low depending on facts of the case.

In accounting materiality needs to be affixed specially while presenting the financial statements. Non representation of a material item discretely in the financial statement may lead to misinterpretation of financial statement. Such inappropriately represented financials could be a method to hide a fraudulent act or unscrupulous activity conducted in an organisation. For example, to hide reduction in revenue from a line of business when compared to previous year it may just be combined with another to only show overall picture.

In a business process authorities may be distributed based on materiality of transactions involved. Multiple levels of authorisations may be designed in case sensitive and material transaction which are key to the organisation or having high impact on the financial position of an organisation.

In case of criminal cases assigning materiality in such manner that maximum transactions or activities are tested would lead to better investigation and inaccurate results. Whereas in civil cases factors of materiality need to be selected in such manner that improvement of process as a whole is aimed at. Hence, materiality impacts accuracy of results in criminal cases whereas it affects quality of investigation in civil cases resulting in process improvements or identification of process loopholes.