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• W3122118001 abstract "I. INTRODUCTION II. GAAP AND MATERIALITY A. Financial Statements and GAAP B. Materiality. The Shift from a Quantitative to Qualitative Standard C. Mapping the Liability Framework 1. Liability Under a Quantitative Standard 2. Liability Under a Qualitative Standard 3. Effect on Pre-Trial Motions 4. Summary III. VALUING FINANCIAL MISSTATEMENTS A. Valuation Methods 1. Market Price 2. Fundamental Analysis B. The Case for Assessing Financial Misstatements Using Fundamental Analysis IV. PERSISTENCE A. Illustration Using Fundamental Analysis 1. Persistent Misstatements a. Earnings Inflation b. Hiding Earnings Decline c. One-Time Charge to Earnings 2. Isolated Misstatements a. Earnings Smoothing b. One-Time Misstatement B. Objections 1. Market Psychology and Isolated Misstatements 2. Managerial Abuse C. Persistence as a Presumption in Assessing the Materiality of Financial Misstatements V. TARGETED VICARIOUS LIABILITY FOR FINANCIAL MISSTATEMENTS A. Distinguishing Types of Accounting Fraud 1. Large Scale Accounting Fraud 2. Small Scale Accounting Fraud B. The Vicarious Liability Debate 1. Criticisms of Vicarious Liability 2. Defending Vicarious Liability for Financial Misstatements C. A Refined Vicarious Liability Standard 1. Companies a. Quantitatively Large Misstatements b. Quantitatively Small Misstatements 2. Individual Managers 3. Benefits VI. IMPLEMENTATION VII. CONCLUSION I. INTRODUCTION The regulation of financial reporting by public companies is principally shaped by two considerations: accuracy and cost. If financial reports are inaccurate, stock prices may not reflect the underlying economic value of companies. But because of the complexity of public companies, as well as the ambiguity of the generally accepted accounting principles (GAAP) with which financial statements must conform, it is expensive to ensure that the accounting for every transaction is appropriate. The law attempts to balance such concerns by making securities fraud liability contingent on a showing of materiality. (1) A financial misstatement can only trigger liability if it is material, or important to a reasonable investor. (2) The materiality standard should thus play a crucial role in screening out trivial from substantial financial misstatements, making the potential liability companies face for inaccuracies in their financial statements manageable. (3) But there is little consensus as to what a reasonable investor would consider important with respect to financial misstatements. The current approach, which has been described as qualitative, considers a wide range of factors and has been criticized as nebulous. (4) On February 8, 2008, a Securities and Exchange Commission (SEC) Commissioner pointed out the need to clear up [the issue of materiality] with the full input of the investor, legal, accounting, academic, and business communities. (5) While numerous proposals for reforming securities class actions have recently been made, none has focused on clarifying the materiality standard. (6) This Article attempts to provide a clearer and more rational basis for assessing materiality with respect to financial misstatements. (7) At the outset, it is important to distinguish between financial misstatements, which are the focus of this Article, and nonfinancial misstatements. This Article's analysis is limited to financial misstatements, or misstatements in a company's financial reports. Though financial and nonfinancial misstatements are generally governed by the same reasonable investor standard, financial misstatements are more susceptible to scrutiny through quantitative benchmarks than nonfinancial misstatements. For a time, materiality with respect to financial misstatements was arguably defined by a rule-like quantitative standard. …" @default.
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• W3122118001 title "Assessing the Materiality of Financial Misstatements" @default.
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