Cultural Perspectives on Audit Failure: Understanding Materiality with Judaic Law

• In Event: Internal Control and Fraud Detection

Abstract

The concept of materiality is a key factor in performing external audits. Although professional standards require auditors to consider materiality from both a quantitative and a qualitative perspective, prior research indicates that auditors sometimes over-rely on quantitative, specifically financial, measures. Because external auditors should strive continuously to improve their processes in order to meet their primary obligation to the public interest, we propose that they broaden their point of view to examine how other cultures have implemented materiality judgments in practice. To that end, we explore centuries-old Judaic applications of materiality and discuss how such concepts can add insight to modern auditing guidelines, thus improving materiality judgments. The Judaic approach to materiality is context-specific, considering intent and extent, and generally provides bases to assess qualitative and materiality factors. Using the Wells Fargo/KPMG example, we show how the current approach to materiality is inadequate. We then discuss how Judaic laws provide insights to assess both (1) general quantitative and qualitative materiality factors; and (2) quantitative factors that that can become qualitatively material upon reaching certain thresholds.

Authors

• Alan Reinstein, Wayne State University

• Shlomo Sawilowsky, Wayne State University

• Eileen Z Taylor, North Carolina State University