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INTRODUCTION
For many years, companies preparing financial disclosures have relied on quantitative benchmarks to determine materiality.1 On August 12, 1999, the U.S. Securities and Exchange Commission (Commission or SEC) released StafF Accounting Bulletin 99 (SAB 99 or Bulletin) presenting its unofficial view on this practice.2 According to the Commission, SAB 99 was intended to eliminate exclusive reliance on these quantitative benchmarks in financial statements.3 Although it supposedly changed nothing in the "current law or . . . in the accounting literature,"4 the effect of the Bulletin has been dramatic.
First, SAB 99 eliminated the use of the commonly accepted accounting rule of thumb that allowed transactions affecting financial statements by less than five percent to be disregarded as immaterial.5 In its place, the Commission now requires that companies perform an almost purely qualitative analysis to determine materiality, asking them to make subjective estimations as to what they deem to be material.6 Second, SAB 99 states that companies may be liable for intentional misstatements even if those statements are immaterial.7 With this, the SEC has ventured into a previously unexplored area and has potentially eliminated the requirement of materiality in securities fraud cases.
This Article traces the development of materiality standards, examines the purpose and reasoning behind the release of SAB 99, and concludes that SAB 99 creates an ambiguous standard, opening the door to liability for innocent mistakes in judgment. To avoid unjust results, a clearer standard is needed to determine materiality.
BACKGROUND
The central purpose of the two main federal securities laws, the Securities Act of 1933 (Securities Act)8 and the Securities Exchange Act of 1934 (Exchange Act),9 is to provide accurate information to the investing public.10 Consistent with this goal, Congress delegated to the SEC authority to require and regulate registration statements,11 prospectuses,12 periodic reports,13 and proxy statements,14 as well as other forms of disclosure. Because a significant portion of investor information is provided by basic financial statements,15 the Commission was also given broad discretion to govern accounting practices in these disclosures.16 Although the SEC has generally re-delegated this authority to the accounting profession,17 the SEC's Chief Accountant has been authorized "to issue accounting releases expressing interpretations of accounting standards on major accounting questions."18 These releases are intended to guide issuers and to...