Finding the Balance
There is no formal standard for defining materiality in local government accounting and financial reporting. So, local governments must use their own judgment to decide what is considered material. In accounting and auditing, something is considered material if knowing about it would affect the judgment of a reasonable person who is using the financial statements.
Judgments about what is material can significantly affect how much work is needed to complete financial reports. These judgments also affect the accountability that financial reporting provides to its audience.
There are important tensions at play here, with different risk exposures on each side. On one hand, a government could make cautious judgments on materiality. This errs on the side of caution by including additional details in the financial report. The cautious approach is more likely to recognize as material some things that would not sway the judgment of most reasonable users of financial statements. This increases the risk of “false positives”—or treating something as material that would not affect the judgment of most reasonable users.
On the other hand, a government could aim to be more selective when judging materiality. This means prioritizing including in financial reports only items that would sway the judgment of most reasonable users of financial statements. However, this approach raises the risk of failing to recognize something that would sway most reasonable users. It increases the risk of “false negatives”—or not treating something as material when it would affect the users’ judgment.
Publication Date: August 2025
