Materiality is an essential consideration in any financial statement audit. The concept of materiality is inherently relative. In the private sector, materiality is assessed in relation to the basic financial statements taken as a whole. In the public sector, however, where accountability has been identified as the paramount objective of financial reporting, materiality has been assessed in relation to fund types rather than in relation to the government's basic financial statements taken as a whole.

The Governmental Accounting Standards Board's Statement No. 34, Basic Financial Statements-and Management's Discussion and Analysis-for State and Local Governments, establishes a new governmental financial reporting model. This new financial reporting model not only retains fund accounting, but provides even higher levels of accountability by placing special emphasis on major individual governmental and enterprise funds. Accordingly, there is no reason to believe that the assessment of materiality would change significantly as a result of implementing the new financial reporting model.

Recently, some in the auditing profession have been advocating a change in auditing guidance that would allow auditors to assess materiality solely in relation to the government's basic financial statements taken as a whole. GFOA strongly opposes this initiative, which would substantially decrease the level of assurance provided by the independent audit of the financial statements, and which is inconsistent with the focus of the new governmental financial reporting model. GFOA believes that accountability for public funds requires that materiality be assessed, not only in relation to a government's basic financial statements taken as a whole, but also in relation to major individual governmental and enterprise funds and in relation to the internal service and fiduciary fund types.

• Publication date: October 2000