Skip to content


Harry Cassin
Publisher and Editor

Andy Spalding
Senior Editor

Jessica Tillipman
Senior Editor

Bill Steinman
Senior Editor

Richard L. Cassin
Editor at Large

Elizabeth K. Spahn
Editor Emeritus

Cody Worthington
Contributing Editor

Julie DiMauro
Contributing Editor

Thomas Fox
Contributing Editor

Marc Alain Bohn
Contributing Editor

Bill Waite
Contributing Editor

Shruti J. Shah
Contributing Editor

Russell A. Stamets
Contributing Editor

Richard Bistrong
Contributing Editor

Eric Carlson
Contributing Editor

Let’s Be Reasonable

It’s a material world — at least for auditors, public-company executives and securities lawyers. Material losses. Material misstatements and omissions. Material adverse changes. But wait. When it comes to the books and records provisions of the U.S. Foreign Corrupt Practices Act, forget materiality. The standard becomes reasonableness — a head fake that confounds professionals and produces a steady stream of compliance calamities.

Why reasonableness? Why — for the FCPA’s accounting standards — should issuers “make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer?” Why do issuers have to “devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are properly executed and recorded?” Why are similar transactions measured at reasonable intervals as a way to sniff out impropriety?

The best explanation comes from former SEC Chairman Harold Williams. His 1981 speech about the FCPA’s accounting standards was so illuminating and succinct, it became an official policy statement. And his remark then that “[t]housands of dollars ordinarily should not be spent conserving hundreds” entered the compliance argot that is still with us today. Here’s part of what he said:

“But, materiality, while appropriate as a threshold standard to determine the necessity for disclosure to investors, is totally inadequate as a standard for an internal control system. It is too narrow — and thus too insensitive — an index. For a particular expenditure to be material in the context of a public corporation’s financial statements — and therefore in the context of the size of the company — it would need to be, in many instances, in the millions of dollars. Such a threshold, of course, would not be a realistic standard. Procedures designed only to uncover deficiencies in amounts material for financial statement purposes would be useless for internal control purposes. Systems which tolerated omissions or errors of many thousands or even millions of dollars would not represent, by any accepted standard, adequate records and controls. The off-book expenditures, slush funds, and questionable payments that alarmed the public and caused Congress to act, it should be remembered, were in most instances of far lesser magnitude than that which would constitute financial statement materiality.

“Reasonableness, rather than materiality, is the appropriate test. Reasonableness, as a standard, allows flexibility in responding to particular facts and circumstances. Inherent in this concept is a toleration of deviations from the absolute. One measure of the reasonableness of a system relates to whether the expected benefits from improving it would be significantly greater than the anticipated costs of doing so. Thousands of dollars ordinarily should not be spent conserving hundreds. Further, not every procedure which may be individually cost-justifiable need be implemented; the [Foreign Corrupt Practices] Act allows a range of reasonable judgments.”

See Foreign Corrupt Practices Act of 1977: Statement of Policy, SEC Release No. 34-17500 (Jan. 29, 1981) [46 FR 11544]. SEC Release No. 34-17500 is the codification of SEC Chairman Harold Williams’ speech on January 13, 1981 to the American Institute of Certified Public Accountants Annual Conference.

See also 15 U.S.C. §§ 78m(b)(2)(A) and 78m(b)(2)(B) [Securities Exchange Act of 1934 Section 13(b)(2)(A) 13(b)(2)(B)].

View Chairman Williams’ January 29, 1981 Speech Here.

Share this post



  1. Furthermore, from the SEC’s point of view (in Staff Accounting Bulletin 99, a “quantitatively” immaterial transaction may be “qualitatively” material if it “affects the registrant’s compliance with regulatory requirements” or “involves concealment of an unlawful transaction.” That means the little misrecorded bribe can turn into a very big deal indeed.

    Pete from DC

Comments are closed for this article!