Financial statement disaggregation decisions and auditors' tolerance for misstatement

Robert Libby, Timothy Brown

Research output: Contribution to journalArticlepeer-review


Current IFRS requires significant disaggregation of income statement numbers while such disaggregation is voluntary and much less common under U.S. GAAP. We examine whether voluntary disaggregation of income statement numbers increases the reliability of income statement subtotals because auditors permit less misstatement in the disaggregated numbers. In our experiment, experienced auditors require correction of smaller errors in disaggregated numbers. Auditors also believe that greater disaggregation will increase SEC scrutiny of uncorrected financial statement errors in the disaggregated numbers. However, the effects are substantially reduced if the disaggregated numbers are presented in the notes. Furthermore, there is significant disagreement among participants on whether disaggregated numbers are relevant materiality benchmarks, and on what current auditing guidance requires. These results suggest a potential deficiency in current audit guidance, which traditionally has been aimed at promoting consensus in practice among auditors. The results also suggest an unintended positive consequence of voluntary disaggregation for the reliability of income statement subtotals. Possible effects of management behavior and required disaggregation resulting from U.S. adoption of IFRS or the recommendations of the joint FASB/ IASB financial statement presentation project are also discussed.

Original languageEnglish (US)
Pages (from-to)641-665
Number of pages25
JournalAccounting Review
Issue number2
StatePublished - Mar 2013


  • Audit guidance
  • Disaggregation
  • IFRS vs. U.S. GAAP
  • Materiality
  • Statement recognition vs. note disclosure

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics


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