Friday, 22 November 2013

Materiality in Global Reporting Initiative (GRI G4), and the ISO 31000 Guidelines for Risk Management.

Reporting standards worldwide are working towards convergence.  There is an interesting relationship between the 'Materiality' focus of the recently released GRI G4 Guidelines, and the ISO 31000 Standard for Risk Management.

Materiality is defined as the tolerable error in statistical sampling.  In Accounting, Materiality is that threshold amount which, if known, would change the decision of the decision maker. e.g. if a transaction amount were to change by 10% from $100 to $110, would this effect a decision?

In Auditing,  The term audit risk refers to the probability of the statements not giving a true and fair view after the audit is completed.

In Financial Auditing, Risk and Materiality must be considered together.  The more material an item the greater the audit risk.  This means, an account or transaction of large dollar size represents a significant threat to the audit if it is misstated.

Materiality in GRI may also be thought of as a 'threshold'.  But unlike financial reports, the focus is much broader - encompassing economic, social and environmental impacts.  Also, the 'decision maker' here is a much wider groups of stakeholders who impact, and are in turn impacted by, the organization.  Thus, the threshold for being a 'Material' issues in GRI should ensure inclusion of all economic, social and environmental opportunities and risks that are regarded as significant by its stakeholders

Risk in ISO 31000 is the effect of uncertainty on the ability of an organisation to meet its objectives.  It is a combination of the Causes for the occurrence of some Events, the Likelihood of such occurrence, and the Consequences of such occurrence.  Risk Management is the deliberate set of actions that an organisation takes on acknowledging these effects of uncertainty.  

Risk and Materiality seem to be joined at the hip, irrespective of the framework through which one is trying to assess organisation health. Both the GRI and the ISO 31000 standards have been put together by panel of highly qualified international experts.  However one wants to name it, following the essential tenets of these guidelines in their spirit to identify Material issues, and applying the principles of Risk Management on such issues will let organisations leverage the full potential of these frameworks, instead of merely reducing them to reporting and compliance necessities.

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