What is a Misstatement in Accounting?

A misstatement is the difference between the required amount, classification, presentation, or disclosure of a financial statement line item and what is actually reported in order to achieve a fair presentation, as per the applicable accounting framework. A misstatement could have been caused by an error in recording a transaction, or fraudulent activity. It is considered to be material when the user of a set of financial statements alters his economic decisions because of the misstatement. Auditors assess the level of material misstatement when developing an audit plan for a client.

When a claim is brought that a business has issued fraudulent financial statements, a common defense is for the organization to claim that a misstatement occurred, which by definition is non-intentional and therefore nonfraudulent.

Example of a Misstatement

Grouch Electronics incorrectly records profits of $2 million, when the actual value should have been $1,950,000, due to the incorrect capitalization of some equipment that should have been charged to expense. The consensus opinion of several industry analysts had been that the firm should report profits of $2 million, so the incorrect reporting resulted in its stock price staying the same. If the correct figure had been reported, the price of the company’s stock likely would have declined, since it would have come in below expectations. Given this change in expectations, the misstatement can be considered a material misstatement.