Berkshire Case

Catherine Wowk

Berkshire Case 2

1. Materiality is the amount that a financial statement can be wrong without effecting the judgment of a reasonable person, for example an investor.  In other words it is the amount that an auditor will let ‘slide’ because it is not seen as crucial to any decision making regarding the financial statements.  Materiality is usually decided on in the planning stage of an audit and then applied to the financial statements during the audit.  If an item is within the range decided is it considered material, or tolerable, and left alone.  Each account gets allocated a materiality limit before the audit, usually in %.
   
2. Recorded as dividend income:

Cash                                xx
Dividend Income                xx

        Proportionate Redemption as Sale:

Cash                                xx
Gain                                  xx
Common Stock                        xx

1. It is important to realize that this meeting, and how it is handled, is very important for the audit firm.  Berkshire Hathaway is a big client and it is likely that Warren Buffet and his audit committee will not be happy with the decision you have made.  It is best to go in prepared for the worst and prepared to explain yourself.  After telling them your decision, and allowing them to ask their necessary questions, it is important to remain calm when giving your explanation.  On the 1983 financial statements the different between treating it as dividends and as a sale of stock was material but in 1984 the value difference is significant.  It is correct, accounting wise, to not only fix the 1984 statement but go back and change the 1983 statement as it may affect what investors see on your financial statements.  Continuously explaining that you understand the issues this may cause their firm but under accounting standards this is the correct and legal way to record the proportionate redemption.  You are bond by ethical judgment to recommend they change their financial statements to a sale of stock.  If they refuse to do so, you cannot approve their final statements, leaving investors even more nervous about investing in Berkshire Hathaway than if they switch their accounting method.