Contingencies Online - November/December 2010

an immaterial violation. To the extent it was used by the public and the media, it would be a material violation.

Here, as in many other situations, repeating an immaterial violation one or more times might make the violations material. Among other things, it would indicate a pattern of behavior on the part of the actuary.

A problem with qualitative examples is that the materiality test often is applied in retrospect. As circumstances evolve, materiality may be judged in relation to the changed circumstances, not those circumstances that applied at the time the professional services were performed. In the case of an accountant preparing or auditing a financial statement, adverse events subsequent to the publishing of the financial statement could lead to an item originally considered immaterial becoming material and causing problems for the accountant and his client.

In the example of the actuary performing due diligence, if adverse development of the acquired company’s reserves led to the acquisition turning out to be unattractive to the buyer, the actuary’s work may be subject to criticism, even though it may have been conducted appropriately. Under these circumstances, the actuary’s conflict of interest may be identified and used to impugn the professional conduct of the actuary—notwithstanding its apparent immateriality at the time the service was performed.

In the pension example, if funding problems develop that can be traced to unanticipated compensation changes, the actuary’s work could be criticized on account of failure to use more refined compensation assumptions.

Avoiding Adverse Circumstances

When judging something to be immaterial, an actuary should consider carefully how this might affect those who make use of the work product. It would help protect against future adverse circumstances if the considerations leading to the conclusion that something is immaterial were documented. Where practical, this documentation might be included in the actuarial report. This would have been helpful in the above pension example.

In some cases, the best practice would be to avoid entirely the assumption of lack of materiality. In the first example, disclosure of the potential conflict to the client would have prevented any future problems.

The main test in evaluating materiality is how it might affect users of the actuary’s work and how this might reflect on his or her reputation and that of the profession, especially under future adverse circumstances. An actuary would be wise to anticipate such possible future adversity in performing and documenting current professional work.

ricHArd roBertson, a past president of both the academy and the Society of actuaries and a former chairman of the actuarial Standards Board, is a member of the aBCD.