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Estates & Wills & Trusts, Family, Legal Suppliers, Tax

No such thing as materiality in estate accounts

While materiality is an important convention in accounting and auditing relating to the significance of an amount, transaction, or discrepancy, it has no real application in estate accounts, says Avi Dahary, founder of AccounTrust.

“It’s critical that all of the transactions are shown in estate accounts without exception and it's equally important that those accounts reconcile to the penny,” he tells AdvocateDaily.com

Materiality in financial information is defined as an amount or a threshold over which any error, omission or misstatement could impact the economic decision of the user/reader of that financial information, Dahary explains.

“We base estate accounts on transparency so each transaction that’s recorded from source documents, such as bank or broker statements, is visible to the reader of the accounts on a line-by-line basis,” he says. “Everything is reflected in the actual accounts and the details are there to see. 

“Once all of the transactions are recorded in the estate accounts, the ending balances — for the capital account, revenue account and investments — all have to reconcile with the ending cash balances that are shown on the source documents.”

There is no such thing as materiality in estate accounts because the ending balances all have to be reconciled to the penny to the source documents, Dahary says.

“For example, let’s say you have estate accounts that aren’t reconciled for some reason — they are off by about $5,” he says. “So for the average person, $5 is nothing and it’s not going to make a big difference in the accounts. But that’s not the case in estate accounts because if the preparer simply puts a reconciled entry into the account to make up for that small $5 difference, the reader doesn’t know what the $5 is made up of. 

“That $5 difference could be made up of various unrecorded significant transactions on the receipts and disbursements sides. So when you offset them in the accounts, they net out to $5. Without reflecting those transactions in the accounts, the user/reader would never know they existed.”

For instance, Dahary says, "the $5 difference could be made up of $10,000 on the receipts side and $9,995 on the disbursements side, and those two transactions offset each to net $5.

“If the preparer doesn’t record those two transactions [of $10,000 and $9,995], this could have a significant impact on decisions I make as the user of the information,” he says. 

 

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