A material weakness is a deficiency, or combination of deficiencies, such that there is a reasonable possibility that a material misstatement will not be prevented or detected on a timely basis.
Severity gradations. A control deficiency; a significant deficiency, important enough to merit attention by those responsible for oversight; and a material weakness, which must be disclosed and precludes a conclusion that internal control is effective.
Common causes. Insufficient qualified accounting personnel; inadequate segregation of duties in a small finance function; deficient controls over complex or non-routine transactions; information technology general controls; and a restatement, which is itself a strong indicator.
Disclosure. The nature of the weakness, its effect, and management’s remediation plan, updated each period until remediated.
Remediation. Designing and implementing the control, then operating it for a sufficient period to permit testing — which is why remediation typically spans several quarters even after the fix is in place.
Consequences. Auditor attention and cost, market reaction, restrictions on using short-form registration, and covenant and rating consequences.
Private company relevance. The same analysis applies where a company is preparing for a sale or a financing, since a buyer’s diligence will identify the same weaknesses and price them.