A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. Material weaknesses represent the most severe category of control deficiencies and require disclosure to stakeholders and regulators.
Material Weakness
Regulatory Definitions
- Sarbanes-Oxley Act (SOX) Section 302: Requires the CEO and CFO to certify that they are responsible for establishing and maintaining internal controls, and to report on the effectiveness of those controls, including disclosure of any material weaknesses.
- SOX Section 404(a): Mandates that management assess the effectiveness of internal control over financial reporting and must disclose material weaknesses identified during the assessment.
- SOX Section 404(b): Requires the independent auditor to attest to and report on the effectiveness of internal control over financial reporting maintained by management, explicitly identifying any material weaknesses.
- PCAOB Auditing Standard AS 1305: Defines material weakness as a control deficiency (or combination thereof) where there is a reasonable possibility that the control will not prevent or detect a material misstatement of the financial statements on a timely basis.