In the ever-evolving landscape of financial reporting and compliance, understanding trends in material weaknesses is crucial for organizations aiming to maintain robust internal controls.

Recent data collected from the SEC's EDGAR database through April 21, 2025, provides valuable insights into the current state of material weaknesses reported by public companies.

Leverage key SEC material weakness findings and emerging trends that can provide guidance for management and auditors with the following insights and analysis.

Public Company Material Weakness Reporting: Overview

The Sarbanes-Oxley Act (SOX) mandates two primary requirements under Section 404:

• SOX 404(a). Management must assess the effectiveness of the company's internal control over financial reporting (ICFR).
• SOX 404(b). Registered public accountants must attest to, and report on, the effectiveness of the company’s ICFR.

Our analysis encompassed over 5,000 management-only assessments and more than 3,000 external auditor assessments from companies filing between 2020 and 2024.

The data reveals significant trends in the prevalence of material weaknesses, particularly in the wake of the special purpose acquisition company (SPAC) boom and subsequent regulatory scrutiny.

Key Trends in Public Company Material Weakness Reporting

Increase and Subsequent Decline in Material Weaknesses

The data indicates a notable spike in material weaknesses reported in 2021 and 2022, with over 26% of filers reporting adverse assessments in 2021. This trend can be largely attributed to the influx of companies going public through SPACs during this period, many of which encountered significant internal control deficiencies. However, the adverse reporting rate has since declined, dropping to just over 15% in 2024.

This downward trend suggests that companies are increasingly addressing their internal control weaknesses and improving their compliance frameworks. It also indicates that companies going public in recent years are more prepared to meet internal control requirements.

Disparities Between Management and Auditor Assessments

Our findings highlight a stark contrast between the adverse assessment rates for management-only reports and those requiring auditor attestation.

Non-accelerated filers, which don’t undergo external audits of ICFR, exhibited a significantly higher adverse assessment rate, primarily driven by audit adjustments and errors in financial statements. This underscores the importance of rigorous internal controls, even for companies not subject to SOX external audit requirements.

Repeat Adverse Reports

A concerning trend is the high percentage of repeat adverse assessments. Over 60% of adverse reports are from repeat filers, with nearly 70% in the last two years.

This indicates that remediation efforts for material weaknesses may be insufficient or ineffective or time intensive, emphasizing the need for organizations to adopt more robust strategies and providing more resources for addressing internal control deficiencies.

Common Causes of Material Weaknesses

The analysis identified several recurring themes in the types of material weaknesses reported:

• Accounting Personnel Resources. A lack of qualified accounting personnel.
• Segregation of Duties. Companies often struggle to establish sufficient staffing levels and expertise, particularly in smaller organizations.
• Information Technology Controls. Inadequate technology or management of technology continue to contribute to the challenges faced by public companies. As organizations increasingly rely on technology, the complexities of IT environments and weaknesses in IT controls have become more pronounced.
• Inadequate Disclosure Controls. Companies frequently report weaknesses in their disclosure controls, which are critical for ensuring transparency and compliance with regulatory requirements.
• Non-Routine Transactions. Companies often find themselves lacking the expertise to handle unusual transactions, leading to control deficiencies in these areas.

Accounting-Specific Trends

When examining the accounting-related issues that contribute to material weaknesses, several key areas emerge:

• Revenue Recognition. This remains a critical area of concern and is the largest contributor to accounting-related material weaknesses. Despite ASC 606 becoming effective for public companies five years ago, revenue recognition continues to challenge companies, highlighting the need for sound controls and processes.
• Inventory, Vendor, and Cost of Sales. Issues related to inventory have been on the rise, particularly since 2022. Companies are grappling with complexities in inventory valuation and management, which have been exacerbated by supply chain disruptions in recent years.
• Accounts Receivable, Investments, and Cash. Weaknesses in managing accounts receivable and accounting for cash and investments can lead to significant financial misstatements. Companies must ensure that they have robust controls in place to monitor and collect receivables effectively and account for them properly once collected.
• Tax. Tax-related material weaknesses frequently appear in assessments, underscoring the importance of accurate tax reporting and highlighting an area that doesn’t receive the attention it should.
• PPE, Intangible, or Fixed Asset. Companies often face challenges in accounting for fixed assets and intangible assets, which can lead to misstatements in financial reporting. Proper valuation and impairment testing are critical in these areas.

These trends highlight the ongoing challenges organizations face in maintaining effective ICFR. Addressing these issues requires a comprehensive approach that includes training, technology investment, and a commitment to continuous improvement.

Navigating the Future of Material Weaknesses

As organizations continue to navigate the complexities of financial reporting and compliance, understanding the trends in material weaknesses is essential. Vulnerabilities that can lead to material weaknesses include:

• A high volume of internal control deficiencies that aggregate to a material weakness
• Lack of qualified accounting personnel
• Insufficient management review
• Inadequate technology or management of technology
• Segregation of duties conflicts
• Ineffective risk assessment
• Increasing regulatory scrutiny

Companies must prioritize the establishment of strong internal controls, invest in personnel training, and enhance their IT infrastructure to mitigate these risks effectively. By addressing these vulnerabilities proactively, organizations can not only improve their compliance posture but also foster a culture of accountability and transparency.

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To learn more about this data, what it mean for your business, and how to best leverage it into business success, contact your firm professional.

Additional Resources

• SOX 404 Services
• Internal Audit Services
• Technical Accounting Services