Insight

Trends in material weaknesses for non-IPO companies

A 2021 KPMG study of public companies reveals common themes and business process areas associated with material weaknesses

Sue King

Sue King

Partner, Advisory, and U.S. SOX Solutions Leader, KPMG US

+1 213-955-8399

Susan Burkom

Susan Burkom

Advisory Managing Director, Internal Audit & Enterprise Risk, KPMG US

+1 410-949-8771

The study analyzed annual filings released by all SEC-registered public companies between November 2016 and June 2021. Data was reviewed from the third-party research database Audit Analytics, and all material weaknesses reported were aggregated and then summarized based on the underlying themes and affected business processes related to the material weakness.

Trends in material weakness themes reported

Notable changes between FY’20 and FY’19 trends in MWs

The following issues contributing to MWs showed notable changes between 2019 and 2020 filings, as depicted below.

Lack of accounting resources, IT/software/security and Material and/or numerous auditor /YE adjustments showed decreases from 2019 to 2020; however, they remained primary MW themes in 2020. Segregation of duties showed a notable decrease from 2019 and was not a primary MW theme for 2020. Restatements increased from 2019 to 2020.

Lack of accounting resources/expertise

51% 2019
33% 2020

IT, software, security & access issues

46% 2019
35% 2020

Material and/or numerous auditor/YE adjustments

59% 2019
48% 2020

Segregations of duties/design of controls

27% 2019
17% 2020

Restatement or non-reliance of company filings

9% 2019
15% 2020
— Material weaknesses reported were often the result of more than one overlapping issue/challenge
— Percentages are calculated by dividing the number of companies with material weaknesses in a category by total number of reports in the stated year. Individual companies may be reported in multiple years.

Trends in material weakness themes reported (continued)

Notable trends in issues contributing to MWs over the last 5 years

The following issues contributing to MWs showed notable trends over the last several years, as depicted below.

Inadequate controls over non routine/complex transactions


 

Steady decline from high of 15% in 2016 down to 6% in 2019, held steady at 6% in 2020

Accounting personnel resources, competency/training
 


 

Hovered at an average of 55% between 2016-2019, followed by a decline to 33% in 2020

Untimely or inadequate account reconciliations


 

Increased from 10% to 13% between 2016-2017, followed by a decline to 8% by 2019, and a steep increase to 14% in 2020

Journal entry control issues


 

Decline from 8% to 5% between 2016-2017, followed by a steady increase up to 13% between 2018 – 2020
 

Lack of documentation, policies & procedures


 

Held steady at 99%-100% between 2016-2020
This means that at least one of the root causes for the MW was related to lack of documentation, policies and procedures; but additional causes may also be identified for each MW.

— Material weaknesses reported were often the result of more than one overlapping issue/challenge
— Percentages are calculated by dividing the number of companies with material weaknesses in a category by total number of reports between 2016-2020 (1,043). Individual companies may be reported in multiple years.


Read the report

Download the report to learn more, including:

  • 2016-2020 material weakness overview
  • 2020 study background statistics
  • Summary and trends of material weakness themes reported
  • Trends in material weakness process areas
  • Summary of material weakness reported in 2020
  • Material weakness in multiple years and examples