Insight

Trends in material weaknesses for non-IPO companies

A 2022 KPMG study of public companies reveals common themes and business process areas associated with material weaknesses.

Sue King

Sue King

Partner and SOX Solutions Lead, KPMG US

+1 213-955-8399

    

The study analyzed annual filings released by SEC-registered public companies between July 2017 and June 2022. Data was reviewed from the third-party research database Audit Analytics, and all MWs reported were aggregated and then summarized based on the underlying themes and affected business processes related to the MW.

For purposes of this report, the 2022 year considers MWs reported in any public company filing that was released between July 2021 and June 2022.  The MWs reported in this year’s study came from companies with year-ends through April 30, 2022.  KPMG notes that the data set underlying this study does not include IPO companies that were first time filers during the time period of the report.

     

    

Trends in material weakness themes reported

Notable changes between FY’22 and FY’21 trends in MWs

MWs related to lack of segregation of duties, lack of accounting resources/expertise, and IT, software, security & access issues all showed significant increases in 2022, following decreases in each area in the 2021 SOX year. All of these issues were primary themes in 2022.  MWs related to restatement of 404 disclosures and/or company filings significantly declined in 2022 and were not primary MW themes.

Lack Segregations of duties/ design of controls

16% 2021
36% 2022

Lack of accounting resources/expertise

34% 2021
50% 2022

IT, software, security & access issues

31% 2021
44% 2022

Restatement or non-reliance of company filings

17% 2021
8% 2022

Restatement of previous 404 disclosures

12% 2021
1% 2022
  • 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.


Lack of documentation, policies & procedures
 

Held steady at 99%-100% between 2018-2022.
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.


Inadequate disclosure controls (timely, accurate, complete)
 

Held steady at 20%-23% between 2019 and 2022.
This has been a primary MW theme in multiple years.


Lack of accounting resources/expertise
 

Increases in alternate years from 2018 through 2022, followed by a decrease in the following year.
This issue was at a 5-year low of 34% in 2021, followed by an increase to 50% in 2022.


Non-routine transaction control issues
 

Steadily decreased from 13% to 7% between 2018 and 2021, followed by an increase back to 12% in 2022.


Lack of segregations of duties/ design of controls
 

Held almost steady 3 consecutive years from 2018-2020 with an average of 28%. Declined to 16% in 2021, with an increase to 36% in 2022

  • 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 2018-2022 (1,027). Individual companies may be reported in multiple years.


Read the report

Download the report to learn more, including:

  • 2017-2021 material weakness overview
  • 2021 study background statistics
  • Summary and trends of material weakness themes reported
  • Trends in material weakness process areas
  • Summary of material weakness reported in 2021
  • Material weakness in multiple years and examples
2022 non-IPO materials weakness study
A 2022 KPMG study of public companies reveals common themes and business process areas associated with material weaknesses.