Material Weakness

AAA

DEFINITION of 'Material Weakness'

When one or more of a company's internal controls, put in place to prevent significant financial statement irregularities, is considered to be ineffective. If a deficiency in an internal control is thought to be of material weakness, this means that it could lead to a material misstatement in a company's financial statements.

INVESTOPEDIA EXPLAINS 'Material Weakness'

A material weakness, when reported by an auditor, simply suggests that a misstatement could occur. If a material weakness remains undetected and unresolved, a material misstatement could eventually occur in a company's financial statements, which would have a tangible effect on a company's valuation. For example, a $100 million overstatement in revenue would be a material misstatement for a company generating sales of $500 million annually.

RELATED TERMS
  1. Walk-Through Test

    A procedure used during an audit of an entity's accounting system ...
  2. Cook The Books

    A buzzword describing fraudulent activities performed by corporations ...
  3. Audit

    1. An unbiased examination and evaluation of the financial statements ...
  4. Hedge Clause

    A provision included in published financial reports that indemnifies ...
  5. Financial Accounting Standards ...

    A seven-member independent board consisting of accounting professionals ...
  6. Internal Controls

    Methods put in place by a company to ensure the integrity of ...
RELATED FAQS
  1. How did Sarbanes Oxley (SOX) affect the rules and regulations for account reconciliation?

    U.S. Congress passed the Sarbanes-Oxley Act of 2002 to shore up perceived weaknesses in accounting regulations. Part of the ... Read Full Answer >>
  2. What Book Value Of Equity Per Share (BVPS) ratio indicates a buy signal?

    Book value of equity per share (BVPS) is a ratio used in fundamental analysis to compare the amount of a company's shareholders' ... Read Full Answer >>
  3. What does an unfavorable variance indicate to management?

    In managerial accounting, an unfavorable variance is discovered when a company's management performs a comparison between ... Read Full Answer >>
  4. Is there a way to include intangible assets in book-to-market ratio calculations?

    The book-to-market ratio is used in fundamental analysis to identify whether a company's securities are overvalued or undervalued. ... Read Full Answer >>
  5. When is market to market accounting performed?

    Mark to market accounting is used for substantially all investments or financial instruments held on a corporation's balance ... Read Full Answer >>
  6. What types of assets may be considered off balance sheet (OBS)?

    Though the off-balance-sheet accounting method can be used in a number of scenarios, this accounting practice is especially ... Read Full Answer >>
Related Articles
  1. Personal Finance

    Top 8 Ways Companies Cook The Books

    Find out more about the fraudulent accounting methods some companies use to fool investors.
  2. Fundamental Analysis

    Financial Footnotes: Start Reading The Fine Print

    Find out what could be hidden in this often-overlooked part of the financial statements.
  3. Options & Futures

    Advanced Financial Statement Analysis

    Learn what it means to do your homework on a company's performance and reporting practices before investing.
  4. Economics

    Understanding Organizational Behavior

    Organizational behavior is the study of how humans interact in group environments.
  5. Economics

    Calculating Net Realizable Value

    An asset’s net realizable value is the amount a company should expect to receive once it sells or disposes of that asset, minus costs from its disposal.
  6. Investing Basics

    Calculating Unlevered Free Cash Flow

    Unlevered free cash flow (UFCF) is the free cash flow of a business before interest payments.
  7. Economics

    Understanding Implicit Costs

    An implicit cost is any cost associated with not taking a certain action.
  8. Economics

    What are Deliverables?

    Deliverables is a project management term describing an object or function that must be provided or completed by a certain due date.
  9. Economics

    What Does Capital Intensive Mean?

    Capital intensive refers to a business or industry that requires a substantial amount of money or financial resources to engage in its specific business.
  10. Taxes

    Understanding Write-Offs

    Write-off has different meanings depending on the context in which it is used, but generally refers to a reduction in value due to expense or loss.

You May Also Like

Hot Definitions
  1. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version ...
  2. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  3. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  4. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
  5. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  6. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!