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What are Material Errors in Financial Statements

“Companies with material weaknesses were 80% more likely to have future fraud disclosures compared to firms with strong controls.”
Internal Control Weaknesses and Financial Reporting Fraud, American
Accounting Association (Aug 2017)

What is a Material Weakness?

A material weakness is a failure in the internal control mechanism that ensure financial rules and processes are followed in a company.

A failure of this nature may result in misstatements in financial statements, which can present an untrustworthy picture of the affairs of the company.

The term is used by auditors when reporting on an audit of a company and results in a qualified audit report.

A material weakness identified by auditor compels company management to take steps to prevent or rectify the cause of the weakness.

As Defined by the Public Company Accounting Oversight Board

'A material weakness is a deficiency, or a 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.'

https://pcaobus.org/Standards/Archived/PreReorgStandards/Pages/Auditing_Standard_5_Appendix_A.aspx

Note about Materiality:

Materiality is an accounting or auditing term that refers to the relevance of a balance, transaction value or other discrepancy that can alter the interpretation of a financial statement. 

The term relates to conformity with a standardised reporting framework such as IFRS or GAAP.

Read more on Wikipedia: https://en.wikipedia.org/wiki/Materiality_(auditing)

About the author

Howard Rybko

Howard Rybko

Involved in software development since 1984.