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 Says:
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 Links:
To spot the signs of earnings manipulation, you need to know the different ways companies can inflate their figures. Cooking The Books 101
Learn what it means to do your homework on a company's performance and reporting practices before investing. Advanced Financial Statement Analysis
Find out what could be hidden in this often-overlooked part of the financial statements. Footnotes: Start Reading The Fine Print
