Material Weakness

Categories: Accounting

Accounting is full of little phrases that seem innocuous on the surface, but actually contain great significance. "Going concern warning" is one of them. "Material weakness" is another.

It may not sound like much, but say "material weakness" in a room full of accountants...and watch them gasp and hold their hands in front of their mouths in worry and chagrin.

The phrase refers to a deficiency in a company's internal financial controls. Basically, it means the company didn't do a good enough job looking over its books. Because of this, there's a good chance that the firm's previous financial statements are (gasp) wrong.

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Finance: What is Adverse Audit Opinion?27 Views

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Finance a la shmoop. What is an adverse audit opinion and you know deficiency

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letter. Okay people this is not good you thought you had good grades but when [Report card is thrown onto the desk]

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you got your report card your teachers had opinions adverse to yours... [Report card has bad grades in it]

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They sent your parents a deficiency letter you know the one with all those [Mom looks shocked]

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D's on it well when it's a company's audit that has similarly gone awry it's [Boss looks angry and employee looks shocked]

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the nice way to say it well then it means they didn't count the beans

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properly when they gave their financial reports to their investors or whoever

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the auditors were serving usually this implies that companies overstated how [Employee counting coffee beans]

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profitable they really were or how well they were really doing so tens of

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thousands of investors if you know the company was public when this all [Big line of people waiting to invest]

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happened paid twenty seven dollars and 32 cents a share when with the real

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numbers the stock probably should have been trading more at like you know

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fourteen dollars and 27 cents a share big difference well basically an auditor

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is saying that yours are not bread-and-butter misstatements no oops [Bean report with the numbers crossed out]

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it's more of a dude there were material ie important

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mistakes and they were pervasive like everywhere math, science, english, history

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your failure it's no mystery that's how auditors talk really

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all right well then there are massive losses to massive numbers of people who hire [Protesters on a street]

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massive numbers of lawyers who sue you.. massively.. in the world of finance an

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adverse audit opinion is a bit like running over everyone's favorite dog [Car goes over a bump]

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several times only you're the one who is likely dead meat [Guy reverses and runs the dog over again and the owner comes to fight]

Find other enlightening terms in Shmoop Finance Genius Bar(f)