A breakdown in internal controls can be disastrous for any organization. 

The consequences of control deficiencies during a Sarbanes-Oxley Act (SOX) audit can be severe, potentially escalating to a material weakness — a red flag that signals a significant risk of financial misstatement. If not quickly and properly addressed, this type of breakdown can damage an organization’s valuation, reputation, and bottom line in the form of significant remediation costs.

But designing and implementing an effective internal control framework is no small task.

So, how can an organization prevent this sort of breakdown? The answer begins with thoroughly understanding the root causes that can trigger a material weakness in internal controls.

In this article from the Risk Advisory team at PBMares, you’ll find an examination of the root causes of compromised internal controls and strategies to strengthen controls and enhance your business.

What Causes a Material Weakness in Internal Controls?

A material weakness arises when one or more internal control deficiencies make it possible for a material financial reporting misstatement to occur — meaning the misstatement would not be prevented or detected in a timely manner. 

5 Common Causes of Internal Control Breakdowns

Below, we examine common causes of material weaknesses in internal controls and provide actionable advice to address these issues.

1. Ineffective Oversight

Strong internal controls require active oversight from management, the board of directors, and the audit committee. When leadership lacks visibility into control processes, critical weaknesses can go undetected.

Proper monitoring of even minor issues can prevent problems from escalating into material weaknesses.

2. Inadequate Risk Assessment

Business changes and emerging threats can cause processes to become outdated. As a result, gaps can materialize that weaken internal controls. 

A robust risk assessment can uncover hidden vulnerabilities in financial reporting and internal controls. By properly identifying and assessing risks, organizations are more likely to mitigate risk and ensure compliance and financial accuracy.

3. An Overburdened Accounting Team

A strong internal control environment hinges not only on technical experience, but also on bandwidth. Unless your organization has an experienced team with deep accounting, auditing, and compliance knowledge that also has time to prioritize maintaining the internal control environment, it’s challenging to prevent errors in financial reporting and control execution.

Your organization can ensure internal controls remain effective and robust by:

  • Investing in ongoing training, professional development, and adequate staffing to maintain effective controls
  • Staying up to date with compliance requirements to ensure internal controls remain effective as financial regulations evolve

4. Ineffective Segregation of Duties

Today’s financial systems are complex and hybrid workforces are becoming the norm. As a result, to prevent fraud and internal control failures, organizations must prioritize how duties are segregated. 

Proper checks and balances help minimize accountability issues and maintain a strong internal control environment.

5. Weakness in Technology Controls and/or Financial Reporting Processes 

Technology plays a critical role in maintaining effective internal controls. However, weaknesses in IT security, system integration, and financial reporting processes are common and can create significant vulnerabilities that lead to material weaknesses.

And when new technology implementations are not seamlessly integrated, gaps often emerge that compound existing control weaknesses.

Among other action steps, organizations can address these challenges by:

  • Conducting regular IT audits
  • Establishing a structured change management process to ensure seamless system integration and mitigate risks in financial reporting

Prevent SOX Audit Issues

Organizations today must ensure that internal controls are working and compliant. That’s nothing new. But here’s the interesting part: 

SOX compliance is more than a regulatory requirement — it’s also an opportunity because truly effective controls significantly enhance operational efficiency. 

As a trusted public accounting firm, the Risk Advisory team at PBMares helps clients go beyond risk mitigation to optimize business processes and drive measurable performance improvements.

Contact us today to learn how you can design, implement, and optimize your internal control framework and build a stronger, more resilient organization along the way.