Material weakness in internal control

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. Public companies disclose them in 10-Ks and 10-Qs; private companies hear about them in the auditor's management letter.

At small biotechs the usual causes are a finance team too thin to segregate duties, a lack of technical accounting resources for complex areas like revenue and equity, and manual close processes that produce errors the auditors find. Newly public companies disclose material weaknesses frequently, often inherited from their private years.

Remediation means designing the control, operating it for enough periods to test, and having management conclude it works. Two to four quarters is typical. The cheaper path is to build the controls before going public, which is what audit readiness is for.