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Under Pressure: Why Internal Controls Are Facing Greater Scrutiny This Year

Under Pressure: Why Internal Controls Are Facing Greater Scrutiny This Year, Frazier & Deeter

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As the financial dust of 2024 settles, many CFOs, CAOs and Corporate Controllers are left reflecting on a year marked by economic turbulence and mounting challenges. From navigating layoffs to managing heightened regulatory expectations, organizations were pushed to their limits, finding ways to do more with less. Now, as the year-end audit process concludes, these leaders face a new reality: significant deficiencies and material weaknesses are projected to rise in 2025.

The Rising Risk of Material Weaknesses

Our latest research and in-depth analysis indicate that material weaknesses are projected to surge over 20% when comparing fiscal year-end 2024 filings to 2023 filings. Moreover, in the first 10 months of 2024, 140 public companies told investors that previous financial statements were unreliable and had to reissue them with corrected figures, according to data from Ideagen Audit Analytics. For those steering the financial health of their organizations, the implications of this trend are both urgent and profound.

What’s Driving the Surge in Internal Control Deficiencies?

The rise in these deficiencies is no coincidence. It reflects the convergence of multiple pressures, creating a perfect storm that threatens to undermine even the strongest internal control frameworks. One major factor is the increasing regulatory complexity driven by the PCAOB, which has placed auditors under intensified scrutiny and compelled them to adopt more stringent procedures. The shift toward internal consultations reflects the heightened rigor embedded in mandatory audit quality control (QC) processes. This evolution underscores a regulatory environment that demands constant vigilance.

Adding to the strain, workforce reductions—while often necessary—have too often been executed without sufficient planning for the transfer of critical internal control responsibilities. As a result, organizations that once had solid frameworks now find themselves navigating dangerous waters, risking not just financial misstatements but the trust of their investors and stakeholders.

In tandem with the new challenges, organizations have also had to contend with historical and common issues. These persistent challenges include:

  • Lack of documentation of policies and procedures
  • Insufficient accounting resources/expertise
  • IT, software and security access issues
  • Lack of segregation of duties/design of controls
  • Inadequate disclosure controls

The Cost of Inaction

In this evolving landscape, staying ahead requires management to familiarize themselves with the barrage of “new requirements” typically introduced in Q3 each year. Without this effort, organizations risk losing control over the narrative of their internal controls program, leaving them vulnerable to over-auditing and escalating risks.

The cost of inaction is steep. Material weaknesses don’t just bring higher audit fees and remediation expenses, they erode confidence. Public companies, in particular, face the wrath of disappointed shareholders, potentially leading to reputational damage that takes years to repair. The financial toll, combined with long-term credibility concerns, underscores the importance of addressing these issues head-on.

How Organizations Can Stay Ahead

Looking ahead, the narrative CFOs, CAOs and Corporate Controllers choose to write in 2025 is up to them. Significant deficiencies and material weaknesses may loom large, but they are not inevitable. By prioritizing internal controls as a strategic initiative, organizations can turn potential pitfalls into opportunities for resilience and growth. The time to act is now—because in the world of corporate finance, staying ahead isn’t just a goal, it’s a necessity.

Our experts at Frazier & Deeter can help you proactively assess risks, strengthen controls and navigate evolving regulations with confidence. Contact us to learn more.

Contributors

Adam Mark, Partner

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