Internal control failures: A growing web of risk factors
In today’s complex financial landscape, internal control failures rarely occur in isolation. A recent five-year analysis (2020–2024) reveals a compelling pattern: companies experiencing internal control breakdowns often face a host of other financial and operational risks.
This population is limited to those companies that reported a material weakness in internal controls for the years 2020-2024. NOTE: The corresponding risk factor years are based upon flag year, defined as the year the risk factor was disclosed.
Key risk factors coinciding with internal control failures
The chart tracks the percentage of companies with internal control failures that also exhibit one or more of the following risk indicators:
- Audit Opinion – Going Concern
- Financial Restatements
- Impairments
- Altman Z-Score (a measure of financial distress)
What the data shows:
Altman Z-Score surges in 2024
After a gradual decline from 66% in 2020 to 51% in 2022, the percentage of companies with poor Altman Z-Scores jumped to 67% in 2024. This spike may reflect worsening financial health among companies with control issues.
Going Concern opinions remain high
Across all five years, 58–61% of companies with internal control failures also received a going concern opinion from auditors. This suggests a persistent link between control issues and doubts about a company’s ability to continue operating for one year.
Impairments are on the Rise
After declining to 23% in 2022, impairments increased to 43% in 2024, indicating that more companies are writing down assets—possibly due to overvaluation or deteriorating business conditions.
Financial restatements becoming more common
Restatements rose from 21% in 2020 to 30% in 2024, pointing to growing concerns about the accuracy of financial reporting in companies with internal control deficiencies.
Conclusion: A convergence of risks
This data underscores a critical insight: internal control failures are often symptomatic of deeper financial and operational problems. Whether it's going concern issues, asset impairments, or financial restatements, these risk factors tend to cluster—making internal control health a key signal of a higher likelihood of broader instability.
What should stakeholders do?
- Auditors should scrutinize control environments more closely when other risk factors are present.
- Investors should view internal control failures as red flags for deeper financial trouble.
- Management must prioritize remediation efforts and transparency to rebuild trust and stability.
This data is derived from our Audit Risk Quality database that tracks risk factors but also the severity of the risk factors and allows the user to identify in one company profile the spectrum of risk factors.
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A seasoned finance professional and CPA, Marie brings thirty years of extensive experience in accounting and auditing to her role as Accounting Research Manager at Ideagen. At Ideagen, Marie leads the research team, develops content and is a subject matter expert for the Ideagen Audit Analytics and Ideagen Disclose product lines.
Marie specialized in transforming acquisitions of private companies into public company entities. She developed accounting teams, financial reporting, controls, financial modeling, Lean based process optimization and led ERP implementations after acquisition. As a member of divisional management teams, she was integral in strategic and operational decision making for the business lines. Having led not only the accounting teams, but diverse areas such as Information Technology, Actuarial Risk Management and Human Resources, Marie has a unique perspective. Notably, early in her career she spent ten years in the audit practice of PwC, where she managed audits of SEC registrants, international subsidiaries and closely held private entities in manufacturing, software, consumer products and services.
