What is a Significant Deficiency?

A significant deficiency is a single weakness or a combination of weaknesses in the internal controls associated with financial reporting. This deficiency is less severe than a material control weakness and yet is sufficient to merit the scrutiny of those responsible for administering an entity's financial reporting. The presence of such a deficiency does not mean that a material misstatement has occurred, but it indicates the possibility of such an occurrence in the future.

Significant Deficiency vs. Material Weakness

A material weakness is a deficiency in an organization’s internal controls over financial reporting that creates a reasonable possibility that a material misstatement in its financials will not be prevented or detected. A significant deficiency is less severe than this situation, and yet is sufficiently problematic to warrant notifying management of the issue.

Reporting of Significant Deficiencies

A company’s external auditors will make management aware of any significant deficiencies they find. They also report these deficiencies to the audit committee of the board of directors.