Material weakness disclosures in an IPO: PwC

Mike Bellin

IPO Services Leader, PwC US

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Erin Cahil

Partner, US IPO Services, PwC US

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Key takeaways:

About half of all companies going public disclose a material weakness.
Material weaknesses are not uncommon and not disqualifying in the IPO process.
Companies should identify and transparently disclose material weakness during the IPO process, supported by a clear remediation plan.
Remediation and demonstrated progress build investor confidence: 97% of companies that disclosed a material weakness also disclosed a remediation plan.

Why does transparency matter in an IPO?

From 2020 to today, about half of all companies going public each year have reported one or more material weaknesses (MWs)¹ in their internal controls before their IPO.

While management is not required to formally report on internal controls until the second annual report following an IPO (and auditor attestation potentially phases in later)², companies that fail to identify and disclose MWs during the IPO process may face significant consequences if those weaknesses come to the public light post-IPO. These include financial statement revisions and loss of trust and credibility with investors and the SEC. Newly public companies are particularly vulnerable given their short public market history.

More and more companies are disclosing MWs in their IPO filings to provide greater transparency to investors. Proactive disclosure, along with clear remediation plans, builds investor trust and positions the company to help mitigate future operational, financial, and reputational risks. Demonstrating progress towards remediating MWs often reflects positively on management, enhancing credibility and confidence in the company’s ability to operate effectively as a public entity. What may seem like an undesirable deficiency can ultimately highlight the company’s strengths in operating and enhancing its controls, thereby instilling greater confidence in the completeness and accuracy of its financial reporting.

Other key reasons for assessing internal controls before an IPO and disclosing MWs include:

Identifying MWs post-IPO can impact share price as analysts and investors may perceive these weaknesses as a risk leading to lower ratings, reduced trust, and lower demand for the stock.
Negative press from delayed disclosures can highlight concerns around financial controls, governance, or public company readiness and damage a company’s reputation.
MW disclosures enforce management’s accountability and help provide transparency, allowing for a more accurate and reliable evaluation during the due diligence process.
With increasing scrutiny from stakeholders (e.g., auditors, legal counsel, underwriters) on an entity’s control environment, companies should proactively identify and disclose MWs, if applicable, to help reduce the risk of potential IPO timeline delays.
Early identification of MWs can support more accurate budgeting and earlier remediation planning which can be time-intensive and costly, often requiring companies to hire additional personnel, overhaul internal processes, and implement more robust financial controls.

Just what is a material weakness?

According to PCAOB auditing standards, a material weakness is defined as “a deficiency, or a combination of deficiencies, in internal control over financial reporting (ICFR), such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.”

Under the Sarbanes-Oxley Act (SOX), management—specifically the CEO and CFO—are required to establish, maintain, and evaluate the effectiveness of ICFR. It also requires external auditors of certain public companies to conduct an assessment and report on the effectiveness of ICFR. The requirements and timing of compliance vary based on the three separate certification requirements introduced by SOX, as described in more detail below.

SOX—Key provisions

Section 302³ requires that the CEO and CFO certify in each annual and quarterly report that (i) they have reviewed the report and (ii) the report does not contain any untrue statement of a material fact or omits to state a material fact. They also certify that the financial statements fairly present, in all material respects, the company’s financial condition, results of operations, and cash flows, and that they have disclosed to the company's audit committee all fraud and significant deficiencies in internal controls of which they are aware.

Section 906³ requires that the CEO and CFO certify in each annual and quarterly report that they fully comply with federal securities laws and fairly present, in all material respects, the issuer’s financial condition and results of operations. Knowingly or willfully submitting false certifications can result in significant fines and imprisonment.

Under Section 404², beginning with the second annual report, registrants must include a report stating that management is responsible for establishing and maintaining adequate ICFR and an assessment by management of the effectiveness of ICFR (Section 404(a)), including robust disclosures of material weaknesses that existed as of the date of the assessment.

In addition, for most registrants, the company’s external auditors are also required to attest to management’s assessment of the effectiveness of ICFR (Section 404(b)).²

The latest trends

PwC analyzed MW disclosures by reviewing filings of domestic and foreign issuer IPOs¹ listed on the NYSE and NASDAQ stock exchanges, from January 1, 2020 to December 31, 2025. The analysis revealed several noteworthy trends:

An average of 46% of companies have disclosed at least one MW while going public.
The average disclosure rate has consistently remained around the mid-40% range, with an exception in 2022 when MW disclosure rate reached 59%.
Over 70% of companies that filed for an IPO and disclosed MWs reported one to two MWs; however some disclosed up to seven MWs.
Foreign private issuers have a significantly higher rate of MW disclosures compared with domestic issuers. On average, 78% of foreign private issuers disclosed MWs in their IPOs compared with 38% of domestic issuers.

These noted trends in IPO MW disclosures suggest the market increasingly expects companies to have a strong understanding of their internal controls well before their IPO.

All IPOs
IPOs by issuer type

Common types of MWs and remediation

Commonly reported MWs relate to lack of financial reporting oversight, insufficient accounting personnel, and lack of appropriate procedures. These types of MWs in pre-IPO companies are not unexpected, considering these companies typically have fewer resources and a leaner organization. In contrast, MWs identified in more mature public companies are typically tied to specific issues or complex transactions, given their more developed organizational structures supporting the organization. When pre-IPO companies disclosed MWs, they included a risk factor disclosure in the IPO registration statement and the majority also included additional disclosures in the Management’s Discussion and Analysis (MD&A).

Along with disclosing MWs, proactively disclosing remediation efforts demonstrates that management is committed to addressing deficiencies and improving internal controls, which can play a part in reassuring stakeholders that the company is taking the required steps to prevent any financial misstatements. Additionally, providing clear remediation plans allows companies to mitigate the negative impact of material weaknesses on public perception by showing progress and accountability. Disclosure of remediation strategies in registration filings can also help avoid further scrutiny from regulators like the SEC, which expects companies to be upfront about both their control deficiencies and corrective actions.

Ninety-seven percent of companies disclosing MWs in their IPO registration statements included remediation plans, with many companies disclosing more than one solution to remedy their MWs. More commonly, companies sought to remedy their MWs by establishing or revising formal policies and procedures or by hiring additional personnel. Other remediation plans include hiring a CFO, preparing training materials, and hiring third-party advisors.

Sector breakout

Sector trends

On average, 53% of TMT companies disclosed at least one MW, which is 7% higher than the average across all sectors at 46%.

Sector insights

The TMT sector IPOs are primarily led by:
- Software
- Enterprise cloud
- Platform companies
These companies tend to have the following elements, all of which can explain their higher-than-average disclosure of MWs:
- Rapid growth and scaling, which can strain existing control resources and systems.
- Complex revenue recognition models including subscription, multi-element arrangements, freemium, licensing and royalty which can lead to additional complexity and need for controls.
- Higher cybersecurity risks and complex IT systems, given the software / cloud platforms, but lack of adequate IT general controls and mitigating internal controls.
- Regulatory environments with a heightened focus on data collection, privacy, employee and third-party access and telecommunications regulations.

Sector trends

PLS companies tend to disclose fewer MWs than the wider market, with an average of 40% disclosing at least one, compared to 46% across all sectors.
Biotech companies, which are typically in the pre-commercial stage, make up the majority of the PLS IPOs. In fact, almost all PLS MW disclosures came from companies with $500 million or less in revenue, reflecting the sector’s earlier-stage, often pre-revenue profile.

Sector insights

The PLS sector IPOs have recently been dominated by biotech companies, driven by:
- Advances in genomic medicine that enable personalized medicine, targeted therapies, and novel treatments.
- Platform models that can generate multiple medical products, diversifying risk and revenue streams.
- Venture capital funding and successful exits, creating a cycle of investment and growth.
PLS companies at IPO are often pre-revenue with no inventory, and the smaller size of the organization is often a root cause of the MWs they disclose. Lean finance and accounting teams can lead to insufficient segregation of duties, limited technical experience with non-routine transactions can result in inappropriate accounting for complex transactions, and limited transactions can lead to lack of sophisticated systems.

Sector trends

In the financial services sector, an average of 37% of the companies that went public disclosed at least one MW, lower than the 46% average across all sectors.
FS companies had proportionally less MW disclosures due to lack of segregation of duties, but complex transactions were a significant driver of MW disclosures for FS companies, at 48% compared to the average of 40% for all sectors.

Sector insights

FS companies tend to have exposure from non-routine complex transactions due to the following:
- Financial instruments – The use of complex financial products such as derivatives, structured finance and hedging instruments increases accounting complexity and the risk of errors or misstatements.
- Global operations and FX – Many FS firms operate globally, making foreign currency transactions and hedging strategies essential, but these transactions can often increase the risk of financial misstatements.
- Legacy systems – FS companies at times rely on outdated or legacy systems for transaction processing and financial reporting, making it difficult to accurately manage non-routine transactions.
Regulatory complexity: FS companies face multi-layered regulatory oversight, such as SEC, FASB, FINRA, and international regulators. This regulatory oversight can encourage FS companies to develop strong control environments, possibly contributing to the overall lower MW rate.
FS companies maintain strong segregation of duties controls due to stringent regulations, enabling accountability and reducing risks of fraud, errors, and compliance breaches in routine transactions.

Sector trends

The average number of consumer market sector companies disclosing an MW was higher, at 55%, than the overall market average of 46%.
Smaller CM companies with $500 million or less in revenue were more likely to disclose an MW than companies with over $1 billion in revenue.

Sector insights

CM companies face unique financial reporting challenges due to factors which can complicate accuracy and increase the risk of control weaknesses:
- Frequent M&A - Consumer companies frequently engage in mergers, acquisitions, and business combinations, which can complicate financial reporting as they incorporate subsidiaries with different ERPs and reporting systems which can lead to errors in consolidating financial statements.
- Complex revenue streams - CM companies often deal with diverse revenue streams (e.g., retail sales, online platforms, franchises), which can complicate the application of revenue recognition rules with complex accounting for variable consideration, discount and promotional models, loyalty programs, etc.
- High volume of transactions - Retail and consumer companies often deal with a high volume of small transactions, typically across multiple sales channels and with complex inventory management systems, which increases the complexity of tracking and reporting financial data accurately, leading to potential control weaknesses.

Sector trends

An average of 50% of the IP companies that went public disclosed at least one MW, which was higher than the overall average of 46%. However, the IP sector had large swings in MW disclosures over the last five years.
After declining from 67% in 2020 to 0% in 2022 and 2023—coinciding with a sharp drop in IP IPO volume—MW disclosure rates increased to 43% in 2024 and surged to 78% in 2025, the highest rate in the six-year period.

Sector insights

2022 and 2023 were historically low IPO volumes for the sector with only one IP company going public each year and neither disclosed an MW.
Year-over-year MW trends in the IP sector have varied significantly depending on the mix and profile of IP companies going public each year.
- In 2025, seven of the nine IP companies disclosed at least one MW. Many of these companies operate in capital-intensive subsectors such as aerospace and defense, infrastructure, and building materials, where complex operations can further strain control environments and the finance functions. For these companies, commonly cited MW drivers included insufficient accounting personnel and inadequate segregation of duties.

Sector trends

Over the past six years, IPO volumes in the EUM sector remain low, ranging from one to five companies annually, resulting in wide year-to-year variation in MW disclosure rates.

Sector insights

The lower IPO volume, and associated MW trends, in the sector can be attributed to several factors, including:
- The capital-intensive nature of the industry requiring large upfront investments.
- Regulatory hurdles requiring stringent compliance at a state, national, and international level.
- Long-term investment horizons with some projects, especially mining and energy, requiring decades to break even.
- A mature industry structure can mean that the sector is often dominated by large, established players with significant market share, leaving little room for smaller companies to start, grow and go public.

Sector trends

Only 27% of HS companies disclosed at least one MW, while in the overall market 46% disclosed at least one.

Sector insights

Health services companies encounter certain industry-specific accounting complications including the importance of accurate billing and coding, regulatory compliance (patient data, billing, etc.) and the management of patient receivables and bad debt.
The noted complications can raise challenges in accurately recognizing revenue, lead to errors or delays in financial reporting and increase the risk of financial misstatements.

The impact of AI on material weakness trends

AI-driven business models dominated investor interests in 2025, with high-scale AI infrastructure, cybersecurity, and AI-enabled technology companies consistently pricing at the top of their ranges and delivering strong post-pricing performance. This momentum is expected to continue throughout 2026 and into 2027, as AI-enabled platforms span an increasingly broad range of sectors including TMT, PLS, EUM, and CM.

While the MW data trends and types of MW disclosures have remained relatively stable through the end of 2025, AI is beginning to introduce additional financial reporting complexity for IPO candidates. Companies built on AI-enabled platforms frequently operate with non-standard customer contracts, and novel revenue models that challenge traditional internal controls. Across sectors, the pace of AI-driven business model innovation may not be matched by accounting teams' ability to develop sufficiently solid policies, processes, and controls.

This evolution is not limited to technology companies. As AI-enabled platforms become more prevalent across sectors, a growing share of IPO candidates outside of TMT may encounter financial reporting challenges historically associated with high-growth technology businesses.

TMT MW disclosure rates have fluctuated year to year, declining from 64% in 2024 to 42% in 2025. However, the rapid growth of large-scale AI infrastructure, cybersecurity, and cloud platforms introduces complex revenue arrangements, significant capitalized costs, and non-standard customer contracts, adding a further layer of complexity to the control environments of TMT companies at the time of IPO.

Historically, PLS companies at IPO have benefited from a simpler pre-commercial business model, often pre-revenue, no inventory, and focused on R&D and regulatory milestones, which has enabled a more straightforward control environment and a lower-than-average MW rate. While this profile still characterizes the majority of PLS IPOs, an emerging cohort leveraging AI-enabled drug discovery and diagnostic platforms is departing from this profile, as licensing royalties, milestone-based revenue, and multi-party partnership arrangements with technology and AI-focused counterparties grow beyond what has historically characterized the sector.

The rise of AI-powered fintech platforms, including automated investing, credit scoring, digital asset infrastructure, and embedded finance, is creating new accounting complexity for FS IPO candidates. These companies often operate with novel revenue models such as subscription fees, transaction-based pricing, and interchange revenue sharing, as well as complex fair value measurements for digital assets and algorithmic trading, that can outpace existing internal controls. FS companies have historically maintained lower MW rates due in part to strong regulatory-driven control environments, but AI-enabled business models may introduce complexity that tests those frameworks.

Surging data center demand is driving increased investment in power generation, grid infrastructure, and energy storage, often structured through project financing, joint ventures, or consortium arrangements. While EUM IPO volume remains low, these non-routine transaction structures can elevate the risk of financial reporting deficiencies for EUM companies approaching public markets.

The shift toward AI-enabled care delivery, including virtual diagnostics, remote monitoring, and home-based services, introduces new billing and revenue recognition complexity beyond traditional fee-for-service arrangements. Although HS IPO activity has been limited in recent years, companies in this space may face heightened control risks as AI-driven care models scale and move toward public markets.

The rise of AI-driven personalization, quick-commerce, and social-to-shelf sales channels introduces new revenue stream complexity and data management challenges that can strain existing financial reporting processes, particularly for companies that have grown through acquisitions.

The integration of AI and advanced manufacturing technology raises capitalization and cost allocation questions that can strain existing financial reporting controls for industrial companies approaching public markets.

Act early, go confidently

1. Start early, stay ahead

Addressing internal controls after IPO registration begins can complicate an already intense process. Meeting SOX requirements often demands meaningful process and control changes—changes that can be disruptive if addressed too late. In our experience, starting six to nine months in advance to design and implement a SOX-compliant framework—and operating under it for at least six to twelve months—help reduce risk, smooth the IPO journey and build investor confidence.

2. Work with experienced advisors

Preparing to go public is a transformational step. We work closely with management teams to conduct holistic readiness assessments that uncover gaps in internal controls and processes—well before they become roadblocks. From early diagnostics to hands-on guidance through each stage of IPO readiness, our team is here to help you move forward with confidence. Reach out to find out how we can guide you through each step of the readiness assessment process and beyond.

3. Looking for deeper insights?

For over 14 years, PwC has tracked and analyzed MW disclosures on a quarterly basis—by sector, in aggregate, and at the individual company level. Our proprietary dataset enables companies to benchmark against peers across seven dimensions.

Volume of MW disclosures
Foreign vs. domestic filers
Nature of the MWs disclosed
Where disclosures appear in filings
Language used to describe MWs and remediation plans
Revenue ranges
Deal values

This depth of insight helps companies benchmark against peers, spot trends, and anticipate investor and regulatory scrutiny.

We’re ready to dive into material weakness trends that matter to your company or industry. Your IPO window may be closer than you think. Let's talk about where you stand. Using the link below—we’d love to help you take the next step.

Special thanks to Jocelyn Leung, Thomas Ko, and Minto Brown for contributing to this publication.

1 IPOs with proceeds that are less than $25 million, best efforts offerings, oil and gas royalty trusts, business development companies, pricing on OTC Bulletin Board and OTC Pink Sheets, and special purpose acquisition companies (SPACs) IPOs and de-SPAC transactions are not included in the population of IPO filings reviewed for this publication. SEC filing forms reviewed include S-1, F-1, N-2, S-11, and Form 10. Note that companies undergoing IPOs may have disclosed a material weakness outside the year of initial pricing; however, disclosures as of the pricing date were used for the purposes of calculating year-over-year percentages.

2 For companies which do not qualify for emerging growth companies (EGCs) status, section 404(a) and 404(b) certifications are required with a company’s second annual report after going public. For EGC filers, 404(b) compliance is deferred for as long as the company retains its EGC status (see below for disqualifying conditions, including the five-year limitation). Many smaller reporting companies (SRCs) also qualify as non-accelerated filers and, accordingly, are not required to comply with the requirements of 404(b). However, if an SRC has annual revenues in excess of $100 million and a public float between $75 million and $250 million, it would meet the definition of an accelerated filer (while simultaneously maintaining its SRC status) and, accordingly, would be required to comply with the requirements of 404(b).

EGCs are broadly defined as companies that meet the following criteria: (1) had less than $1.235 billion in gross revenue (indexed for inflation every five years) for the most recently completed fiscal year; and (2) has not issued more than $1 billion of non-convertible debt in a rolling three-year period. An issuer that is an EGC as of the first day of its fiscal year continues to be an EGC until the earliest of: (1) the last day of the fiscal year during which it had total annual gross revenues of $1.235 billion or more; (2) the last day of the fiscal year following the fifth anniversary of the first sale of the issuer’s common equity securities in an offering registered under the Securities Act of 1933 (Securities Act); (3) the date on which the issuer has issued more than $1 billion in non-convertible debt securities during the previous three-year period; or (4) the date on which the issuer becomes a large accelerated filer (generally, more than $700 million in worldwide public float).

In May 2026, the SEC proposed amendments that would simplify filer status categories and extend certain scaled disclosure accommodations, which, if adopted, would change when newly public companies become subject to the Section 404(b) auditor attestation requirement. The proposal had not been finalized as of the date of this publication.

3 Section 302 and 906 certifications are effective for companies starting with their first quarterly or annual report as a public company regardless of EGC status.