Our Guide to SOX Compliance 2021: Who Comply SOX Law?

The US Congress passed the Sarbanes-Oxley Act (SOX) in 2002. Its name was derived from the legislation’s sponsors, Representative Michael G. Oxley and Senator Paul Sarbanes. The main objective of instituting the law was to protect investors by making corporate declarations regarding security laws more reliable and accurate.

This means firmer internal control protocols in terms of financial security and reporting in publicly traded entities.

Congress passed the SOX compliance act in an era of notorious financial scandals. Giant entities Tyco, WorldCom, and Enron, faced significant fraud charges, and WorldCom was folding in bankruptcy of $104 billion.

Every public company has a SOX-compliance obligation both on the IT and financial sides. The legislation has significantly changed how IT departments keep their electronic records.

Who Must Comply with the SOX Law?

SOX law binds all public companies in the US, requiring them to align with the provisions of the act’s 11 sections. It also affects publicly-traded establishments and their fully-owned subsidiary firms and any foreign organization that does business and has publicly traded in the country. What’s more, the legislation controls any auditing firm that has served any public company in the nation.

Charities and private companies aren’t obliged to follow the law’s provisions. But those that are soon going public via IPOs must begin preparing for compliance with Sarbanes-Oxley regulations. This law also exempts non-profit companies.

SOX regulations protect whistle-blowers. This move aims to encourage team members to present themselves and report any fraudulent operations in their respective companies. The law offers strict penalties for auditors, officers, and board members who destroy their entities’ data.

The punishments are criminal and are applicable to publicly-traded companies and non-profit corporations.

SOX Compliance Requirements

Here’s an overview of the vital Sarbanes-Oxley requirements:

  • The law requires every public company to have an Internal Control Report stating the management’s duty in maintaining a satisfactory internal control structure for financial data. In case any shortcoming is witnessed, the responsible officer must report it up the chain as fast as possible for a transparent process.
  • CFOs and CEOs have a direct responsibility to document and submit accurate internal control structures and financial reports to the SEC. Failure to comply with this, whether it was purposeful or not, would attract monetary penalties or even jail time.
  • The law requires public companies to provide and maintain documented proof that they comply with SOX and always appraise and observe their compliance objectives.  
  • The law requires companies to present formal data security policies, communicate them adequately, and ensure their consistent enforcement. Companies must also establish and apply comprehensive data security approaches to secure and protect any entity’s financial data.

A detailed SOX compliance audit can ascertain all these.

What Does A SOX Compliance Audit Entail?

The term SOX compliance audit refers to a mandated annual evaluation to ascertain how your company manages its internal controls. Afterward, the results of the assessment are presented to shareholders.

The main objective of these audits is the verification of the entity’s financial statements. It’s also focused on addressing the company’s cybersecurity concerns. This connection arises because internal controls cover every protocol applied by information systems when handling financial data.

SOX compliance audits are handled by independent auditors who are distinct from other audits. This helps avoid conflict of interest that may lead to inaccurate information and tampering with the crucial data.

Auditors may go as far as interviewing company staff to determine compliance controls’ sufficiency in maintaining SOX compliance requirements. SOX sections 409,404, and 302 recommend monitoring logging and auditing of the following conditions and parameters:

  • Network activity
  • Internal controls
  • Login activity, both the successful ones and the failed attempts
  • Account activity
  • User activity
  • Information access
  • Database activity

Preparation for a Sarbanes-Oxley Audit

Whether the next SOX audit is months from now or impending, companies need a longstanding strategy to demonstrate their commitment to the act’s compliance requirements.

Currently, numerous software solutions can significantly cut the effort of intelligent identification of threats, log management, and form creation. However, it’s vital for publicly-traded companies to learn the most effective implementation strategies and how to get the best results.

It’s also essential to train your IT team on secure data handling practices, identifying potential security threats, and how to get the most of SOX compliance software. They should know how to optimize these software solutions for seamless and accurate financial reporting.

Effective, continuous training begins with facilitating productive conversations between respective departments. This makes it easy for the company’s senior executives and finance team to share views and communicate needs to the IT team, who will offer their specialized cybersecurity insights.

Benefits of SOX Compliance

Staying compliant with SOX regulations helps you avoid penalties. It also benefits your company in the following ways:

Risk Prioritization

Most entities opt for a consolidated and integrated view of the company’s objectives and risks. Establishing and implementing a comprehensive, unified risk-management structure in your operations and culture helps you achieve transparency and visibility into coordination, processes, and mitigation. You’ll also enhance your performance monitoring and have more anti-fraud activities.  

Enhanced Corporate Governance

Complying with SOX provisions allows you to regulate your audit committees even better. Before the legislation was signed, audit committees in most public companies worked independently from management. The regulation now requires that audit committee members stay independent and comprise a financial expert. This means your audit committee will be better equipped and skilled to offer truthful and precise reports on the company’s financial status.

A Stronger Control Structure

Organizations nowadays leverage standard control structures like COBIT and COSO to boost their controls and enhance their connection with risks. Doing this could improve how you document controls and streamline control processes assessment. With more robust internal controls, you’ll benefit from accurate financial reporting, more effective operations, and advanced compliance programs. 

Auditor Independence

Complying with SOX provisions leads to a more independent audit process because audit firms are prohibited from providing actuarial, management, or bookkeeping functions to the entities they’re auditing.

Improved Audit Performance

Sarbanes-Oxley enactment resulted in the creation of PCAOB (Public Company Accounting Oversight Board) to assess auditors’ board members’ and executives’ liability and oversee accounting decision-making by management.

SOX audit is now an independent assurance function, and you’ll improve your company’s operating effectiveness in governance, internal control, and risk management. The new development also reduced the gap between the audit itself and its fulfillment and made it more streamline.  

Enhanced Accountability

Complying with the Sarbanes-Oxley regulations makes the company executives more accountable and focused on protecting investors. The team will be required to certify the financial reports in person. It also offers several penalties for any fraudulent exploit.

Automated and Centralized Reporting 

SOX sections 404 and 302 are vital, but the efforts and cost that come with the two make them controversial. The regulations require management to conduct a detailed evaluation of the company’s internal controls and accuracy certification.  

By doing this, you’ll create room for high-quality, automated, centralized, and efficient financial reporting. The process also leads to improved accountability in recording public disclosures and journal entries.

Understandably, it’s not a simple job to keep meticulous records and submit extensive SOX compliance records for the entire company. Working with a reliable information security management platform could make SOX compliance easier for you.

Author Bio: Reciprocity Inc (San Francisco) develops cutting-edge consumerized enterprise software, most recently for the Governance, Risk, and Compliance (GRC) market space. Our hosted GRC solution ZenGRC, helps Compliance and Audit Managers get beyond spreadsheets to better execute their enterprise programs. Unlike Archer, ZenGRC is very flexible and integrated with Google Apps, with a lightning-fast ROI. Founded by Ken Lynch (MIT enterprise software startup veteran) in 2009, Reciprocity is based in San Francisco.

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