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Enron, WorldCom, and Tyco became household names in the early 2000s due to massive accounting scandals that destroyed entrepreneurs’ and workers’ public faith in corporate America. 

In reaction to these and other scandals, the United States Congress passed the Sarbanes-Oxley Act (SOX) in 2002. The law imposed additional rules to combat accounting fraud in publicly listed corporations and high criminal penalties for executives who commit such fraud. 

The heart of Sarbanes-Oxley is a need for strong financial controls to prevent fraud and protect business financial data. “SOX reporting” refers to a company’s efforts to fulfill those criteria.

What is SOX Compliance?

All public companies in the United States must comply with the Sarbanes-Oxley Act (SOX), which was created to provide greater accuracy and transparency of corporate disclosures in financial statements and safeguard investors from fraudulent accounting practices through effective risk management.

To achieve SOX compliance, a company must meet all the requirements outlined in SOX. While the law includes 11 titles, divided further into sections, the most significant SOX compliance requirements are spelled out in Sections 302 and 404.

Section 302 of the Act mandates a set of internal procedures that are designed to ensure accurate financial disclosure. Section 404 requires management and external audit firms to report on the adequacy of the company’s Internal Control on Financial Reporting (ICFR).

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Preparing for a SOX Audit Using COSO
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Why is SOX Compliance Important?

First and foremost, the Sarbanes-Oxley Act is a U.S. federal law. Compliance is not optional for public companies in the United States. Any private company considering an Initial Public Offering (IPO) must also prepare to comply with SOX.

Ignoring the SOX compliance process can cause numerous problems. SEC enforcement actions will cost time and money, potentially resulting in financial penalties that run into millions of dollars.

Civil and criminal penalties can be filed against company officers, such as the CFO, which can amount to fines of more than $5 million and a prison term of up to 20 years. If the ineffective controls also lead a company to restate erroneous financial statements, shareholders will inevitably bring civil litigation against the company.

While achieving Sarbanes-Oxley compliance is an investment, the penalties can be more costly. Achieving compliance with SOX has benefits, too. For example, robust controls encourage greater public confidence in the company’s financial statements and reduce the likelihood of financial fraud or other suspicious activity by employees or other stakeholders.

SOX Requirements at a Glance

To demonstrate SOX compliance, your business must submit proof of all risk controls during an external audit annually. As stated before, while SOX contains 11 titles, external auditors focus on compliance requirements specified in sections 302 and 404.

Section 302

Corporate Responsibility for Financial Reports requires that:

  • CEOs and CFOs review all corporate financial reports.
  • The reports are “fairly presented” and free of misrepresentations.
  • CEOs and CFOs hold responsibility for internal accounting controls.
  • CEOs and CFOs must report any deficiencies in internal accounting controls or any fraud involving the management of the audit committee.
  • CEOs and CFOs must indicate any material changes in internal accounting controls.

Section 404

Management Assessment of Internal Controls, which actually has two subsections:

  • 404(a), which applies to all publicly traded companies, requires management to certify whether Internal Controls over Financial Reporting (ICFR) are or are not effective and, if not, why.
  • 404(b), which only applies to larger publicly traded companies, requires an external audit of ICFR to assess their effectiveness.

SOX Compliance Checklist

To help you get prepared for your SOX compliance audit and build the appropriate control framework, we’ve compiled the following helpful checklist:

1

Prevent data tampering by implementing an automated internal audit system that tracks logins and detects suspicious activity.

2

In addition to identifying fraudulent activity, your audit trail should also capture timestamps for workflows relevant to SOX requirements besides identifying fraudulent activity. Encrypt this data to prevent any tampering.

3

Use compliance management software that can extract data from all your information systems, files, and databases and has functionality that tracks anyone who accesses or modifies that information.

4

Implement control testing to validate all your remediation and auditing protocols and ensure they are effective at their desired goal.

5

Choose a software solution that allows you to centralize your audit document management and uses automation to streamline your regulatory compliance workflows.

6

Use continuous monitoring that can detect a cybersecurity breach in real time and notify you through meaningful alerts so you can take action immediately to prevent disaster.

7

Disclose any security breaches to your auditor and the documentation that details your resolution efforts.

Learn how to Comply with the Sarbanes-Oxley (SOX) Act

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ROAR is an Integrated SOX Compliance Solution

RiskOptics ROAR provides real-time threat intelligence. Instead of using spreadsheets to manage your compliance requirements, use Compliance innovations to automate evidence and audit management across your compliance frameworks, including SOX, COSO, NIST CSF, and many more. It also serves as a user-friendly risk and process management tool.

It provides a single point of truth that ensures your business is always audit-ready. The built-in documentation repository lets you keep your rules and procedures conveniently accessible and revision-controlled.

It also provides workflow management tools for easier monitoring, automatic reminders, and audit trails, offering your company valuable data and dashboards that indicate gaps and high-risk areas.

RiskOptics ROAR enables you to administer due diligence surveys, save completed questionnaires, evaluate status, and assign a risk score based on responses. Organizations may also perform risk assessments, create business continuity plans, map controls across frameworks, and discover additional risk mitigation strategies.

RiskOptics ROAR SOX Capabilities

  • Built by compliance experts for faster time-to-value during the implementation
  • A single source of truth to assign, capture, and track requests for information
  • A central repository for all audit-ready documentation
  • Universal Control Mapping to fulfill requirements across multiple frameworks, like GDPR, COSO and COBIT
  • Identifies gaps in your compliance so you can focus on filling them and get audit-ready faster
  • Continuous monitoring of your compliance stance
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Frequently Asked Questions

Yes, it is. The Sarbanes-Oxley Act (SOX) of 2002 is a law that requires businesses to provide greater transparency and accuracy in their financial statements, as well as to safeguard investors from fraudulent accounting practices. It is legally enforceable and required for all public companies.

All public companies in the United States must comply with the Sarbanes-Oxley Act. Private companies that plan to file for an IPO must also comply with SOX risk management requirements by the time they go public.

SOX is the law that mandates internal solid financial controls. COSO is a framework for effective internal control that public companies widely use to achieve SOX compliance.

COSO provides a framework managers can use to design their internal control system. It comprises 17 principles and 87 “points of focus” when creating and analyzing controls.

SOX itself doesn’t provide much guidance around internal controls and requires no specific internal control framework. Instead, SOX focuses on holding CEOs and CFOs accountable for failure to control risks related to their financial statements and reporting.

The cost of SOX compliance varies from organization to organization. As an estimate, however, a business can expect to spend $500,000 to $1 million on compliance efforts and audits.

Internal controls over financial reporting are a risk management tactic designed to protect an organization from risks related to the economic aspects of its business. They assure that the company operates effectively and lawfully as regulatory requirements like SOX dictate.

Technology can help automate SOX compliance’s smallest aspects for IT professionals and CIOs. A great SOX compliance tool should:

  1. Be Simple and Intuitive.
  2. Have a Central Repository.
  3. Allow Real-Time Collaboration.
  4. Include Automated Workflow.
  5. Include Real-Time Status & Issue Tracking.
  6. Allow Role-Based Permission Configurations.

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