The United States Congress established the Sarbanes-Oxley Act (SOX) of 2002 as legislation to warrant the protection of consumers and the general public against fraudulent practices and illicit financings of firms and other business organizations.

The primary goal of SOX compliance is to ensure companies’ financial statement transparency and establish a system that keeps an eye on their internal controls.

Implementing SOX compliance also benefits businesses by preventing data theft and cyber attacks, proving an efficient business strategy.

The article will cover everything, from SOX controls to preparing an audit. So, keep reading.

Outline: Background Of SOX 

Sarbanes-Oxley Act (SOX) was sanctioned by the US House of Representatives and the US Senate on July 30th, 2002, as a reaction to highly publicized corporate financial scandals.

Scandals like WorldCom, Enron, and Tyco provided Senator Paul Sarbanes (D- M.D.) and Representative Michael Oxley the necessity to draft the bill. SOX aims to help protect investors from swindling practices by making corporate financial disclosures more reliable.

According to this legislation, all publicly held companies must submit an annual report about their finances. Failing to do so will cause crime penalties.

The bill was passed by a heavy majority in the House and Senate, with only three members voting in opposition to SOX.

Who Does SOX Compliance Apply To?

SOX is applied to all publicly held companies in the United States and the foreign firms that do business in the US Firms that audit companies for SOX also fall under this category.

Private companies and nonprofit organizations are generally exempted from this regulation.

What Are SOX Controls?

SOX controls aim to verify the accuracy of financial reporting and data protection. It is, however, very important to know the role of SOX controls within your company.

Normally, it includes both business and information technology (IT) controls. In the area of business, SOX controls focus on the protection of data that comprehend financial reporting. In the department of information technology (IT), insurance of error-free and reliable systems to make financial records available is the goal for SOX controls.

What Are The SOX Compliance Requirements?

To comply with the SOX regulations, chief executive officers (CEOs) and chief financial officers (CFOs) of the companies are responsible for the submission of an accurate annual report of their finances to the US Securities and SEC.

SOX also demands a report on internal control stating that management takes full responsibility for the internal control framework related to financial records. To ensure transparency, any limitations must be notified to the higher authorities.

SOX demands organizations mandate formal data policies to secure the use and storage of financial data during regular operations. Communication and implementation of these policies should be ensured.

All these publicly traded companies must also maintain compliance documentation demonstrating that SOX compliance objectives are monitored the entire year.

What Is The SOX Compliance Checklist?

Following is a checklist for SOX compliance:

1. Block Tampering Of Data

Ensuring that your classified financial data isn’t altered is important to SOX compliance. Therefore, install software to monitor breaches to databases containing sensitive information.

2. Record The Timeline Of All Activities

Activity documentation is significant during SOX audits. Hence, use softwares that can keep track of activities on all transactions and encrypt the data.

3. Implement Access Tracking Devices

Employ systems that can supervise messages and calls from all automated sources. This will help in the identification of breaches. Visual tools and cybersecurity tracing are specifically helpful in this regard.

4. Ensure Security Systems Are Functional

Keep your safeguarding devices in check to ensure their proper working. Let your auditor access the system so they can view the relevant data.

5. Gather And Analyze Defense System Information

To ensure the efficacy of your security system, install multiple systems.

6. Install Security-Breach-Tracking Softwares

Install detection softwares to identify dubious activities related to SOX compliance. The software should be able to report to the management team as soon as any unusual incident happens.

7. Allow Access To Defense Systems To The Auditing Team

All succeeding companies must give their auditors controlled access to the security systems to point out working issues without altering the data.

8. Reveal Security Incidents To Auditors

In case of security breaches, alert your SOX auditor as soon as possible so they can address the problem accordingly and in due time.

9. Disclose Technical Difficulties To Your Auditors

Your information technology (IT) department must consult with your auditors if any technical difficulty is found in the security system.

What Is SOX Compliance Audit? 

This is a compulsory yearly assessment of how well a company handles its internal controls, and the results are shared with the business partners.

The primary goal of the SOX compliance audit is to verify the company’s financial statements. To prevent any conflict of interest, companies hire independent auditors.

Auditors go through the past statements and compare them with the current year’s statements to analyze if everything is in check. They can also question employees and claim that compliance controls are enough to establish standards of SOX compliance.

The SOX auditor gets access to the necessary defense controls, and any changes a company makes to act according to SOX should be available in written form.

Putting Together A SOX Compliance Audit

Keep your company’s internal auditing systems and reporting updated. To avoid surprises during reviewing, ensure that SOX compliance software is functioning properly. Before an audit, have your financial documentation and electronic information security organized and available.

Auditing Of SOX Internal Controls

Internal controls have the following four components that are investigated annually:

Access Controls

Ensure that only authorized people have access to sensitive financial data. This means physical (doors, badges, locks on drawers) and digital controls (security, i.d., least privilege access, passwords, and more).

IT Security

It is very crucial to identify sensitive information and protect it against cyber attacks. Close monitoring of who can see the data and detection followed by immediate response to security occurrences is required to ensure this effectively.

Data Backup

Evaluate your company’s backup data and systems to minimize disturbance and data loss, such as financial reports and internal control reports during an incident. Along the original systems, all the data center devices containing backed-up data should be safeguarded by SOX.

Change In Management

In case of the addition of any new employee, computing system, or software, changes must be documented to avoid potential risks in the internal control structure.

Pros Of Compliance Software For A SOX Audit

A compliance software and system can be beneficial in the following certain situations:

• Information Security: Data-related software security devices enhance visibility into all SOX compliance affairs.
• Tracking Permission: Platforms that secure data reduce insider threats by pinpointing glaring permission issues.
• Classification Of Data: This software classifies data based on sensitivity and risk profile.
• Prevention Of Cyber Attacks: This software can notify you of any unusual activity and crypto-virus attacks, thus avoiding breaches ahead of time.

What Are The SOX Compliance Advantages? 

Following are some significant SOX compliance benefits:

Financial Protection

SOX compliance provides companies with the framework for better handling their financial statements, benefiting other areas of the firm.

Improved Reporting

Since financial reporting is predictable and well-regulated, SOX-compliant companies have better gains in stock markets.

Enhanced Cybersecurity 

SOX regulations protect companies from cyber thefts and lawsuits in case of data breaches. These lawsuits and fines are expensive and can cause great damage to the company’s reputation.

Improved Collaboration 

SOX compliance improves cross-functional communication and cooperation between different company sections involved with the audits.

Risk Prioritization 

Due to regulation of SOX compliance, an effective risk management program is established and maintained within a company that ensures transparency and duly breach mitigation.

While maintaining a company’s integrity, SOX compliance also helps restore the general public’s confidence in big corporations.

What Are The Challenges Of SOX Compliance? 

The two most common challenges of SOX compliance that companies often face are:

1. Spreadsheet And End-User Issues

A spreadsheet is a significant part of SOX workflow because it links data across different documents. However, these new (modern) audit projects demand more detail about controls, thus creating version control issues, incomplete data, typing errors, and sometimes deleted data.

2. Rising Costs And Resources

Even though SOX compliance has multiple advanced advantages regarding cybersecurity and reporting on finances, with its cost running into the millions, it means an added burden. Thus, it would be an understatement to say that it is simple to comply with the Sarbanes-Oxley Act.

What Are The Key Sections Of SOX?

The Sarbanes-Oxley Act is based on eleven different sections. Here are some of the most significant sections for the businesses and organizations

Sarbanes-Oxley Act302

Collective Accountability for Finance Reports

This section demands publicly held companies to submit their annual financial reports to the US Securities and Exchange Commission (SEC). Companies should include internal controls to avoid incorrect data. Moreover, the executives must establish that these controls are confirmed within two-three months of the report.

Sarbanes-Oxley Act303

Inappropriate Impact on Audit Conduct

This section precludes deceitful, manipulating, or coercing auditors. Civil penalties are implemented by the US Securities and Exchange Commission (SEC) if found guilty.

Sarbanes-Oxley Act401

Disclosure in Systematic Statements

This announces that all financial reports should have OBS or incognito leverage transactions, duties, and arrangements. It also declares that the reports must not include deceptive remarks.

Sarbanes-Oxley Act404

Managing Review of All Internal Control Structures

An organization’s management is held accountable for its internal control. Both external audit management teams brief on the appropriate management.

Sarbanes-Oxley Act802

Illegal Punishments for Tampering Records 

Any worker found at fault for changing financial records or obscuring a record is subjected to criminal punishments from penalties to being sentenced to prison for over a decade.

Sarbanes-Oxley Act806

Safety for Workers Who Give Proof of Fraud

This area defends the employee who aids in the investigation and issues information regarding the company’s financial fraud.

Sarbanes-Oxley Act906

Corporate Accountability for Finance Documents

Workers who submit confusing or false reports are subjected to criminal penalties in breach of the SOX. These penalties include damages and detention for more than two decades.

Sarbanes-Oxley Act1107

Retribution Against Snitches

This area develops national fines and penalties or jail time for less than a decade for turning against an informant.

What Types Of Software Can Assist With SOX Compliance?

Maintaining all the records and documentation of SOX compliance is a burdensome task, particularly when done manually.

Non-compliance of the employees is another factor that hinders accurate reporting. Therefore, it is really important to have software and systems that track sensitive information and identify and notify security threats in time.

Given below are some of the tools that can help in this regard:

• SOX Compliance Software: It efficiently flags cyber thefts and generates financial reports according to the preferred templates.
• SIEM Software: This software can protect secure data by detecting hackers, spyware, and unauthorized personnel. Moreover, it also sets alarms to alert the authorities in case of a security threat.
• Access Management Software: Obscuring the chance of unauthorized access protects an organization’s working system.
• File Transfer Software: This software allows a company to ensure what type of data they want to transfer, thus ensuring safe data transfer.

What Is SOX Equivalent In Different Countries?

Implementation of the SOX Act of 2002 is practiced in other countries. Some countries with their version of this act are mentioned below:

• Australia.
• Canada.
• France.
• Germany.
• India.
• Italy.
• Japan.
• The Netherlands.
• South Africa.
• The United Kingdom.

Noteworthy Organizations And Frameworks

SOX is over 60 pages and has several concepts and policies that are related to the auditing process:

Control Objectives For Information And Related Technologies (COBIT)

It is a framework designed by the Information Systems Audit and Control Association (ISACA) for information technology management and IT governance.

The Committee Of Sponsoring Organizations Of The Treadway Commission (COSO)

It is a joint initiative established in the United States by five private sector organizations to combat fraud, dedicated to guiding executive management and government entities.

The Public Company Accounting Oversight Board (PCAOB)

It is a nonprofit organization created by SOX to oversee the audits of public companies to secure the interests of investors and the public. All PCAOB rules are approved by the US Securities and Exchange Commission (SEC).

The IT Governance Institute 

It is an information technology (IT) framework to attain SOX compliance that uses Control Objectives for Information and Related Technologies (COBIT) and The Committee of Sponsoring Organizations of the Treadway Commission (COSO) but works on defense systems instead of general compliance.

Frequently Asked Questions 

What Are The Four SOX Key Controls? 

Four key aspects of SOX controls are:

• Access controls.
• Information technology security.
• Backup of data.
• Change management.

All these areas are required to be addressed while preparing for a SOX audit.

What Is The Goal Of SOX Compliance?

The instituted goal of the Sarbanes-Oxley Act (SOX) 2002 is to guard investors by enhancing the validity and dependability of corporate disclosures created according to the security laws.

What Are The Penalties For SOX Non-Compliance? 

Apart from a lawsuit and bad press, a person found guilty of non-compliance, or fraud is subjected to up to $1 million in fines and imprisonment of 10 years. Deliberate fraudulent practice can cost up to $5 million in fines and 20 years in prison.

Why Did Congress Pass the SOX?

Accounting scandals of corporate giants like WorldCom, Arthur Andersen, and Enron faced accusations of substantial fraud, with WorldCom involved in a $104 billion bankruptcy. As a result of a string of such financial scandals, the creation and passage of SOX were made.

Bottom Line

The Sarbanes-Oxley Act (SOX) is a standard of practice for international commerce and investment banking. While it was created to avoid criminal corruption, it also allows companies to improve their financial reporting, cybersecurity, and access control capabilities.