What is SOX Compliance?

All public companies in the United States are obligated to comply with the Sarbanes-Oxley Act (SOX), which was created to provide greater accuracy and transparency of corporate disclosures in financial statements and to 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, which are then divided further into sections, the most significant SOX compliance requirements are spelled out in Sections 302 and 404.

Those sections require businesses to design and implement proper disclosure controls (Section 302) and proper internal controls over financial reporting (Section 404). Companies must also submit quarterly certifications about the effectiveness of their controls to the Securities and Exchange Commission (SEC).

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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) will also need to prepare to comply with SOX.

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

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

While achieving Sarbanes-Oxley compliance is an investment, the penalties can be quite 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 will need to submit proof, annually, of all risk controls during an external audit. As stated before, while SOX contains 11 titles, auditors tend to focus on compliance requirements specified in sections 302 and 404.

Section 302Corporate 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 404Management 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. 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 of your remediation and auditing protocols and assure they are effective at their desired goal.

5

Choose a software solution that allows you to centralize all of 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 as well as the documentation that details your resolution efforts.

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

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Reciprocity Has Your SOX Compliance Solution

Our Reciprocity GRC experts can walk you through the entire SOX compliance process, helping you to examine your environment and policies and shore them up before your formal audit.

We can also advise on documentation best practices and provide a template that will enable you to ensure that you are fully prepared and have done your due diligence before your audit.

Using our flexible, integrated ZenGRC platform allows you to ditch your Excel spreadsheet and manage your SOX requirements through our intuitive dashboard, while our solution automates many of the tedious manual processes and reduces the time and resources required to manage them.

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ZenGRC 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 are obligated to comply with the Sarbanes-Oxley Act. Private companies that plan to file for an IPO will also need to comply with SOX risk management requirements by the time they go public.

SOX is the law that mandates strong internal financial controls. COSO is a framework for effective internal control that’s widely used by public companies to achieve SOX compliance.

COSO provides a framework managers can use to design their system of internal control. It consists of 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 financial aspects of their business. They assure that the business is operating effectively and lawfully as dictated by regulatory requirements like SOX.

Furthermore, creating a set of internal controls for business financial processes and cash handling will enable it to safeguard its finances and uphold its legal obligations.