What is SOX Compliance?

The Sarbanes-Oxley Act of 2002 was passed by the US Congress in an order to protect customers and the general public from businesses that act irresponsibly or intentionally. The general standards of SOX compliance are designed to make sure that businesses present their financial information in a transparent manner and that there are more formal regulations in place to avoid fraud.

SOX compliance refers to annual audits conducted by public corporations, which are required by law to demonstrate evidence of accurate, secure financial reporting.

 

What Are SOX Controls?

Companies implement SOX security controls as a way to spot and stop errors or inaccuracies in financial reporting, whether they are deliberate or not. These controls must be performed for all business operations and cycles based on financial reporting or revenue growth. Companies that manage financial reports must record, test, maintain, and often evaluate controls in order to be SOX compliant.

To verify that controls are compliant with SOX regulations, internal auditors must conduct compliance audits on a regular basis. These controls aim to increase company leadership's accountability, ensure the truth of financial statements, and safeguard investors from fraud. The US government also established the Public Company Accounting Oversight Board (PCAOB), a non-profit institution, to supplement SOX controls and guarantee the accuracy of financial audits carried out on behalf of public businesses.

 

SOX Compliance Requirements

Following are the requirements of the SOX regulation:

Senior management responsibility: The CEO and CFO of a publicly traded firm are directly accountable for the financial reports that are submitted to the Securities Exchange Commission (SEC). For violations, these senior officials face serious criminal penalties, such as prison time.

Internal Control Report - A report proving management is in charge of the internal control framework for financial records is required under SOX. In order to maintain transparency, any problems must be disclosed right away to high management.

Data security policies: In accordance with SOX, businesses are required to keep a formal data security policy that provides sufficient protection for the usage and storage of financial data. All staff members should be informed of and adhere to the SOX data policy.

Proof of compliance: According to SOX regulations, businesses must keep a record of compliance documentation, make it available to auditors as needed, perform regular SOX testing, and track and evaluate SOX compliance goals.

 

Benefits of SOX Compliance

All publicly traded companies benefit from SOX compliance because it communicates a standard degree of financial assurance and fosters stakeholder and investor trust as well as market certainty. SOX provides executives a reason to redirect a portion of corporate profits toward upgrading financial management systems and capabilities, which protects shareholders, minimizes the danger of lawsuits, and enhances company operations by assisting them in avoiding bad decisions.

SOX has helped companies to standardize and consolidate important financial operations, eliminate redundant information systems, decrease discrepancies in their data loss protection strategy, automate manual procedures, minimize the number of handovers, and eliminate irrelevant controls.

 

What is the Sarbanes-Oxley Act?

The Sarbanes-Oxley Act also referred to as the SOX Act, is a federal law in the US that seeks to protect investors by enhancing the quality and authenticity of corporate disclosures. President George W. Bush signed the Act into law on July 30, 2002, after it was proposed by Senator Paul Sarbanes and Representative Michael Oxley.

The following are the most important sections of the Act:

Section 302: The Security and Exchange Commission requires public firms to file regular reports. Top executives are in charge of establishing internal data controls and must personally attest to the accuracy of the information in these reports.

Section 404: A section on internal controls must be included in annual financial reports, together with an assessment of its performance and disclosure of any flaws found. The evaluation of the internal controls by management must be supported by registered external auditors.

Section 409: Any substantial changes in the company's financial status or activities must be notified to the public as soon as possible.

Section 802: Section 802 deals with deal with penalties as any firm representative found responsible for hiding, erasing, or changing records with the purpose to delay an inquiry might spend up to 20 years in prison and pay the necessary fines. Any accountant who intentionally helps business representatives destroy, modify, or fabricate financial statements could spend up to 10 years in prison.

 

Who does Sarbanes-Oxley apply to?

The Sarbanes-Oxley Act applies to:

• All SOX regulations apply to publicly traded firms in the United States and their auditors.
• All wholly-owned subsidiaries with operations in the United States.
• Every international company with a public stock market conducts business in the United States.

 

Privately held businesses do not have to comply with the reporting requirements, although they are still bound by the liability and punishment clauses. They are also subject to several SOX Act restrictions, such as fines for retaliating against whistleblowers and criminal penalties for fabricating or destroying records.

Conclusion

Privately held businesses must be aware of SOX, as their value is increased by their improved ability to borrow money, raise capital, and monetize their value through an IPO or sale to a public company, among other provisions that directly and significantly affect them. SOX Compliance’s goal is to improve corporate behavior by requiring corporations to collect and maintain accurate financial data and to make that data readily available to investors and regulators in real time.

 

Author

Sonali Thakur

Associate - Sales and Marketing

RiskPro India