In areas like accounting and finances, compliances exist to provide a set of standards that organizations should continuously work towards meeting. These standards consist of laws, policies, and regulations created to protect the interests of society at large. With the objective of protecting shareholders and the general public from malpractices in an enterprise, SOX compliance is no different. It does its job by requiring publicly held companies to establish and enforce internal control procedures to reduce corporate fraud.
Even though SOX compliance applies to the entirety of an organization, it is particularly relevant to Information Technology (IT) departments. The reason for this is that IT departments will be in charge of introducing broad and all-encompassing information accountability measures. At the same time, this department’s specialists need to create, organize and maintain a comprehensive archive of corporate records. Usually, they should coordinate these actions with the management in order to secure cost-effectiveness.
What Is SOX Compliance?
Otherwise known as the Sarbanes-Oxley Act, the SOX Act was passed by the United States Congress in order to protect investors and the general public from financial malpractices in publicly held companies. Secondarily, it aims at improving the accuracy of corporate financial disclosure.
Motivated by the financial scandals that occurred at Enron, WorldCom, Tyco and others companies, the SOX act has the objective of bettering corporate governance and accountability. Being in compliance with SOX translates to following certain rules for data storage, the keeping of electronic records and other forms of sensitive information handling.
Who Needs to Become SOX Compliant?
The landmark Sarbanes-Oxley Act appeared during the aftermath of various economic crises and scandals such as the Enron fraud and the burst of the high-tech bubble. Quite understandably, the faith of investors diminished greatly after these incidents, creating a climate of economic uncertainty. In many ways, this was the beginning of the process that led to the 2008 economic crisis. However, it’s hard to tell what the effects of that crisis would have been without the mitigating effects of the SOX act.
With the objective improving corporate governance, fomenting financial transparency and regaining the trust of investors, SOX is mandatory for all publicly held companies in the United States. In order to maintain certain standards, it also includes publicly-traded international companies doing business in the US. Additionally, SOX affects wholly-owned subsidiaries and private companies under preparation for their initial public offering.
No matter what their size is, the Sarbanes-Oxley Act is mandatory for all publicly-traded organizations. In order to submit to SOX compliance, these organizations need to create a framework for financial accounting to generate readily verifiable financial reports. In order for you to easily track and verify the reports, you need to comprise all traceable data.
How to Implement SOX Compliance in Your Organization
Business organizations of all sizes need to implement SOX compliance in order to get insurance, avoid lawsuits and attract investors. This is done by adopting all the regulations described by the SOX Act.
The act itself is comprised of eleven sections and over 60 pages. However, you should keep in mind that sections 302, 401, 404, 409, 802 and 906 are essential regarding compliance. Additionally, one should consider that the two main sections relating to security are sections 302 and 404. While section 302 plays the role of a safeguard against flawed financial reporting, Section 404 requires those same safeguards are externally verifiable by independent auditors.
Particularities aside, there are some basic steps that one can take in order to implement SOX compliance in any company. The best way to implement SOX compliance is simply to establish an effective internal control system. Experts should set-up this concept in such a way that it continually updates management of breaches, failures, or weaknesses in the system.
9 Steps to Achieve SOX Compliance
1. Evaluate Your Board Members: It’s hugely important to make sure board members are acting by the same standards the company subscribes to. One should always consider corporate literacy as something truly important.
2. Create Relevant Committees
This is achieved by breaking up board members into committees. Among others, there can be audit committees, nominating committees, compensation committees and disclosure committees.
3. Get Advice From Corporate Officers
Sound legal counsel is a must for any company. However, acting members should also obtain it individually. CEOs and CFOs are particularly vulnerable, making it hugely important they get advice from corporate officers.
4. Install Defensive Communication Standards
Clear and transparent communication standards can only be beneficial whenever a legal battle ensues. Establishing standards that focus on potential problems can be life-saving.
5. Evaluate Risky Board Members
According to the law, board members are equally responsible to shareholders and third parties that depend on the company’s finances. For that reason, individual evaluation can help avoid many legal issues.
6. Be Careful With Section 404 Auditors
By identifying areas in which legal liabilities are minimal, attorneys can achieve lowered costs in Section 404 processes.
7. Appreciate Whistle-Blowers
Alerting the company regarding breaches of internal policy and government regulations can make the difference between life and unexpected death. Furthermore, it’s important to be considerate of the people brave enough to take this step forward.
8. Be Opportune Filing 8-K Reports
Things like changing in management or losing a major client, need to be properly documented through 8-K reports.
9. Consider an SAS 70 Form
Even small companies may be required to provide certifications about their internal control. The SAS 70 form is a highly recognized auditing standard created by the American Institute of Certified Public Accountants. Moreover, it guarantees that a service organization has been examined regarding their control objectives and control activities.
SOX compliance is not only a requirement but a necessity as well. Even though its benefits may not be evident, they help improve corporate governance, restoring the faith of investors. Do you have additional tips for becoming SOX compliant? Share your knowledge!