SOX Controls Laws and Regulations
SOX controls are regulatory laws that safeguard a process cycle of financial reporting. But these aren’t just any old rules; they fall under the Sarbanes-Oxley Act and Section 302, or SOX for short. Basically, it’s a United States federal law requiring all public companies to comply with the regulation in order to prevent errors from happening within their own processes, including private companies who have been granted exceptions by way of Sections 404 and 409. The law was created to better protect investors and increase the accuracy of financial statements, while at the same time, protecting companies from fraud. These provisions are a result of corporate scandals in recent years where CEOs were accused of lying about their company’s finances.
These internal processes can either prevent or detect problems in the area of finance while meeting the objectives at hand. The auditor will perform routine SOX compliance audits on a company’s systems as well as testing all cycles leading up to reporting results for business purposes. It is imperative that these businesses have strong control measures in place if they want to avoid any non-compliance with this law.
To tighten up your SOX compliance, your business will need to document and test the processes that control financial reporting. For example, by removing all but essential access from a network system or tightening security on passwords. To prevent non-compliance with these regulations we recommend performing regular audits as well.
If you want financial reports to be accurate, then SOX controls are the safeguard for them. They make sure that each overarching business process achieves its objectives and prevents any errors from causing deficiencies in a process. To ensure consistent integrity of audits completed by accounting firms or an external auditor, Congress created The Public Company Accounting Oversight Board (PCAOB). The Public Company Accounting Oversight Board (PCAOB) is an organization in charge of overseeing the audits performed by accounting firms or external auditors. This ensures that consistency and integrity are upheld for all audits, which consequently leads to fewer errors within financial reporting processes.
Using COSO for Internal Framework
Many US companies have taken the internal controls framework and made it their own, which was published by the Committee of Sponsoring Organizations of the Treadway Commission, also known as COSO. The Committee of Sponsoring Organizations of the Treadway Commission is a joint initiative between five private sector organizations dedicated to providing thought leadership through development and guidance on enterprise risk management, internal control, and fraud deterrence.
Companies working with financial data need to put in the right SOX controls. If they refer to COSO, five types of control are needed. These include an environment that promotes ethical behavior and limits risk exposure including assessment for risks through periodic reviews, ongoing monitoring, training employees on compliance issues or accounting procedures, all of which can help reduce errors and frauds respectively, and exchanging information by both informing staff about changes within a company while also ensuring management’s oversight over all other aspects related to finances. While communication encompasses, not only from organizational leadership down into the ranks at different levels but internally between departments like finance or HR, it should be open enough so everyone knows what others are doing without any secrets being kept.
The Sections of SOX Compliance Law
The Sarbanes-Oxley Act of 2002 is a law that has 11 sections, each with different mandates. Three key provisions are referred to by their section numbers 304, 404, and 802.
Section 302 of the Sarbanes-Oxley Act requires senior corporate officers to personally certify that their company’s financial reports are in compliance with SEC disclosure requirements and have adequate SOX internal controls for public disclosures. This provision is meant to protect investors from reckless or fraudulent practices, as well as ensure transparency between management and shareholders.
Section 404 lays out requirements for how external auditors verify companies’ accounting processes by checking balance sheets, income statements, or other financial documents as well as reviewing management’s assessment about their company’s compliance with SOX standards.
Section 802 forces companies to keep records electronically and physically for a certain period. Different types of business records have different retention periods depending on their importance, such as financial documents which must be kept at least 10 years after they are used. Additionally, this section includes three rules that affect recordkeeping dealing with destruction or falsification of a company’s public filings, through backdating transactions. These three sections are defining what constitutes a “record,” specifying how long publicly traded businesses should retain information in order to comply with SEC regulations regarding securities trading disclosures, and including electronic communications within these requirements.
What Does a Company Have Control Over Internally?
With SOX in place, companies are required to have their third-party contractors provide assurance reports demonstrating compliance with the company’s systems.
In order to remain compliant with SOX, it is important that each company has control over its employees’ access. These areas include employment contracts and termination policies as well as controls on vendors such as payroll processors who can affect or cause a breach of information security if they’re not held accountable by the organization.
The head of every company is responsible for making sure that the employees are following all policies and procedures. Internal controls, such as a sign-off from an executive officer or approval by several people involved in payroll processing activities, help keep responsibility with one person instead of allowing it to be spread out over many different areas.
One of the most important aspects of ensuring a company’s financial integrity is establishing SOX internal controls. One example includes having executive officers, such as CEOs or CFOs, sign off on disclosures being submitted to SEC filings. Additionally, other examples include hiring managers approving candidates and HR verifying that they meet all requirements for hire, which helps ensure no one can bypass these steps without getting caught. The financial reporting process also requires various reviews before checks are written and usually, there need to be at least two approvals. This was needed due to the high risk of embezzling from payroll processing systems. With SOX controls in place, there are multiple sign-offs granted and segregation of duties within the reporting process.
