3 Things To Know About SOX Compliance  

February 10, 2023 No Comments

by Kennedy Baker

Cybercrime and fraud cases are increasing with every passing day. So now more than ever, businesses need to put in place proper measures to ensure they remain secure and compliant with government regulations and requirements.  

One such regulation is the Sarbanes-Oxley Act of 2002, or simply SOX. The United States Congress passed this federal law to safeguard the general public from corporate fraud. It does this by enhancing the reliability of financial reporting.   

The need for SOX compliance arose to ensure a company is held responsible for carelessness or maliciousness in handling the public’s data. With this in mind, understanding SOX compliance and looking up examples of SOX controls are essential.  

Applying this business practice ensures you protect your customers’ data. As a result, you can better lower the chances of losing data either from a cyberattack or insider threats. Keep reading to learn more about SOX compliance.   

1. What Is SOX Compliance?   

The Sarbanes-Oxley Act (SOX) refers to an annual obligation requiring all publicly traded companies with business operations in the United States to establish financial reporting standards such as:   

• – Maintaining electronic records for audits   
• – Monitoring for attempted infringements   
• – Protecting data   
• – Showing proof of compliance   
• – Entering electronic records for auditing   

The SOX Act was named in honor of Representative Michael Oxley and Senator Paul Sarbanes, who were at the forefront of passing it. SOX is also known by other names, such as:   

• – Corporate and Auditing Accountability and Responsibility Act   
• – Public Company Accounting Reform and Investor Protection Act   

The SOX Act aims to safeguard clients and investors from deceitful practices and accounting errors by enhancing financial disclosures. The disclosure of financial reports will help avoid accounting scandals such as those that rocked the world in the early 2000s involving huge companies such as World.com, Enron, and Adelphia. The entities required to be SOX-compliant include:   

• – Publicly traded companies with operations in the United States   
• – Accounting companies auditing firms for SOX compliance   
• – Privately held businesses in specific areas of financial reporting   
• – All fully owned subsidiaries   
• – International firms owning securities or stocks registered with the Securities and Exchange Commission (SEC) 

2. How Does SOX Compliance Affect The Information Technology (IT) Department? 

SOX compliance also affects the IT department, prompting companies to change how they handle and store electronic records. This is done to examine the control requirements and data security measures a company has implemented. Some of the things that the IT department must do to remain SOX-compliant include:   

• – Enhancing transparency of financial data security practices   
• – Being cautious of the access policies   
• – Adhering to set log management standards for the handling of all financial records   

During SOX IT audits, the four critical focus areas include data backup, access controls, change management, and IT security.   

What Are SOX Compliance Requirements?   

There are four SOX compliance requirements that companies must follow. These should be done to detect, prevent, and reveal possible cybersecurity incidents and risks. Here’s a look at these SOX compliance requirements:  

• – SOX Section 302: Corporate Responsibility For Financial Reports   

All publicly traded companies must report their financial records on time and regularly to adhere to SEC regulations. The company’s CEO and CFO must vouch for all these financial reports to confirm they’re accurate. These two will be responsible either by serving prison time or paying hefty penalties if the information found on the financial reports is incorrect.   

The IT department under Section 302 is also expected to present real-time reports to show compliance with SOX protocols. This includes providing real-time reporting to show their SOX compliance controls, such as presenting all the required remediation, automated testing, and collecting all relevant IT-related documents. It’s best if the financial reports are written in a language that the executives and auditors understand.   

• – SOX Section 404: Management Assessment Of Internal Controls   

This section states all financial reports should have an Internal Control Report to ensure the accuracy and transparency of financial reporting. External auditors and management will examine these internal control procedures to look for things that might lead to SOX violations. During their review, external auditors will gauge how well the company maintains, tests, and documents its internal controls.   

• – SOX Section 409: Real-Time Issuer Disclosures   

This SOX compliance section requires companies to disclose any information which might interfere with their financial performance. Some of the information to share on time during these disclosures includes events such as data breaches, acquisitions, mergers, dissolutions, and bankruptcy.  

• – SOX Section 802: Criminal Penalties For Altering Documents   

This section states there’ll be criminal repercussions for concealing, destroying, or altering any financial reports during an audit, bankruptcy proceeding, or legal investigation.   

Takeaway  

SOX compliance is a must for every company looking to go public through a special purpose acquisition company (SPAC) or IPO listing. Doing this helps avoid cases of fraud by promoting transparency in financial reporting. 

This comprehensive article has perhaps enlightened you on the essential things you need to know about SOX compliance. This will ensure your company is better placed to safeguard itself from data security threats, fraud, and compliance issues.

Author Bio

Kennedy Baker is a content writer whose interests include business and law topics. When he’s not researching, writing, or editing articles, he’s playing Elden Ring.

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