Financial reporting has always been a necessity. For a long time, fraudulent, activities became rampant such as those that occurred at Enron Corporation, WorldCom, Tyco International and so on. There was a need to think of ways to fight fraud, improve reliability to financial reports and restore the confidence of stakeholders. This is what led to the development of the Sarbanes-Oxley Act (SOX).
The SOX is a law that was passed in the year 2002. Initially, this law aimed at protecting the investors and the public at large from dishonest practices and accounting errors of an enterprise. Nowadays, not only has it helped companies to avoid lawsuits but it has helped to improve disclosure of the accounting information of companies.
Steps Of SOX Compliance
SOX compliance is the measure of how well your company manages its Internal Controls. Usually, the internal controls are policies that are put in place in an organization to ensure that the accounting system is reliable and that there is accurate financial reporting. They include the security of information especially when the financial reporting is done electronically. Sox Compliance involves two stages which are;
- SOX Section 302: As an executive -the CEO and CFO of a public corporation, SOX indicate that you should personally certify that the financial statements and records are accurate. It also states that as an executive, you have to develop and maintain suitable internal controls.
- SOX Section 404: A company should hire an independent auditor that should continuously review the accounting practices on an annual basis. Additionally, SOX requires that the external auditor discloses the company’s financial information.
Common Bodies That Facilitate SOX Compliance
The Public Company Accounting Oversight Board (PCAOB) is a body that sets rules and regulations concerning audit reports. Periodically, this body makes changes to the process of auditing. As an auditor of public companies, it is a requirement that you register with PCAOB. The PCAOB inspects, investigates and prevents the auditing firms from conducting fraud businesses with the companies that they are auditing. The PCAOB trains auditors on how to assess the internal controls of a company.
The Committee of Sponsoring Organizations (COSO) is a body with representations from Institute of Management Accountants (IMA), Institute of International Auditors (IIA) and Financial Executives International (FEI). It is responsible for publishing changes that are in the auditing process and making recommendations of the internal controls.
The Information Technology Governance Institute (ITGI) is a body that helps businesses to meet their objectives while still observing the security of information. This body has its framework for SOX compliance. Additionally, this body deals only with security issues.
SOX Compliance Testing
For you to understand fully about the SOX compliance, it is crucial to look at the essential areas that need SOX testing. This is important mainly if a company uses IT.
An organization has to access their risk which involves evaluating the internal controls of a company. You should locate the risks with a purpose and while focusing on ITGI. You should look at areas that have significant threats especially in the IT and thus develop measures to minimize those risks.
Importance Of SOX Compliance Testing
As you already know, SOX compliance starts when you identify risks and establish internal controls. Usually, failure of controls is the primary reason why financial statements and reports can be stated falsely. Due to this, there is a need for regular testing of the controls. It is not always easy to review the controls continuously especially if your company is growing.
Benefits Of Automating SOX Compliance Testing
An organization that needs to scale while still observing the internal controls may need to adopt several technology approaches that can automate the efficiency of the Sox Compliance Testing.
- Ease of updating the SOX control testing and the documentation since the executives make changes from the source. Changes reflect to all documents such as flow charts, and audit presentations.
- Transparency is crucial in both internal and external audits. This can be facilitated by the constant flow of information and documentation. Automation enables ease of tracking SOX audits.
- As earlier said, an organization has to follow various regulations that have been outlined by in different frameworks. Automation allows for collaboration of controls from various compliance regulators.
- Information is accessible to everyone including executives who can meet the SOX requirements easily. Such an action proves to the auditors and regulators that you have fulfilled your responsibility.
- An organization needs to provide evidence that the controls have been tested. Automation provides a single source of information to the external auditors.
- Through automation, SOX compliance managers can access any documentation easily but they cannot tamper with the information. This encourages the flow of information between departments, increases the reliability of reports and economizes on time.
Ken Lynch is an enterprise software startup veteran, who has always been fascinated about what drives workers to work and how to make work more engaging. Ken founded Reciprocity to pursue just that. He has propelled Reciprocity’s success with this mission-based goal of engaging employees with the governance, risk, and compliance goals of their company in order to create more socially minded corporate citizens. Ken earned his BS in Computer Science and Electrical Engineering from MIT. Learn more at ReciprocityLabs.com.
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