SOX Compliance – Background, Requirements and Facilitating Technology

What is the Sarbanes-Oxley Act (SOX)?

After some of the worst accounting scandals in history, the United States Congress passed the Sarbanes-Oxley Act (SOX) in 2002 with its main purpose to minimise and monitor fraudulent corporate activities, and protect the public. This Act was initiated and spurred on by a series of infamous accounting scandals such as Enron Corporation and WorldCom where publicly listed companies reported on inaccurate corporate data with the intention to misrepresent financial health. A key benefit of Sarbanes Oxley is that it brought an end to self-regulation by establishing an external and independant auditing process through the Public Company Accounting Oversight Board (PCAOB). In order to protect investors and the general public from the excessive greed of a few individuals, the SOX Act was signed to ensure the reliability of financial practices, with the compliance requirements applying to all US listed companies and accounting firms.

What happened to Enron Corporation?

In 2001, energy giant Enron Corporation filed one of the biggest corporate bankruptcies in the financial world at that time, as executives in the management team pocketed millions of dollars through a fraudulent accounting scheme. More specifically, the management team reported inaccurate information in their financial reports that inflated profits. To deter and minimise the risk of similar accounting frauds in the future, regulators decided to increase the security required. SOX was thus implemented to ensure publicly listed companies implement comprehensive measures to enhance the accuracy of corporate disclosures that report on financial data. 

What is the purpose of Sarbanes-Oxley Act (SOX) Internal Controls over Financial Reporting?

The Internal Controls Report, mandated by Section 4 of the Act, commonly known as SOX 404, requires that all US publicly listed companies have adequate internal controls in place to report accurate financial data in their annual reports. More specifically, SOX 404 requires companies to implement adequate Internal Control over Financial Reporting (ICFR) to ensure fair financial reporting practices have been put in place in accordance with Generally Accepted Accounting Principles (GAAP). While it seems like a rather fair and straightforward request, SOX requirements have been widely condemned due to it being rather vague in nature. This required organisations to create controls that cover a large scope of IT and financial requirements, all tailored to their unique organisational structure, oftentimes based on guesswork. External auditors must attest annually to the design and effectiveness of the organisations’ Internal Control over Financial Reporting and the accuracy of the financial statements.

Key SOX compliance requirements

• Ownership and responsibility: Section 302 states that the CEO and CFO are directly responsible for the accuracy of all financial reports and internal control structure to the SEC.
• Management of Internal Controls: Section 404 states that management is responsible for an adequate internal controls structure, an assessment of the effectiveness of the internal control structure and report on any shortcomings for full transparency.
• Data security policies and strategies need to be clearly formalised, communicated and enforced to protect all financial data that is stored and utlised.
• Continuous monitoring and documenting: It is required that organisations continuously monitor and measure their efforts in order to become SOX compliant.

Benefits of using technology for easier SOX compliance and SOX Audit

To address the ambiguity in SOX requirements and the limitations of ‘reasonable assurance’ in audit reports, professional institutions have issued standards that contain best practices and guidance on how to position your company for good Internal Controls and Risk Management. This includes the likes of self-assessments that help to understand maturity, identify shortcomings and derive appropriate countermeasures to prepare your company for upcoming audits and certifications. Another cornerstone of a successful business relationship is vendor assessments. Critical additional steps are usually required to substantiate claims made at the vendor, such as employing sample testing or data analytics. Evidence obtained through the course of a self-assessment should be subject to a critical review to assess the design effectiveness of controls in place at the vendor, too. This is where Alyne’s technology can help.

The Internal Control over Financial Reporting (SOX, SOC 1) Control Set has recently been rolled out, leveraging Alyne’s extensive Library of Financial Controls. The capability offered in Alyne provides detailed guidance on effective control design, with out of the box assessments and deep analytics that can serve as your organisation’s ‘health check’ in terms of financial and business integrity, helping you to meet SOX and SOC 1 compliance more easily.

Alyne’s Control Set covers the Internal Control over Financial Reporting (ICFR) requirements of the U.S. Sarbanes-Oxley Act (SOX) Management assessment of internal controls”, and the System and organisation Controls 1 (SOC 1) framework, defined as “Reporting on an Examination of Controls at a Service Organisation Relevant to User Entities’ Internal Control Over Financial Reporting.” Although different, both focus on compliance with ICFR and highlight the importance of appropriate reporting mechanisms.

Read more about Alyne’s Sox-in-a-Box capabilities in this article.

The RegTech Report Podcast: Listen to a discussion with Karl Viertel and Alyne’s specialist for Control Frameworks based out of the US, Frederick Geyer, for more insight into Alyne’s approach to Financial Controls and SOX Compliance. 

Interested in a guided tour into how Alyne’s extended capabilities can help to align your internal controls towards easier SOX Compliance? Why not book a meeting with an Alyne expert here.