The Sarbanes-Oxley Act of 2002 (SOX) was created to protect investors from fraud and deception in the corporate world.
It can be an intimidating law for organizations to follow, but understanding the various SOX regulations and how to prepare for them can help you meet the necessary requirements.
Explore answers to the following questions:
What Is SOX?
SOX was introduced to protect investors and the general public from fraudulent corporate accounting practices. The act requires publicly traded companies, their subsidiaries, vendors, and partners to:
- Create an internal control system for financial reporting
- Maintain accurate financial records
- Have the accuracy of the 10-Q and 10-K financial statement filings certified by the CEO and CFO
- Provide a process for reporting fraud
While it’s a daunting task for organizations to follow SOX regulations, understanding the different types of SOX regulations and how to prepare for them can help your organization meet all necessary requirements.
Why Did Congress Pass SOX?
The collapse of Enron acted as the primary catalyst for the act's fast-tracked passage by Congress in 2002. The act reflected public sentiment that investors needed additional protection from fraudulent corporate practices and was passed to restore investor confidence and promote transparency.
An independent regulatory body known as the Public Company Accounting Oversight Board (PCAOB) was also formed to oversee and regulate accounting firms that audit publicly traded companies to ensure proper compliance with SOX regulations.
What Does a SOX Compliance Program Look Like?
A basic SOX compliance framework includes:
- Risk assessment and scoping
- Preventive and detective methods to mitigate material financial errors or fraud
- Documentation of the organization’s internal controls over financial reporting (ICFR), including entity level controls (ELCs) and Information and Technology General Controls (ITGCs)
- Monitoring the operating effectiveness of the organization’s ICFR
- Key report monitoring
- Deficiency identification and remediation
How Can I Monitor and Maintain SOX Compliance?
Organizations that don’t adhere to SOX regulations may be subject to severe penalties, which is why an effective plan should be established to guarantee ongoing compliance with SOX laws and regulations.
Internal Control Evaluations
Internal control evaluations should be conducted frequently to detect any deficiencies in the company’s internal control framework over financial reporting, as well as devise a strategy for addressing and remediating any deficiencies identified and any unmitigated risks.
Companies should also ensure that they have processes in place for the following:
- Segregation of duties
- Evaluations of third-party service providers
- Communication with those charged with governance
Automated Monitoring Systems
Automated monitoring systems can also play a crucial role in keeping track of changes in data or transactions, thus helping prevent errors that could lead to noncompliance issues.
Companies should also develop an overall compliance program of policies, procedures, and risk assessments to stay up to date with all aspects of SOX requirements.
Monitor SOX Updates
Businesses must stay informed on changes or updates made regarding SOX compliance laws, such as amendments passed by Congress or guidance provided by regulators like the SEC.
What Are the Penalties for Skipping SOX Compliance?
Under the SEC authority, companies that fail to follow SOX regulations may be subject to civil action.
Noncompliance can result in:
- Hefty fines
- Disgorgement of profits
- Civil lawsuits
- Other corrective measures
Individuals like CEOs or CFOs not in compliance could face significant fines or imprisonment. The Department of Justice enforces SOX compliance and can bring criminal charges upon any individual found guilty of committing fraud against shareholders or attempting to violate any aspect of SOX regulations.
This can also result in prison sentences and fines for both companies and individuals not in compliance.
Investors may have a private right of action against officers, directors, or accountants whose actions resulted in losses due to violating SOX compliance. Investors should consult with legal counsel if they suspect fraud or negligence.
What Are the Different Types of SOX Regulations?
SOX contains 11 titles split into 66 sections. This framework is designed to protect shareholders and the general public. The four primary sections that make up the SOX framework are as follows.
Corporate Responsibility for Financial Reports
This section dictates CEO and CFO certification of the accuracy of the financial statements and effectiveness of internal controls.
Management Assessment of Internal Controls
This dictates SOX compliance audit requirements, this being the most prolific compliance title.
Criminal Penalties for Altering Documents
Section 802 dictates criminal penalties for altering, destroying, or falsifying documents.
Corporate Responsibility for Financial Reports
Section 906 dictates penalties to which public company executives could be subjected.
Together these regulations help protect investors and the general public from fraudulent accounting practices and encourage reporting of any potential fraud. They require organizations to implement and monitor an ICFR framework, maintain accurate records, and certify financial statement reports issued to the public.
Are SOX and HIPAA Related?
SOX and HIPAA laws both focus on compliance but in different areas. SOX is primarily concerned with financial reporting, auditing, and disclosure requirements for publicly traded companies. HIPAA focuses on health care organizations and their use, storage, and transmission of patient information.
Some overlap remains between SOX and HIPAA in certain areas, such as internal control systems. For instance, a health care organization can comply with SOX 404’s internal control objectives and best practices as well as HIPAA’s security rules to comply with rules protecting sensitive patient data. Both frameworks play a crucial role in maintaining the integrity of financial reporting and protecting sensitive information within their respective domains.
We’re Here to Help
If you have further questions about SOX compliance, contact your Moss Adams professional. You can also explore the SOX compliance checklist to find out more basic information about maintaining compliance.