As an executive manager in a public company, you have probably heard of Sarbanes-Oxley, also referred to as SOX or Sarbox legislation. But what do you know about it? In this article, we shed more light on what SOX compliance is and why your firm should be compliant.
What is SOX?
The Sarbanes-Oxley Act (SOX) is a piece of legislation named after its congressmen sponsors, Senators Paul Sarbanes and Michael Oxley.
The two congressmen proposed the legislation in 2002, after the discovery of major financial scandals such as Enron and WorldCom. These scandals negatively affected the financial markets and eroded investors’ confidence in Wall Street.
The SOX was made into law through the senate’s Public Company Accounting Reform and Investor Protection Act, and the House’s Corporate and Auditing Accountability, Responsibility and Transparency Act. The legislation aimed to respond to financial fraud and increase investor confidence in the financial markets.
The Sarbox legislation regulates financial reporting processes and responsibilities of CFOs and CEOs, as well as public companies’ code of ethics related to financial reporting.
Public companies are required to comply with SOX to ensure reliable and accurate financial reporting. The legislation also helps public companies to integrate IT into accounting processes to make it easy for financial reports to be traced and verified.
Does Your Company Need To Be SOX Compliant?
Publicly traded companies doing business in the US need to comply with the SOX Act. This also includes wholly-owned subsidiaries and non-US publicly traded firms whose business operations are in the US.
Moreover, private firms planning for an Initial Public Offer (IPO) are expected to be compliant with some provisions of SOX.
What is SOX-Compliance?
To become SOX compliant, you must meet all the requirements of the legislation. The Act is made up of eleven titles that are divided into different sections. The significant sections of the Act that relate to financial security are sections 302 and 404. These sections require CEOs and CFOs of public companies to:
- Ensure the accuracy and reliability of their companies’ financial reporting systems
- Ensure the firms have working financial controls
- Provide certified financial reports to the Securities and Exchange Commission (SEC) on an annual and quarterly basis.
Corporate officials of noncompliant companies can serve jail terms of up to 10 years and be fined up to $1 million. Officials that obtain compliance certificates fraudulently can be sentenced up to 20 years of jail time and be fined up to $5 million.
Benefits of Being SOX Compliant
The SOX legislation has led to a more transparent approach to financial reporting. The benefits of the Act include:
1. Stronger Organization Controls
The SOX regulation requires firms to document the financial controls they have in place. This helps to create more transparency and control awareness among a firm’s employees and shareholders. The legislation also makes it easy to implement the financial controls and stipulates the actions to take in case of inadequacies.
SOX emphasizes on the use of IT for transparent code of ethics and financial reporting. The use of automated tools to document controls makes it easier for stakeholders to access and be aware of the existing controls.
2. Improved Financial Reporting
SOX seeks to make financial reporting more transparent by mapping out a firm’s financial control processes. The legislation requires companies to show evidence that these controls exist for all its accounts. Financial control mapping makes it easy for organizations to pinpoint any reporting gaps and correct them.
Mapping controls enhance financial reporting, making it easy to keep track of reporting processes and correct mistakes immediately they occur.
3. Improved Audits
Being SOX-compliant requires your firm to document all financial controls in place. This provides the needed much-needed evidence during internal audits.
When an internal audit is done satisfactorily, external auditors will have an easier time performing their audits. This will also lower the audit costs and reduce the time employees have to spend answering external audit questions.
4. Good Performance from the Start
SOX compliance makes it easier for management to correct any financial reporting issues very early in the company’s life. According to the Institute Of Internal Auditors presentation by Steve Guarani, being SOX-compliant allows public firms to:
- Focus on high-risk processes and accounts
- Come up with control structures to protect themselves from compliance costs
- Maximize auditing and operational efficiency
- Use IT to reap for automation control processes.
When firms become SOX-compliance at an early stage, they can come up with controls that work. The management is also able to encourage a culture of transparency in financial reporting, which leads to improved performance in the long run.
The SOX legislation has helped to restore investor confidence in the financial markets. If your firm is not SOX-compliant, it’s time you got on to it to tow the Act’s requirements and avoid costly litigations.
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