The Sarbanes-Oxley Act, commonly known as SOX, represents one of the most robust safeguards for investors. Becoming and remaining SOX compliant is vital for publicly traded companies, as it ensures financial reporting transparency and promotes corporate responsibility.
However, the sweeping nature of the Sarbanes-Oxley Act can make it challenging for Chief Financial Officers (CFOs) and accounting firms to achieve and maintain total compliance. A SOX compliance checklist can be a valuable resource for your team because any information or data shared with investors and regulators will need to be SOX compliant, not just financial data. Creating a checklist will ensure you are covered for all the data you share with investors. Here’s everything to know about creating a SOX compliance checklist.
Origins of SOX Compliance Requirements
The Sarbanes-Oxley Act (SOX) was passed in 2002. This federal law is designed to protect investors from corporate fraud by establishing strict standards for both financial reporting and internal controls.
SOX was enacted in response to a string of corporate scandals, including Enron and WorldCom. These consisted of business leaders manipulating financial reports, misleading investors and regulators and ultimately led to huge losses for shareholders, criminal convictions for executives, and loss of employment for everyone else.
To prevent similar events, SOX requires publicly traded companies in the United States, including their subsidiaries, to implement transparent financial reporting practices, robust internal controls, and accurate disclosures. These compliance requirements help the Securities and Exchange Commission (SEC) protect investors and hold corporate leadership accountable.
What Is SOX Compliance?
The Sarbanes-Oxley Act is divided into multiple sections. These three main provisions outline the core compliance requirements you need to be cognizant of:
Section 302: Financial Reporting Accuracy
Section 302 of SOX focuses on the accuracy of financial statements and disclosures. Under this provision, corporate executives, typically the CEO and CFO, must certify the completeness and accuracy of their company’s financial disclosures and reports. By personally signing off on these documents, executives assume legal accountability for their accuracy and integrity.
Corporate leadership could face fines or criminal penalties if external auditors uncover inaccuracies. The WorldCom case is a prime example of worst-case outcomes for CFOs and CEOs who behave unscrupulously. While that case — as well as the offenses Ebbers was convicted of — predates SOX, the WorldCom situation speaks to the SEC’s harsh stance on misleading investors.
Section 404: Internal Controls
SOX 404 requires that organizations design, implement, and maintain effective internal controls for financial reporting. In the context of a SOX compliance checklist, internal controls are processes and mechanisms that help prevent and detect errors or fraud in financial transactions and reporting.
This section obliges companies to conduct annual external audits of these controls, where an independent auditor assesses the effectiveness of internal controls. Additionally, you must document your internal assessment in an annual report.
The report must include a description of each control, any weaknesses you discovered, and how your organization has addressed them. Section 404 is often regarded as the most labor-intensive aspect of SOX compliance.
Section 409: Timely Reporting of Material Events
Section 409 mandates that companies report any significant changes in financial conditions or operations to the public and the Securities and Exchange Commission as soon as they occur. A material event could include changes such as mergers, acquisitions, major product launches, and litigation that could impact the company’s financial standing.
Section 409 ensures that investors and stakeholders receive timely and accurate information, allowing them to make informed decisions. This section requires your company to establish clear communication strategies for promptly disclosing material events to relevant parties.
SOX compliance has reshaped the way that publicly traded companies and their wholly owned subsidiaries approach corporate governance. The act promotes the creation and use of security controls that preserve the safety and transparency of financial transactions.
Who Needs to Comply?
SOX compliance is mandatory for all publicly traded companies in the United States, including subsidiaries of international companies that are listed on U.S. stock exchanges. The act applies to any publicly held company that files periodic reports with the SEC, including quarterly and annual reports.
Accountancy firms engaged in preparing and auditing annual accounts and disclosures are also themselves, subject to SOX.
Private companies are not required to adhere to SOX. However, many voluntarily implement similar controls, especially those planning to go public or attract significant investment. Following SOX compliance protocols, even if your company is not legally obligated to do so, can boost the confidence of potential investors and business partners.
If your company is publicly traded, SOX compliance is mandatory. Even if your company is private, you may want to consider creating a SOX compliance checklist and implementing provisions that promote financial transparency. Doing so can serve to enhance your organization’s reputation and encourage better financial governance.
Key Elements of a SOX Compliance Checklist
Creating a SOX compliance checklist is essential for ensuring that your organization meets the stringent requirements of the Sarbanes-Oxley Act. Here is a look at what you need to include in your SOX compliance checklist.
Financial Reporting Accuracy (Section 302)
SOX Section 302 emphasizes the importance of accuracy and completeness in your financial records. Company executives, especially the CEO and CFO, must certify the accuracy of all financial statements and disclosures.
During the certification process, your executive leadership team must be diligent in identifying any financial misstatements that could lead to civil or criminal repercussions. Here are a few key steps you will need to include as part of your compliance efforts:
- Document All Financial Transactions: You need to ensure that every transaction is accompanied by extensive documentation to create an identifiable audit trail
- Document Disclosures: Data other than Financial Data is also regularly disclosed, the interpretation of this data could also have a meaningful impact on investor sentiment or regulatory understanding. If data is reported directly or cumulatively, its source must be understood and protected.
- Establish Review Procedures: Your organization should implement a systematic review process for financial statements that includes checks by finance and internal audit teams
- Executive Sign-Off: Once financial statements have been completed and reviewed, top executives need to sign off on them to confirm the integrity of the data
Ensuring financial accuracy in your reporting processes requires a collaborative effort across multiple departments. When each team is diligent about record-keeping and review processes, your organization will be well on its way toward meeting SOX requirements for accurate reporting.
Internal Controls & Documentation (Section 404)
Section 404 represents one of the most comprehensive and labor-intensive components of the Sarbanes-Oxley Act. It requires you to implement a variety of internal controls, including access controls to limit who can view and manipulate financial records.
Under this section, your organization must establish, evaluate, and document internal control mechanisms per SOX regulations. Your internal control framework should prioritize risk management, cybersecurity, and the protection of sensitive data from tampering.
Start by assessing the risks associated with your organization’s financial reporting process. Identify areas where errors or fraud are most likely to occur, such as expense reporting or revenue recognition. Your risk assessment will serve as the foundation for your control framework and help you proactively prevent security incidents.
After you’ve established controls, assess your internal control structure via an internal SOX compliance audit. Your testing process may involve simulated transactions to check for any flagged discrepancies or gaps. If a control fails, follow these steps:
- Document your findings
- Create a timeline for fixing the issue
- Ensure Management understands the issue
- Take corrective action
One of the most time-consuming aspects of 404 compliance involves documenting your internal controls. You must prescribe each control and how you test those protocols to ensure efficacy. You will also have to detail the results of each control test.
Implementing strong internal controls helps reduce the risk of non-compliance and promotes accuracy in financial reporting. Section 404 compliance builds credibility with investors and establishes a framework for accountability within your organization.
Information Technology (IT) Controls
Much of your organization’s financial data resides in an array of digital systems. A SOX compliance checklist can help promote collaboration between your IT and accounting teams so that you can address technology-related SOX vulnerabilities. Effective IT controls ensure that your financial data remains accurate and accessible only to authorized personnel.
The main checklist items for IT controls include the following:
- Access Controls: Ensure that only authorized individuals have access to sensitive financial information, review and revoke regularly
- Data Backup and Recovery: Develop a robust backup and recovery process to protect against data loss, and test it regularly
- System Change Management: Document any system changes that could impact financial reporting
Implementing IT controls helps protect your financial data from threats and maintains the ongoing integrity of your organization’s financial records. By establishing strong IT controls, you can strengthen your company’s ability to maintain compliance with SOX requirements.
You’ll also need to create a list of all digital solutions that store financial data, including your accounting software, enterprise resource planning (ERP) tools, and customer relationship management (CRM) solutions like Salesforce. Learn more about how you can achieve and maintain SOX compliance in key systems like Salesforce.
Timely Reporting & Transparency (Section 409)
Section 409 of SOX addresses the need for timely and transparent disclosure of significant financial events. According to this section, your company must promptly report any material events that could impact its financial condition or operations. Material events include include:
- Mergers
- Acquisitions
- New debt obligations
- Any significant changes in revenue projections
You’ll need to establish a policy that outlines the criteria for identifying and reporting material events. Some events have clear definitions, such as a merger or an acquisition. However, you’ll also need to set thresholds for what constitutes a significant change in revenue projections. It’s best to err on the side of caution here rather than risk drawing the ire of the SEC. This could also include cyber security incidents or data corruption incidents which could in turn cause reputational damage.
After you’ve outlined what incidents require notification, you’ll need a means of reaching out to investors and stakeholders. Use a multifaceted approach that includes channels such as press releases, direct calls, secure emails, and public filings.
Keep in mind, too, that you also have to notify the SEC. Be open and honest about relaying any significant changes so that you can promote transparency and protect your organization’s reputation. When you adhere to these requirements, your company will build trust with stakeholders and empower investors to make informed decisions.
A Sample SOX Compliance Checklist
Below, we’ve created a sample SOX compliance checklist to help you implement practical strategies that promote compliance with the Sarbanes-Oxley Act. Consider adding other sections to the SOX compliance checklist to address specific organizational concerns.
How Can Own Help With SOX Compliance?
A SOX compliance checklist will help you effectively manage SOX compliance. However, you’ll also need the right tools to support your SOX compliance efforts checklist and give stakeholders peace of mind. Own can help.
Own offers compliance solutions to help private and public companies protect financial data within SaaS applications like Salesforce per the provisions of the Sarbanes-Oxley Act. Connect with us to schedule a demo.
