What is SOX Compliance? 2024 Complete Guide

Federal lawmakers enacted the Sarbanes-Oxley Act in large part due to corporate scandals at the start of the 21st century. Cloud Data Security – Simplify securing your cloud databases to catch up and keep up with DevOps. Imperva’s solution enables cloud-managed services users to rapidly gain visibility and control of cloud data. Andrew Magnusson, Customer Engineering Expert, has worked in the information security https://business-accounting.net/ industry for 20 years on tasks ranging from firewall administration to network security monitoring. His obsession with getting people access to answers led him to publish
Practical Vulnerability Management with No Starch Press in 2020. It was signed into law by President George W. Bush, who likened SOX to the far-reaching business reforms made by Franklin D. Roosevelt in the wake of the Great Depression.

1. Furthermore, the Act led to the creation of the Public Company Accounting Oversight Board (PCAOB), which sets standards and rules for audit reports.
2. Internal Audit teams rely on spreadsheets and shared folders to manage their controls, so documentation often remains on the desktop of internal audit teams — far away from process owners.
3. Internal auditors must perform regular compliance audits to ensure controls are consistent with SOX requirements.
4. This post-Enron law that aimed to protect investors by preventing fraudulent accounting and financial practices has major implications for data retention and security.
5. Its limitations notwithstanding, there is a strong argument that Sarbanes has accomplished its core goal of preserving public confidence in the financial markets and in financial reporting.

Auditors will also look closely at financial reporting and filings to ensure accuracy and that there are no signs of malfeasance. Generally speaking, SOX requirements encompass both business controls and information technology (IT) controls. On the business side, SOX controls focus on the accuracy and security of data that feeds into financial reporting. The goals for IT controls are to ensure all systems are accurate, complete, and error-free in ways that could potentially impact financial reporting.

SOX changes the way corporate boards and executives work, making them accountable for the accuracy of financial statements and removing the defense of board-level ignorance. Financial information must now be certified by management and criminal penalties for fraudulent financial activity are now much more severe. This Act, also known as the SOX Act of 2002 and the Corporate Responsibility Act of 2002, was a reaction to financial scandals involving publicly traded companies such as Enron Corporation, Tyco International plc, and WorldCom. The fraudulent activities “shook investor confidence in the trustworthiness of corporate financial statements and led many to demand an overhaul of decades-old regulatory standards” (Kenton, 2020).

Vice Vicente started their career at EY and has spent the past 10 years in the IT compliance, risk management, and cybersecurity space. Vice has served, audited, or consulted for over 120 clients, implementing security and compliance programs and technologies, performing engagements around SOX 404, SOC 1, SOC 2, PCI DSS, and HIPAA, and guiding companies through security and compliance readiness. Over time, the simple spreadsheet has morphed into a SOX workflow staple, due in part to its ability to link data across different documents and automate basic tasks.

First, it mandates that public companies create audit committees that are independent of management. SOX also makes it illegal for organizations to attempt to influence the outcomes of audits. Under the Securities Exchange Act of 1934, public companies of a certain size already had to file annual and quarterly financial reports with the SEC.

Key Takeaways

Install software that can track suspicious logins and prevent breaches to business databases containing sensitive financial data. Ensuring your sensitive data isn’t accessed or altered is a cornerstone of SOX compliance. To that end, you should strongly consider implementing some form of data privacy protection software. Centralized management of audit and assessment of heterogeneous systems streamlines the execution of these processes. Automation with SOX compliance tools reduces the amount of resources required to maintain on-going SOX compliance and can provide a positive return on investment. In addition to SOX controls, the US government has created the Public Company Accounting Oversight Board (PCAOB), a non-profit organization that ensures the integrity of financial audits performed on behalf of public companies.

Identifying SOX Controls – Key and Non-Key Controls, ITGCs, and Other Entity-Level Controls (ELCs)

The Sarbanes-Oxley Act (SOX) defines the requirements for the integrity of source data related to financial transactions and disclosures. SOX Section 404 requires implementation of technical controls and continuous access auditing to assure the reliability of data related to financial transactions. In order to establish internal controls, public companies look to implement frameworks like COSO, CobiT, ISO and more.

SOX is expensive to implement

The focus of the audit scope should be those assets, people, systems, and processes that affect the financial disclosure process — which means that not everything in the organization will be in scope. A SOX audit scope should include and consider any and all risks to an organization’s internal controls over financial reporting in a risk-first approach to SOX compliance. In enacting SOX, one of Congress’s primary aims was to prevent a firm’s management from interfering with an independent financial audit. Section 302 and 303 seek to enhance the independence of audits through regulating internal procedures and management actions. Section 302, codified 15 U.S.C. § 7241, requires public companies to adopt internal procedures for ensuring accuracy of financial statements and makes the CEO and CFO directly responsible for the accuracy, documentation, and submission of the financial reports and internal control structure.

Reports must be prepared according to generally accepted accounting principles (GAAP), a set of standards maintained by the Financial Accounting Standards Board (FASB) (link resides outside ibm.com). SOX aims to prevent corporate fraud by setting strict regulatory mandates for how organizations protect financial records from tampering and making auditors more independent from their clients. Besides the financial side of a business, such as audits, accuracy, and controls, the SOX Act of 2002 also outlines requirements for information technology (IT) departments regarding electronic records.

SOX makes it illegal to retaliate against employees who report potential fraud by demoting, firing, suspending, harassing or otherwise harming them. Although proponents and critics continue to assess the overall impact of the law, it is seen as the most significant piece of security legislation since the Exchange Act. Corporate leaders also voiced concerns that meeting the regulations laid out in the Sarbanes-Oxley Act would take too much executive time and that compliance costs would amount to an exorbitant amount of money.

Sarbanes-Oxley compliance

It came as a result of the corporate financial scandals involving Enron, WorldCom and Global Crossing. Effective in 2006, all publicly-traded companies are required to implement and report internal accounting controls to the SEC for compliance. In addition, certain provisions of Sarbanes-Oxley also apply to privately-held companies. Finally, companies must implement internal controls to protect financial data from tampering and fraudulent use by internal or external actors.

A full 9 out of every 10 companies with ineffective Section 404 controls self reported effective Section 302 controls in the same period end that an adverse Section 404 was reported, 90% in accurate without a Section 404 audit. Sarbanes-Oxley also created sabanes oxley act the Public Company Accounting Oversight Board (PCAOB), a non-government organization to oversee the public accounting profession and audits of public companies. Sarbanes-Oxley is administered and enforced by the Securities and Exchange Commission (SEC).

SOX-compliant companies report more predictable finances and easier access to capital markets. Whether producing reports for investors, auditors, or regulators, your reporting capabilities will be much improved with SOX. Access means both physical controls (doors, badges, locks on file cabinets, etc.) and electronic controls (login policies, least privileged access, and permissions audits). For example, you might place a biometric scanner on the entrance to a server room that houses critical data to ensure only authorized personnel can enter.