No one can claim that SOX 404 compliance and developing a SOX controls compliance program is easy. We can say, however, that the overall process has become much easier after years of practice and an evolving understanding—by regulators, companies, auditors and, yes, consultants—over what’s needed to create a solid internal control framework that reduces the risk of a material misstatement of the financial statements.
In fact, the process has opened up incredible efficiencies within companies as they discover during the identification, assessment and documentation of their Sarbanes-Oxley internal controls that there are much better ways of getting done. This applies to the operations within the finance department and beyond that has any effect on how financial information is processed, analyzed and reported.
For companies that see an IPO in their near future or that have to suddenly become SOX compliant because they are going through a SPAC merger (merging with a special purpose acquisition company speeds up the SOX compliance timeline), this is a positive take on SOX controls. Here are some other basics to keep in mind as you undertake this process and look at your SOX internal controls.
Identifying SOX Controls
Under SOX 404, the internal control provision of the Sarbanes-Oxley Act, public companies need to provide a management assessment of the effectiveness of their internal controls over financial reporting (ICFR) and have their external auditor attest to that assessment.
How much time you have for identifying and assessing Sarbanes-Oxley internal controls depends on where the company is in terms of size and its public-company journey. Ideally, however, even private companies should tiptoe into the SOX waters if they want to gain an understanding of what it takes to build financial integrity into the foundation of their business and operate like a public company. Once your company goes public, it is subject to more frequent financial-reporting cycles, and a higher potential for material errors that could have a financial impact or harm your company’s reputation.
With financial operations that are on the up and up, with tight internal controls, the risk of a material misstatement and fraud are greatly minimized. Also the ability to meet SOX compliance requirements is enhanced and made to be more efficient if the process is tailored to the way your company operates and is set up so that it is sustainable to follow.
Assessing SOX Controls and Creating a SOX Controls List
Before getting to a list of your key SOX controls, a risk assessment can bring clarity to the current risks facing your company today that could have a detrimental effect on the company’s ability to produce reliable financial reporting. Relevance and materiality will keep the scope of SOX compliance on the internal controls over financial reporting (ICFR) that matter.
How to Identify SOX Controls?
What are the processes and systems your company has in place that should prevent employees from committing a mistake or fraud? If an error or incidence of fraud does occur, what are some ways it would be detected? These ICFR measures contribute to management’s ability to give assurance to the company’s stakeholders and securities regulators that the company’s financial information can be trusted.
What Are Some SOX Controls Examples?
- Segregation of duties: This is one that even the smallest of finance teams learn to value as it spreads responsibility for a task beyond just one person. For instance, an employee needs to get a manager’s okay before moving forward on payments. It’s a way to keep everyone honest, and to protect the integrity of financial information and transactions.
- Code of conduct: Employees should acknowledge their awareness and compliance of the code on an annual basis.
- Account reconciliations: Mistakes get uncovered through this method of double-checking that information has been entered correctly.
Documenting SOX Controls
Documentation during the entire process will save valuable time later on when it comes time for management to affirm confidence in the company’s ICFR system and then for the auditors to weigh in on that assessment.
Remember to document the steps involved during the review process; the supporting documentation will aid the company’s ability to address any auditor questions and also help the company when the process starts over the following year. SOX experts can offer helpful insights on keeping this process as efficient as possible and also liaise with the auditors to minimize the back-and-forth that can arise during a SOX audit.
Being Efficient with SOX Compliance
RoseRyan has had a dedicated Sarbanes-Oxley Compliance solution since the 2002 law’s regulations went into effect. Companies have hired us to not only design a program that works with their workflow but to continue working alongside the company to maintain the program by updating and simplifying controls.
The ultimate goal of the SOX controls compliance effort is to strengthen your ICFR system so that a material misstatement of the financial statements can be prevented. The legal mandate makes this a must for public companies, but there is room to make it your own. With the help of SOX experts, you can establish an ICFR system that works for your company, that shows your company operates with integrity (which can help your valuation), and reinforces that your company is a good business partner.