Blog  •  June 05, 2024

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The Comprehensive SOX Compliance Guide

In 2002, Congress passed the Sarbanes-Oxley Act as a response to a series of financial scandals, including those at WorldCom and Enron. The act bears the name of the two congressional representatives who created the legislation and is known as SOX for short. Continue reading for more information about SOX regulations, including compliance.

What Is SOX Compliance?

The financial scandals that preceded the creation of Sarbanes-Oxley cost investors billions of dollars. They also caused a loss of trust and confidence among investors.

The Sarbanes-Oxley Act was created to increase transparency among corporations, for example, by mandating more accurate corporate disclosures. The measures were designed to restore investor confidence in securities markets.

SOX consists of eleven distinct requirements that impact financial reporting and corporate governance.

Publicly traded companies that do business in the US, including both domestic and foreign-owned companies, must comply with SOX.

The Securities and Exchange Commission is in charge of SOX enforcement, including penalties for those entities found not in compliance.

Key Provisions of SOX

Key provisions of Sarbanes-Oxley include:

  • Section 302: This section requires corporate management to personally vouch for the accuracy of financial statements and other financial reports.
  • Section 404: This section instructs companies to develop internal controls over their financial reporting, including financial reports, internal accounting, communication of financial information and ongoing monitoring.
  • Section 906: This section specifically requires a company's CEO and CFO to sign off on the accuracy of their financial statements and submit their signature to the SEC.

SOX Compliance Requirements

Looking specifically at the key provisions outlined above, what do companies need to know about compliance with SOX?

The implications for corporate officers are at the top of the list.

Section 302 states that a company's management must personally verify the accuracy of financial statements and internal controls.

Section 404 looks specifically at the internal controls and outlines four critical areas that management must pay attention to: financial reporting overall, internal accounting of financial transactions, effectively capturing and communicating financial information, and the continued monitoring and improvement of internal controls.

Section 906 requires that a company's chief executive officer (CEO) and chief financial officer (CFO) sign off on their financial statements in a form that is submitted to the SEC.

If companies are found to not be in compliance with Sarbanes-Oxley, they face fines. CEOs and CFOs who are found to have submitted incorrect information may be penalized with fines and jail time. At the extreme end of things, companies could be delisted from public stock exchanges.

Knowing the SOX requirements for public companies and the penalties for noncompliance, how can companies demonstrate that they are, in fact, in compliance with the act?

Implementing SOX Compliance in Your Business

The first step toward effective compliance is developing a compliance strategy. An effective strategy outlines what is to be done and why. It keeps everyone on the same page and provides a single source of truth for the organization.

To capture and organize financial information, as required in Section 404, companies must implement financial reporting software. The right financial reporting software will be able to ingest information from an array of sources, sort and organize information for easier discoverability, and adapt to the financial reporting and transparency requirements of SOX.

These two steps will help greatly when it comes to SOX compliance. However, companies need to invest in ongoing education and training for their employees. New hires may not understand the full implications of not complying with the act, even accidentally. A continuing education program not only can keep SOX provisions top of mind for all relevant hires, but also can improve efficiency.

Benefits of SOX Compliance

Complying with SOX reporting mandates helps a company avoid fines and penalties. It also offers intrinsic and extrinsic benefits for the corporation. The benefits of adopting SOX guidelines include:

Increased investor confidence: Investors place a premium value on transparency, particularly in the present era of ESG. SOX documentation helps companies walk the walk when it comes to transparency, which has a positive effect on investor confidence.

Strengthened internal controls: In order to be improved, something must be measured. For the majority of companies, SOX guidelines around internal controls are a lot more effective than processes that were in place before. While it means a lot more information to manage and track, the net benefit of this is stronger internal controls.

Enhanced corporate governance: As part of SOX compliance, there is a natural separation between the corporate management and its board of directors. This is designed to increase organizational oversight and accountability. Although this can be a big cultural shift for the organization, ultimately it pays off with enhanced corporate governance. For one example of an improvement after SOX implementation, both sides will need to make a greater effort to communicate, which will result in greater information-sharing and transparency.

Challenges and Solutions in SOX Compliance

While the act is not new, SOX compliance can be challenging for many companies. Let's explore a few of the common compliance challenges for companies and how these can be overcome:

SOX internal controls: Companies typically have to start organizing and tracking a significant amount of data regarding internal controls. The right financial reporting software can help with SOX compliance automation features, including machine learning and AI capabilities.

Navigating complex regulations: Financial regulations are frequently changing. Companies must keep up to date with changes when filing reports and verify the accuracy of information contained. Here, seeking the right partnerships with auditing, reporting and legal matters will help a company keep up to date with regulatory changes and maintain SOX compliance moving forward.

SOX compliance is time-consuming. By investing in the right software, companies can reduce the amount of labor needed to adhere to reporting requirements without a correlative loss in information accuracy. To discover how DFIN supports companies with all their financial reporting needs, learn more about our suite of products.