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What Corporations Need To Know About SOX Compliance

52% of corporate fraud cases start with insiders, according to PwC. The results of such incidents can be quite frustrating, with most companies experiencing both a drop in stock value and reputation. However, compliance with the Sarbanes-Oxley Act is among the best ways to reduce the chances of fraud.

Not only does it ensure that your financial statements are correct, but it also helps you cater to aspect such a cyber-security. In turn, this will uplift your business’ reputation and make it easy to attract investors. Typically, the benefit galore that you can enjoy from SOX compliance depends on how well you follow the guidelines.

Here is what you should know about being SOX compliance:

Who Exactly Needs To Be SOX Compliant?

SOX regulations are aimed at controlling how publicly traded companies, foreign firms, and wholly-owned subsidiaries conduct business with US borders. It also keeps accounting firms that audit other companies’ SOX compliance in check. Generally speaking, private entities non-profits and charities do not necessarily have to be SOX compliant.

However, this doesn’t mean that these entities have the right to destroy their financial data or falsify it as SOX still has clauses that can penalize them for this. If a private company wants to go public through an IPO, then it should work on being compliant.

What You Stand To Gain from Compliance

At its core, SOX reporting is meant to improve a company’s financial reporting norms and control them, which in turn comes with more benefits. Companies get to offer predictable reports, making their stakeholders happy. On the other hand, an improved financial reporting system is bound to make your access to financial markets more streamlined.

Among the most significant impacts of compliance is helping organizations prepare for and deal with cyber threats. The regulations outline the best practices for protection against data breaches and how to handle your business’ reputation if the threats come to life. Lastly, compliance is bound to improve communication within your organization in terms of circulating financial data and preparing for financial audits.

Key Requirements for SOX Compliance

Under SOX regulations, CEOs and CFOs hold full responsibility for the accuracy, documentation, and submission of financial data to the SEC and ensuring that there is a financial internal control structure in place. Otherwise, they may face jail time and/or monetary penalties regardless of whether non-compliance was intentional or not. Secondly, the management holds full responsibility for their internal reporting structure and how financial records are handled.

Third, companies need to create, communicate, and consistently enforce data security policies to protect their financial data. Lastly, organizations need to provide documented evidence of their compliance and show that they are continually monitoring their compliance efforts.

Fulfilling the Need to Work with Complaint Vendors

As a company grows and its financial reporting needs increases, it is normal for it to outsource some of its financial tasks. However, you still have to ensure that the vendors you choose to work with are complaint to SOX requirement for the sake of your key stakeholders. That’s where SOC reports come into play, and you have to get these reports from every vendor. Generally, there are three types of SOC reports:

  • SOC 1– this report is meant for financial transaction processing. Its main aim is to validate control over the accuracy and completeness of financial reports as well as financial transactions.
  • SOC 2– this report is meant to validate the security, privacy, availability, processing integrity, and confidentiality of your vendor’s hosted systems and any data they process or store.
  • SOC 3– while this report covers the same testing procedures as the SOC 2 reports, it is aimed for use by the public. As such, it omits detailed results that would otherwise expose sensitive data to the public or have excessive industry jargon.

Each report can either be produced as a type one or type two report. While type one covers reports for a specific point in time, type two covers reports for a given duration. The latter tends to be more valuable as it tests the effectiveness of controls over a long period.

Preparing For SOX Compliance Audits

You will typically need to complete yearly audits to make your compliance information readily available for key stakeholders. You should hire independent auditors for the SOX audits, but the audits must be independent of any other to reduce the chances of conflicts of interest.

Primarily, the goal is to verify your company’s financial statement and compare it to past statements. An auditor also has the right to interview your workforce and gauge whether your compliance controls are enough. Since the auditing process can stall other business operations, it would be wise to invest in SOX compliance software to make access to compliance information easy. Ideally, you need to ensure controls such as access control, data backup, security, and change management are on point.

SOX requirements were made with the interest of your business and all stakeholders in mind. Remaining complaint not only makes your business seem professional, but it also limits the chances of fraud. Commit to being SOX compliant to protect your business’ reputation.

Source: What Corporations Need To Know About SOX Compliance

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