When running a successful business, it’s essential that due diligence is used to ensure regulatory compliance in all areas of the company. This has especially become the case over the last several years as waves of business scandals have led to strict legislation being enacted to compel companies to conduct their business activities lawfully.
One such example of a legislative response to fraudulent business practices was the creation of SOX compliance regulations.
What is SOX Compliance?
SOX stands for the Sarbanes-Oxley Act and was implemented for all businesses on July 30, 2002 by the US Congress. The legislation was designed to impose regulations on a company’s internal processes when dealing with their financial reporting. Failure to comply with this regulation can lead to millions of dollars in fines and can even lead to criminal convictions.
Companies today must comply with the Sarbanes-Oxley Act which spans across many departments and affects many internal accounting and management functions. It also has a major impact on IT operations.
Why was the Sarbanes-Oxley Act of 2002 Created?
The Sarbanes-Oxley Act was created in response to some of the largest accounting fraud scandals, including major oil and gas companies, telcos and banking institutions. Most notable were the Enron scandal, uncovered in 2001, and the Worldcom scandal, revealing $3.8B in fraud in 2002. This was later revised to asset inflation of $11B, the largest accounting fraud in American history at the time. The fraudulent practices of these companies, including conspiracy, securities fraud, and falsifying bank statements, led to billions of dollars of losses to many parties.
The results of these legal cases had disastrous consequences on the global economy as Enron, followed by nearly 1,000 other publicly traded companies, restated their financial records which resulted in the stock market losing almost $6 trillion in stock market value overnight. To prevent this type of economic disaster from happening again, Congress passed the Sarbanes-Oxley Act in 2002.
How Does SOX Compliance Benefit Businesses?
In the aftermath following the events of 2002 and the creation of the Sarbanes-Oxley Act, all companies were forced to rethink their processes for adequately maintaining and reporting their financial records. This new type of enforcement has enabled companies to keep a much higher standard for organizational compliance and better control their financial stability.
The leading benefit companies have seen from SOX compliance regulations is the improved access to capital markets. Investors can be confident that financial statements are accurate and there are safeguards in place against fraud. This greatly reduces the risk of investment, leading to reduced cost of capital.
These new regulations helped define the missing pieces of high-level financial reporting and paved the way for much more advanced internal systems, full documentation storage, and much more efficient preparations of financial statements.
SOX compliance has also highlighted the importance of teams to collaborate and build strong working relationships regularly. To mitigate the risks associated with falling out of regulatory compliance, directors, general counsels, and chief risk officers all need to work together to ensure all departments are adequately prepared for SOX audits. New collaboration tools have been designed to specifically support the enforcement of compliance standards across all departments in an organization.
Understanding the Scope of SOX Compliance
To effectively approach SOX compliance, it’s important to define all the requirements that have been set out for businesses and determine which regulations an organization needs to support. By limiting the scope of the compliance, you’re able to identify which internal systems and services need to be secured sooner than others and prioritize your approach to compliance.
Financial systems are typically diagnosed first to ensure they’re able to handle the level of reporting necessary during routine audits; however, systems databases and operating systems should also be able to support the growing demands of the organization. Part of SOX regulations address the importance of secure network authentication systems and applications, and thorough examination of these auditing systems is essential to prove business compliance.
While the Sarbanes-Oxley Act focuses primarily on business financial issues and imposes regulations to address them, section 302 and 404 of SOX lay out regulatory requirements that directly affect how businesses manage their IT processes to support the collection and storage of sensitive business records.
SOX Requirements – Section 302
In the past, data tampering created significant issues when it came to accurate and honest financial reporting. Section 302 of SOX places clear requirements on companies to have the right systems in place that protect against these fraudulent practices. Having data tampering protections in place helps to ensure that financial records are protected from both internal and external unauthorized access and edits. These precautions may come in the form of advanced firewalls, antimalware suites, and better security access management.
Timeline tracking is another critical aspect of SOX compliance. Companies are now required to log any changes that are made to financial records, when the file itself was modified, and who made the adjustments. Because managing these log updates manually may quickly become onerous, it is crucial to design internal processes that support these efforts effectively.
SOX Requirements – Section 404
Section 404 of SOX relates to data handling and requires that the security systems deployed adequately protect sensitive data. Beyond the need for high-level data security measures, all system data also needs to be protected, and able to be adequately presented to auditors when required. Many companies find that using hosted solutions that enable read-only access to outside individuals is a viable solution when working with auditors. In this case, the auditors themselves can verify that all system structures and security measures are in place and meet all compliance regulations.
When providing documentation relating to SOX regulations, businesses are expected to be able to prove that they’ve been operating under full compliance for at least 90 days. In the event of any instances relating to security breaches or other problems, companies are expected to disclose all pertinent issues regarding incident resolution and any damages incurred. Incident tracking and resolution is an essential aspect of compliance reporting and managing these efforts effectively will ensure a much smoother process in the event of a business audit.
Preparing for a SOX Audit
Audit readiness is an essential aspect of the sustainability of a company, especially when proving SOX compliance at all business levels. To ensure your company is prepared for the demands of these regulations, performing interdepartmental efficiency audits along with educating all staff members on the importance of these standards is essential.
Employee Training and Education
Most employees don’t fully understand the importance of regulatory compliance and adequately maintaining security policies. This makes it vital that you develop a thorough training schedule for all departments and staff about SOX guidelines and how your business can work within them.
Keep Adequate Paper Trails
Regardless of the number of processes your business uses to stay within SOX regulations, keeping adequate paper trails and documentation relating to your compliance is vital. Transparency and coherency of your documentation are crucial to have. This is not just important for your employees, but also for auditors in the event a compliance audit.
Utilizing SOX Compliance Software
Ever since the creation of the Sarbanes-Oxley Act, software development companies have continued to develop effective ways for organizations to manage SOX compliance year after year. By utilizing FIM (File Integrity Monitoring) solutions, companies can easily track their documentation in real-time, ensuring they conform to section 404 of the regulations.
Create a SOX Compliance Checklist
An effective way of ensuring your company works within SOX regulations is by generating a checklist that covers all aspects of your business processes and tools used to support your compliance.
1. Data Tampering Safeguards
Ensure that your internal systems are regularly monitored and that computers containing sensitive data are actively protected from outside access attempts. Maintaining record integrity is an important part of SOX compliance standards, and data tampering safeguards help to ensure these standards are met.
2. Establish Effective Timeline Tracking
Your system should be able to timestamp all of the data that is imported into your system. Remote locations can help you to manage the loss or alteration of data while maintaining accurate access logs.
3. Regularly Report on Safeguard Effectiveness
Reporting is critical to maintaining SOX compliance. ERP systems and other enterprise solutions can assist you when reporting on data tampering and timeline tracking.
4. Access For SOX Auditors
In the event of a compliance audit, your system should be able to support remote access with role-based permissions, to allow auditors the ability to ensure compliance.
5. Security Failure Testing and Reporting
Rather than waiting for security breaches to happen, testing your system for vulnerabilities is an effective way to ensure your business meets the security stands set out in SOX regulations. In the event of any security breach, your system should be able to accurately report on the incident and resolution during an audit.
SOX Compliance – Central for Finance, Management, and IT
The Sarbanes-Oxley Act of 2002 created an essential shift in the way that businesses handle their financial reporting and security protocols. While the demands of these regulations have forced companies to reevaluate their systems processes and compliance readiness, companies continue to benefit from a much more transparent approach to managing their organizations now and in the future. By making efforts to understand the requirements of these business regulations and educating your staff on the importance of adequate compliance, you can ensure that your organization is prepared in the event of a compliance audit.