What Internal Controls are Required for SOX Compliance?

ARTICLE - As businesses grow, they inevitably encounter new challenges. One challenge growing businesses face is complying with The Sarbanes-Oxley Act (SOX).

This article provides an overview of SOX and the internal controls required to comply.

What is Sarbanes-Oxley?

The Sarbanes-Oxley Act (SOX) is a United States federal law passed by Congress in 2002 that aims to protect investors and the public by ensuring that companies have accurate financial statements.

The law is named after its sponsors, Senator Paul Sarbanes and Representative Michael Oxley. The law directly responded to a series of corporate scandals in the early 2000s, which resulted in billions of dollars in losses for investors and shook public confidence in the stock market.

What are SOX internal controls?

The primary purpose of Sarbanes-Oxley is to increase the accuracy and reliability of financial statements, which investors and other stakeholders use to make decisions. To achieve this goal, the law established several requirements for public companies, including:

• Creation of an independent audit committee composed of members of the board of directors who are not involved in the day-to-day management of the company.
• Requirements for auditors to certify the accuracy of financial statements and to report any material weaknesses in internal controls.
• Restrictions on insider trading and the use of accounting tricks to inflate earnings.
• Enhanced disclosure requirements for public companies, including the disclosure of material off-balance sheet transactions. While SOX targeted public companies, any business can benefit from these requirements.

Challenges becoming SOX compliant

Although the goals of SOX are laudable, many businesses have found compliance to be hard. One of the biggest challenges of becoming SOX compliant is the cost of compliance. The law requires companies to implement significant internal controls over financial reporting, which can be expensive and time-consuming without the right processes and technology. Additionally, companies may need to hire additional staff or outside consultants to meet the requirements of the law.

Another challenge with becoming SOX compliant is the complexity of the law itself. The Sarbanes-Oxley Act is a lengthy and detailed law that requires companies to understand and comply with various requirements. For example, the law requires companies to perform a risk assessment and document their internal financial reporting controls. These tasks can be challenging, particularly for smaller companies that may not have the resources to hire dedicated compliance staff.

Finally, the penalties for non-compliance can be severe. Companies that violate the law may face fines, lawsuits, and reputational damage. In extreme cases, executives may face criminal charges.

How technology helps SOX compliance

Technology can help businesses comply with SOX by providing tools that support the requirements of the law. Here are some ways that technology can assist companies in becoming SOX compliant:

• Financial reporting automation: Automation tools can help businesses streamline their financial reporting processes and reduce the risk of errors. Enterprise resource planning (ERP) applications such as NetSuite can automate various financial processes, such as journal entries, account reconciliations, and financial statement generation. ePayables solutions native in NetSuite further improve control by automatically reconciling payments in real-time in NetSuite, providing better visibility, tracking, and reporting.
• Document management: Technology can help companies maintain proper documentation and record-keeping practices required by SOX. For instance, finance automation solutions that are native in NetSuite can enable businesses to store and retrieve financial records easily, create and manage compliance-related documents, and provide secure access controls.
• Internal controls management: SOX mandates that public companies must establish and maintain internal control processes to ensure financial accuracy and integrity. Finance automation solutions that are native in NetSuite can help businesses customize and track their internal control processes and ensure they comply with SOX regulations. Finance automation solutions that are native in NetSuite also can help companies automate the monitoring and testing of internal controls, track compliance activities, and generate reports.
• Data analytics and payment fraud detection: Technology can assist in detecting and preventing payment fraud. Companies can use data analytics tools to monitor financial transactions and detect anomalies that could indicate fraudulent activities. Finance automation solutions native in NetSuite can help businesses track and analyze their financial data and identify trends or patterns that could indicate potential payment fraud.

Overall, technology can play a significant role in helping businesses comply with SOX. By automating financial reporting, managing documents and records, tracking internal controls, and detecting fraud, companies can ensure they meet SOX requirements and protect the integrity of their financial data.

Let's discuss your needs

Sarbanes-Oxley aims to protect investors and the public by ensuring that companies have accurate financial statements. But complying with the law can be a significant challenge for businesses, particularly smaller companies that may not have the resources to meet the law's requirements.

To comply with the law, businesses must establish a strong culture of compliance, implement strong internal controls over financial reporting, establish an independent audit committee, and ensure that their auditors are independent and objective. By taking these steps, businesses can comply with the law and build trust with investors and other stakeholders. Finance automation solutions that are native in NetSuite can help provide the control that companies need for SOX compliance.

If your business struggles with SOX compliance, iCloudAuthority wants to speak with you. Please email us to arrange a time to speak with one of our automation experts about your needs.