The Sarbanes-Oxley Act (SOX) of 2002 is a U.S. federal law enacted to protect investors from fraudulent financial reporting by corporations after several high-profile financial scandals. The legislation serves as a corporate checks-and-balances system by enforcing regulations to improve financial disclosures and prevent accounting fraud.
To remain compliant with SOX, companies need formal data security policies paired with consistent enforcement of those policies. Compliance is verified through performance of annual SOX audits, which ensure organizations uphold high standards of transparency and accountability in their financial reporting.
What Is a SOX Audit?
A SOX audit is an evaluation process that ensures a company's financial reporting complies with the Sarbanes-Oxley Act. The primary goal of a SOX audit is to assess the effectiveness of a company's internal controls over financial reporting (ICFR) to prevent fraud and ensure the accuracy of financial statements.
SOX compliance must be renewed annually, as companies are required to undergo yearly evaluations of their internal controls and financial reporting to ensure ongoing adherence to the Sarbanes-Oxley Act. This means firms must conduct SOX audits annually to remain compliant.
Who Can Perform a SOX Audit?
Third-party auditors are selected to perform SOX audits and must be registered with the Public Company Accounting Oversight Board (PCAOB) to issue an opinion. SOX auditors must remain independent from a company’s operations to effectively evaluate its internal controls and financial reporting accuracy and should not have any conflicts of interest with the company being audited. Auditors take several approaches when performing SOX audits, but priority responsibilities include assessment of processes, reviewing and documenting controls, and evaluating overall SOX compliance.
Why Are SOX Audits Important?
SOX audits play a key role in safeguarding stakeholders by enhancing financial transparency and preventing fraud. This commitment to financial accountability serves to boost investor confidence by providing reliable financial reporting and making sure there are no material misstatements.
Additionally, audits can pinpoint areas where internal controls can be strengthened, leading to more efficient business operations. For one, companies must verify that their information technology (IT) assets — such as network hardware and computers — are strong enough to prevent fraud or large-scale errors. These requirements collectively strengthen the transparency and reliability of financial reporting, safeguarding the interests of investors and maintaining compliance.
Audits are also vital to avoiding Securities and Exchange Commission (SEC) penalties due to non-compliance, such as fines, investigations or potential lawsuits. This enhanced reliability of financial reporting contributes to the stability and integrity of financial markets.
Key SOX & SEC Provisions
SOX provisions define legal standards for financial accountability, making these audits an essential part of compliance. Key SOX provisions include:
- Section 302: Mandates that senior corporate officers personally certify the accuracy and completeness of corporate financial reports. This ensures accountability at the highest level of management.
- Section 404: Requires management to evaluate and report on the effectiveness of the company’s internal controls over financial reporting. This involves a comprehensive assessment of internal control structures to ensure they are adequate for accurate financial reporting.
- Section 802: Imposes penalties for the willful destruction, alteration, or falsification of financial records. This section serves as a deterrent against tampering with financial documents, ensuring the integrity of financial data.
Collectively, the SOX provisions denoted above specifically require the monitoring, reporting and auditing of:
- Internal Controls
- Network Activity
- Database Activity
- Access to Information
- Login and Account Activity
What Types of Organizations Require SOX Audits?
SOX compliance audits are required for all publicly traded companies in the U.S., including management, company boards and accounting firms that audit public companies. Compliance also applies to wholly owned subsidiaries and foreign companies listed on U.S. exchanges.
While not required, private companies preparing for an initial public offering (IPO) or seeking acquisition by a public company may voluntarily adopt SOX compliance practices to enhance credibility and readiness.
What Is the SOX Audit Process for Auditees?
When preparing to undergo an audit, company leadership will need to understand the SOX-specific requirements, as well as the current internal control environment. Whether preparing internally, through co-sourcing, or full outsourcing, an auditee will follow these general steps:
- Testing and Monitoring: This involves periodic reviews of internal controls to determine effectiveness and proper function.
- Remediation: If weaknesses or deficiencies are identified, the auditee will need to take action to remediate the issue, possibly revising processes or implementing additional controls.
- Documentation: Processes and controls must be thoroughly documented. Senior management must also verify the accuracy of financial statements.
- Reporting: The auditee will check the accuracy of the external auditor’s reporting on the company’s internal control assessment and annual financial filings.
- Continuous Improvement: The auditee will work with the external auditor’s recommendations to continually assess and improve internal controls to adapt to changing regulations, business environments and risks.
What Is the SOX Audit Process for Auditors?
A typical SOX audit can be broken down into seven key steps, including:
- Planning: Defining the scope of the audit allows auditors to gain a deeper understanding of operations. Planning and defining scope typically involves determining key processes and controls.
- Risk Assessment: The risk assessment will help the auditor identify areas with potential risks of material misstatement.
- Control Evaluation: This step involves evaluating the design and implementation of internal controls to check their effectiveness. Application controls, entity-level controls and IT controls are all reviewed for data accuracy, access restrictions and prevention of unauthorized transactions.
- Testing Controls: Auditors perform a variety of tests to verify that key controls function effectively. This step can include reviewing documentation, observing processes and interviewing employees involved in financial reporting.
- Deficiency Assessment: After testing, deficiencies will be identified in the internal control framework. Auditors may categorize these control gaps as material weaknesses or significant deficiencies, depending on the severity.
- Reporting: A detailed report will be provided in which the auditor documents their findings, including any deficiencies. Recommendations for improvement will also be offered in the reports.
- Follow-up: Auditors will follow up after a SOX audit to assess whether identified issues have been addressed and remediated.
How To Prepare for a SOX Compliance Audit
If your business is preparing for a SOX audit for reporting purposes, internal co-sourcing, or to enhance basic controls, there are several ways you can prepare for the journey ahead, including:
- Maintaining comprehensive records of financial reporting procedures and controls
- Attending SOX training or holding internal educational trainings to educate staff on compliance requirements and their roles in maintaining controls
- Engaging with auditors early and often to clarify expectations and streamline the audit process
- Engaging co-sourcing providers to enhance documentation, business processes, automation initiatives, cybersecurity efforts and more
- Reviewing prior audit results (even pre-SOX) to understand current control environment maturity
The internal audit function plays a critical role in the SOX compliance process by providing independent assessments of the effectiveness of internal controls and identifying areas for improvement, making it an invaluable service for companies seeking to enhance their financial reporting integrity and support adherence to regulatory standards.
Using a SOX compliance checklist during an audit can help companies mitigate security issues, prevent fraud and streamline the preparation process.
How Can Cherry Bekaert Help?
Cherry Bekaert’s Risk Advisory practice provides comprehensive SOX compliance services, including a risk assessment of your entire SOX program and guidance throughout the compliance process.
Our professionals work with you to identify areas for improvement and offer solutions, including:
- Ways to strengthen internal controls
- Enhance documentation
- Safeguard financial data
- Implement controls to meet compliance requirements
- Solutions and strategies for remediation
- Liaison with external auditors
By understanding and adhering to SOX compliance requirements, businesses can enhance their financial integrity, build investor trust and avoid potential legal consequences. Contact Cherry Bekaert today to learn how we can help support your company through SOX audits and compliance. Download the SOX compliance checklist for a quick, comprehensive guide to audit preparedness.
Related Insights
- Article: SOX Compliance: Everything You Need To Know
- Article: Six Steps To Creating Efficiencies and a Well-planned SOX Program
- Article: Uncovering the ROI of SOX Compliance
- Case study: Regulatory, Tax and SOX Compliance for Biopharmaceutical Company Expanding U.S. Presence
- Article: Adapting to Change: SOX Compliance in the Era of Remote Work
