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What Accounting Firms Should Know About SOX?

Sharissa Barnett May 31, 2024 7:24:23 AM
Business women working in office on SOX in Accounting

Understanding SOX in Accounting 

The Sarbanes-Oxley Act (SOX) encompasses a comprehensive set of policies, processes, and procedures aimed at detecting and preventing errors in a firm’s financial reporting. These controls are crucial for maintaining ethical business practices, ensuring accurate financial reporting, and bolstering investor confidence. Implementing a robust SOX compliance system helps companies avert fraudulent activities and safeguards their reputations.

The Significance of SOX in Accounting

Enacted as a US federal law, the Sarbanes-Oxley Act (commonly referred to as SOX) was established to protect shareholders and the public from accounting fraud. It mandates increased transparency in corporate disclosures, thereby fortifying the integrity of financial reporting for both public and private companies.

How Has the Sarbanes-Oxley Act Affected Accountants?

Male professional working with a laptop for sox in accounting Improved Corporate Governance: SOX in accounting introduced much higher standards for boards of directors, which, in turn, mandated them to have independent audit committees and take the responsibility of financial reporting and disclosure.

Strengthened Internal Controls: The Sarbanes oxley accounting rules required companies to create and maintain efficient internal controls over financial reporting in order to avoid and spot fraudulent activities. It imposed documentation, assessment, and testing of internal SOX accounting controls systems.

Increased Auditor Independence: The sarbanes oxley act accounting has regulated auditor's independence, including the banning of non-audit services with audit clients, in some cases, to reduce conflicts of interest and ensure that auditors are impartial.

Expanded Financial Disclosure: SOX in accounting enabled companies to integrate  disclosure requirements of financial reports, including disclosures such as those for off-balance-sheet transactions and executive compensation.

Sarbanes Oxley Accounting Standards

The Sarbanes-Oxley Act requires the Board to define auditing and related professional practice standards for preparing audit reports for public companies, other issuers, and broker-dealers.

Sox Accounting Requirements

SOX has three broad requirements:

1. Preparing accurate financial reports certified by business executives

SOX section 302 requires a company's top executive, the CEO or CFO or equivalent authority, to sign off on the financial reports filed with the SEC every year and quarterly.

During approval, the CEO and CFO must certify that the reports are fully accurate. Additionally, they must maintain a record that the internal controls are there and they have been validated within the last 90 days.

Businesses are required to announce all material changes in their financial status. And so, a cybersecurity incident counts as a material change as per SOX in accounting.

2. Implementing appropriate internal controls

Accounting companies are improving the integrity of financial information by implementing SOX internal controls that act as a barrier against potential unauthorized internal or external manipulation. This is because companies are able to implement controls at both business processes and information technology infrastructure.

Business process controls    

The business process controls comprise things like training of employees on SOX requirements, instituting secure channels, and reporting for whistleblowers. 

Some companies implement segregation of duties whereby workflows are broken into various tasks carried out by different individuals. The idea is that no one person has his/her hands on the whole process. In this way, each individual involved acts as a check on the others.

In addition, businesses may develop processes of saving and preserving records to comply with the SOX retention policy.

IT Controls

Automation is gaining prominence especially as SOX compliance accounting processes become more challenging. Some firms use specialized SOX compliance accounting softwares to securely store the SOX documents, flag internal control loopholes, track activities and ensure general compliance with SOX. 

Data loss prevention (DLP) tools are able to track the type of data stored, who accesses it and what they do with it. Some DLP tools are designed to prevent users from acting against financial data integrity or moving it to an unauthorized location. Companies would additionally benefit from automated backups so that data could be restored if destroyed or compromised.

3. Passing regular audits

Also, as mentioned previously, the CEO and CFO must ensure the accuracy of each financial report and verify the efficiency of internal controls.Regular audits help executives make these statements..

By conducting regular internal audits on financial reporting standards, businesses can monitor compliance by tracking events and identifying gaps that need to be fixed thereafter.

The Effects of SOX

The SOX act is a wide reaching bill with eleven titles in all including the act itself. Some of its impacts include:

The creation of the Public Company Accounting Oversight Board (PCAOB)

SOX compliance accounting created PCAOB which is a nonprofit organization that sets accounting and auditing standards and supervises the accounting firms for public companies. The PCAOB investigates companies suspected of noncompliance, and can penalize them with fines of up to USD 10,000 for individuals and USD 2 million for businesses.

Holding corporate top management accountable for financial reporting and controls 

Under SOX in accounting, the CEOs, CFOs and any officers of a company performing similar functions are each held accountable for making sure that financial statements are accurate and the internal control structure is effective. Executives could be fined and sentenced if their financial statements are not accurate, whether they withheld this information intentionally or not.

Striking a balance between auditors and analysts as independent actors

Conflicts of interest are some of the main reasons for the passage of the SOX legislation. Auditing firms that audit public companies' financial reports often earn profitable consulting contracts from these same companies. Accountants found themselves motivated to produce audit reports the clients could accept, otherwise, they might lose these profitable deals.

On the other hand, a great number of market analysts who conduct the assessment of stock values work for institutions that provide investment banking and other services to public companies.

SOX in accounting primarily aims to prevent conflicts of interest through the following approaches. To begin with, the act requires private companies to set up an audit committee which should be independent from the management. 

Accounting firms should not provide consulting or other services to the same companies for which they audit SOX in accounting. These companies must also switch external auditors every five years.

Securities analysts should avoid links with their companies' investment banking departments. In addition, they are required to communicate conflicts of interest when dealing with securities.

Protecting whistleblowers

SOX in accounting makes it illegal to retaliate against an employee who reports suspected fraud by any means of demotion, firing, suspension, harassment, bullying, or any other means of harm.

Is Sox Only for Public Companies?

Three tax professionals reviewing sox compliance accounting

SOX compliance accounting is mandatory for all publicly traded companies, and is in the best interest of companies that aim to pursue an IPO. On the other hand, private firms and non-profit organizations are not required to be SOX compliant.

Even though they may not be subject to SOX, nonprofits and private companies may consider applying some of the available frameworks of SOX. For instance, COSO’s Internal Control - Integrated Framework (ICIF) and COBIT to enhance risk management and internal sox standards in accounting.

SOX compliance accounting plays an important role in the development and longevity of your business. Non compliance could lead to criminal and civil liability, or delisting from the public stock exchange. SOX compliance accounting protocols were created to safeguard the public from erroneous or fraudulent practices by businesses. With our refreshingly simple software for accountants, we help you implement SOX financial security controls to protect your sensitive data from theft, interference, unforeseen errors or cyberattacks. Our cloud collaboration software delivers this by simplifying financial operations, preventing risk of errors, improving decision making, increasing compliance and ensuring data accuracy. The best part is that you can try Basil for 15-days free with a complimentary personalized demo with no commitment or obligations. 

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