SOX — the Sarbanes–Oxley Act — is public legislation in the US that helps “to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes.”
Although the Sarbanes–Oxley Act is a legal obligation for every organization, it proves to be a beneficial business practice as well. The reason being it enforces numerous data security practices that help protect your organization against data thefts as a result of cyberattacks, insider threats, and other attacks.
That’s not all; SOX helps in many more ways. However, let’s first understand the Sarbanes–Oxley Act before getting on to know its benefits for a business.
What is the Sarbanes–Oxley Act?
SOX — also known as Sarbanes–Oxley or Sarbox — is the Sarbanes–Oxley Act of 2002. It’s a federal law which was enacted on 30 July 2002 in the United States. It introduces or expands requirements for public accounting and management corporations and public company boards in the US. Its rules and regulations may apply to private organizations as well, say for the destruction of evidence.
The bill was enacted as a countermeasure against frauds and scandals held by public corporations. It helps protect the general public as well as shareholders from accounting malpractices and other fraudulent operations worked out in the public enterprises. It came into existence after major accounting and corporate scandals at biggest public corporations like Enron, Tyco, and WorldCom.
The eleven sections of the bill cover the financial responsibilities of any public company’s board of directors and criminal penalties for numerous misconducts. They also instruct the Securities and Exchange Commission of the US to enforce rules and regulations for complying with the Sarbanes–Oxley Act (SOX).
Shall your Business Comply with SOX?
If your business is a publicly-held or publicly-traded corporation in the United States, it must comply with SOX. It should also comply if it’s a wholly-owned subsidiary or a foreign company doing business or publicly trading in the US. Also, the accounting firms that audit companies must comply with SOX. Also, private companies planning to go public must comply before they’s public.
SOX doesn’t enforce all of its regulations on charities, non-profit organizations, and private companies, however, any organization mustn’t falsify financial data or willingly destroy data (say, an evidence that may prove useful in a federal investigation). The Sarbanes–Oxley Act enforces penalties for such violations.
What are the Criminal Penalties under SOX?
In the event of failing to certify financial reports knowing they don’t comport with all the requirements mentioned under SOX, the responsible corporate officer shall be fined not more than $1 million or imprisoned not more than 10 years, or both. However, if a person willfully certifies the same, he shall be fined not more than $5 million, or imprisoned not more than 20 years, or both.
Also, if a person retaliates against a whistleblower who informed the concerned authorities about a violation of SOX shall be fined under the title “Section 1107 of the Sarbanes–Oxley Act”, imprisoned not more than 10 years, or both.
What SOX Compliance means for Business IT?
In an audit for SOX, the IT team provides the documentation — to prove the compliance — that the business meets the required financial accountability and transparency as well as data security infrastructure, as suggested by SOX.
In order to comply with SOX, the IT team must know the access privileges, log management, and security requirements for safekeeping the financial data. Then, the first step for establishing internal controls for complying with SOX requires the team to create a “control environment”, which must, at least:
- Acknowledge the requirement for internal balances, regulation, and transparency within the organization.
- Endeavor to implement control actions for ensuring the reliability of the financial data and mitigating all associated risks.
That being said, SOX is a necessary compliance for any organization. However, it’s beneficial to comply with the Sarbanes–Oxley Act. How? Let’s see.
What are the Benefits of SOX Compliance?
SOX compliance is advantageous in various ways for any business. For instance, it helps the companies going public to set better pricing for their IPOs.
According to Harvard Business School Working Knowledge, “Despite high initial costs of the internal control mandate, evidence shows that it has proved beneficial. “Markets have been able to use the information to assess companies more effectively, managers have improved internal processes, and the internal control testing has become more cost-effective over time,” according to Srinivasan.”
Moreover, “79 percent of 222 financial executives recently surveyed by Oversight Systems reported that their company has stronger internal controls after complying with Section 404. Seventy-four percent said that their company benefited from compliance with Sarbanes-Oxley and, of those, 33 percent said that compliance lessened the risk of financial fraud,” according to Public Company Accounting Oversight Board (PCAOB), the nonprofit corporation created by SOX to oversee the financial audits of public corporations and other entities.
That means the Sarbanes–Oxley Act contributes to improving the business processes and boosting the value in many key areas, as discussed below.
Prioritizing Risks
SOX compliance gives businesses a starting point for asset and risk analysis. Then, companies benefit from company-wide visibility and transparency in their processes by implementing a comprehensive risk management framework.
Strengthening Control Structure
Organizations gain strengthened control structure and improved control and risk association, thanks to implementing standard internal control frameworks such as COBIT and COSO. It further helps in improving the documentation and evaluation of controls and processes, which boosts operational efficiency.
Improving Performance of Audits
Since SOX established Public Company Accounting Oversight Board (PCAOB) for watching the audits of public companies, it boosted the performance and value of audits. It allowed audits to become independent assurance that helps ensure the effectiveness of a company’s control, governance, and risk management.
Improving the Financial Reporting
SOX requires organizations to provide transparency in their financial reporting, which encourages the companies to opt for an automated, centralized, efficient financial solution. It helps companies to improve the accuracy of their financial reports as well, which further help them to make better financial decisions.
That’s all about the various benefits of the Sarbanes-Oxley Act (SOX). Overall, SOX compliance boosts governance practices and business operations in any organization — big or small. What do you think about SOX? Let us know in the comments.
