The Sarbanes-Oxley Act (SOX) of 2002 aimed to make the management of corporations accountable for their actions. This was after the stock market performed poorly in 2002 due to scandals that affected several large corporations. The act was meant to restore the trust of the public by placing controls that reduce and prevent misconduct in organizations.
The SOX controls keep senior management like CEOs and the Board of Directors from committing fraudulent activities in corporations. At a glance, SOX looks like a framework that documents and tests internal control strategies. In reality, the SOX act is a complex compliance that has covered the use of technology in generating financial statement. The SOX seeks to ensure that financial statements show the true and fair financial position of a corporation.
What is SOX Compliance Testing?
SOX compliance testing is an evaluation that is conducted to check whether the controls put in place are working efficiently. The test also checks if an organization has complied with the set requirements of the act. Companies should comply with the requirements focusing on their risky automated areas because SOX testing will focus on high risk areas. The act has set IT controls that should be used as a basis for IT assessment in financial reporting and audit.
How Can Organization Establish Internal Controls?
Internal controls are strategies put in place to mitigate risks that an organization faces. An organization must come up with objectives for risk assessment. These objectives set a guideline for the areas where risk assessment should be concentrated on. The risk assessment must be done before establishing controls that are SOX compliant. Risk assessment should evaluate the policies and structure of the company in terms of technology. This will give the organization an in-depth understanding of their current technology-related risks. Each control is defined by the risk it mitigated and should be founded on confidentiality and integrity.
The SOX recommends that the internal controls developed should be customized to suit the identified IT risks. The highest threats identified should form the biggest portion of the internal controls program. The company should also establish internal controls that cover the risks of having third-party vendors as per the SOX requirements. This is especially so where the external vendors handle sensitive financial data. Every organization has an obligation to protect their client’s personal information.
What are The Values of Internal Controls?
For internal controls to be effective in an organization, everyone should understand their value so that they can comply. Auditors should ensure awareness within the organization so that internal controls are observed. Employees and business partners of an organization need to be educated why the controls are in place and how they work.
Importance of SOX Compliance Testing
The act of identifying the potential threat as per SOX section 404 is the first step of SOX compliance. SOX compliance testing requires intense evidence that proves that the controls are working effectively. Control failures are highly highlighted especially when they lead to misstatements. Effective compliance usually assists an organization to publish financial statements that are true and fair.
Automation in an organization is established to help manage an increasing number of employees. Automation of organization systems also helps the organization serve their client better. Automation in itself acts as a risk mitigation strategy for reducing human error. SOX recommend efficient access controls for automated systems. Access controls ensure that only authorized employees can view sensitive information. An authentication system should be put in place. The sensitive matter should be authorized by one or more superiors to minimize fraud risks. The results of compliance testing should be supported by the necessary documents.
Importance of SOX Compliance Testing Documentation
Compliance testing documentation assists the auditor with information on activities in the organization. There are programs that offer compliance documents and tools that can be used for efficient audit tracking. Some platforms like ZenGRC assist with maintaining consistency where compliance frameworks are overlapped. For example, SOX focuses on accurate financial reporting while HIPAA framework focuses on security measures. Both compliances recommend access controls in an organization. An audit tracking platform ensures that an organization enforces an effective mix of available frameworks to mitigate risks.
It is the duty of a compliance officer to enforce the implementation procedures. The compliance officer should have open communication channels with external auditors to ask for help for any challenging matters. This will ensure consistency in the SOX compliance on automated systems in the organization.
The SOX has seen the number of published misstatements reduce since its enactment in 2002.
Author Bio
Ken Lynch is an enterprise software startup veteran, who has always been fascinated about what drives workers to work and how to make work more engaging. Ken founded Reciprocity to pursue just that. He has propelled Reciprocity’s success with this mission-based goal of engaging employees with the governance, risk, and compliance goals of their company in order to create more socially minded corporate citizens. Ken earned his BS in Computer Science and Electrical Engineering from MIT. You can learn more at ReciprocityLabs.com.
