Background

Sarbanes Oxley Act (or SOX Act) is a U.S. law which was passed on July 30, 2002. Witnessing a number of high-profile accounting scandals in the U.S., including Eron, Tyco, WorldCom, and the bursting of the dot-com bubble in the late 1990s, which resulted in huge losses to the investor & badly impacted the financial market. After all those incidents happened in U.S. Lawmakers felt it was necessary to implement strict rules for accountants, auditors, & corporate officers with a view to reduce scandals the country would face in the future. SOX Act, 2002 was implemented with a view to protect shareholders, Employees & investors from accounting errors & fraudulent financial practices.

Why SOX?

SOX audit ensure the effectiveness and efficiency of IFC. It also helps in identifications of risk involved in the system where there are no any such controls to mitigate such risks. It also improved the documentation in the organisations as SOX make the companies personnel accountable for completeness & accuracy of records.

It also helps the organisations in identifying of any illegal activities carried out by any personnel in the organisations, also ensures reduction of manual work carried on in the organisations through automation.

With the help of SOX audit, organisations can mitigate the risk both at designed level and operational level associated with the processes by implementing the proper control on it.

Importance Of SOX

Sr. No

Particulars

1

SOX compliance encourages companies to improve their financial management process & the overall operations of business.

2

SOX allowed the company to implement the IFC in their organisation to mitigate all the risk-prone areas & eliminate the unnecessary controls.

3

It also motivates the company to automate all the manual work in order to standardise the processes the organisation

4

With the enforcement of SOX compliance, it changes the way corporate actually work. It makes the companies accountable for the accuracy of the financial statement with an aim of protecting the interest of investors.

5

The SOX compliance audit is a mandate yearly assessment to verify how well the company is managing its internal controls.

6

It also helps in identifying the deficiencies in the IFC of the companies at the designed level and operational level as well.

Applicability of SOX compliance

The said law is applicable to the following companies. However Private companies & charities are not required to follow all the provisions of the SOX Act, also private companies having annual revenue of less than $ 100 million are not required to comply with SOX.

Sr. No

Particulars

1

All publicly traded companies in the United States, including wholly-owned subsidiaries.

2

International Companies that are publicly traded and have registered stocks or securities with the SEC & have business in U.S.

3

Firms that are responsible for auditing & accounting of the companies who are required to comply with the SOX compliances.

4

The private companies who are planning to go public with an IPO

11 Titles of SOX Compliances

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Titles

Description

1

Public Company Accounting Oversight Board

PCAOB was created to manage the audit of all public companies. It sets the standard and auditing rules. It ensures adherence to all the set rules in SOX Act,2002 by the auditing firms. It also tasked with the oversight on the work accounting & auditing firms.

2

Auditors Independence

This section contains 9 sections. It is mainly to prevent any conflict of interest and to ensure that auditor is working independently in actual without any threats of independence.

3

Corporate Responsibility

This section mainly focusing on the accountability of corporate executives. All corporate executives should be individually & personally responsible for ensuring that the company complies with SOX.

4

Enhanced Financial Disclosures

Public companies must comply with the financial disclosures (like insider trading, and off-balance sheet transactions), which are mandatory to disclose as per SOX. Disclosures should be made in a timely manner

5

Analyst Conflict of interest

This section was introduced to improve the investors' confidence regarding the reporting of securities analysts. This section includes the code of conduct & disclosures of any and all conflicts of interest known to the company.

6

Commission Resources & Authority

This section is not mainly for the companies having concerned with compliance. It's mainly including the SEC'S Authority to remove someone from the positions on which they are rendering services currently (for e.g.- broker, advisor, dealer) based on certain conditions

7

Studies & Reports

This section outlines certain task which need to perform by the SEC & Comptroller general to ensure that any illegal activities are not being practised by the investment banks, credit ratings agencies, accounting firms in securities market.

8

Corporate & Criminal Fraud Accountability

This sections clearly states that any alterations, concealment, destructions of records with an objective to influence the report/ outcome of federal investigation will be punished with 20 years of imprisonment with fines.

9

White Collar Crime Penalty Enhancement

This sections states that any illegal & unethical activities conducted by officers & managers will have to face criminal charges and will be punished with imprisonment along with the heavy fines. This section makes manager accountable for the accuracy & completeness of the records.

10

Corporate Tax Return

This section is relating to proper authorisation of CEO of the organisations on the Federal Income Tax Return of such corporations.

11

Corporate Fraud Accountability

It includes seven sections that properly defines corporate frauds. It defines any tampering of record is a punishable criminal offence. It also gives SEC the authority to freeze the unusual transactions

Why SOX Compliance Requirements Benefit CFO’s

• SOX compliance provides an entrenched framework through modern tools
• Reduction in data breaches with secure backups, stringent access controls and change management protocols.
• Improving stakeholders’ confidence through increased visibility.
• Reduction of risk of a material misstatement and fraud risk in the financial statements.

Authors:

Umesh Vishwakarma

Manager | Email: umesh.vishwakarma@masd.co.in | LinkedIn

Vikash Parashar

Associate Consultant | Email: vikash.parashar@masd.co.in | LinkedIn