If you are considering taking your company public, your general ledger and IT security will be under greater scrutiny than ever before.
Is your company financial reporting up to scratch?
In this post, we will take a closer look at the Sarbanes-Oxley Act as well as the benefits of being compliant.
What is Sarbanes-Oxley Compliance
Sarbanes-Oxley (better known as SOX) is an act drafted by Paul Sarbanes and Michael Oxley in 2002.
This Federal law regulates public companies (or private companies about to go public) in the USA as well as their auditors.
The law was put in place to protect investors from fraudulent accounting practices by publicly traded corporations.
The act is administered by the SEC (US Securities and Exchange Commission).
After the SOS (Sarbanes-Oxley Act of 2002) was endorsed, businesses were required to rethink their business reporting to avoid penalties.
For more information about SOX compliance, check out this practical guide for SOX requirements here.
It’s not all doom and gloom though. SOX compliance brings forth substantial benefits for your benefits. For starters, this new approach to financial reporting created through SOX has generated greater market trust.
6 Benefits of SOX Compliance for Your Business
1. Identifying Risks
Not all risks are the same. SOX compliance is advantageous for businesses as it provides them with a good starting point for analysing business assets.
SOX expresses expectations, to help businesses predict the standard they will be upheld to. Understanding the risk gives them the tools to target their controls more efficiently.
The most effective and appropriate way of defining an accurate scope and the extent of assessing for every SOX system is by performing a risk assessment on the risks linked with the SOX compliance audit checklist and specific to ITGC.
It is crucial to identify whether the emphasis of risk assessment is integrity, confidentiality, and/or availability, and then define your company’s risk parameters.
2. Strengthening Control Structure
Sections 302 and 404 of the act require documenting controls, which include personnel policies, operations manuals, as well as recorded control processes. With these types of documentation being compulsory, many businesses might find the process a tad overwhelming. However, the steps required for compliance can be incredibly productive for the business.
SOX compliance is useful for generating more efficient control awareness, and understanding how such controls fit into the big picture, hence becoming more transparent.
As companies grow, organic changes can impact control as the business matures. Businesses that pay attention to compliance reap the benefits of SOX much sooner.
3. More Productive Audits
More efficient and productive operations result in advantageous audit outcomes. With more efficient audit outcomes, the external auditing process will be more effective, subsequently lowering overall audit fees by reducing the cost of employee time responding to any external audit report results and requests.
Generating more efficient audit evidence collection creates a smoother user experience in support of auditors.
4. Better Financial Reporting
The primary aim of SOX is to offer transparency with regard to financial reporting. By doing so, the statute defined minimum requirements for determining dependable data.
Even with the effort required for gathering documentation and strengthening controls, completing the process permits for more reliable and efficient financial reporting.
Better financial reporting for a business means less time spent to rectify any mistakes.
5. Achieving Peak Operational Performance at An Early Stage
Early engagement with SOX can benefit businesses through implementing process efficiencies that position the company for future expansion.
Once companies initialize controls early on, SOX compliance benefits them by motivating them to evaluate their starting points and assess their risk annually. This means controls will not be haphazard. Organizations can also operationalize best practices in advance.
Related: A Comprehensive Guide to Business Growth and Expansion
6. Promoting Team Collaboration and Building Work Relationships
SOX compliance necessitates deeper and more regular collaboration amongst internal stakeholders. Especially in the field of IT security. Trying to operate in isolation can limit compliance efforts.
Those who oversee SOX assessments, as well as internal auditors, must work together across business lines to work alongside individuals who contribute towards or own financial and information controls, like IT, HR, or control owners. SOX guidelines promote building deep-seated working relationships across all teams.
An integral part of this collaboration is communication. Automatic GRC tools are effective for easing collaboration by generating one accessible location where stakeholders can convene. Such a location can be regulated, offering appropriate access based on compliance responsibility.