Beyond regulatory requirements, developing an effective internal controls framework is valuable in helping your company manage risk.
Identifying and mitigating the company’s financial and operational risks under the Sarbanes Oxley Act’s (SOX) Section 404 requirements can also be a prudent investment in improving efficiency by aligning management’s priorities with the organization’s internal processes and operations.
3 Tips for Getting the Most Out of SOX Compliance
1. Understand Your Obligations (SOX 404a vs 404b)
One of the keys to successful SOX compliance is understanding whether your company falls under the reporting requirements of 404 Section (a) or Section (b). While management must certify the effectiveness of its internal controls in either case, Section (b) adds the requirement (based on the company’s capitalization and revenue) for your external auditor to attest to that effectiveness.
In practice, we often see companies that are not required to file under Section (b) scale back their compliance efforts by trimming assessments to the bare bones and eliminating internal testing — yet continuing to issue certifications.
This may seem like a cost-savings move, but the company may run into significant deficiencies and material weaknesses that are discovered during the year-end external audit. This, in turn, leads to additional remediation steps that must be implemented quickly. More importantly, these deficiencies can reduce confidence in the quality of the company’s financial reporting and internal controls from auditors, the board, and potentially investors.
Taking the time to develop an effective compliance framework and culture helps your company manage risk more effectively while also satisfying your regulatory obligations.
2. Focused Attention
It’s critical for your company’s management to identify the most important risks to the quality and accuracy of your financial statements, and to focus attention and resources on the areas that represent the most important risk.
The COSO Enterprise Risk Management – Integrated Framework offers a good starting point for developing an effective internal controls system. The framework offers 17 principles embedded within five components outlining your controls environment, risk assessment, control activities, and other key aspects.
To learn more, you can view a recording of our webinar, Navigating SOX 404a Compliance.
Similarly, it’s helpful to understand that, over time, the company’s risk profile is going to evolve in response to market conditions as well as organizational changes. Part of an effective risk assessment strategy is understanding those changes, the potential impacts on the company, and the processes and controls that must be adjusted as a result.
3. Build a Compliance Culture
Optimizing the value of your SOX investment, like your compliance effort, also depends on management setting an effective tone highlighting the importance of risk management and ethical behavior.
Management needs to stress the importance of compliance and risk management company-wide, and to back up those statements with internal training and quarterly check-ins to ensure management identifies and controls its most important financial statement risks.
Department leaders also need to understand that compliance isn’t a once-and-done or periodic activity, but rather an ongoing process of identifying risk, establishing effective controls, testing those controls, and making necessary corrections.
An effective compliance culture will improve risk management and cost savings by helping the company minimize last-minute surprises with its audit committee and auditors.
In addition, management can focus on the most direct risk to its financials, create appropriate controls, and produce the high-quality financial data the organization needs for external and internal reporting.
Getting Help With SOX 404a Compliance
Whether you’re looking to establish, enhance, or outsource your internal audit function, we provide ‘right-sized’ audit support to assist you. For more information about optimizing the value of your SOX investment, reach out to our team.