The Sarbanes-Oxley (SOX) landscape is complex, evolving, and unforgiving. Companies are navigating a dense web of requirements, from data privacy mandates to financial reporting obligations under SOX and industry-specific frameworks such as PCI DSS. The stakes are high: missteps can result in financial penalties, reputational harm, and diminished investor confidence.

Traditionally, organizations have managed SOX compliance as a manual, reactive exercise. Internal teams scramble to prepare and execute, often relying on spreadsheets, siloed systems, and ad hoc processes. This approach consumes valuable time and resources while exposing organizations to heightened risk. 

Compliance as a Service (CaaS) introduces a proactive, continuous, and tech-enabled approach that simplifies SOX compliance. By blending expert human oversight and continuous monitoring with automation, CaaS offers finance leaders a way to reduce costs, proactively reduce financial risk exposure, increase confidence, and strengthen resilience in the face of ever-expanding requirements.

SOX Compliance as a Service is an outsourced, cloud-based model where a third-party provider manages an organization’s compliance obligations on an ongoing basis. Rather than shouldering the full cost and burden of compliance internally, companies can partner with specialists who combine automation, continuous control monitoring, real-time visibility, and professional expertise to align compliance programs with management’s strategic initiatives.

Key components of a CaaS model include:

Together, these elements provide a sustainable, forward-looking approach that transforms compliance into a strategic function.

CaaS brings tangible advantages across industries and regulatory frameworks:

SOX compliance remains one of the most resource-intensive challenges for U.S. public companies. Section 404 requires rigorous documentation and testing of internal controls over financial reporting. Traditional SOX programs often devolve into annual, labor-intensive exercises that strain finance teams and delay strategic priorities.

A CaaS model redefines the SOX experience:

For CFOs and audit committees, the result is a SOX program that is more efficient and reliable, turning compliance into a strategic advantage rather than a compliance cost center.

Transitioning to a SOX CaaS model is both achievable and pragmatic. Finance leaders should consider the following steps:

Best practices for success include securing leadership buy-in early, setting measurable objectives for the transition, and maintaining ongoing dialogue with the provider to ensure continuous alignment.

Our Offering: As part of our commitment to advancing compliance innovation, we’re launching SOX Quest, our dedicated SOX Compliance as a Service solution. To learn more about this offering, please see our official launch article: Sensiba Launches Subscription-Based SOX Compliance Model.

Compliance is no longer a periodic checklist—it’s a strategic imperative that shapes how companies build trust with stakeholders, investors, and regulators. Compliance as a Service moves organizations beyond reactive, manual processes to promote continuous assurance, resilience, and transparency.

The message for finance executives at publicly traded companies is clear: adopting a CaaS model for SOX and beyond is not just about meeting today’s requirements. It is about preparing for tomorrow by building a governance structure that instills confidence, drives efficiency, and positions the organization to thrive in an era of accelerating regulatory scrutiny.

To learn more about Compliance as a Service, contact us.

As organizations become more complex and regulatory expectations increase, the traditional phased approach to Sarbanes–Oxley (SOX) compliance is increasingly feeling outdated. Management teams struggle to identify emerging risks and meet deadlines as year-end approaches.

In this article, we’ll explore the shortcomings of the traditional model, define continuous auditing as a next-generation approach, and demonstrate how organizations can transition to a proactive, data-driven compliance model.

The benefits of continuous auditing are clear: faster risk identification and remediation, smoother workloads, stronger stakeholder confidence, and better alignment with today’s pace of business change.

Since the passage of the Sarbanes-Oxley Act in 2002, most companies have relied on a three-phased compliance model to anchor their internal control programs. This approach traditionally begins with walkthroughs and design assessments early in the year to confirm key controls are in place and designed appropriately.

From there, auditors conduct interim testing (sampling transactions and reviewing control activities during the first nine to 10 months) to gauge whether controls operate effectively.

Finally, companies face year-end testing in the fourth quarter, where controls are evaluated one last time before certifications are finalized.

This cadence has offered structure and clarity for years, giving organizations a predictable framework for meeting their compliance obligations.

While effective in theory, this once-reliable model is increasingly at odds with today’s business environment. Under the phased approach, for example, control failures often come to light months after they occur, leaving little time for remediation before year-end filings.

The burden on finance and audit teams is also backloaded heavily, with testing bottlenecks in the fourth quarter that can create intense pressure as reporting deadlines approach.

Meanwhile, the model assumes a static risk profile throughout the year. This assumption rarely holds true in organizations undergoing rapid change, whether from new system implementations, acquisitions, or shifts in regulatory requirements.

Perhaps most critically, the traditional SOX cycle fosters a reactive posture. Rather than empowering organizations to stay ahead of risks and adapt controls as conditions evolve, it encourages a game of catch-up in which problems are discovered after the fact instead of being prevented in real time.

For financial executives tasked with safeguarding trust and steering their organizations through dynamic market conditions, this outdated model can hinder agility and increase risk exposure.

Continuous auditing represents the modernization of SOX testing, moving compliance away from rigid, phase-based cycles toward an ongoing process of monitoring, testing, and remediation.

Instead of waiting for designated checkpoints in the year, organizations adopt a model that aligns with the continuous way businesses operate (and risks can emerge). 

At its core, continuous auditing is a methodology powered by automation, analytics, and collaborative workflows that deliver near real-time assurance over internal controls.

This approach integrates technology directly into compliance processes:

Just as important, collaborative remediation closes the loop quickly, ensuring issues are detected and resolved before they can cascade into larger compliance failures.

By surfacing issues as they occur, organizations shift into a proactive risk management posture that supports stronger SOX certifications under Sections 302 and 404. The continuous flow of testing and remediation helps finance and compliance teams avoid the familiar year-end scramble, distributing audit workloads more evenly across the year and reducing Q4 bottlenecks. For leadership, real-time visibility enhances trust with investors and regulators, demonstrating a commitment to transparency and accountability.

Over time, this model also delivers cost efficiencies. Automating data collection and reducing duplicate testing streamlines compliance work, while improved alignment across finance, IT, and internal audit reduces rework.

More strategically, continuous auditing enables organizations to adapt their SOX framework as business conditions change. Whether integrating new systems, navigating acquisitions, or scaling toward an IPO, companies gain the agility to update controls without waiting for the next annual cycle.

Finally, the continuous model improves feedback loops across the organization. Instead of hearing only about failed controls, managers and control operators receive regular feedback on every evaluation, creating a culture of engagement and accountability.

This emphasis on communication builds stronger ownership of controls at every level, ensuring compliance is not viewed as a once-a-year hurdle but as a shared, ongoing responsibility.

Making the shift to continuous auditing requires more than simply layering new tools on top of old practices. It demands a deliberate approach that rethinks processes, roles, and expectations across the compliance function.

For finance leaders, this transition represents not only an opportunity to modernize SOX but also to strengthen risk management and ease the burden on teams. The following roadmap outlines how organizations can build a strong foundation for success.

Many organizations already know where the bottlenecks occur—recurring deficiencies, control failures that surface too late, or spikes in workload concentrated around quarter- and year-end. By documenting these pain points formally, leaders can articulate the business case for change and ensure the transition addresses real challenges rather than theoretical improvements.

This clarity also helps win buy-in across teams who may initially view continuous auditing as “just another compliance initiative.”

Continuous control monitoring (CCM) tools are particularly valuable in high-risk areas such as user access, journal entries, and revenue recognition. When paired with analytics, these tools can flag anomalies as they happen and transform testing from a retrospective exercise into an active, preventive safeguard. Technology doesn’t replace auditors; it augments their ability to focus attention where it matters most.

Instead of concentrating audit activity into semi-annual or quarterly phases, testing can be performed monthly (or even more frequently) based on organizational needs. Smaller, more regular testing cycles ensure controls are evaluated across the entire fiscal year, smoothing workloads and preventing last-minute scrambles. This cadence also increases confidence that the control environment reflects the business as it is today, not as it was months earlier.

Continuous auditing cannot succeed if finance, IT, and internal audit remain siloed. Shared dashboards and communication channels allow these groups to see the same data, interpret results together, and act quickly if issues arise.

Establishing rapid-response protocols ensures remediation keeps pace with detection, reducing the risk of small control failures snowballing into material weaknesses.

Audit committees and external auditors should understand not only what continuous auditing is, but how it benefits them directly. Educating these groups on the advantages helps secure their support and builds trust in the new model. Demonstrating early wins, such as faster remediation or smoother year-end testing, can reinforce the value proposition.

Leveraging the Risk and Control Matrix (RCM), finance teams can define the controls that are tested each month and the required sample sizes. Coordinating with management, control operators, and external auditors ensures expectations are aligned, responsibilities are clear, and remediation efforts are prioritized effectively.

This step transforms the concept of continuous auditing into a disciplined, repeatable process embedded in the organization’s compliance culture.

Taken together, these actions create more than a compliance upgrade. They build a framework that aligns SOX with the pace of modern business, reduces strain on teams, and strengthens investor and regulator confidence.

The phased SOX compliance model has reached its limits. Continuous auditing represents not just an efficiency improvement, but a strategic shift in how companies approach risk management and compliance.

By adopting continuous auditing, management teams transform SOX from a reactive, compliance-heavy burden into a proactive, value-adding function. The result is not just compliance—it’s confidence, agility, and resilience to meet the dynamic challenges of today’s fast-moving business environment.

To learn more about the benefits of continuous auditing, contact us.

Maintaining robust internal controls and ensuring SOX compliance are non-negotiable for financial integrity and regulatory confidence. But for many small to mid-sized companies, building and sustaining an in-house audit function can be a costly and resource-intensive endeavor.

That’s why more organizations are turning to outsourced or co-sourced internal audit and SOX compliance solutions—a strategic move that offers agility, expertise, and cost-efficiency.

Outsourced internal audit involves hiring an external firm to conduct audit activities. In a co-sourced model, organizations retain control over key or low-risk areas while outsourcing complex or high-risk tasks, combining internal insights with expert support for optimal balance.

Here are 7 compelling reasons why outsourcing your internal audit and SOX compliance could be a game-changer for your business:

Maintaining a full-time internal audit team involves salaries, benefits, training, and technology investments. Outsourcing transforms these fixed costs into variable ones, allowing you to pay only for what you need—freeing up budget for other strategic initiatives.

SOX compliance and internal audits require deep knowledge of financial controls, IT systems, and evolving regulations. Outsourced partners bring seasoned professionals with cross-industry experience, eliminating the need for costly hiring and training.

Top-tier audit firms leverage automation, data analytics, and agile methodologies to deliver faster, more accurate audits. Their up-to-date regulatory knowledge ensures your compliance efforts are always aligned with the latest standards.

An external team offers a fresh, unbiased perspective on your internal controls. Their insights can uncover hidden vulnerabilities—such as fraud risks or cybersecurity gaps—before they become costly issues.

As your business grows or faces new regulatory demands, your audit needs will evolve. Outsourcing gives you the flexibility to scale resources up or down without the delays and commitments of hiring full-time staff.

Internal teams may overlook inefficiencies due to familiarity. An independent audit partner provides impartial assessments, reinforcing accountability and enhancing the credibility of your financial reporting.

Outsourcing allows your leadership and finance teams to focus on driving growth and innovation, while compliance and risk management remain in expert hands.

To maximize value from your outsourced internal audit or SOX compliance program, it’s essential to approach the partnership strategically. The best practices outlined below are backed by industry experts and proven to drive success:

Outsourcing internal audit and SOX compliance is not just about reducing costs; it’s about gaining access to top-tier expertise, improving efficiency, and strengthening risk management.

If your company struggles with staffing, compliance complexity, or operational inefficiencies, outsourcing could be the key to a more cost-effective, scalable, and reliable audit process.

Looking for expert SOX compliance and internal audit solutions? Our consulting team specializes in helping businesses like yours navigate compliance with confidence and ease.

As publicly traded companies work to optimize their Sarbanes-Oxley (SOX) compliance, increasing the efficiency and effectiveness of those efforts requires management to better understand organizational risks, align management and the audit committee, train process owners, increase automation, and centralize the monitoring of risk exposures and control performance.

The optimization process starts with an effective risk assessment that helps the company understand its exposures and map the various controls that help it mitigate those risks. The types and number of needed controls will depend on a specific company and its risks.

It’s also important to avoid imposing more controls than the company needs to mitigate risks effectively because each control bears costs for design, documentation, testing, evaluation, and reporting. Understanding the company’s risks, and ensuring you have the correct number of controls, is key to effectiveness and efficiency. This can be further enhanced through a control rationalization, with a deeper review of key risks and the alignment of mitigating control activities.

Management and the audit commitment play important roles in SOX compliance by setting the appropriate “tone at the top” by actively asking about and understanding the company’s key risks, and allocating resources to the implementation and evaluation of the appropriate controls. By demonstrating that they believe in and understand risk management and compliance, they set a tone that the rest of the company will generally follow.

A valuable way to increase efficiency and potentially reduce the cost of a SOX review is making it as easy as possible for external auditors to rely on the company’s testing and documentation. Under SOX, external auditors are required to sign off on the company’s internal controls, give an opinion about the effectiveness of those controls, and identify any deficiencies.

To make these determinations, the auditors will either rely on the company’s control testing and documentation, or will have to perform that testing themselves. While a company won’t be able to reach a point where the auditors rely exclusively on the company’s testing, expanding the percentage of company-tested controls increases efficiency. It does this by reducing the volume (and cost) of auditor testing, as well as avoiding controls being tested twice by the company as well as by the auditors.

Another important step in optimizing SOX compliance is providing training for financial reporting process owners—the managers with oversight responsibilities for specific processes. In addition to setting the tone at the top with messaging from a SOX sponsor (e.g., the CFO), managers need to understand the nature of transactional flows and data involved with significant processes—and be enabled to identify gaps in the performance or documentation of those steps. They should also understand the risks that could affect material accounts.

As part of this training, process owners need to understand the value of testing and documentation outside of preparing for an audit. These steps need to be part of ongoing, year-round risk management activities.

While the role of automation in financial reporting is early and evolving in many organizations, the advantages of streamlining the financial processes that underlie the controls being evaluated will pay dividends in SOX compliance. A large portion of the SOX effort and control performance are steps that are repeated through the fiscal year and across fiscal years.  Where tasks are repeated and involve systems or applications, there are opportunities to automate.

For instance, the vast majority of the information needed for SOX compliance is produced during the accounting period close. Critical activities that occur during closes include journal entries, analyses, reconciliations, approvals, and more—all of which need to be documented and are subject to auditor review.

Tools such as BlackLine increase process accuracy and SOX compliance by importing data from feeds and matching transactions to reconcile accounts automatically, posting journal entries, and coordinating task completion and approval using real-time dashboards. This reduces reliance on manual tools and the risk of data existing in disparate spreadsheets.

To the extent various activities can be automated, the company and its auditor benefit. Manual processes, documentation, and testing are more expensive and typically have higher rates of deficiencies. Where companies have more automation, auditors see fewer deficiencies and smoother, more efficient testing that is conducted with less work and a lower resulting cost.

Companies can increase the efficiency and effectiveness of their SOX compliance efforts by creating a project management office to coordinate their compliance efforts. Depending on the size and scope of the company, that oversight could come from one person, a team, or someone using a combination of internal and outsourced resources.

Without regard to how the role is structured, it’s important for the team member to have an appropriate level of knowledge and experience to coordinate its SOX compliance efforts year-round to ensure controls are performing as designed, and that emerging issues are addressed as quickly as possible.

If your company needs assistance with implementing effective SOX internal controls, reach out to our team of audit professionals who can support you throughout the process.

Accurate revenue tracking is paramount in understanding the performance and growth prospects of companies, such as SaaS providers, that rely on subscriptions. Investors, management, and finance teams evaluate metrics such as annual recurring revenue (ARR) and GAAP revenue recognition, which, while both related to revenue, serve different purposes and are often confused.

Annual recurring revenue is a key financial metric for many subscription-based businesses, serving as a benchmark for tracking growth and providing a high-level view of predictable revenue.

ARR measures the revenue that a business expects to receive from recurring customers in the next 12 months. It is defined as the value of all recurring contracts (subject to renewal on at least an annual basis) normalized to an annual basis.

If average customer terms are less than a year, monthly recurring revenue (MRR) may be a more useful metric.

U.S. generally accepted accounting principles (GAAP) define revenue recognition from contracts with customers under Accounting Standards Codification Topic 606 (“ASC 606”).

ASC 606 requires companies to recognize revenue based on a five-step model designed to align revenue recognition with the customer receiving the good or service. This requires a company to evaluate the amounts that are expected to be collected and the nature of the transfer of goods or services to determine the proper amount and timing of revenue recognition.

Step five of the ASC 606 model requires companies to determine whether revenue should be recognized ‘over time’ or at a ‘point in time’. For subscription-based businesses, this consideration often means revenue is recognized over the subscription term, however there are factors that could lead to point-in-time recognition.

There are several key differences between ARR and GAAP revenue recognition. While both metrics are related to revenue, they are not equivalent. Stakeholders need to understand these differences and when the use of each metric is most valuable.

ARR is a forward-looking metric, while GAAP revenue recognition measures historical information. ARR includes only revenues that are recurring in nature, while GAAP revenue recognition will also include any non-recurring items such as implementation fees.

ARR typically includes any closed bookings for which executed documents may not be completed or services may not have commenced. Under GAAP, this type of contract would not be recognized as revenue until services commence.

GAAP revenue recognition appears on the company’s GAAP financial statements. ARR typically accompanies management reporting and is often included in the Management Discussion and Analysis (“MD&A”) portion of financial reporting. Finance and accounting teams are more likely to use GAAP revenue to analyze the company’s performance while investors and company leadership teams use ARR.

Investors often review ARR as a metric to imply the value of a company by applying industry-based ARR multiples, among other valuation techniques. Because ARR is a non-GAAP metric, it is not subject to audit.  A CPA firm cannot opine on ARR or related metrics, as there are no published rules regarding the classification of recurring versus nonrecurring revenue.

For companies in which ARR is a relevant metric, it is imperative that management and the stakeholders understand the differences between ARR and revenue recognition under GAAP. Also, they must understand that ARR is not defined under specific rules and regulations.

Based on our experience, the following are best practices as they relate to tracking and measuring ARR and GAAP revenue recognition:

We hope this article has helped clarify the difference between annual recurring revenue and GAAP revenue recognition and has provided useful information on best practices for each. If you’re a technology company looking for an audit partner, please don’t hesitate to reach out. Our team has experience with a wide range of clients in the technology industry, and we would be happy to chat with you.py to chat with you.

The SECURE 2.0 Act of 2022 (“Act”) was designed to strengthen the retirement system and improve Americans’ financial readiness by expanding access to plans, encouraging savings, enhancing flexibility in planning, and simplifying plan administration.

The Act introduced several key implications for employers offering retirement plans, with many taking effect this year. Some of the Act’s most notable provisions include the following.

Effective January 1, 2025, new defined contribution plans such as 401(k) or 403(b) plans that were signed and enacted after December 29, 2022, must automatically enroll participants upon becoming eligible unless the participants opt out of coverage.

Plans established before December 29, 2022, are “grandfathered” and not subject to this mandatory automatic enrollment feature.

The initial automatic enrollment amount for new plans is at least 3%, but not more than 10%. Each year thereafter, that amount increases by 1% until it reaches at least 10%, but not more than 15%.  If a participant makes an affirmative election, that remains in effect. Additionally, participants can affirmatively elect to make contributions in a different amount.

Automatic enrollment is expected to significantly increase employee participation in retirement plans. Participation rates in plans with automatic enrollment typically exceed 90%, for instance, compared to around 44% for traditional opt-in plans.

This broader participation can help plans pass non-discrimination tests more easily, benefiting highly compensated employees as well.

Effective January 1, 2025, plans have the option to increase the amount of catch-up contributions employees aged 60-63 are able to make. If a plan adopts the provision, employees in that age group can make higher catch-up contributions of up to $11,250 to eligible retirement plans. The increased amounts are indexed for inflation after 2025.

Starting January 1, 2026, employees earning over $145,000 in the prior year must make catch-up contributions to Roth accounts in after-tax dollars. Other eligible participants in the plan who are not subject to this new rule will be able to make catch-up contributions on either a pre-tax or Roth basis.

The Act provides increased tax credits for small businesses starting new retirement plans:

The SECURE Act requires employers to allow long-term, part-time workers to participate in the employers’ 401(k) plans. The SECURE Act provision provides that, except in the case of collectively bargained plans, employers maintaining a 401(k) plan must have a dual eligibility requirement under which an employee must complete either one year of service (with the 1,000-hour rule) or three consecutive years of service (where the employee completes at least 500 hours of service).

Section 125 of SECURE 2.0 reduces the three-year rule to two years, effective for plan years beginning after December 31, 2024. Section 125 also provides that pre-2021 service is disregarded for vesting purposes, just as such service is disregarded for eligibility purposes under current law.

Section 110 permits an employer to make matching contributions under a 401(k) plan, 403(b) plan, or SIMPLE IRA with respect to “qualified student loan payments.” A qualified student loan payment is broadly defined as any indebtedness incurred by the employee solely to pay qualified higher education expenses of the employee.

Governmental employers are also permitted to make matching contributions in a section 457(b) plan or another plan with respect to such repayments. For purposes of the nondiscrimination test applicable to elective contributions, Section 110 permits a plan to test separately the employees who receive matching contributions on student loan repayments.

The SECURE 2.0 Act introduces several new types of distributions to offer participants flexibility and support for various situations. Some of the new distributions include:

The Act includes provisions to simplify plan administration by:

Under current law, generally, a Form 5500 for a defined contribution plan must contain an opinion from an independent qualified public accountant as to whether the plan’s financial statements and schedules are fairly presented. However, no such opinion is required for a plan covering fewer than 100 participants with plan balances.

Section 345 clarifies that plans filing under a group of plans (or defined contribution group) need only to submit an audit opinion if they have 100 or more participants with balances. In other words, DOL and Department of Treasury would continue to receive full audit information on at least the number of plans as under current law.

These changes aim to make it easier for employers to offer retirement plans and encourage greater employee participation and savings.

To learn more about SECURE 2.0 or retirement plan disclosures, contact us.

As a technology startup prepares for its first audit, there are a few common accounting issues that can increase the time and cost required to complete the audit.

These issues often result from the accounting/finance team balancing competing priorities, not having certain technical accounting knowledge, or not having proper systems in place to account for transactions properly.

The most common accounting challenges we see for technology companies include:

Technology companies are often unsure how to account for various non-cash, equity related transactions. This includes accounting for equity instruments such as restricted stock, warrants, and stock options. Because non-cash equity activity won’t appear on bank statements, these transactions are often overlooked from a financial reporting perspective and are not recorded (or are recorded improperly).

Similarly, legal or other costs incurred in the issuance of preferred stock are often recorded improperly as legal expenses, rather than being properly capitalized on the balance sheet as stock issuance costs.

A common challenge for tech startups is failing to recognize revenue in line with the often-complex provisions within the GAAP requirements under ASC 606. Startups may struggle to understand, for instance, precisely what’s being sold within a customer contract, the complexities of subscription revenue accounting, or the accounting implications of non-cash items.

Startups often lack a robust revenue recognition policy or may have inconsistencies in recording similar kinds of transactions. In many situations, the accounting for revenue must be adjusted to complete the audit successfully.

For startups that operate through multiple entities/subsidiaries, intercompany accounts are often not reconciled, so the auditors may request that a company unwind historic transactions to determine if intercompany balances are appropriate and in line with any intercompany cost-plus agreements. If a startup has international entities, such as an offshore development subsidiary, the company needs to be sure any foreign currency translations or remeasurements are assessed and calculated properly.

Technology startups face the specific, complex issue of accounting for software development costs in accordance with GAAP. Many companies mistakenly expense the costs associated with software development as they are incurred, but there are complicated rules dictating whether these costs should be capitalized or expensed.

Many companies also lack the necessary documentation regarding the nature of their software development costs, making the accounting determinations increasingly difficult.

If reconciliations aren’t done on a consistent and timely basis, there’s a risk that expense or revenue cutoff dates are missed. As a result, transactions can be recorded in the wrong period, which causes an inaccurate accounting of the organization’s performance in each period. Common causes for this issue include a lack of proper accounting policies or inconsistent practices among different team members.

While most of these startup challenges can be resolved, a consultation with your external auditor early in the audit process to identify and resolve potential roadblocks is extremely beneficial. Consulting with your auditors as you’re setting up systems, developing accounting policies, and creating your financial infrastructure can save time and money while helping you achieve your business goals sooner.

If any of these scenarios sound familiar, don’t hesitate to reach out.

Undergoing your technology startup’s first audit can be daunting. Here are a few tips to help ease the stress.

You’ll need the cooperation of several key team members to navigate your first audit successfully. Your auditor will need to understand your accounting policies and your general business practices. Ensure key team members with knowledge of accounting, HR, sales, and operations are ready to participate in the audit process.

It is common for startup companies to operate without a robust accounting team in their early stages. For that reason, before the first audit it is common for financial statements to be on a cash basis or have other deviations from U.S. Generally Accepted Accounting Principles (“US GAAP”).

Before beginning your first audit, ensure the company’s accounting records are brought in order. This includes reconciliations for all balance sheet accounts, documented accounting policies for key areas, and ensuring your supporting documentation is available and organized.

As mentioned in #2, there are several common accounting issues in startup company financial statements. Ensure you engage someone with the necessary understanding of U.S. GAAP accounting rules to facilitate the audit. Some of the most common areas of accounting complexity include:

See this article for more detail around these complex areas:

5 of the Most Common Audit Challenges We See with Tech Startups

Understanding the business need for the audit is crucial to building the timeline. Knowing who is counting on the audit report (such as lenders or investors) can determine whether there are any hard deadlines to meet.  Once you establish a deadline, work with your auditor to lay out a detailed timeline.

The audit process is iterative and requires management’s cooperation throughout, so it is important to establish key milestones with your auditor to ensure both parties stay on track. Request regular check-ins with your auditor to ensure any issues are resolved timely.

Initial audits take time to complete, so be sure to communicate proactively and continuously with key stakeholders to manage expectations.

At the end of each audit, your auditor will provide you with their report as well as more detailed results for management’s consideration. It is common for startup companies to receive recommendations from their auditor on areas needing improvement. Common deficiencies the first time through an audit include a lack of supporting records, improper segregation of duties, or insufficient internal controls.

Talk through the findings with your auditor, discuss remediation priorities with the Board of Directors or Audit Committee, and make a plan to begin implementing their suggestions. At the end of the audit, you should also provide feedback on the process to you auditor because developing a good working relationship with your auditor requires providing feedback in both directions for shared success.

Use this checklist to assess your readiness. Audit Readiness Checklist – Technology Company (First Year Under Audit)

When choosing an auditor, look for a firm experienced in the auditing of startup companies who will be prepared to partner with your company throughout the process. At Sensiba, our technology accounting team has helped hundreds of startups navigate their first audits successfully. Contact us to discuss your company’s needs.

If your company offers a 401(k) retirement plan, you understand the extraordinary benefits it can offer your workforce. What many companies don’t realize is that the size of your company dictates whether or not your 401(k) plan requires a third-party audit.

Ensuring your plan is up-to-date with compliance standards is key, and there are often overlooked issues that serve as red flags for the Department of Labor (DOL) and/or the IRS. To make your audit process as smooth as possible, there are some critical points to consider when preparing for your retirement plan audit and maintaining 401(k) compliance.

Generally, a plan is considered a “large” plan and requires an audit when there are more than 100 participants with account balances on the first day of the plan year. If the plan had more than 80 participants with account balances the previous year but has fewer than 120 participants in the current year, it can follow prior year’s filing as a small plan and forego the audit requirement.

Whether or not every participant is employed by the company, an employee is eligible to participate if they meet the definition of eligibility outlined in the plan documents. Eligibility is the minimum age and service requirement that the plan requires as a condition of participation. Based on eligibility requirements of the plan, the plan should determine which individuals are eligible to participate to join the plan or would be automatically enrolled in accordance with plan provisions.

Under Section 412 of the Employee Retirement Income Security Act (ERISA), a fidelity bond must cover the plan’s assets in case of fraud or dishonesty. The fidelity bond must cover at least 10% of the plan’s assets as the beginning of each plan year, subject to a minimum bond amount of $1,000 and a maximum of $500,000 ($1,000,000 for plans that hold employer securities). As plan assets increase each year, an increase in coverage could be required if the bond no longer meets the 10% minimum requirement.

It’s important to ensure that all deferred contributions were calculated properly under the definition of eligible compensation outlined in the plan documents. There are various types of compensation that may be considered ineligible in accordance with plan documents and should be excluded from the calculation of deferrals.

Always keep your plan documents updated with the most current compliance standards and laws. It’s helpful to keep records and make all amendments easily accessible. This allows all participants to fully benefit from the plan, particularly when the documentation has not been recently revised.

It is important to establish a Fiduciary Committee to provide oversight for vital functions such as:

It’s a good idea to draft, record, and retain your annual 401(k) committee meeting minutes to help prove and defend any allegations of breach of duty.

Ensure that employee contributions are deposited within a reasonable amount of time. This can be either a timeframe outlined in the plan’s documentation or as administratively feasible. Businesses considered to have a small plan are eligible for a safe harbor rule that allows for a seven-business day window to deposit contributions.

There is an annual addition limitation designated by the IRS, subject to change every year, that is placed on the dollar amount participants are allowed to contribute to their 401(k) plan each year. If an excess contribution is found, necessary actions must be taken to remove the excess contribution and avoid penalties and potential tax issues.

If your company offers employer matching, it is important to note any maximums in your plan documents, as well as to not surpass the Plan’s matching cap. There is also an annual addition limit, subject to change by the IRS, placed on the combined contribution of employee and employer. This limit should be monitored each year by the plan to ensure compliance.

When employees are offered the option of managing their investment portfolio, make sure participants are given adequate information on the investment choices as well as the fees associated with those options. While providing participants with investment choices may reduce fiduciary liability, the committee should still maintain oversight and ensure participants are well-informed.

For companies that require an audit, Form 5500 is due by the last day of the seventh month after the plan’s year-end with a two and a half month extension. For example, if the plan’s year ends on December 31, Form 5500 will be due on July 31, with an optional extension through October 15 (Form 5558).

If you would like to learn more about the rules and regulations surrounding 401(k) compliance, or if you want to find out how Sensiba can help make your 401(k) plan audit as seamless as possible, don’t hesitate to get in touch with one of our employee benefit plan audit specialists.

Sponsoring a 401(k) plan can bring tremendous value to your organization. Having a great benefits plan can boost the morale of your team members, for example, and improve your ability to attract and retain top talent.

Managing your 401(k) plan, however, can get more complicated.

Many companies fail to meet their basic responsibilities as plan sponsors. Whether you sponsor a large or small plan, your fiduciary responsibilities are the same. The Department of Labor (DOL) and Internal Revenue Service (IRS) both conduct examinations of 401(k) plan sponsors, so it is critical to understand and meet your responsibilities.

Many plan sponsors are overly reliant on third-party service providers, assuming that because they are paying a service provider manage their plan, all of their responsibilities have been met. In reality, many 401(k) sponsors neglect their fiduciary duties, harming their employees and organization. Failing to meet regulatory requirements can lead to larger investigations from the IRS and the DOL, and more money from your pocketbook.

As a plan sponsor, you are responsible for managing your employees’ assets. The IRS and the DOL have published requirements on the fiduciary responsibilities of plan sponsors.

Some of the commonly overlooked requirements include:

Your third-party provider can also help you understand your responsibilities. Just remember that hiring a third-party plan provider alone doesn’t ensure you are meeting your obligations; in fact, reviewing their work is part of your fiduciary responsibility.

Government examinations are not the best time to discover problems with your plan. Understanding the problems that are typically found during an examination can help plan sponsors find and correct issues before they are revealed under examination.

For instance, many sponsors fail to meet document retention requirements, mistakenly assuming their third-party plan provider keeps all documents. When participants take a hardship distribution or borrow money from the plan, these activities must be documented, and records should be retained.

It is common for plans to fail to adequately define ‘compensation’ and ‘contributions,’ which leads to incorrect matching contributions that can create liability and interest for the plan sponsor. Many smaller plans have nondiscrimination issues, where plan contributions are unfairly top heavy. Other plans have problems omitting eligible employees. Management must notify employees when they become eligible and follow up on participation.

The DOL voluntary fiduciary correction program generally provides plan sponsors with the opportunity to self-report and correct problems before fines are assessed. The IRS and DOL are generally much more lenient regarding self-reported corrections than problems found under examination.

Regardless of the size of your plan, you have a fiduciary duty as the plan sponsor. While larger plans require audits that often identify problems during the audit process, smaller plans must also ensure that their fiduciary responsibilities have been met.

For more information regarding the responsibilities of 401k sponsors, get in touch with one of our 401k plan auditors.

To inspire more employers to offer retirement savings plans, a regulatory change has reduced the number of employee benefit plans required to obtain an audit report with Form 5500, “Annual Return/Report of Employee Benefit Plan.”

For plan years beginning on or after January 1, 2023, only plans that have 100 or more participants with account balances at the beginning of the plan year are now counted as a “large plan,” and therefore subject to audit requirements. Previous regulations specified that all eligible employees needed to be counted in determining whether a specific plan was large (whether or not they participated in the plan).

This change means fewer retirement savings plans will need to obtain a Form 5500 audit, saving them the cost and administrative requirements associated with an external audit.

Plans with fewer than 100 participants that have account balances will instead be able to file the Form 5500-SF. This form has fewer schedules and disclosure requirements than Form 5500.

In its Regulatory Impact Analysis, the U.S. Department of Labor estimated more than 19,000 of the nation’s 149,000 large plans, nearly 13%, would no longer be classified as large plans.

In addition to reducing administrative burdens and costs for smaller plans, the new threshold was designed to encourage more small businesses to offer retirement plans to employees.

The “80/120 participant rule,” which was not affected by the 2023 changes, offers an important exception related to Form 5500 filing requirements for employee benefit plans. The 80/120 rule allows plans with between 80 and 120 participants at the beginning of the plan year to file Form 5500 in the same category (large or small) as they did in the previous year.

Under this rule, a plan that filed as a small plan in the previous year can maintain that filing status until it reaches 121 participants. Similarly, any plan that filed as a large plan in the previous year can continue to file as a large plan until it drops below 100 participants.

The rule provides consistency and flexibility for plans hovering around the 100-participant threshold, allowing them to avoid switching between large and small plan status (along with the associated changes in filing requirements) from year to year.

Looking ahead to the 2024 plan years, the Department of Labor is expected to make additional changes under the 2022 SECURE Act (known as SECURE 2.0) designed to simplify plan administration while making retirement plans more accessible and attractive to employees.

For instance, effective January 1, 2025, the definition of a Long-Term Part-Time employee is scheduled to change to include part-time employees who worked at least 500 hours in two consecutive years (rather than the three years required in 2024). This eligibility is determined by looking at hours worked since January 1, 2021.

While this change could expand the number of employees eligible to participate in a plan, the administrative cost is likely to be offset for many plans by the reduced “large plan” criteria outlined above.

Also starting in 2025, companies that request an extension for filing Form 5500 with the Department of Labor will be able to do so electronically, rather than having to file a paper form.

To discuss the filing changes and potential implications for your employee benefit plan, contact us.

Audit confirmations are information requests, typically distributed by email or through secure portals, in which accountants ask third parties to confirm information provided by the company being audited.

Audit confirmations are a powerful tool for auditors that provide independent evidence to substantiate various financial statement assertions.

To be considered credible, the confirmation process should be performed between the auditor and the third party verifying the requested information. Confirmations received directly by the auditor from the confirming parties are more reliable than evidence generated internally by the audited entity.

For example, a company being audited providing bank statements is not considered credible evidence because the statements may have been created or edited by the company. Instead, the auditor interacting directly with the bank to verify balances mitigates the risk of a statement containing inaccurate or modified information. As such, auditors perform bank confirmations to validate the information on the bank statements received from the company.

Audit confirmations can be categorized by their format:

While specific inquiries can vary according to the company, industry, or specific risk factors, common confirmation requests center around:

In late 2023, the SEC and the PCAOB approved AS 2301, The Auditor’s Use of Confirmation, to replace guidance for audits of public companies. The new standard, which emphasizes auditors’ responsibility to use confirmations to obtain reliable audit evidence, makes a number of changes that include:

While these changes do not impact private company audits, it is important to consider these changes when evaluating the sufficiency of confirmations for an audit.

If a third party does not provide the requested confirmation or does not agree with the information presented for confirmation, auditors can use alternative methods to verify information. These may include:

Several potential obstacles can hinder the effective use of confirmation requests in the audit process. For instance, many large enterprises, as a matter of policy, will not respond to requests related to their suppliers or other business partners.

In other instances, a company may have outdated contact information for the third party, so a confirmation request is never received. Another common challenge is a data entry error, such as transposing two digits, that causes a mismatch between specified amounts in two locations. In these situations, auditors will turn to the alternative methods described earlier.

If you have questions about the use of confirmations during the audit process, contact us.

For public companies offering employee stock purchase plans or defined contribution plans with options to invest in the plan sponsor’s stock, Form 11-K is an essential compliance document designed to ensure transparency and accountability to employees and investors.  

The annual 11-K report, which provides a detailed account of the plan’s financial health and its policies, is required by the U.S. Securities and Exchange Commission (SEC) to maintain investor confidence in a company’s governance practices. Understanding what Form 11-K entails, stakeholder expectations for the form, and how to file the report can help companies stay compliant and avoid potential compliance risks.

Form 11-K must be filed annually by companies that offer employee stock purchase, savings, or similar plans in which employees have the option to invest in company stock. The filing is generally due within 90 days after the end of a given plan’s fiscal year.

Public companies, as well as certain private entities with registered employee stock plans, are required to submit Form 11-K if they are subject to SEC regulations. The content of Form 11-K covers several key areas:

Other important details include a description of the plan’s purpose, structure, and any significant changes made during the reporting period, as well as disclosures such as administrative fees or conflicts of interest that could affect the plan.

Financial statements must be prepared in accordance with SEC requirements (Regulation S-X) or ERISA requirements.

Meeting the filing requirements involves understanding the process, including the deadlines, electronic filing mandates, and the SEC’s review procedures. Form 11-K must be filed within 90 days after the plan’s fiscal year end, and if the plan is subject to ERISA, it should be filed within 180 days of the plan’s fiscal year-end. Companies can request an extension if necessary.

The form must be submitted electronically via the SEC’s EDGAR system. Once filed, the SEC reviews the document for completeness and compliance, and may ask for additional information or corrections if needed.

Auditors play a crucial role in the Form 11-K process. They are responsible for auditing the plan’s financial statements to ensure accuracy and compliance with applicable standards. Generally, a financial statement audit is required to evaluate the plan’s net assets and overall financial health, and to obtain reasonable assurance the plan is being managed according to its stated terms.

The auditor’s report, which accompanies Form 11-K, provides an opinion on whether the financial statements are presented fairly in all material respects. A clean auditor’s opinion indicates sound management practices, helping to maintain investor trust.

To stay compliant, companies should focus on several best practices:

Understanding and filing Form 11-K correctly is crucial for any company with employee stock purchase plans. By meeting stakeholder and regulatory expectations, companies can maintain compliance, protect their reputation, and continue to foster trust among employees and investors.

To learn more about Form 11-K filling and the audit process, contact us.

Preparing an 11-K report is a critical step for companies with certain types of employee benefit plans, serving as a vital tool to ensure compliance with Securities and Exchange Commission (SEC) requirements. These reports, filed annually, detail the financial condition of employee benefit plans in which employees can invest their contributions in employer securities, such as 401(k) plans with a company stock investment option.

Auditors play an essential role in this process by providing expertise to ensure filings are accurate and compliant, which in turn minimizes the risk of penalties or reputational damage.

For compliance professionals contemplating a change in auditors, choosing the right partner is invaluable in helping them navigate the complexities of 11-K filings and achieving 11-K readiness.

11-K filings come with unique challenges, and understanding the specific requirements is important. Auditors are responsible for examining the financial statements of employee benefit plans and attesting to their fairness and compliance with accounting standards. Their work must be independent, objective, and thorough.

Independence and Objectivity 

Independence is a cornerstone of a reliable audit. Auditors must remain free from conflicts of interest and committed to unbiased assessments.

Expertise in ERISA and Employee Benefit Plan Audits 

Auditors need specialized knowledge of the Employee Retirement Income Security Act (ERISA) and employee benefit plan audits to understand key aspects such as fiduciary responsibilities and the associated reporting requirements.

Familiarity With SEC Filing Requirements 

Given the intricate nature of SEC regulations, auditors must be deeply familiar with the SEC’s filing requirements for 11-K reports.

11-K audits can present several challenges, including evolving regulations, complex plan structures, and data management issues. The right auditor can help mitigate these challenges by staying up to date on regulatory changes, maintaining a deep understanding of industry practices, and employing robust data analytics tools to ensure accuracy.

Not all auditors are the right fit for your company, especially when it comes to the unique demands of 11-K filings. Knowing when to consider a change can save time, money, and stress.

For instance, selecting an auditor who matches your company’s risk profile and growth strategy is important. An auditor with a deep understanding of your industry and business model will be better positioned to provide accurate insights and recommendations that support your long-term goals.

Conversely, an auditor who lacks industry-specific experience or fails to stay updated on evolving regulations can put your company at risk. Communication issues, such as delayed responses or a lack of transparency, are another red flag.

When considering a new auditor, it is essential to evaluate several factors to ensure they meet your company’s needs. The following criteria can help you evaluate potential partners:

Industry Specialization and Track Record 

Look for auditors specializing in employee benefit plans with a proven track record with 11-K filings. Their experience can offer peace of mind, knowing they have successfully navigated similar challenges before.

Comprehensive Understanding of 11-K Requirements and SEC Regulations 

Your auditor should demonstrate a strong understanding of 11-K requirements and SEC regulations, ensuring that your filings comply with all applicable standards.

Reputation for Integrity and Independence 

Choose an auditor known for their integrity and independence. This reputation is built through consistent adherence to ethical standards and a commitment to objective assessments. Look for membership in the AICPA’s Employee Benefit Plan Audit Quality Center.

Accessibility and Client Service 

Accessibility and responsiveness are key. An auditor who is available when needed and provides timely feedback can make the 11-K filing process smoother and more efficient.

Use of Technology and Innovative Tools 

The right auditor will leverage technology to enhance audit efficiency and accuracy. Look for firms that use advanced data analytics, digital audit tools, and other innovations to streamline the process.

When selecting a new auditor, ask questions that help determine their alignment with your needs. Inquire about their experience with similar clients, their approach to staying current with regulations, and how they manage client communication and expectations.

A productive working relationship with your auditors and advisors is key to successful 11-K readiness. Regular communication and clear expectations, for instance, are essential. Involve your auditors in planning discussions and leverage their expertise for training and internal process improvement. Building a collaborative relationship fosters trust while improving the efficiency of the 11-K filing process.

By understanding your auditor’s responsibilities, evaluating your current partnerships, and selecting the right team for your needs, you can ensure a smooth path to 11-K readiness.

To learn more about effective 11-K filings, contact us.