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Internal SOX Controls: A Quick Overview

Shiv Sujir - January 31, 2022

What Is Internal SOX Controls?

The Sarbanes-Oxley (SOX) Act of 2002 was established as federal law to ensure accurate financial reporting by public companies and protect the intended users, such as lenders, investors, and government organizations, from financial statement errors and fraud and malpractice.

The Act includes 11 sections, out of which sections 302 and 404 are the most relevant to internal SOX controls. SOX section 302 defines the corporate responsibility for certifying the financial reports. Section 404, known as Management Assessment of Internal Controls, specifies requirements for maintaining and monitoring internal controls related to the company’s financial reports.

What Is An External SOX Audit?

Section 404 requires businesses to have an annual audit of internal SOX controls performed by an independent external auditor. The purpose of the external audit is to enhance the degree of confidence of the intended users in the accuracy and completeness of the company’s financial reports, including balance sheets, income statements, cash flow statements, and statements of shareholders’ equity.

4 Key SOX Compliance Requirements

Any company that needs to comply with SOX must meet the following requirements annually. While each organization may establish its own compliance best practices, the ultimate goal is to meet four key requirements.

Management Responsibility:

SOX requires a company’s CEO and CFO to personally certify that all records are complete and accurate. Specifically, they must confirm that they accept personal responsibility for all internal controls and have reviewed these controls in the past 90 days. Failure to do so can result in heavy fines of millions of dollars and imprisonment.

Internal Controls:

The SOX act stipulates that public companies need to file a report that demonstrates the existence and efficacy of internal controls pertaining to financial records. Once again, SOX puts the burden of implementing these controls on the CEO and CFO to ensure the integrity and accuracy of financial information.

Data Security Policies:

Organizations that fall under the SOX act must create and implement data security policies that are designed to protect the storage and use of financial information. These policies should be communicated across the organization and enforced consistently to prevent financial inaccuracy or misinformation.

Proof of Compliance:

Companies are required to maintain and provide documentation that proves that all compliance requirements are being met. Also, all controls pertaining to SOX must be continuously monitored, tested, and recertified to measure SOX compliance objectives.

Impact Of Internal SOX Controls On ERP Systems

Layered Internal Controls

The consistent implementation of internal controls mandated by SOX means that organizations must ensure adequate controls within all applications, including ERP systems. However, the role-based access controls provided by most ERP vendors are not fine-grained enough to demonstrate internal SOX controls.

To implement and demonstrate controls, organizations need to be able to implement layered access controls, often called defense-in-depth, that go beyond the initial point of access. Security teams must be able to monitor who is accessing what, when, and from where. This requires controls to be implemented at the access, transaction, and data field levels.

Even if you succeed in implementing these controls, SOX demands that these controls be continuously tested and monitored, making control recertification an integral part of your ERP SOX compliance process. And finally, your internal audit teams must be able to pull reports and logs that can undeniably verify the existence and efficiency of these controls.

Segregation of Duties Management

Segregation of Duties (SoD) is another aspect of SOX that affects ERP applications. Detecting and preventing SoD violations is vital to managing risk and fraud. When ERP admins need to manage thousands of roles and authorizations requests, there is a real risk of user over-provisioning and role conflicts that could lead to financial fraud. However, manually tracking each role and the resulting conflicts between roles is practically impossible.

To counter this challenge, automated SoD management solutions can be implemented across your applications. Automated cross-application SoD capabilities help you monitor role conflicts and SoD violations in real-time. They also manage your overall application risk from a single platform.

How Appsian Enables Internal SOX Controls In ERP

The Appsian Security Platform provides organizations with a range of controls and monitoring solutions that enable your security and compliance teams to not only implement internal SOX controls but also demonstrate their effectiveness at multiple levels.

Attribute-Based Access Controls

With Appsian’s ABAC capabilities, organizations can enhance their existing role-based access controls by taking contextual risk into account. For example, when users log into ERP applications, ABAC allows you to implement granular policies based on attributes like time, device, IP address, locations, etc. This information enables you to allow or deny access to sensitive information based on the context of access and significantly reduce data exposure in high-risk scenarios.

Adaptive Internal Controls

SOX requires companies to implement controls on access to and modification of data that affects financial reporting. Appsian enables internal controls at the ERP data field and transaction levels with tools like data masking and step-up multi-factor authentication for sensitive transactions. Coupled with Appsian’s ABAC capabilities, these layered controls can be activated based on contextual risk while allowing users full access when the risk is acceptable.

Automated SoD Management

Manually managing thousands of roles and authorizations while ensuring there are no SoD conflicts is a challenge for most organizations. Appsian automates SoD management by monitoring user activity and role usage in real-time. It pinpoints any current SoD violations of users and roles and prevents potential conflicts by testing roles in advance. Appsian’s cross-application capability also allows you to manage ERP risk with a single platform and implement SOX compliance consistently in all your ERP systems.

Learn how Appsian enables SOX compliance across your ERP applications with cross-application risk management, continuous controls monitoring, and adaptive internal controls. Schedule a demo with our ERP compliance experts.

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