What is SOX Act?

The Sarbanes-Oxley Act (SOX) of 2002 is a U.S. law created to enhance corporate governance and improve financial transparency and accountability in response to infamous scandals like Enron and WorldCom.

Under SOX, public company CEOs and CFOs must certify financial statements. Also, SOX requires public organizations to enable internal controls and accurate financial reporting while ensuring executive accountability.

SOX Act applies to public companies, international companies publicly traded in the U.S. or registered with the SEC, and accounting and auditing companies. Penalties for non-compliance with SOX include hefty fines and criminal charges.

Applicability of Sarbanes-Oxley Act 2002

SOX compliance helps protect investors, staff, clients, accounting firms, and any relevant party. To achieve this, SOX sets its requirements to:

• Publicly traded companies based in the US, including wholly owned subsidiaries
• Publicly traded non-US companies conducting business in the US
• Private companies preparing for an initial public offering (IPO)
• Accounting firms and third-party companies that offer services to any of the above companies

Compliance Requirements of the Sarbanes-Oxley Act

The SOX Act is structured into sections, each organized into 11 titles. Sections address specific areas, such as financial reporting, financial disclosures, corporate governance, internal controls, and penalties for non-compliance. The most critical sections for compliance include 302, 404, 409, 802, and 906.

Section 302: Corporate Responsibility for Financial Reports

CEOs and CFOs of public companies must personally sign financial reports submitted to the SEC. They must ensure reports are accurate, complete, supported by internal controls, and validated within 90 days before submission.

Section 404: Management Assessment of Internal Controls

Corporate management must establish adequate internal controls. Both management and external auditors must assess and report on their adequacy.

Section 409: Real-Time Issuer Disclosures

Requires timely disclosure of significant changes in a company’s financial condition or operations to investors and the public.

Section 802: Criminal Penalties for Altering Documents

Imposes criminal penalties, including fines and imprisonment, for tampering with financial documents or concealing information.

Section 906: Corporate Responsibility for Financial Reports (Penalties)

Imposes fines and imprisonment for company executives who submit misleading or false financial reports.

11 Step SOX Compliance Checklist

Following is a ten step sox compliance checklist:

1. Conduct Risk Assessment
2. Protect Against Data Tampering
3. Document Activity Timelines
4. Establish Access Tracking Controls
5. Develop a Risk-Based Testing Schedule for Internal Audits
6. Implement Robust Security Data Collection and Analysis
7. Track Security Breach
8. Test Internal Controls
9. Grant Auditors Access to Defense Systems
10. Communicate Security Incidents to Auditors
11. Report Technical Difficulties to Auditors

Each of the item in checklist required some practical steps by public companies as follows:

SOX Compliance Checklist	Practical Steps
Risk Assessment	Asses areas susceptible to material misstatement in financial reporting. Identify accounts, processes, and transactions that could impact financial statements.
Protecting Against Data Tampering	Implement security measures to prevent any individual’s unauthorized tampering or modification of financial data by focusing on its integrity.
Documenting Activity Timelines	Set the controls for timely and accurate financial reports. Setting specific deadlines for each step in the reporting process is critical to ensure the overall process is completed on time.
Developing a Risk-Based Testing Schedule for Internal Audits	Perform scheduled testing of key financial and IT controls to identify weaknesses. Run final year-end testing before finalizing the financial statement. If issues arise, implement corrective actions and re-test.
Implementing Robust Security Data Collection and Analysis	Implement data collection systems that gather and store logs from various systems, such as network activity, system events, and user behavior.
Security Breach Tracking	Implement automated systems for continuous monitoring and quick security threat identification
Testing Internal Controls	Ensure continuous control monitoring is enabled to detect anomalies. Enable automated testing tools to streamline tasks like data validation and analysis
Granting Auditors Access to Defense Systems	Ensure continuous control monitoring is enabled to detect anomalies and automated testing tools are enabled to streamline tasks like data validation and analysis.
Communicating Security Incidents to Auditors	Develop a formal reporting protocol in case you need to promptly escalate incidents to management and auditors.
Reporting Technical Difficulties to Auditors	Implement a root cause analysis process to identify the source of technical problems and prevent their recurrence. Share the findings of these audits with auditors.

Let’s look at the in-depth breakdown for each of the area in sox compliance checklist.

1. Conduct Risk Assessment

SOX compliance risk assessment involves several key aspects to ensure ongoing compliance:

• Identify high-risk areas: This includes assessing areas susceptible to material misstatement in financial reporting. Identifying accounts, processes, and transactions that could impact financial statements.
• Evaluate internal controls and their effectiveness in financial reporting: Assess the design and operational effectiveness of Internal Controls over Financial Reporting (ICFR). Identify control gaps and weaknesses that may lead to financial misstatements.
• Run fraud risk assessment: Evaluate the potential for fraudulent financial reporting and asset misappropriation. Consider fraud risks related to management override, revenue recognition, and expense manipulation.
• Prioritize risks. Risk assessment is performed based on qualitative and quantitative factors to identify the company’s most significant areas. Use materiality, complexity, and past audit findings to determine focus areas.
• Define scoping and keep documentation: Determine which processes and controls will be tested for compliance. Define the scope of SOX testing based on the most significant risks.
• Develop a SOX compliance plan: Developing the project plan, including the objectives, timelines, budget, and resources.

2. Protect Against Data Tampering

Implement security measures to prevent any individual’s unauthorized tampering or modification of financial data by focusing on its integrity. These measures include:

• Encrypt sensitive financial data.
• Implement role-based access control systems.
• Audit regularly for potential vulnerabilities.
• Detect and address issues timely.

3. Document Activity Timelines

Set the controls for timely and accurate financial reports. Setting specific deadlines for each step in the reporting process is critical to ensure the overall process is completed on time, including review and reconciliation, data collection, and submission of reports to the SEC. This guarantees the timely filling of quarterly reports (Form 10-Q) and annual reports (Form 10-K) and compliance, which, as a result, prevents reporting delays and improves the overall reliability of financial reporting disclosure.

4. Establish Access Tracking Controls

• Establish and implement authorization procedures to ensure appropriate personnel authorize all transactions. Ensure that financial actions can be approved by an authorized person only.
• Enable role-based access controls to financial systems and review and update user permissions regularly. Enable regular reviews to ensure that only authorized individuals are allowed access to critical systems. Ensure that the access control policy supports prompt updates of privileges when an employee changes roles or leaves the company.
• Track and monitor user sessions across critical systems for suspicious access to sensitive data. Ensure audit logs record all changes, approvals, and unauthorized attempts.
• Enable Access Monitoring: Enable automated access monitoring to flag suspicious activities.

5. Develop a Risk-Based Testing Schedule for Internal Audits

• Run regular control testing: Perform scheduled testing of key financial and IT controls to identify weaknesses. Include controls ensuring financial integrity (e.g., transaction approvals, reconciliation). Evaluate IT controls, such as user access management, segregation of duties, and system configurations.
• Run final year-end testing: Run final year-end testing before finalizing the financial statement. Focus on high-risk areas and previously identified weaknesses.
• Re-test high-risk areas at year-end: If issues arise, implement corrective actions and re-test to ensure resolution before reporting.

6. Implementing Robust Security Data Collection and Analysis

There are several best practices for robust security data collection and analysis.

• Implement data collection systems that gather and store logs from various systems, such as network activity, system events, and user behavior.
• Monitor and analyze these logs to identify potential security risks in real time.
• Enable real-time analysis and reporting to detect anomalies and get alerts for suspicious activities.
• Ensure data is securely stored, encrypted, and retained for at least 5-7 years.

7. Security Breach Tracking

• Implement automated systems for continuous monitoring and quick security threat identification.
• Establish a clear incident response plan that defines roles and responsibilities, security breach containment procedures, and recovery steps.
• Ensure all security incidents and breaches are thoroughly logged, including all the steps for breach detection, actions taken, and outcomes. Establish a process for promptly disclosing breaches to auditors.

8. Test Internal Controls

• Ensure continuous control monitoring is enabled to detect anomalies.
• Enable automated testing tools to streamline tasks like data validation and analysis.
• Ensure all testing procedures and results are detailed to support audit conclusions.

9. Grant Auditors Access to Defense Systems

• Use role-based access control (RBAC) to provide auditors with temporary, read-only access to necessary data.
• Established an access approval process and document approval and access details.
• Log all auditor actions and keep the audit trail to ensure the actions are transparent.
• Run regular access reviews and monitor access continuously.
• Enable data encryption to protect sensitive information.

10. Communicate Security Incidents to Auditors

• Implement real-time monitoring tools for timely detection and logging of security incidents.
• Develop a formal reporting protocol in case you need to promptly escalate incidents to management and auditors.
• Run a root cause analysis of an incident and document corrections made.
• Maintain detailed records of each incident to communicate those incidents. These documents must include the outcomes of your investigation and follow-up steps taken.

11. Report Technical Difficulties to Auditors

• Establish automated incident detection systems and ensure all issues are logged with detailed information. In case of an incident, you should have a formal incident reporting procedure, which defines responsibilities for issue escalation and resolution.
• Implement a root cause analysis process to identify the source of technical problems and prevent their recurrence. Share the findings of these audits with auditors.
• Establish employee training to explain the steps to report any technical issues recognized.

How to Identify if SOX Program is Inadequate?

It can be identified by:

• Internal auditors during an internal audit, internal control testing, or process review.
• External auditors during the annual audit.
• Compliance officers during compliance assessments or due to regulatory changes.
• IT and security teams due to their findings in system logs and access control failures.
• Finance and accounting teams due to identified discrepancies in financial statements.
• Board of directors or audit committee during their review of audit reports, compliance updates, or whistleblower complaints.
• Regulatory agencies during their investigations of whistleblower reports or company filings.
• Employees or whistleblowers who notice control failures or observe unethical practices.

10 Steps to Improve SOX Program

Enhancing a SOX compliance program requires a proactive approach. Let’s review how you could achieve that.

1. Implement a “compliance by design” approach. If you are getting ready to become SOX compliant, consider integrating SOX controls first rather than adding them later. Ensure that new systems and workflows are built based on compliance best practices in mind. That will reduce the number of last-minute fixes.
2. Continuous risk assessment: Invest in regular risk assessments to identify potential issues early and identify compliance gaps or inefficiencies in your processes.
3. Leverage automated tools. Consider automating risk trend analysis in financial transactions to identify patterns of non-compliance or fraud indicators.
4. Run beyond-schedule compliance checks. This way, you can uncover gaps that might be hidden from your view during predictable audits.
5. Implement SOX-focused change management. When systems or processes change, ensure these modifications are aligned with SOX requirements.
6. Dedicate a cross-functional SOX team. As audit season approaches, consider establishing a team to handle audit requests, documentation, and issue resolution.
7. Test controls with real-world scenarios. Simulate actual fraud attempts or financial misstatements to assess control effectiveness.
8. Maintain an “audit-ready” documentation culture. Enforce real-time documentation updates instead of scrambling before an audit.
9. Encourage internal reporting. Create ways to boost a compliance culture where it is safe for a whistleblower to report compliance concerns.
10. Enhance employee training. Ensure all employees involved in SOX compliance are well-trained on controls, policies, and procedures.

How Pathlock Helps with SOX Compliance

Pathlock Cloud is a leading technology solution designed to help organizations automate compliance processes. It addresses important SOX requirements, especially in financial reporting, access management, and audit trails.

I. Implement Internal Control Over Financial Reporting (ICFR) with Pathlock

This is the core of SOX compliance. Auditors assess the effectiveness of implemented controls to ensure the accuracy and reliability of your financial reporting. Key areas within ICFR include:

• Risk Assessment: How the company identifies, analyzes, and manages financial reporting risks. Pathlock AAG helps identify and assess access-related risks, while CCM allows for ongoing monitoring and analysis of those risks.
• Control Activities: The specific actions taken to address risks, such as approvals, authorizations, verifications, reconciliations, reviews of operating performance, and segregation of duties. AAG automates key control activities such as user provisioning, movement, and de-provisioning of users. It provides elevated access management, user access reviews, certifications, and role management, which improves efficiency and accuracy. CCM consolidates controls, continuously monitors the effectiveness of these controls, and provides risk quantification in financial terms.
• Information and Communication: How the company communicates financial reporting responsibilities and information, both internally and externally. Pathlock provides reporting information supporting audit responses for compliance requirements like the U.S. Securities and Exchange Commission cybersecurity rule of July 2023, requiring rapid disclosure of material breach information.
• Monitoring Activities: Ongoing evaluations of the effectiveness of internal controls, including periodic audits and reviews. Pathlock provides real-time monitoring of violations of business process controls and IT general controls. Monitoring changes to configurations, settings, and master data, as well as the ability to configure custom events to monitor across all transactions, is a key differentiator.

II. Implement IT General Controls (ITGCs) with Pathlock

These controls support the effective operation of the ICFR by ensuring the reliability of IT systems. Key areas within ITGCs often include:

• Access Controls: Restricting access to systems and data to authorized users only. This includes logical access (passwords, multi-factor authentication). Pathlock provides access restrictions based on access risk analysis and compliant provisions supported by role management.
• Change Management: Ensuring that changes to IT systems are authorized, tested, and implemented in a controlled manner to prevent unintended consequences. Pathlock monitors changes to IT configuration settings and master data, including the original value, the adjusted value, and values that have been deleted.
• IT Security: Protecting IT systems and data from unauthorized access, use, disclosure, disruption, modification, or destruction. This includes firewalls, intrusion detection systems, and security awareness training. Pathlock provides Cybersecurity Application Controls, including vulnerability management, threat detection and response, and transport control to protect IT systems and data. Some areas of IT Security, like firewalls and security awareness training, are covered by other solutions.

III. Implement Entity-Level Controls (ELCs) with Pathlock

These controls operate across the entire organization and have a pervasive impact on the control environment. Examples include:

• Fraud Prevention Program: Implementing measures to deter, detect, and prevent fraud. Pathlock provides continuous control monitoring to monitor the separation of duties violations a user has committed, supported by risk quantification and mitigation steps to prevent fraud.

IV. Implement Disclosure Controls and Procedures with Pathlock

These controls ensure that the company meets its obligations to disclose material information to investors promptly and accurately. This includes:

• Completeness and Accuracy of Financial Reporting: Ensuring that all material information is included in financial reports and free from misstatements. Financial reporting includes reporting financial transactions outside the governance, risk, and compliance areas.
• Timeliness of Reporting: Meeting deadlines for filing financial reports with the SEC. Pathlock provides real-time reporting supporting SEC reporting related to compliance with disclosure material breaches within the SEC cybersecurity rules.
• Internal Reporting: Providing management with the information it needs to make informed decisions about financial reporting. Pathlock provides information about the separation of duties violations and monitored transactions to support accurate reporting.

V. Conduct SOX Audits with Pathlock

SOX audits may also cover areas such as:

• Remediation of Deficiencies: Developing and implementing plans to correct any control deficiencies identified during the audit. Pathlock allows you to identify control deficiencies and fix them before an audit. Accountability provides management with tools to confirm the accuracy and confidence of financial reports.
• Fraud Risk Assessment: Identifying and assessing the risk of fraud within the organization. Pathlock provides continuous control monitoring to monitor the separation of duties violations a user has committed, supported by risk quantification and mitigation steps to prevent fraud.

Frequently Asked Questions