What is SOX Compliance in 2025?

SOX compliance is a set of financial control requirements designed to ensure the accuracy and reliability of financial statements of public companies, preventing fraud and protecting investors.

A more descriptive definition for SOX Compliance in 2025 could be:

SOX compliance refers to the requirements set by the Sarbanes-Oxley Act (SOX), which mandate that publicly traded companies operating in or doing business in the U.S. establish and maintain internal control systems. These companies must document, assess, and report on the effectiveness of their internal controls to the Securities and Exchange Commission (SEC). Additionally, they must undergo an independent annual audit, overseen by the Public Company Accounting Oversight Board (PCAOB), to demonstrate compliance with SOX regulations.

Sarbanes-Oxley (SOX) Act 2002

The Sarbanes-Oxley (SOX) Act 2002 is a United States federal law brought by Paul Sarbanes and Representative Michael Oxley. Its purpose is to increase the accuracy and transparency of corporate governance and financial reporting for public companies by preventing accounting fraud.

Corporate Scandals Leading to SOX

The Sarbanes Oxley Act (SOX) was introduced following the financial scandals involving companies like Enron, World Com, and Tyco International were exposed. The extent of fraud was such that Enron experienced a significant decline in their share price from $90 to $12 initially, and when a potential acquisition failed after the scandal, it fell to $1. Enron used “mark-to-market accounting,” where it wrote future expected income from some contracts to the current income statement, inflating its current income and profits. Moreover, Enron transferred its loss-making operations to SPE (Special Purpose Entitles) to under report its losses on financial statements. After the scandal was exposed, investors were surprised by Enron’s announcement to post a loss of $683 million in Q3 2001. Following this scandal, the Sarbanes-Oxley Act was introduced, which was passed in both the House of Representatives and the Senate in 2002.

Overall, the SOX Act was passed to prevent fraudulent accounting practices and restore investors’ trust in public companies. SOX provides strict rules and regulations for financial practices, requiring companies to maintain internal controls comply with its SOX reporting standards, and pass audit to prove its compliance.

Read More: Sarbanes-Oxley Act (2002) Summary

Cost of SOX Compliance in 2025

On average companies of all sizes budget $1-$2 millions dollars for SOX compliance, along with average of $5000 to $10,000 man hours. Majority of these costs are spent on SOX 404 internal controls audits, and 70% of manhours being spent on tasks like Spreadsheet management. Based on the survey conducted by research firm Protivity in 2022 regarding SOX compliance, below are findings:

• Companies spending $2 million or more on compliance have increased, while those spending $500,000 or less have declined.
• Smaller reporting companies saw a 27% increase in compliance costs from $1.12 million to $1.43 million.
• Organizations with revenues below $500 million experienced the highest increase at 118%, indicating that SOX compliance is becoming more expensive even for smaller firms.

Hence, it’s an indication regardless of business size, cost seemed to have increased for SOX compliance. And it’s likely expected costs will continue to increase in 2025 as well.

Who should be SOX Compliant?

SOX Act primarily applies to all publicly traded companies in US or doing business in US that require these companies to implement, document, asses and certify internal controls on financial reporting. Moreover, it also require these companies to pass an annual independent audits. However, some of SOX provisions pertaining to accurate and reliable financial reporting are also applied to private companies and Nonprofits. Additionally, it also regulates audit firm with PCAOB.

SOX compliance by type of organizations

Nonprofits

SOX does not directly apply compliance to nonprofits. However, many nonprofits adopt SOX principles voluntarily to provide strong governance and transparency, mainly if they handle public funds or donations.

Privately-held companies

Private companies are generally exempt from SOX, except if they plan to go public, are acquired by a public company, or interact with public companies in ways that require SOX compliance. Many private companies also choose to adopt SOX standards to improve their financial integrity or prepare for future public listing.

Accounting firms

Firms auditing public companies must comply with PCAOB regulations, which are part of SOX Compliance. They are subject to inspections, standards enforcement, and restrictions on offering certain non-audit services to audit clients.

Publicly Traded Companies

SOX applies comprehensively to all publicly traded companies on U.S. exchanges. These organizations must implement strong internal controls, conduct regular audits, and certify financial reports and controls at the executive level.

International Companies

Foreign companies listed on US exchanges must also comply with SOX. This ensures that all entities benefiting from US capital markets stick to strong governance and reporting standards.

Benefits of SOX compliance

The value of SOX compliance often outweighs its costs, particularly for publicly traded companies. While the upfront costs are significant, the long-term benefits of improved governance are invaluable. SOX builds trust, enabling access to capital markets and opportunities for growth. Non-compliance can result in severe financial and legal consequences, making the cost of compliance a necessary investment.

• Financial Stewardship. SOX compliance ensures accurate financial reporting, which builds stakeholder and investor trust. Implementing effective internal controls diminishes the probability of fraud, financial misstatements, and operational inefficiencies.
• Improved Reporting. When SOX regulations are followed, financial data is more transparent and of higher quality. Businesses give investors trustworthy information to help them make better decisions and boost confidence in the financial markets.
• Enhanced Cybersecurity. Strong IT controls brought upon by SOX compliance enhance cybersecurity. Businesses lower the risk of data breaches and safeguard their brand by protecting critical financial data.
• Better Collaboration. Cross-departmental cooperation is made possible by SOX compliance, particularly within the operations, finance, and IT departments. A culture of accountability and clearly defined procedures are frequently the results of this teamwork.
• Risk Prioritization. Companies can identify and prioritize risks through routine audits and reviews. Businesses can address weaknesses and their overall risk management strategy with this method.

Challenges of SOX compliance

• High Costs: Implementing and maintaining SOX-compliant systems can be costly, especially for smaller businesses. Expenses include investing in IT systems, employing outside auditors, and allocating funds for compliance initiatives. To decrease costs, automate compliance processes where feasible, such as control testing and monitoring. Outsource specific tasks like IT audits to reduce internal resource budget.
• Administrative Burden: Compliance requires regular audits, frequent testing of internal controls, and extensive documentation. These endeavors may divert resources from other administrative tasks.
• Complexity: SOX requirements can be challenging to understand, particularly for businesses with little experience in compliance. Any regulatory action could lead to serious fines and harm to a company’s reputation.
• Spreadsheet and End-User Issues: Lack of version control in spreadsheets used for financial reporting causes errors due to manual data entry and can also cause unauthorized access to sensitive data stored in spreadsheets. To avoid this challenge use automated financial reporting tools to reduce reliance on spreadsheets, implement access restrictions and change tracking for important files, and regularly validate and audit spreadsheet calculations.

Impact of the SOX Act on Corporate Governance

SOX has had extensive effects on businesses and corporations. Boards and executives, especially CEOs and CFOs, now face strict accountability for financial practices. Companies must provide more accurate and detailed financial reports. Organizations are required to implement strong internal control systems to rebuild trust in financial markets by preventing fraudulent practices and greater accountability. Despite its benefits, compliance with SOX has increased operational costs and administrative burdens, especially for small companies. The following are the core impacts of SOX:

• Establishment of Public Company Accounting Oversight Board (PCAOB)
• Strong Financial Reporting Requirements
• Personal Accountability for CEOs and CFOs
• Prevent Conflict of Interest for External Auditors
• Protect Whistleblowers

Establishment of Public Company Accounting Oversight Board (PCAOB)

SOX established the PCAOB to look after the SOX audits of public companies. The PCAOB sets auditing standards, inspects auditing firms, and enforces compliance to ensure high-quality, independent audits.

Stronger financial reporting requirements

SOX introduced strong financial reporting requirements to ensure accuracy and transparency:

• Companies must provide detailed declarations about financial performance and risks.
• Companies must regularly assess and disclose the effectiveness of internal controls.
• Companies must report material changes in financial conditions on time.

Personal accountability for CEOs and CFOs

One of SOX’s most significant changes is holding CEOs and CFOs personally accountable for the accuracy of financial statements. Executives must issue statements certifying the integrity of the financial reports and that strong internal controls are in place and function effectively. Failure to comply with SOX can result in severe penalties, including imprisonment.

Prevent conflict of interest for external auditors

SOX imposed strict rules to prevent conflicts of interest for auditors and analysts, such as external auditors, who cannot provide certain non-audit services to clients. Audit committees must be independent and responsible for hiring and looking after auditors. Analysts must declare conflicts of interest to maintain objectivity.

Protect whistleblowers

SOX provides protections for whistle-blowers who expose corporate fraud or misconduct. It prohibits retaliation against employees who report violations. It requires companies to establish whistle-blower procedures, allowing them to seek legal advice if they face discriminatory misconduct. It prohibits retaliation against employees who report violations. It requires companies to establish whistle-blower procedures, allowing them to seek legal advice if they face discrimination.

Requirements for SOX Compliance in 2025

The SOX Act made signing officers (CEO and CFO) of the public company responsible for ensuring the accuracy and reliability of financial reports. As per Section 302 and Section 404 of Sarbanes-Oxley (SOX) Act 2002, signing officers of public companies must:

• Review quarterly and annual financial reports.
• Certify that financial statements are accurate and do not omit or misstate any material fact relating to the company and its subsidiaries.
• Establish and maintain internal controls to ensure accurate financial reporting.
• Test the effectiveness of internal controls within 90 days prior to report.
• Submit an extensive report on effectiveness of internal controls annually.
• Disclose any material weakness in design and operation of internal controls to company’s auditor
• Disclose any material fraud by employees or management with role in company’s internal controls
• Disclose any material changes in internal controls or factors impacting controls after evaluation.
• Obtain an independent auditor’s attestation on the effectiveness of internal controls in accordance with the standards of attestation set by the PCAOB.

SOX Internal Controls Audits

Section 404 of SOX further increases accountability by requiring publicly traded companies to go under an independent audit of their internal control for financial reporting. It highlights the need for external auditors to assess and validate the effectiveness of the company’s internal controls.

SOX Internal Control Testing

SOX internal control testing is necessary to evaluate the effectiveness and reliability of a company’s internal controls over financial reporting (ICFR).

The primary purpose of this test is to ensure that the internal controls are functioning properly and that they reduce the risk of material misstatements in financial statements.

SOX requires publicly traded corporations to evaluate their internal controls yearly and report on their efficiency. This assessment creates a double layer of accountability by requiring independent audits and management evaluations.

Internal control testing procedure is critical for meeting these compliance standards and preserving the general integrity of financial reporting. Effective internal control testing starts with careful planning. Organizations must develop a complete testing strategy to identify key controls, relevant financial reporting processes, and potential risks.

It is also important that the testing procedure should be documented, including the following:

• Any shortcomings found, arranged and dealt with according to their seriousness.
• Identification of the controls that were tested.
• The testing process and the justification for the samples that were selected.
• Results analysis, including gathered evidence.
• Assessment of the efficiency of the controls

SOX Act 2002 Key Sections for Compliance

Section 302: Corporate Responsibility for Financial Reports

SOX Section 302 requires that CEOs and CFOs must certify the accuracy and completeness of financial reports. Executives must affirm that internal controls are in place and function effectively. Certification includes accountability for the detection of fraud.

Section 303: Improper Influence on the Conduct of Audits

SOX Section 303 prohibits officers and directors from influencing auditors to alter financial statements or reports. Ensures audit integrity and independence.

Section 401: Disclosures in Periodic Reports

SOX Section 401 requires that financial statements must accurately reflect the company’s financial status, including off-balance-sheet liabilities and obligations. Enhances transparency and ensures stakeholders clearly understand the company’s financial health.

Section 404: Management Assessment of Internal Controls

SOX Section 404 requires management to evaluate and report on the effectiveness of internal controls over financial reporting. External auditors must attest to the management’s assessment.

Section 409: Real-Time Issuer Disclosures

SOX Section 409 require publicly traded corporations to promptly notify the public of any significant material changes to their operations or financial situation. Significant shifts in financial status, mergers, acquisitions, loss, and other occurrences that might affect investor choices are examples of material developments.

Section 802: Criminal Penalties for Altering Documents

SOX Section 802 states penalties for altering, destroying, or falsifying records with the intent to obstruct investigations. It requires companies to retain financial records for at least seven years. For violators, penalties include fines up to $5 million and imprisonment from 10 to 20 years or both.

Read More: SOX Violations & Penalties: How to Prevent Them?

Section 806: Whistleblower Protection

SOX Section 806 protects employees who disclose fraudulent activity and ensures that whistleblowers can disclose wrongdoings without fear of retaliation against them. This law requires that businesses set up systems for anonymous reporting.

Section 906: Corporate Responsibility for Financial Reports

SOX Section 906 requires CFOs and CEOs to attest that regular reports adhere to SEC rules. Not complying with this imposes fines of up to $5 million and jail time of not more than 20 years as criminal punishments for making false certifications.

Section 1107: Retaliation Against Informants

SOX Section 1107 makes it illegal to retaliate against people who report breaches of federal laws. Those found guilty of retaliation face fines and jail time as punishments.

Steps to Prepare for a SOX Audit

The SOX audit process consists of several organized processes to guarantee compliance. The main goals are to confirm the accuracy of financial reporting, find weaknesses, and confirm the efficiency of internal controls. Public companies can prepare for SOX audit in 8 steps:

• Define the SOX audit scope using a risk assessment approach
• Determine materiality in SOX
• Identify SOX controls
• Perform a fraud risk assessment
• Manage process and SOX controls documentation
• Test key controls
• Asses deficiencies in SOX
• Deliver management’s report on controls

Define the SOX Audit Scope using a Risk Assessment Approach

The scope of SOX audit is established to evaluate the risks to financial reporting. Payroll, revenue recognition, and IT systems are examples of accounts and procedures that are more likely to have errors or fraud. Sort controls according to how they affect the accuracy of financial accounts. Steer clear of auditing accounts or procedures that are thought to be unimportant to financial reporting.

Determine Materiality in SOX

The term “materiality” describes how a financial reporting error or inadequacy becomes solid enough to affect investor decisions. Set cutoff points based on total assets, net income, or revenue. Consider non-quantitative effects like reputational damage or regulatory compliance.

Identify SOX Controls

SOX controls, meaning maintaining internal controls, are classified into the categories below:

• Key Controls: Directly prevent or detect material misstatements in financial reporting.
• Non-Key Controls: Indirectly support financial reporting accuracy but are not critical for material misstatement prevention.
• IT General Controls (ITGCs): Help ensure the integrity of systems used in financial reporting, such as access controls and change management.
• Entity-Level Controls (ELCs): Broad controls affecting the organization’s overall control environment, such as tone at the top and risk assessment.

Perform a Fraud Risk Assessment

Evaluate processes with high fraud risks, such as revenue manipulation or expense misclassification. Introduce controls to mitigate identified fraud risks, such as segregation of duties or approval workflows. Continuously review processes to detect unusual or fraudulent activity.

Manage Process and SOX Controls Documentation

Use templates and tools to document processes, risks, and controls. Maintain detailed records of control owners and responsibilities, and evidence of control performance, e.g., reconciliations, approvals, and audit trails for IT systems.

Test Key Controls

Verify that the control is appropriately designed to mitigate the risk and execute as intended. Use statistical methods to test a representative sample of transactions or processes.

Assess Deficiencies in SOX

Deficiencies are classified into three categories based on severity:

• Material Weakness: A deficiency that results in a reasonable possibility of material misstatement.
• Significant Deficiency: Although not as severe as material vulnerability, it is nonetheless significant enough to be reported to management.
• Inconsequential Deficiency: Small problems that do not significantly affect financial reporting.

Deliver Management’s Report on Controls

Management must provide a report detailing the effectiveness of the company’s internal controls over financial reporting, any identified material weaknesses, the remediation steps taken, and certifications from the CEO and CFO attesting to the report’s accuracy.

SOX Act Equivalents Across World

The SOX Compliance Act Global has influenced corporate governance and financial reporting standards. Although SOX is a U.S. law, other countries have adopted comparable laws and regulations because of SOX guidelines. US businesses that conduct business abroad are subject to their complicated compliance requirement.

• Canada: Canadian SOX (C-SOX) -The Canadian equivalent of the SOX Act is commonly known as Bill 198.
• European Union: EU Audit Regulation – The European Union Audit Directive and Regulation apply to public interest entities, including listed companies, banks, and insurers.
• United Kingdom: UK Corporate Governance Code -The Combined Code on Corporate Governance applies to public companies listed on the London Stock Exchange.
• Japan: Financial Instruments and Exchange Act (J-SOX) – Applies to publicly traded firms in Japan. The requirements for internal control assessments and certifications are key provisions that closely resemble SOX Section 404.
• Australia: Corporate Governance Principles – ASX Corporate Governance Council’s Principles and Recommendations apply to companies listed on the Australian Securities Exchange (ASX).
• India: Companies Act, 2013 – Under the Companies Act and its implementing regulations, companies in India are subject to stringent compliance requirements.
• China: Basic Standard for Enterprise Internal Control (C-SOX) – It applies to both public companies and large state-owned enterprises and is issued by the Ministry of Finance in coordination with other regulatory agencies.

Tools for 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 controls designed to ensure the accuracy and reliability of your financial reporting. Key areas within ICFR include:

• Risk Assessment: How the company identifies and analyzes risks to financial reporting, and how it manages those 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 deprovisioning 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 that supports audit responses for some 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 of changes to configurations, settings and master data and 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 personnel only. This includes logical access (passwords, multi-factor authentication) Pathlock provides access restrictions based upon access risk analysis and compliant provision 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: Implementing measures to protect IT systems and data from unauthorized access, use, disclosure, disruption, modification, or destruction. This includes things like firewalls, intrusion detection systems, and security awareness training. Pathlock provides Cybersecurity Application Controls that include vulnerability management, threat detection and response, and transport control to protect IT systems and data. Some areas of IT Security like firewall and security awareness training are covered by other solutions.

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

These are controls that 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 Controls Monitoring to monitor Separation of Duties violations that a user actually did do 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 in a timely and accurate manner. This includes:

• Completeness and Accuracy of Financial Reporting: Ensuring that all material information is included in financial reports and that it is free from material misstatements. Financial Reporting includes reporting of financial transactions that occur outside of the Governance, Risk and Compliance area.

• Timeliness of Reporting: Meeting deadlines for filing financial reports with the SEC. Pathlock provides real-time reporting that supports SEC reporting that relates 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 Separation of Duties violations and the 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 provides the ability to identify control deficiencies and correct them in advance of an audit. Accountability, provides management with tools to confirm the financial reports’ accuracy and confidence.

Fraud Risk Assessment: Identifying and assessing the risk of fraud within the organization. Pathlock provides Continuous Controls Monitoring to monitor Separation of Duties violations that a user actually did do supported by risk quantification and mitigation steps to prevent fraud.

SOX Compliance Deadlines

Company Type	10-K Filing Deadline	10-Q Filing Deadline	SOX 404(b) Auditor Attestation Required?
Large Accelerated Filers (Public float ≥ $700M)	60 days after fiscal year-end	40 days after quarter-end	Yes
Accelerated Filers (Public float ≥ $75M and < $700M)	75 days after fiscal year-end	40 days after quarter-end	Yes
Non-Accelerated Filers (Public float < $75M)	90 days after fiscal year-end	45 days after quarter-end	No
Smaller Reporting Companies (SRCs)	90 days after fiscal year-end	45 days after quarter-end	No

Closing Thoughts

SOX compliance is a law to keep an eye on corporate governance, creating trust between the public, stakeholders and investors. Even though there are challenges in implementing it, the benefits of financial transparency, risk management, and operational efficiency are worth the costs.

SOX protects investors by ensuring their accurate financial reporting and limiting the possibility of fraud. It defines accountability for corporate executives and auditors. Using SOX organizations like PCAOB, COSO, COBIT, ISACA, and ITGI can improve compliance efforts by automating controls and reducing errors. The implementation of SOX enhances security and saves time during audits. Third-party solutions like Pathlock and other GRC tools help ensure audit-ready compliance. Integration of technology addresses rising costs and resource demands. Though SOX is a US law, its principles have inspired similar regulations across the world, creating the global importance of corporate accountability.

Frequently Asked Questions on SOX Compliance