The Sarbanes-Oxley Act is comprehensive and lengthy, and it’s easy for companies’ accounting departments to become overwhelmed by it.
Generally, SOX requirements fall on companies that are publicly traded in the United States (that includes wholly owned subsidiaries of foreign companies) as well as foreign companies that raise equity or debt on one of the U.S. public exchanges. There are a few exceptions for smaller companies (e.g., under $100 million in annual revenues and emerging growth companies). Sarbanes-Oxley law requires that all financial reports include an internal controls report that shows that a company’s financial data is accurate and that the company has adequate controls in place to ensure the data is secure.
Internal controls are deemed important for a reason
SOX compliance is mandatory of certain companies today for good reason. The law was passed in the wake of the accounting scandals at Enron, WorldCom, Arthur Anderson and other companies with the intent of reforming American business practices. It covers auditor independence, corporate governance, internal control assessment and enhanced financial disclosures.
The Sarbanes-Oxley Act helps keep companies honest and protects shareholders from fraud perpetrated by publicly traded companies. Being compliant has many other benefits as well. Here’s a rundown of some of the most important value adds:
- Improved general control environment – Transparency is the name of the SOX game. There’s no question that the requirements related to documentation of internal controls can help a company get a much better handle on how control activities are executed throughout the financial, operational and IT environments of the organization. SOX compliance helps companies identify areas where their controls could and should be better.
- Better risk control – The risk assessment piece of SOX helps you understand where you’re exposed and where controls over financial reporting are more likely to “break.” Companies that have established, effective operating controls in place and risk properly assessed have the ability to be more proactive than reactive if and when issues arise.
- Streamlined and efficient processes that save time and money – When you have good policies and structure in place regarding internal controls, your business tends to run more smoothly overall. A solid internal control environment can avoid duplicate steps in various processes and find efficiencies in others.
- Better overall work environment – Nobody wants to work at a company that is chaotic. Having controls in place benefits your staff and any future staff you hire because your organization’s operations will be more efficient and effective overall (see the previous bullet!). When your financials are more reliable, the jobs of your staff as well as your auditors will be that much easier. Written policies and procedures for various processes and tasks can make onboarding much easier as well.
- Greater visibility into business operations – An internal control environment that is structured creates visibility between departments and with management. The clearer you are on how controls intersect with one another, the easier it is for you to mitigate risk and make improvements. You’ll be better able to educate your staff across business areas about how to enhance internal communication and operations—and build trust among the areas.
- Improved investor/investment opportunities – Having internal controls in place proves to investors and lendersthat the risk of misstatement or misappropriation of funds is low in your organization, giving them comfort that your financial data is accurate. If your control environment is in place when you’re a smaller organization, you allow yourself to be more flexible and dynamic when opportunities for strategic growth present themselves.
SOX compliance might seem like a pain for your company and your employees, but once you get and stay on top of it every year, you’ll reap many other benefits. Your organization will be more organized, efficient and financially healthy, not to mention more successful and sustainable for the long term.
Call TGRP Solutions for help
TGRP Solutions has deep knowledge about Sarbanes-Oxley, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) Internal Control Integrated Framework, and best practices for internal controls. We can help your organization understand these best practices by performing an internal controls assessment. This assessment will identify where your internal controls need improvement and help you prioritize actions to take to mitigate risks. We can help you put an effective framework in place and maintain it for easier audits going forward.
In this two-part series, we’re discussing the importance of effective internal controls to protect your business and ensure you are in compliance with regulations. Read our blog on internal controls for smaller, non-public companies.
