How automation helps businesses achieve SOX 404 compliance

The U.S. Congress passed the Sarbanes-Oxley Act in 2002 to protect shareholders from corporate fraud. The law increases transparency by requiring companies to provide financial statements periodically that clarify their current financial standing. Since the law passed, companies have struggled to keep up with the processes required to stay in compliance.

Issues with auditing and risk assessment have made it difficult for businesses to identify and monitor controls around SOX compliance. That means employees spend more time and effort trying to get financial reporting in order, which puts a strain on operating expenses.

What is SOX 404 compliance?

Section 404(a) requires management’s annual assessment of internal control over financial reporting. Section 404(b) adds independent auditor attestation for issuers subject to that requirement. The Securities and Exchange Commission (SEC) describes exemptions for emerging growth companies(opens in a new tab) and qualifying smaller issuers(opens in a new tab).

Internal controls are the framework put in place to help companies comply with SOX 404 regulations. The Committee of Sponsoring Organizations of the Treadway Commission (COSO) internal control framework(opens in a new tab) came about from a joint initiative developed by five organizations with oversight over those handling business financials.

Companies subject to Section 404(a) report the following information in their annual filings:

• A statement outlining management’s responsibility to establish and maintain effective internal control around their financial reporting
• A statement that identifies what framework management uses to evaluate the effectiveness of current internal controls
• An assessment from management around the effectiveness of internal controls at the end of the most recent fiscal year
• An independent auditor’s attestation when Section 404(b) applies

Failing to implement internal controls puts organizations at risk of violating SOX 404 requirements as mandated by federal law. For that reason, organizations must find ways to deal with problems that impede their SOX 404 compliance efforts.

SOX 404 compliance gaps

Companies often struggle with the scope of the documentation, evaluation, and testing of procedures required to ensure SOX 404 compliance. They also run into internal control issues that impede efforts to make the company more efficient in maintaining financial disclosures. Leaving flaws in the process unresolved can prevent management from providing accurate reporting and could bring about a negative review from an independent auditor.

Below are some of the biggest threats to an enterprise’s ability to maintain SOX 404 compliance.

1. No company-wide internal control management program

Any SOX 404 compliance project put in place needs to cover a business’s entire control program. It also needs to provide guidance on handling key processes tied to financial reporting, including all business units. The company needs to establish a foundation for SOX compliance requirements that it can repeat yearly. Company leaders must also accept responsibility for managing internal controls throughout the organization.

The absence of a company-wide internal control management program can lead to:

• Negative assessment by external auditors
• An inability to sustain SOX 404 compliance
• Lack of knowledge around potential financial issues
• Lack of confidence in company leadership

2. No company-wide risk management program

An effective risk management program is critical to the success of an internal control management program. Companies need a formal process designed to spot financial reporting risks and their impact. Those risks should link back to specific business areas or activities. Businesses need supporting technology capable of collecting, tracking, and maintaining risk information.

Other issues that arise with a lack of a risk management program include:

• Lack of training around SOX 404 requirements
• Not being able to identify risks in specific processes
• No communication between departments about potential financial risks
• Poorly maintained or inadequate IT SOX compliance tools

3. Lack of ability to test and evaluate internal controls for outsourced processes

With many companies outsourcing fundamental business processes, they may not have adequate oversight of SOX 404 compliance issues. If they don’t establish SOX requirements, there could be issues with the data used in financial disclosures and reports. Management also won’t be able to report the effectiveness of these controls.

Ways to improve IT SOX compliance through automation

Having software dedicated to maintaining SOX 404 compliance helps businesses stay on top of the regulations. They can set up a centralized data repository that holds SOX compliance requirements and all related documentation. Auditors gain a deeper understanding of how internal controls work. Businesses can create dashboards showing all internal control processes, testing results, and components for SOX 404 compliance.

SOX compliance teams have a place to handle the technology used to run automated processes related to SOX processes, including:

• Dealing with version control issues
• Collaborating on risk assessments
• Outlining testing documents
• Issuing status updates
• Overseeing the collection process

Automation makes it easier for organizations to get through all stages of SOX compliance testing.

• Design and assessment — SOX compliance teams can create narratives and flowcharts that outline internal controls. They can perform internal control assessments and make updates to workflows if there are issues within the process.
• Interim testing — Teams can automatically execute tests at different points during the year. They can deal with problems and adjust the design or execution before year-end testing.
• Year-end testing — Before issuing financial disclosures, teams can automatically execute tests to ensure that all internal controls function at maximum operational effectiveness.

Having all automation and documentation maintained in one system makes it easier for independent auditors to understand what’s happening around a company’s internal controls. They can quickly run audit reports that get attached to company financial statements.

Better SOX compliance with Nutrient Workflow

Nutrient Workflow can route control assessments and testing tasks, collect supporting evidence, and track approvals. Teams configure these workflows around their control framework and review the results; the software doesn’t establish compliance or replace professional judgment.

Find out more about how we can adapt Nutrient Workflow to your business needs by setting up a consultation.

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