The US federal law passed the SOX Act, which states that the public companies in the US must comply with the regulation. SOX compliance requires companies to identify and test their internal controls over their financial reporting process and submit specific financial certifications to the Securities and Exchange Commission (SEC) quarterly and annually. Private companies that want to transform into public may also require to comply with certain requirements of SOX.
Also, non-compliance with SOX requirements may lead to the following:
- Million dollars fines and penalties against the company, and
- Removal from listings on public stock exchanges
Let’s understand how the SOX compliance framework will help your company grow from adolescence into adulthood.
According to the SOX compliance requirements, your business must follow the step-by-step procedure to identify the areas where serious errors are likely to occur. Proper understanding of business processes can help your organization in identifying new ways (that includes new software tools) to make these processes more efficient.
For instance, a person was working in a company having more than 60 different cash and money market accounts. At the time of the SOX compliance process, it was discovered that each month, two different people were reconciling those accounts manually. They eliminated this duplicated effort by automating this complicated process so that they have enormous time for other work. Automating this process also helped in minimizing the opportunities for internal fraud.
If your company establishes consistent processes, the gathered data (from sales to a tax bill) will become more accurate and hence, valuable. Controls drive consistency; consistency drives benchmarks.
For instance, rather than recording sales whenever a team has time, a company can establish a consistent process for recording sales at the moment a contract is signed. Consistency offers more accurate data for better decision-making and a clearer view of long-term growth.
Better benchmarks lead to better performance assessments for the team. Performance measurement becomes less qualitative and more quantitative.
For instance, a company created a consistent process for recognizing sales when a contract was signed or payment was received. This process helped in eliminating the temptation for an individual or a team to pull pending sales forward to strengthen the lackluster quarter. Every salesperson was recording their sales the same way and while comparing performance across the team, it was found that the comparison was fair and accurate.
Small and big companies are driven by people and systems respectively. For informal processes, individuals can keep essential information in their heads. For instance, the VP of tax knows every small detail about a company’s tax position. If processes are not consistent and repeatable, then everything will be personally run by the VP. However, think of a situation when the VP is absent due to any reason.
Creating systems enable businesses to slot new people into key roles, whenever required. If your business has clear systems and everything is well-documented, it is much easier to grow a department quickly as new people will be able to hit the ground running.
It was observed that when the SOX compliance process took through a company, the VP of tax got fed up with the new paperwork requirements and started to complain.
Running a business is not easy. However, some people love the all-night hackathons of the startup phase but will find it tedious to work in a more formal company. When a public company starts to establish systems, it will need early help to identify such people and either change their minds or exit them. When the company becomes public, everybody must be fully aligned and pulling in sync. SOX compliance can help companies tackle those essential people issues early so that they are ready for their next phase of growth.
Although SOX compliance is costly to organizations, it provides benefits to the company. Implementation of SOX compliance helps to build a strong internal control environment that enhances confidence in company internal financial reporting, reduce fraud risk, and improve corporate governance. It eventually helps companies to win new businesses.