Businesses need to comply with government standards if they wish to survive in the market. Understanding SOX compliance, or Sarbanes-Oxley Act compliance is one of them. So what is SOX and how do you stay compliant with what the government has laid out as guidelines? Below, we’ll give some history on the act and why technical writers are crucial to businesses getting SOX compliance right!
What is SOX (Sarbanes-Oxley Act)?
The Sarbanes-Oxley Act (SOX) is a US federal law that was passed in 2002 in response to corporate scandals involving high-profile companies such as Enron, Tyco, and WorldCom. The Act is named after its two primary sponsors, Senator Paul Sarbanes and Representative Michael Oxley, and is also known as the Public Company Accounting Reform and Investor Protection Act.
The purpose of the Sarbanes-Oxley Act is to improve the accuracy and reliability of corporate financial reporting and increase transparency in the financial industry. The Act applies to all publicly traded companies in the United States and requires them to adhere to certain accounting standards and reporting requirements.
What is one of the key provisions of SOX?
One of the key provisions of the Sarbanes-Oxley Act is the requirement for companies to establish and maintain effective internal controls over financial reporting. This means that companies must implement procedures and safeguards to ensure the accuracy of their financial statements and prevent fraudulent practices. The Act also requires companies to disclose their internal controls to their auditors and the public.
Another important provision of the Act is the requirement for companies to establish independent audit committees. These committees must be comprised of members who are not employees or officers of the company and must oversee the work of the company’s auditors. The audit committee is responsible for ensuring the integrity of the company’s financial statements and the independence of the auditing process.
The Sarbanes-Oxley Act also established the Public Company Accounting Oversight Board (PCAOB), a non-profit organization that oversees the auditing profession. The PCAOB has the power to set auditing standards, inspect auditing firms, and discipline auditors who violate the rules.
What has the impact of SOX been?
The Sarbanes-Oxley Act has had a significant impact on the financial industry since its passage. Companies have had to invest significant resources in complying with the Act’s provisions, including hiring additional staff and implementing new internal controls. Some critics argue that the costs of compliance are too high and that the Act has had a negative impact on smaller companies.
What are the benefits of SOX?
Supporters of the Act argue that it has been effective in improving the accuracy and reliability of financial reporting and restoring public confidence in the financial industry. They point to the fact that there have been fewer corporate scandals since the passage of the Act and that companies are more accountable for their financial statements.
The Sarbanes-Oxley Act has also had a global impact. Many countries have implemented similar regulations to improve the transparency and accountability of their financial systems. The Act has been particularly influential in Europe, where the European Union has adopted similar legislation known as the Eighth Directive.
How Does SOX Affect You?
The purpose of SOX is to have corporate governance and financial disclosure. Moreover, disclosure can be provided with accurate and thorough compliance documentation. To accomplish this, section 404 of SOX requires the filing of an internal controls report. An internal controls report includes the mechanisms and procedures used by a company to ensure the integrity of its financial and accounting information. Similarly, Section 404 states all public companies need to establish internal controls for financial reporting: this section can include wages, benefits, paid time off, and training costs.
Lastly, all financial information needs an accurate picture of the order it was compiled. By filing this documentation with the government and being compliant with the SOX Act, your business can safeguard your financial data. Given the breadth of information required under section 404, having a technical writer as your SOX auditor would be helpful. Failure to comply with SOX can result in fines of up to $5 million as well as potential jail time of up to 20 years.
How Can Technical Writers Help with Sox Compliance?
In addition, it is time-consuming to compile countless documents in compliance with the SOX Act. Inexperienced individuals will not just find it time-consuming, but it can spread thin company resources. According to a 2008 SEC survey of public companies, Sarbanes-Oxley compliance documentation costs an average of $2.3 million annually. Along with the strict penalties and procedures of SOX, having a technical writing consultant can help streamline the Section 404 audit process.
Of course, Section 404 is not the only provision in the Sox Compliance Act, neither is it the only section of its title. In fact, there are a total of 11 titles in the act, each ranging from one to nine sections per title. While section 404 is regarded as the most complex section to pin down, technical writers can also help in other areas of SOX compliance. Here are just a few:
Title Three, Section 302
Title three’s main objective is to detail the corporate responsibility of senior officers and executives when it comes to the completeness and accuracy of financial reports. Of course, the government wants to make sure companies are neither inflating nor deflating yearly financial reports to gain an edge over their competitors. Everything must stay above board.
Section 302 specifically states that financial reports should be filed with the SEC and that it must be certified that the CEO and CFO have looked it over and given it their approval once it’s determined that there are no false statements contained within it. Furthermore, the chief officers must also attest that all internal systems have been put into place and have been running at least 90 days before the report has been issued, so as to not break the rule of leaving false statements.
Using a technical writer to write out these reports can take much of the guesswork out of both the CEO’s and CFO’s hands. Having someone who knows how to write these reports and collate all of the information into simplistic wording can make an arduous task into merely giving the report a quick once-over.
Title Four, Section 409
Title four deals with how to report SOX compliance requirements for financial transactions, whether they be pro-forma figures, stock transactions of corporate officers, or balance-sheet transactions. It also mandates audits and reports of internal controls that are required to confirm the accuracy of disclosures and financial reports. This is also where the infamous section 404 comes from.
Section 409 specifically deals with procedures that should be put in place by companies when changes in their finances take place. This includes any changes they might have made, including mergers or buyouts of other companies, as well as any material changes in their financial condition. Furthermore, they must also disclose to the public any security breaches, both physical and cyber, to maintain full transparency with the public. A technical writer, in this case, allows for a smooth output of this information, staying vigilant of the different actions made by their employer to make sure nothing goes unmentioned.
Title Eight, Section 802
Also called the “Corporate and Criminal Fraud Accountability Act of 2002,” title eight establishes the criminal penalty for the destruction, alteration, or manipulation of financial records or interference with investigations by the federal government. Included in it are some protections for whistleblowers.
You might notice that many of these sections are very similar or redundant despite being located in different titles. While it’s easy to say that the government just likes to waste space on paper, really it’s for their benefit. The more they clarify what they want from corporations and businesses, the better the system runs in the way they want to see it. But this can also work in the favor of businesses because if the act didn’t over-explain itself, the holes that would be there from a potential under-explaining could lead to competitive advantages that would stifle economic competition.
That being said, the purpose of section 802 is to state the penalties for the guilty party who intentionally alters financial records in any way. It also demands that all review or audit work papers must be retained for a timespan of five years after the audit, including both non-electronic and electronic records. Of course, failure to do this results in some serious fines and potential jail time.
No one wants to be caught in this situation, whether you’ve done it intentionally or unintentionally. But, if you are of the mind of the latter, and you’d rather not go to jail for falsifying financial reports, then hiring a technical writer and save you from a lifetime of headaches and substantial government fines!
Conclusion
The importance of SOX compliance documentation for a company is evident in the fines for not complying with the act. By hiring EDC’s technical writers your company will be able to provide accurate financial reports. Most importantly your financial reports will comply with the requirements under the SOX Act.
What Can EDC Do for You?
Essential Data Corporation’s technical writers are trained in audit documentation. So, by hiring EDC’s technical writers to look at your company’s internal knowledge and policies, you can expect a faster and most likely cheaper process. A technical writer trained in a SOX compliance program and financial documentation knows what to look for and how to handle the compliance documentation needed.
Whether you need a single technical writer for a brief project or a team of consultants to produce a complete line of documentation, the quality of our work is guaranteed for you. Our clients work closely with an Engagement Manager from one of our 30 local offices for the entire length of your project at no additional cost. Contact us at (800) 221-0093 or [email protected] to get started.
Written by Stanley Chu