302? 404? Everything You Need to Know About Sarbanes-Oxley

5 min read
  • Financial Services
  • Accounting & Finance

The Sarbanes-Oxley Act, commonly referred to as SOX, was designed with the goal of implementing accounting and disclosure requirements that increase transparency in corporate governance and financial reporting with a formalized system of internal checks and balances.

Effective in 2006, all publicly-traded companies in the United States, including all wholly-owned subsidiaries and all publicly-traded non-US companies doing in business in the US, are required to implement and report internal accounting controls to the Securities and Exchange Commission (SEC) for compliance under the Sarbanes-Oxley Act. In addition, certain provisions of Sarbanes-Oxley also apply to privately-held companies that are preparing for their initial public offering (IPO).

Formal penalties for non-compliance with SOX can include:

  • Fines
  • Removal from listings on public stock exchanges
  • Invalidation of Directors and Officers (D&O) insurance policies

CEOs and CFOs who willfully submit an incorrect certification to a SOX compliance audit can face fines of up to $5 million and up to 20 years in jail.

Each system that contributes to financial reports and disclosures must be monitored and tracked with audit trails in order to comply with SOX regulations. Under the SOX law, organizations must exercise tight control over financial reports and transactions, including document controls, disclosure methods and executives’ approval.

An effective Content Services Platform/Digital Document Management solution contains powerful organizational tools that elevate any organization’s compliance program with the ability to manage data with workflow automation, a complete audit trail, and security features.

There are two sections of the SOX Act which have clear implications for data management, audit trail reporting and security:

Section 302 Corporate Responsibility for Financial Reports:

This section relates to a company’s financial reporting. The act requires a company’s CEO and CFO to personally certify that all records are complete and accurate. Specifically, they must confirm that they accept personal responsibility for all internal controls and have reviewed these controls in the past 90 days.

Section 404 Management Assessment of Internal Controls:

This section states that annual disclosures and quarterly updates must be provided to shareholders and the U.S. Securities and Exchange Commission. It stipulates further requirements for the monitoring and maintenance of internal controls related to the company’s accounting and financials. It requires businesses to have an annual audit of these controls performed by an outside firm. This audit assesses the effectiveness of all internal controls and reports its findings back directly to the SEC.

Automating AP Processes Enables Compliance with SOX

Organizations are faced with regulations that require them to control information, retain it and make it accessible to external auditors. Three key areas that can help support standardized, secure, internal controls for business processes include; Digital document management, automated workflows and record retention solutions implemented to ensure compliance procedures are consistently followed and can be easily tracked and audited.

An effective Content Services Platform/Digital Document Management solution provides internal controls with clear visibility into the network with complete oversight and control of secure access to the network, applications, databases, and sensitive data. Automation of internal [AP] processes enforces standardized operating procedures that ensure data authenticity, integrity, compliance and retention. With a verifiable audit trail, staff can document every step to auditors and provide them with detailed reports that demonstrate changes made to information systems can be detected, corrections verified, and variances explained.

A centralized solution allows organizations to organize, and maintain records on these automated processes in a secure, dynamic environment. In addition, it eases the cost and burden of manually monitoring systems and provides enhanced reports to evaluate procedures and ensure consistent and repeatable activities and processes.

In addition to ensuring that your organization passes external compliance audits for Sarbanes-Oxley, HIPAA, and other industry-specific regulations, you can save time and resources by implementing document management best practices. An optimized digital document management solution can help your organization comply with SOX with monitored, logged and audited activities including; information access, login, network, user, account and database activity.

Data Management with Workflow Automation

  • Replace manual processes and provide a documented audit trail for the flow of information and documents.
  • Track all activity with automated workflow functionality that enables you to electronically match and route invoices for approval, review and exceptions resolution and post to ERP system.
  • Capture, index and analyze all electronic data, including report data from print streams and items within workflows.
  • Enable robust search and retrieval of documents and transactions with multiple indexing capabilities.
  • Automate document capture, classification and coding to reduce input errors.
  • Ensure processes and procedures are followed and reports are available to perform self-auditing checks for internal compliance.
  • Support version control for documents which allows visibility into when and who accessed which files, and the actions taken.
  • Granular content-type and class-level access control with feature and function permissions.

Compliance and Record Retention

  • Automate life cycle management to process records and record folders according to a life cycle, through creation, retrieval, storage, hold status and final disposition with automatic email notification to an approver before deletion.
  • Create custom file and folder structure and configure retention rules specific to the organization and in full compliance with government or industry regulations to prevent inappropriate or premature file deletion.
  • Gives you instant, comprehensive visibility into your repository, workflows and record retention activity to quickly generate reports of records currently eligible for cutoff, transfer, and destruction dispositions, and vital record review or records on hold.
  • Simplify the audit process, centralize your documents, images, photos, emails, voice files, faxes, and other documents in a fully searchable repository, or point to their location in other applications for fast, easy retrieval.
  • Demonstrate controls that reflect standards set by Generally Accepted Accounting Principles (GAAP).
  • Robust search and retrieval functionality — information is instantly available in search results.

Security and Audit Trail 

  • Role based access controlsdefined access rights and permissions for individual users, groups and roles to information assets within the system and assignment of privileges, such as viewing, editing, printing and downloading, which restrict unauthorized activity.
  • Tracks information access, login, users, network, applications, database activity and access to sensitive data with reporting to perform self-auditing checks for internal compliance.
  • Security classification hierarchy with segregation of duties and reports showing who handled, routed, approved and processed transactions.
  • Unchangeable audit log — all key usage is recorded and unchangeable including logging and auditing of permission and security changes.
  • Preserve data in its purest form — access to historical data for audit and forensic requirements and evidentiary presentation.
  • Tracks unauthorized modifications of data and configurations — automatically flags altered database files so that internal and external auditors can be confident they are viewing accurate and complete information

Key Benefits of AP Automation

  • Mitigate Risk and Avoid Noncompliance Fines
  • Prevent Fraud
  • Improve Visibility, Efficiency and Profitability
  • Develop Accurate Financial Reporting
  • Comply with Applicable Federal, State, Local Laws and Business Rules
  • Access to Historical Data for Audit and Forensic Activities
  • Improved Decision Making
  • Leverage AP Staff Resources on Higher–value Activities
  • Reduce Cost of AP Processes and Compliance
  • Capture Available Early Pay Discounts
  • Automating Document Retention and Destruction
  • Reducing the Costs of Long-term Data Preservation
  • Eliminating the Costs of Offsite Storage
  • Lowering the Costs of In-house Storage

A holistic Content Services Platform with digital document management, automated workflows, record retention and security controls along with the alignment of people, processes, and policy controls, helps enable organizations to satisfy the requirements for sections 302 and 404 and meet SOX requirements.

By leveraging existing technology and tools, organizations can identify, assess, and report on the status and security of financial-related processes and information, and can provide auditors with tangible evidence of their information security initiatives.

With a verifiable audit trail, staff can then document every step to auditors or assessors and provide them with detailed reports that demonstrate changes made to information systems can be detected, corrections verified, and anomalies explained.

By implementing effective, comprehensive policies and procedures for establishing accountability and consistent data collection, retention, and reporting practices, your organization can mitigate risk and enhance compliance for SOX Sections 302 and 404 requirements and keep costs under control.

SOX Compliance Checklist

Download and use this interactive checklist to facilitate internal discussions and assess progress towards improving controls across your organization’s ecosystem.

Download our simple SOX compliance checklist.

Click here to view the complete H.R. 3763 Sarbanes – Oxley Act of 2002 / text.

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