SOX Compliance: Requirements

A dive into some of the most significant SOX compliance requirements, fines, and whistleblowers


The surge in the number of hours spent on Sarbanes-Oxley Act or SOX compliance, along with the COVID-19 pandemic, has left organizations and industry leaders concerned about the Act. A recent survey by Protiviti states that 65% of the 650 audit, compliance, and finance leaders polled reported a 10% increase in SOX compliance hours over the previous year. Despite that, the survey also claims that improved internal controls on financial reporting structure helped 57% of companies, the control design and control operational performance improved by 51%, and the continual improvement of business procedures was seen up by 47%. For more information on SOX compliance and who should comply, click here.


As a result, organizations and industry leaders are forced to reconsider their internal accounting reporting and retention practices concerning financial audits and reviews. Since, as it turns out, SOX compliance is not only a regulatory requirement; it is an innovative business practice that pushes companies to act ethically and restrict access to internal financial systems. It is a collection of actions that address auditor independence, corporate and information governance solutions, internal control evaluations, and increased financial transparency and is equivalent to most data security procedures. However, sections 302, 404, 409, 802, 806, and 906 of SOX compliance are regarded as some of the most significant and challenging since they are vital for business data security.


Section 302: Corporate Responsibility for Financial Reports

Section 302 of SOX compliance requires every public business to file financial statements and internal control reports periodically as part of their corporate responsibility. The Chief Executive Officer (CEO) and Chief Financial Officer (CFO) are directly accountable for the accuracy, documentation, and submission to the Securities Exchange Commission (SEC 17a-4) of all financial reports and the internal control system. The section also states that the CEO and CFO are in charge of developing and maintaining internal SOX controls, which must be validated within 90 days of the report's release.


Section 404: Management Assessment of Internal Controls

Section 404 is deemed one of the most challenging and costly SOX compliance requirements mandating that all annual financial reports state that management is responsible for an "adequate" internal control system and a performance evaluation of management's control structure. It necessitates an independent SOX auditor to certify the management's claim that internal accounting controls and framework are in place, operational and practical, and flaws are noted, if any. 


Both management and the external auditor are responsible for conducting their assessments in a top-down risk assessment framework checklist, which requires management to focus its evaluation and gather evidence on risk increasing the cost, time and effort required.


Section 409: Real-Time Issuer Disclosures

The core of Section 409 is that firms must disclose any substantial changes in their financial position or activities in near-real-time. This is done to safeguard the interests of both investors and the general public.


Section 802: Criminal Penalties for Altering Documents

Altering, destroying, mutilating, hiding, fabricating financial data, papers, or tangible items to hinder, impede, or influence legal investigations is punishable by up to 20 years in jail under Section 802. It also imposes penalties of up to ten years on an accountant, auditor, or another person who knows and deliberately fails to keep all audit or review materials for five years.


Section 806: Sarbanes Oxley Whistleblower

Employees of publicly listed businesses or their subsidiaries who disclose illegal actions are protected under Section 806. This promotes the exposure of corporate fraud and empowers the US Department of Labor to safeguard whistleblower reports against retaliation by employers and the US Department of Justice to prosecute individuals guilty of the retaliation.


Section 906: Corporate Responsibility for Financial Reports

Section 906 states that certification of a false or fraudulent financial report may lead to a criminal penalty of up to $5 million in fines and up to 20 years in jail.

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