Organizations subject to the Sarbanes Oxley Act (SOX) have a responsibility to ensure they maintain proper documentation and an adequate system of internal controls. Now that regulators are scrutinizing companies more intensely, just one mistake with your company’s internal controls can cause a failed SOX compliance audit.
Many businesses receive letters from the SEC questioning internal controls they haven’t tightened up, like inventory management. Any business process remotely related to financial reporting will be under scrutiny during an internal audit. If there is anything inconsistent or questionable, it’s likely to be addressed.
Impeccable internal controls will help you pass SOX compliance audits
A critical aspect of preventing a failed audit is to implement stronger internal controls. Doing so will help you pass compliance audits and will save your organization time, money, and the headache of having to fix an issue brought to the surface by an audit.
For example, if an audit finds that you have improper inventory accounting procedures, you’ll be required to remedy the situation, resulting in a time-consuming, costly, and disruptive process. It’s much easier to implement a tight system from the start.
The consequences of a failed SOX audit send ripples throughout your company. Your CFOs, FP&A teams, and internal audit teams will be heavily impacted. Failing a SOX audit can lead to ineffective and inefficient internal processes and controls. This can cause discrepancies in the accuracy, reliability, and accountability of corporate disclosures and threaten investor confidence, reducing the effectiveness of stakeholder reporting share outs.
SOX violations can occur even if an organization misreports financial figures by accident, making data accuracy during a SOX audit vital to sidestepping a SOX penalty.
What makes an effective internal controls system?
An effective internal controls system is one that will help you pass SOX audits, but it’s also a system that is practical and doesn’t get ignored. If your system is too difficult or too complex to use, people may find ways to work around it or worse, fabricate sign-offs for the sake of convenience.
While the specifics will vary for each organization, the best thing you can do is focus on creating internal controls that are easy to implement.
Here are four tips to design a strong internal controls system:
1. Prioritize employee compliance
First and foremost, an effective internal controls system is one that gets used properly. You could have the most intricate, strict system, but it’s only as strong as your team’s willingness to follow the procedures. If you have a weak link, your entire system is at risk of failure.
That’s why the most important factor is getting people to adhere to the proper procedures. You can accomplish this by explaining the importance of following your systems, through periodic training refreshers, and setting serious consequences for violations.
Not adhering to your company’s internal controls procedures should be a fireable offense considering the damage a failed audit can do to your company. Anyone who intentionally ignores your procedures is a financial liability to your company.
2. Create a strong documentation workflow
Since audits will scrutinize your documentation, you’ll need a strict and consistent workflow for processing documentation to SOX-compliant standards. If you don’t know how to create your workflow, hire an expert.
Once you have a strong workflow in place, make sure it includes a strict method for documenting sign-offs and check-ins for controls that need to be reviewed and certified. One of the biggest problems revealed in audits is that control procedures aren’t being reviewed by the necessary people, but are being checked off like they have been. This is something that will come up in an audit.
3. Use software to automate processes
Software that automates key processes and gives teams back time to prioritize important work can be a life saver. Companies like Workiva design
applications to help businesses manage processes through automation and integrate SOX-compliance. Some of these applications can even detect internal fraud.
4. Conduct regular process evaluations
Are your controls working as intended? The only way to find out is to conduct your own evaluations. If anything isn’t working or isn’t being followed, you’ll have the chance to fix the situation yourself, which is much better than having it turn up in an audit with consequences.
Don’t put internal controls on the back burner
Now that you have an idea of what makes a strong internal controls system, check your system against these points and make the necessary changes.
SOX compliance is mandatory, and you can’t afford to fail an audit.