SOX Testing & Automation: CFO Guide

Regulatory Reporting

The early 2000s was rife with financial fraud in many well-known corporations, like Enron Corporation and Tyco International, to name a few. As a result, the Sarbanes-Oxley act of 2002, known as SOX, was implemented by the U.S. Federal government. So, what does SOX testing, SOX compliance, and SOX controls actually do?

We’ll cover all this, and take a look at how automation solutions can aid in SOX compliance.

Coming Up

1. What is SOX Testing?

2. What is the History of SOX Testing?

3. Is SOX Compliance Mandatory?

4. What are the Stages of Compliance Testing?

5. What is the SOX Compliance Checklist?

6. What are SOX IT Controls?

7. Why is Technology Important for SOX?

8. The Bottom Line

What is SOX Testing?

SOX testing is a part of the regulation that ensures financial compliance and responsibility. It is related to Section 203: The Corporate Responsibility for Financial Reports and Section 404: Management Assessment of Internal Controls.

What this means for businesses is that they have to include an Internal Control Report with all financial reports. This report states that management has implemented internal controls and assessed its structure for accuracy and effectiveness.

Additionally, external auditors who are registered must also share their audit opinion regarding management’s assertion that the company’s controls are, in fact, in place.

Compliance testing gets split up into different steps, beginning with designing a testing phase, which is commonly called a walk-through test. The next (and bigger phase) is known as operational effectiveness testing.

We’ll break down the details of the steps shortly.

What is the History of SOX Testing?

The value and importance of internal controls cannot go unnoticed. The entire reason why SOX testing exists in the first place is because of the corporate scandals of the early 200s.

When companies like Enron and Tyco created their fraudulent financial reports, the entire businesses suffered, as did stakeholders who lost everything. The US market was ill-affected, and change had to happen.

In turn, the U.S. government took action by drafting and passing the Sarbanes-Oxley Act of 2022 (the name comes from the two senators who drafted the act). Nowadays, most public companies are very aware of SOX testing and SOX requirements.

When it comes to the many financial transactions and massive amounts of data that businesses have to deal with, it can become overwhelming when trying to control everything manually.

That’s why many businesses have come to realise and priortise the use of financial automation software that makes compliance easy. Since all data exists securely within a centralised system, transaction matching happens with accuracy, and financial reports can be made with certainty, these automation solutions make it hassle-free to cross off every item on the SOX compliance checklist.

Is SOX Compliance Mandatory?

For publicly-traded companies, SOX testing is mandatory. And, it’s not just mandatory for finance teams. It’s also required for IT departments and the ways by which they store corporate electronic records.

Again, utilising a financial automation solution like SolveXia aids in SOX compliance because all records are stored and transferred while upholding bank-grade security.

What are the Stages of Compliance Testing?

To implement SOX testing, most companies follow the below steps. While it’s possible to deviate somewhat from what’s below, this covers the gist of what’s required.

1. Initial Assessment & Design

The SOX testing process starts with the walk-through, as alluded to earlier. A walk-through is going through every step of a process and documenting it, whether it be with narrative or a flowchart, or the combination of the two.

After that’s done, the team will assess the effectiveness of internal controls. If there are issues with how things are operating, they’ll provide updates to the workflow.

2. Interim Testing

At some point in the year, the team should conduct testing again to make sure that any amendments to the processes are working as intended. If there needs to be any process improvement or redesigns, this would be a time to do it.

3. Year-End Testing

By year’s end, it’s time to test again to make sure that the interim testing amendments held up to their intentions. While the first round of testing includes the walk-throughs, these two later rounds of testing are more focused on operational effectiveness.

4. Independent Auditors Testing

Lastly, it’s time for an external audit. With a third-party auditor, companies remove the risk of bias and the auditor gets to validate whether or not the company’s own assessment of its internal controls are valid.

When it comes to external audits, they may still leverage work performed by the internal audit team. Here’s yet another reason why financial automation solutions can be of great value. It makes it seamless to run audit reports.

And, since everything is documented in the centralised system, auditors have an easier time understanding what’s been done already, rather than having to source information from multiple individuals or teams.

What is the SOX Compliance Checklist?

To prepare for SOX testing properly, take the time to review and implement the following SOX compliance checklist within your organisation. It will end up paying off!

1. Define the Scope: Fraud Risk Assessment

For auditors to share an accurate opinion of internal controls, they have to assess the risks that exist to internal controls in the first place.

Rather than an auditor creating a list of compliance procedures, this step serves to identify risks and risk sources. Along with the source of risk, auditors should evaluate how these risks can affect the business. See how a risk assessment matrix can be of use here.

2. Determine Materiality & Risks

Financial statement items are “material” if they may have an impact on the financial decisions being made. Auditors will make a determination of what’s considered material usually in the form of a percentage.

Should financial statement account balances exceed the material determination that was made, then they’ll be considered in-scope for SOX testing in the next year.

When you are identifying these risks, consider what’s going on behind the scenes that could result in misreported financial transactions. If your finance team is conducting a manual financial close process, for example, this could very well result in human errors when it comes to data entry.

Or, they could miss fraud by accident because of the sheer amount of data. A solution like SolveXia can prevent such cases as it handles data and transaction matching automatically and with utmost accuracy.

3. Identity & Document Controls

As a part of SOX testing, auditors will document what may be preventing accurate financial reports.

Material accounts usually need more than one control in place to protect material misstatements. To focus your business’ efforts on the highest-outcome changes, document controls based on categorisation of key and non-key controls. These terms will define the level of which the risk must be addressed.

4. Testing Key Controls

SOX control testing is carried out to evaluate the effectiveness of testing methods. Is the control going to actually protect against material misstatements? That’s what you’re looking to answer here.

Some ways to do this include: continuous observation, walkthroughts, documentation inspections, and communicating with process owners.

5. Assessing Weaknesses in SOX

Auditors will need to assess where weaknesses reside. For example, it’s all too common that finance teams are relying on manual execution of processes, which is rife with risk. The assessment here is to deduce whether the issue stems from operating failure or design failure, or both.

6. Management Report on SOX Controls

Once SOX testing has been completed, there must be a report to share the outcome with the team and management. Here, everyone can see what management’s opinion is, how the testing was done, what evidence was collected, test results, failures and root causes, and the third-party auditor’s opinion.

What are SOX IT Controls?

We’ve focused a lot on the finance team’s role in SOX testing and SOX compliance, but we would be amiss if we left out the other half of the equation, namely the IT aspect of it all.

IT assets, from computers to networks, have to be protected and secure because of the sheer amount of sensitive data passing through these systems. You can break down the controls into four main categories:

1. Access Control

Physical and digital access to data shouldn’t be the same for every member of your team. From locking cabinets to providing digital access to a select few, you can reduce your risk of fraud or loss. With SolveXia, you can set access controls based on roles and responsibilities.

2. IT Security

You need to do whatever it takes to prevent hacks and security breaches. Both equipment and services should be updated to provide maximum protection. When you implement SolveXia, you can rest assured knowing that this is the case as all updates to the system are done automatically to make the latest security protocols a reality.

3. Data Backup

Back up data and ensure that the backups are also equally protected. This is another reason why so many companies are moving to cloud-based services and software-as-a-solution as they benefit from the peace of mind knowing that data is being securely backed up.

4. Change Management

With the constant changes in business, everyone within your IT team should be aware of the latest protocols and regulations, from installing new equipment to onboarding new employees. With financial automation solutions, it’s possible to standardise all of these processes.

Why is Technology Important for SOX?

It’s clear to see that there’s a massive amount of controls that need to be in place to protect the myriad of processes that take place in your business on a daily basis. Plus, that’s not to mention the different hands touching the data and the amount of people involved in getting tasks done from A to Z.

Technology can play a crucial role in SOX compliance and help to relieve the amount of time you spend on monitoring your internal controls.

When you implement a financial automation solution like SolveXia in your organisation, you get to reap the various benefits of doing so. This includes:

  • Accurate data
  • Internal and external audit collaboration
  • Access controls
  • Security
  • A centralised system that stores all transactions and processes

When you reduce the risk associated with incorrect data entry, account reconciliation, and all the other processes that inform your financial statements, then you boost the accuracy of your statements. This way, you can adhere to all financial regulations and accounting standards, including SOX.

The Bottom Line

SOX testing isn’t going anywhere. Your business needs to be prepared with proper internal controls to remain compliant and avoid negative financial and reputational consequences in the process.

You’ve already seen how financial automation solutions can help on many fronts. Ready to try it for yourself? Request a demo of SolveXia from one of our experts.

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