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What Is SOX Compliance?

Accounting and Taxes
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SOX compliance refers to the Sarbanes-Oxley Act of 2002, which was legislation enacted in response to early 21st century financial scandals, such as Enron, that resulted in a loss of public trust in accounting and reporting practices. This legislation is intended to protect shareholders and the general public from accounting errors and fraudulent practices in corporations. It essentially defines what records should be kept by businesses and corporations and for what duration. The Securities and Exchange Commission (SEC) oversees SOX compliance, setting deadlines and public rules and requirements.

SOX Regulations

According to the Sarbanes-Oxley Act, all business records, including electronic files and messages, must be saved for at least 5 years. SOX compliance also involves rules that affect the management of electronic records, involving the destruction, alteration, or falsification of records. The SEC also requires that financial institutions carefully document and disclose their material controls, the ethic codes employees are subject to, and audit committee reports. SOX regulations apply to all public companies in the U.S., international companies with debt securities or regular equity with the SEC, and accounting firms that work with these entities.

SOX Implementation

It is recommended that companies view SOX compliance as a part of corporate life rather than as a project that has a beginning and an end. Thus, companies need to set aside ongoing funding for expenditures and staff in order to make the system work long term. Many companies choose to hire a SOX IT specialist, who can help set up the system and figure out shortcomings in controls, as well as build a good working relationship with external auditors. There are also a variety of independent training and certification programs for audit and IT professionals that executives can choose from.

Consequences for Non-Compliance

Non-compliance penalties depend on what section of the SOX regulations a company fails to comply with. Penalties can include the loss of an exchange listing, the loss of D & O (directors and officers liability) insurance, fines up to $1 million, and a maximum of 10 years imprisonment. A more subtle consequence that can be equally devastating to a company, of course, is the loss of investor confidence. The submission of a false certification carries even steeper penalties. If a CEO or CFO submits a wrong certification, penalties run up to $1 million and 10 years imprisonment. If it's found that this was done intentionally, fines then can increase to $5 million with up to 20 years in prison.

SOX compliance has gone a long way toward restoring public confidence in financial institutions in the U.S. Whether they retain a professional or do it on their own, it's important for businesses to understand SOX regulations so they can successfully set up a SOX compliance system within their organization.

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