Build a Culture of Transparency: SOX Compliance Tips for the C-Suite

Reliable financial reporting can protect companies and their investors from fraudulent activities. In fact, the C-Suite is held to stringent requirements imposed by the intricate provisions of the Sarbanes-Oxley Act of 2002 (SOX), making transparency and accountability essential components of corporate governance.

Despite the serious consequences of noncompliance — including fines, criminal charges, loss of reputation, and delisting — SOX compliance may be shuffled behind a myriad of competing corporate initiatives. Taking a proactive approach is generally best, and it begins with gaining a deeper understanding of what SOX compliance means to members of the C-suite.

SOX Compliance Relevance to the C-Suite

Prior to 2002, a series of financial scandals eroded investor confidence and exposed significant flaws in corporate governance. The Sarbanes-Oxley Act was the government’s response.

Complying with SOX has become a crucial component of contemporary corporate governance. SOX establishes legal accountability for senior executives, who can be held personally responsible for inaccuracies and misstatements of the financial statements they certify. The financial integrity of a company hinges on its accurate financials; unreliable financial reporting can erode the trust of investors and tarnish the company’s reputation in the market. Strong internal controls can streamline processes, provide the C-suite with reliable data, and help mitigate risk.

Key C-Suite Responsibilities

SOX contains two sections that are particularly relevant to the C-suite and have led to significant changes in corporate governance.

• Section 302 mandates that senior executives certify the accuracy of financial reports. The CEO and CFO sign personal attestations as to the accuracy and completeness of the reports, which makes them accountable for the integrity of the company's financial reporting.
• Section 404 requires that senior executives establish and maintain robust internal controls, continuously monitoring and updating them as needed.

It’s important to note here that senior executives like the CFO and CEO may not participate in the writing of financial reports or the design and implementation of internal controls. However, they do oversee such activities and, more importantly, provide an overall “tone from the top” that promotes integrity and ethical behavior.

Building a SOX-Compliant Culture

SOX compliance depends on the company’s culture of compliance, something that can be built into the company’s day-to-day operations. Just as the responsibility for compliance falls to the C-suite, senior executives are also responsible for taking the steps needed to build a SOX-compliance culture. Developing that environment starts with the C-suite leading by example and demonstrating a commitment to ethical behavior and transparency.

Employees are another key component to SOX compliance. Training and awareness programs help educate them about SOX requirements and inculcates the importance of compliance. Staff also should feel comfortable reporting their concerns about suspicious activities to their superiors without fear of retaliation.

While complying with SOX, senior executives can help ensure that employees understand and use the internal controls they approve; procedures that become part of the process are easier for employees to embrace. Instead of approaching compliance as a separate “exercise,” frame it as a normal part of doing business.

Finally, the board of directors and audit committee members contribute to the company’s governance and its culture of transparency.

Implement Effective Internal Controls

Internal controls provide a framework for ensuring the integrity of financial reporting and compliance with regulatory requirements. Such controls help the company:

• Comply with regulations and laws.
• Prevent and detect fraud.
• Enhance reliability of financial records.
• Identify and help mitigate risk.
• Provide clear guidance on accountability within the organization.
• Present accurate and complete financial information.
• Promote a corporate culture of transparency, integrity, and ethical behavior.

Before designing and implementing internal controls, it’s important to start with a comprehensive risk assessment to help identify potential vulnerabilities. Control procedures then can be developed and documented, with clear guidance on the assignment of responsibilities.

Even after internal controls are in place, the work continues. Monitoring people, processes, and systems in any organization is an ongoing process. Changes to any of those categories — such as employee turnover or implementation of new processes — could result in weakened controls, but periodic reviews and testing can help identify and address critical situations. Another way to improve compliance and reduce human error is by leveraging technology and automation. Companies that lack the in-house capabilities to implement such technology should consider outsourcing this critical function.

Challenges and Best Practices for SOX Compliance

Companies with poor Internal Controls over Financial Reporting (ICFR) are missing a critical component of the company’s corporate governance. ICFR processes are designed to help ensure the reliability of financial reporting, and SOX controls are focused on the production of accurate financial statements. Senior executives on the path to SOX compliance will face challenges, but it is well worth the effort to overcome them.

Lack of awareness, especially among the C-suite, can be the first issue to address. If senior executives do not understand the serious consequences of noncompliance, then building compliance into the company’s culture can become a nonissue. Understanding SOX requirements is an important first step.

Employees often resist changes to established procedures. But a “we’ve always done it this way” mindset can stand in the way of progress that leads to SOX compliance. Senior executives can lead by exhibiting a willingness to change and an expectation that others will align their actions with the company’s culture of compliance.

C-suite members must understand that reactive compliance is generally more costly than proactive compliance. Poor ICFR processes can lead to material weaknesses and irregularities in financial reporting, which in turn can lead to loss of reputation, loss of stakeholder trust, and potential delisting. The culture of transparency and compliance should permeate the entire company, and that can be accomplished with programs that are comprehensive, consistent, and routine.

Continuous Improvement and Adaptation

The corporate environment is not static. Emerging risks and regulatory changes can affect a company’s preparation and filing of financial reporting. The C-suite must stay informed about changes and adapt their compliance strategies accordingly.

For example, trends that may affect SOX compliance processes include increased use of technology — including AI and automation — and a greater emphasis on data analytics. Regulatory bodies may alter their regulatory requirements, which means evaluating and realigning processes to remain in compliance.

SOX compliance requires on-going evaluation. As senior executives lead their companies to full compliance, the following steps are needed to maintain the right program for the current environment:

• Monitor your internal processes and controls.
• Refresh them as needed.
• Check with auditors to learn how they assess financial reporting.

Finally, obtaining objective opinions and advice from third party professionals can assist the C-suite in making informed decisions as they move toward SOX compliance.

Is Your Company Fully Compliant with SOX Requirements?

Our team has experience helping other clients navigate SOX requirements and understand how to tailor best practices and internal controls to the client’s circumstances. We have also worked with auditors from all levels and understand what they are looking for. Because of BDO’s network — both at home and on the international stage — we can access professionals who offer a wide array of services. Please contact us to learn how our team can help with your company’s SOX compliance.

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