6 Ways SOX Compliance Benefits An Organization - ZenGRC
The article outlines six organizational benefits of SOX compliance, including enhanced risk triage by focusing on high-risk areas, strengthened control structures through mandatory documentation of controls, improved financial reporting accuracy, increased investor confidence leading to better IPO pricing, overall market stability by filtering out unreliable companies, and clearer compliance expectations that help companies efficiently allocate resources and improve internal processes.
After the Sarbanes-Oxley Act of 2002 (SOX) was enacted, companies were forced to rethink their reporting to avoid penalties, but SOX compliance brings significant benefits. The new approach to financial reporting that SOX created engenders greater market trust. For private companies considering going public, these SOX compliance benefits manifest as better IPO pricing. Research shows that SOX implementation has strengthened the public market, communicating a baseline level of financial assurance in publicly-traded companies, which inspires both investor confidence and market certainty. SOX has cleaned the market of less financially-reliable companies, while new publicly-traded entrants can command higher IPO pricing. This has increased overall market strength and individual corporate financial stability.
These advantages represent macro-level improvements to the broader marketplace. But what are the impacts of SOX at the level of a particular company?
Six Ways SOX Compliance Benefits the Organization
- 1.
Risk Triage
Not all risks are created equal. SOX compliance benefits companies by giving them a starting point for asset analysis. SOX articulates expectations, so that organizations can predict the standard they will be held to. Understanding risks means being able to more effectively target your controls. Focused risk assessments mean understanding the landscape of the organization’s risk exposure and controls. By learning what areas do not need to be SOX compliant, the company can focus its efforts on the in-scope areas that are the greatest risk. In addition, by learning what areas are subject to SOX and how they fit into the compliance profile, internal stakeholders gain insight into how various types of compliance overlap.
- 2.
Control Structure Strengthening
Sections 302 and 404 require documentation of controls, including operations manuals, personnel policies, and recorded control processes. With this kind of documentation mandatory, many organizations may find the process overwhelming. However, the steps needed to comply can be productive for the company. One benefit of SOX compliance is better control awareness; how these controls fit into the big picture becomes more transparent. The additional scrutiny that comes through a SOX assessment prompts participants to put forth even more effort to ensure that activities important to financial reporting are well-executed. The process may also highlight inefficiencies in how documentation is generated and stored. Automated tools provide a single location for the documentation, providing the necessary artifacts to demonstrate controls.
- 3.
Better Audits
More effective and efficient operations lead to better audit outcomes. With better internal audit outcomes, the external audit process becomes more efficient. Streamlining external audit lowers overall audit costs by lowering the cost of employee time responding to external audit requests and report results. Creating better audit evidence collection smooths user experience supporting auditors. One key way to achieve this evidence collection is with an automated platform, which provides dashboards that make audit project management easy.
- 4.
Efficient Financial Reporting
The main goal of SOX was to provide transparency in financial reporting. In doing this, the statute defined minimum standards for determining reliable information. Despite the effort needed to gather documentation and strengthen controls, completing this process allows for more-efficient, more-reliable financial reporting. Once the effort to map the control environment has been completed, the organization has grappled with compliance requirements. It is positioned, for future years, to track material changes. This makes reporting easier as the organization matures. More accurate financial reporting means less time spent needing to correct mistakes.
- 5.
Peak Operational Performance Early On
Early engagement with SOX compliance benefits companies by instilling process efficiencies that position it for future growth. When organizations initiate controls at an early stage, SOX compliance benefits companies by motivating them to assess their starting points and annually assess their risk. By beginning with a streamlined approach to risk that integrates multiple business areas, organizations can operationalize best practices early.
- 6.
Team Collaboration and Build Working Relationships
SOX compliance requires deeper and more frequent collaboration among internal stakeholders. Particularly in the area of IT security, attempting to operate in isolation will constrain compliance efforts. Internal auditors and those who oversee SOX assessments must collaborate across business lines to work with those who own or contribute to financial and information controls, such as control owners, IT, or HR. SOX requirements incentivize building stronger working relationships across teams. At the heart of this collaboration lies communication. Automated GRC tools ease collaboration by creating a single, accessible location where the stakeholders can meet. This location also can be controlled, providing appropriate access based on compliance role.