Auditing is an essential requirement for all companies, particularly publicly traded companies. One important regulatory law widely recognized is the Sarbannes-Oaxley Act of 2002. Named for its principal architects, Senator Paul Sarbanes and Representative Michael Oxley, the SOX Act was also known as the “Public Company Accounting Reform and Investor Protection Act” or the “Corporate and Auditing Accountability and Responsibility Act.”
The extended SOX compliance standards apply to all boards, management, and accounting firms of publicly traded companies in the United States. It now impacts how companies record, oversee, and communicate their financial operations and makes leaders and management liable for the accuracy of their financial statements. The accuracy and integrity of financial reporting may be impacted by issues in business processes, which can be found or avoided using these internal controls.
Businesses should use and review these procedures for each cycle that results in their financial reports. To ensure that SOX regulations are followed, internal auditors should do compliance audits regularly. There are application controls and IT General Controls (ITGC) on the IT side. A SOX ITGC audit aims to determine if the ITGC is enough to guarantee the financial reporting system’s accuracy, completeness, and error-free operation. To enable seamless SOX compliance initiatives and successful audits, ITGC must be done correctly. Here are the five most frequently asked questions about SOX ITGC compliance.
What are ITGCs?
ITGCs ensure the enterprise’s various technological components are being used efficiently and aren’t exposed to needless risks or vulnerabilities.
For instance, applications supporting finance, purchasing, inventory, research, sales and marketing, and human resources may be available at a large organization. Each of these groups uses its IT programs and depends on them to function in a certain way. Many apps are integrated into major businesses’ centralized Enterprise Resource Planning (ERP) systems. ITGCs are essential to compliance and network security. Here are two instances of lax controls that could lead to disastrous outcomes:
- Anyone can create a covert user account to monitor critical data or even transfer corporate funds to their bank account without authorization if all employees are allowed to create new user accounts.
- Inadequate patch management may leave systems vulnerable to known flaws. Then, by taking advantage of these flaws, attackers can obtain access to ERP systems, steal information, or remove priceless intellectual property.
One critical difficulty in managing ITGCs is having external audit firms perform routine ITGC inspections as part of SOX audits. Thus, you will only pass the audit if your ITGCs are equal. Investors may be aware of the information as a major weakness if an ITGC is mentioned in an audit, which might harm the company’s image and brand. To avoid surprises at the audit stage, treating ITGCs seriously and developing a robust, well-managed set of ITGCs is essential.
Five Most Frequently-Asked Questions About SOX ITGC Compliance
- What domains of SOX compliance does ITGC focus On?
The primary goal of a SOX ITGC audit is to determine whether the ITGCs are sufficient to ensure the integrity, accuracy, and completeness of the financial reporting system. To comply with the Sarbanes Oxley Act of 2002 (SOX), organizations must record, test, maintain, and review controls that impact financial reporting procedures. These internal controls are ways to find and stop mistakes in business processes that can affect the integrity or accuracy of financial reports.
Businesses should implement and evaluate these procedures at each phase of the financial reporting cycle. To guarantee SOX compliance, internal auditors should also perform compliance audits often.
- Access Management: This domain guarantees that access to data and programs is only available to approved individuals. A simple example can be a standard user account that is active and has access to sensitive data. Unauthorized access might result in data corruption, deletion, or leakage of sensitive information if the access provisioned is not monitored and regulated.
- Patch Management: Businesses should patch vulnerabilities or add new features regularly, as well as update systems, networks, and apps. Users who neglect to update their programs periodically expose their companies to potential attacks because unpatched programs have vulnerabilities. As a result, ITGC necessitates continuous monitoring of an organization’s network service-level guarantees, systems, applications, and frequent changes.
- Change Management: This domain aims to test and approve application updates before their publication for production. Companies ought to evaluate app updates regularly. Moreover, segregation and approval should exist between the development, testing, and production environments.
- Data Backup: Data backups must be regularly performed, managed, and ensured to adhere to policies, processes, and best practices inside organizations.
- How long does it take to achieve SOX ITGC compliance?
The timeline needed to comply with Sarbanes-Oxley (SOX), especially in relation to Information Technology General Controls (ITGC), can vary based on a number of variables, such as the organization’s size and complexity, current compliance readiness, and chosen strategy.
The preparation usually takes 1-3 months, followed by the risk assessment and control design phases, which can take 2-4 months to complete. The control implementation testing and evaluation phases take 3-6 months each. This is succeeded by the remediation, audit, certification, and reporting steps, each with a variable timeline. Lastly, like any other regulatory framework, monitoring for compliance adherence is an ongoing process.
Many companies take more than a year to get through the whole process. To successfully manage the compliance process, it is imperative to collaborate with seasoned experts, such as external auditors and compliance consultants.
- What is the COSO Framework, and how does it relate to SOX ITGC Compliance?
The COSO framework is a set of 17 principles organized into five sub-sections that help a third-party auditor assess that the business complies with SOX cybersecurity requirements. It was created as a collaborative effort by the American Accounting Association (AAA), Financial Executives International (FEI), Institute of Internal Auditors (IIA), American Institute of Certified Public Accountants (AICPA), and The Association of Accountants and Financial Professionals in Business (IMA).
An ITGC framework is typically adopted from public standards such as COSO, COBIT, or NIST.
These are the five sub-sections of the COSO framework:
Control Environment
The rules and procedures that serve as the cornerstone for implementing internal control throughout an organization are outlined in the control environment. The control environment serves as the foundation for an efficient internal control system, which the strategic objectives should guide:
- delivering trustworthy financial reports to stakeholders both inside and outside the company;
- running the company successfully and efficiently;
- observing all relevant laws and guidelines; and,
- protecting valuables and private data using established structures, reporting lines, authorities, and responsibilities.
The principles supported in this include showing that you are committed to moral principles and integrity, making sure the board fulfills its monitoring duties, displaying that you are dedicated to having a skilled team and making key stakeholders more accountable in crisis situations.
SOX Risk Assessment
Determining a company’s risk factors and how they will be addressed requires a risk assessment for SOX. Here, “risk” refers to the likelihood that something will happen that will interfere with company goals. Top management must evaluate the effects of changes to the control environment and, where necessary, take appropriate action to manage risk to comply with risk assessment.
The principles associated with this include deciding on suitable goals, determining and evaluating the risks, considering fraud risks, and determining and evaluating modifications that might substantially impact internal controls.
Control Activities
The phrase “control activities” describes the steps to reduce the risks identified during the risk assessment. These tasks can be carried out at all organizational levels and can be preventive or investigative.
The principles supported by this include choosing and creating risk-reducing control measures, choosing and creating technological controls, and implementing control measures using guidelines and protocols.
Information and Communications
Effective and efficient sharing of messages and information occurs up, down, and across organizations. Information systems and repositories must promptly and sufficiently understandably deliver pertinent information to the right stakeholders on their stated goals. Auditors outside the organization also require the same.
The principles associated with this include using accurate and relevant data to assist the internal control function, sharing information about internal controls within the company, and sharing information about internal controls externally.
Continuous Monitoring
The organization should implement ongoing internal control assessments to ensure internal control mechanisms are functioning properly. When flaws are discovered, they should be assessed and promptly reported to top management and the board of directors, if required, so they can be fixed immediately.
The principles supported by this include conducting periodic or continuous assessments of internal controls, or both, and informing them of any shortcomings in the internal controls.
- How much does SOX Compliance Cost?
Based on the Protiviti Report on SOX Compliance, costs range from $181,300 to $2,014,100 on average for small businesses with less than $25 million in revenue, and they are still growing. On the other hand, businesses with more than $5 billion in revenue in 2022 were expected to spend an average of $4.7 million each implementing the new 404 rule this year, according to Financial Executives International.
However, these figures can be misleading. By automating many processes, big businesses can reduce the expense associated with compliance. On the other hand, smaller businesses incur higher costs due to the increased effort required to handle compliance. The costs majorly depend on the size and complexity of the organization, the maturity of its existing internal controls, the industry in which it operates, and the specific requirements set by the regulatory authorities.
- What are the challenges in complying with the SOX Act?
While a company may gain market credibility as a result of complying with the Sarbanes-Oxley Act, here are some of the challenges in complying with SOX Section 404 for financial reporting:
- Creating new internal controls: It takes a lot of work to build procedures for financial data, verify report correctness, and include entirely new controls to satisfy SOX requirements.
- Increased audits: While this guarantees accounting objectivity, it also drives up costs for accounting companies.
- Hiring new staff members and independent contractors: IT procedures must be added, reviewed for compliance, and monitored over time—and this can be labor- and resource-intensive. New hires are also needed for segregated accounting tasks, which provide controls to internal accounting procedures.
- More fines: Besides the penalties already imposed for fraud, CEOs and private companies may also face penalties for failing to sign or publish financial statements.
SOX ITGC Compliance Readiness with Akitra!
Establishing trust is a crucial competitive differentiator when courting new SaaS businesses in today’s era of data breaches and compromised privacy. Customers and partners want assurances that their organizations are doing everything possible to prevent disclosing sensitive data and putting them at risk, and compliance certification fills that need.
Akitra offers an industry-leading, AI-powered Compliance Automation platform for SaaS companies. Using automated evidence collection and continuous monitoring, together with a full suite of customizable policies and controls as a compliance foundation, our compliance automation platform and services help our customers become compliance-ready for SOX ITGC compliance framework, along with other security standards like SOC 1, SOC 2, HIPAA, GDPR, PCI DSS, ISO 27001, ISO 27701, ISO 27017, ISO 27018, NIST CSF, NIST 800-53, NIST 800-171, FedRAMP, CCPA, CMMC, and more such as CIS AWS Foundations Benchmark, etc. In addition, companies can use Akitra’s Risk Management product for overall risk management using quantitative methodologies such as Factorial Analysis of Information Risks (FAIR) and qualitative methods, including NIST-based for your company, Vulnerability Assessment and Pen Testing services, Trust Center, and AI-based Automated Questionnaire Response product to streamline and expedite security questionnaire response processes, delivering huge cost savings. Our compliance and security experts will provide customized guidance to navigate the end-to-end compliance process confidently.
The benefits of our solution include enormous savings in time, human resources, and cost savings, including discounted audit fees with our audit firm partners. Customers achieve compliance certification fast and cost-effectively, stay continuously compliant as they grow, and can become certified under additional frameworks using a single compliance automation platform.
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