The Sarbanes-Oxley Act or “Company Accounting Reform and Investor Protection Act” is a federal law passed by the US Congress in 2002 to reform the corporate financial reporting and the accounting process. This regulation was enacted after huge financial frauds occurred in the US, leading to the fall down of corporate giants like Enron, Arthur Anderson and WorldCom. The section 404 of Sarbanes-Oxley Act (SOX Section 404) is the most challenging, complicated and expensive to apply of all the sections of this regulation meant for compliance. It declares that all publicly-traded companies should have adequate internal accounting controls in place and carry out their assessment by management at the end of every year to make sure they remain operational and efficient all the time. The aim of SOX Section 404 is to lower the corporate fraudulent activities by growing the strictness of procedures and standards for financial reporting.
SOX Section 404 involves two key components: drawing details about the accounting system, responsibility of executives and financial officers with regard to the accuracy of financial statements and for the effectiveness of work furnished by the department of internal control. The regulation also asserts requirements for individual directors, to avoid disagreement or deliberation of decision-making based on the opinion of a small group of executives. SOX Section 404 requires the setup of audit committees entirely of non executive directors to discharge the duty of appointing, dismissing, and compensating auditors. It ensures an improvement in the audit committee’s role that will add to the independence of auditor and his/her audit quality. While approving the implementation of corporate governance principles and highlighting the limits in the relationship of the management and the external auditor, SOX Section 404 regulation acknowledges a few other measures to protect shareholders. By taking the basic steps to maintain the principles of corporate governance (reliability, transparency, and responsibility), your financial accounting firm can make sure to be compliant with the 404 section of SOX act. But you should be prepared to overcome the hurdles that may come in your way of achieving compliance, including:
10 Hurdles in the Way of SOX Section 404 Compliance
If you need to comply with SOX section 404, you should be aware of the following hurdles that may delay the process:
1. Absence of a corporate-wide, executive-run internal control structure
2. Absence of a proper corporate risk management plan initiated by a qualified auditor
3. Too little controls concerning the recording of irregular, complex, and abnormal transactions
4. Poorly controlled post merger or acquisition integration
5. No adequate controls over the IT surroundings
6. Inefficient financial reporting and corporate disclosure procedures
7. No proper controls over the financial reporting closing process
8. No up to date, unfailing, comprehensive, and documented accounting procedures and policies
9. Incapability to assess and test controls over outsourced functions, activities and processes
10. Too little understanding of the board and audit committee about the risk and control
Finally, it is recommended to refer to this list as a benchmark to begin the preliminary stage of a macro level financial risk assessment within your firm. By going through this list cautiously, you can recognize possible concerns that may affect and develop a suitable plan of action plan to solve out these risks as soon as possible.
To know what you exactly need for SOX section 404 compliance and how to avoid the financial risks and penalties, contact CompCiti’s expert auditors at (212) 594-4374.