SOX was introduced to protect investors and the general public from fraudulent corporate accounting practices. The act requires publicly traded companies, their subsidiaries, vendors, and partners to:

• Create an internal control system for financial reporting
• Maintain accurate financial records
• Have the accuracy of the 10-Q and 10-K financial statement filings certified by the CEO and CFO
• Provide a process for reporting fraud

While it’s a daunting task for organizations to follow SOX regulations, understanding the different types of SOX regulations and how to prepare for them can help your organization meet all necessary requirements.

The collapse of Enron acted as the primary catalyst for the act's fast-tracked passage by Congress in 2002. The act reflected public sentiment that investors needed additional protection from fraudulent corporate practices and was passed to restore investor confidence and promote transparency.

An independent regulatory body known as the Public Company Accounting Oversight Board (PCAOB) was also formed to oversee and regulate accounting firms that audit publicly traded companies to ensure proper compliance with SOX regulations.

A basic SOX compliance framework includes:

• Risk assessment and scoping
• Preventive and detective methods to mitigate material financial errors or fraud
• Documentation of the organization’s internal controls over financial reporting (ICFR), including entity level controls (ELCs) and Information and Technology General Controls (ITGCs)
• Monitoring the operating effectiveness of the organization’s ICFR
• Key report monitoring
• Deficiency identification and remediation

Organizations that don’t adhere to SOX regulations may be subject to severe penalties, which is why an effective plan should be established to guarantee ongoing compliance with SOX laws and regulations.

Under the SEC authority, companies that fail to follow SOX regulations may be subject to civil action.

Noncompliance can result in:

• Hefty fines
• Disgorgement of profits
• Civil lawsuits
• Other corrective measures

Individuals like CEOs or CFOs not in compliance could face significant fines or imprisonment. The Department of Justice enforces SOX compliance and can bring criminal charges upon any individual found guilty of committing fraud against shareholders or attempting to violate any aspect of SOX regulations.

This can also result in prison sentences and fines for both companies and individuals not in compliance.

Investors Rights

Investors may have a private right of action against officers, directors, or accountants whose actions resulted in losses due to violating SOX compliance. Investors should consult with legal counsel if they suspect fraud or negligence.

SOX contains 11 titles split into 66 sections. This framework is designed to protect shareholders and the general public. The four primary sections that make up the SOX framework are as follows.

Section 302

Corporate Responsibility for Financial Reports

This section dictates CEO and CFO certification of the accuracy of the financial statements and effectiveness of internal controls.

Section 404

Management Assessment of Internal Controls

This dictates SOX compliance audit requirements, this being the most prolific compliance title.

Section 802

Criminal Penalties for Altering Documents

Section 802 dictates criminal penalties for altering, destroying, or falsifying documents.

Section 906

Corporate Responsibility for Financial Reports

Section 906 dictates penalties to which public company executives could be subjected.

Together these regulations help protect investors and the general public from fraudulent accounting practices and encourage reporting of any potential fraud. They require organizations to implement and monitor an ICFR framework, maintain accurate records, and certify financial statement reports issued to the public.

SOX and HIPAA laws both focus on compliance but in different areas. SOX is primarily concerned with financial reporting, auditing, and disclosure requirements for publicly traded companies. HIPAA focuses on health care organizations and their use, storage, and transmission of patient information.

Some overlap remains between SOX and HIPAA in certain areas, such as internal control systems. For instance, a health care organization can comply with SOX 404’s internal control objectives and best practices as well as HIPAA’s security rules to comply with rules protecting sensitive patient data. Both frameworks play a crucial role in maintaining the integrity of financial reporting and protecting sensitive information within their respective domains.