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What is Automated SOX and SOX Compliance Testing?

SOX, or the Sarbanes-Oxley Act of 2022, is a law in the United States that protects investors from the unlawful accounting acts of some corporations. The law prescribes strict reforms to strengthen corporate disclosures and avoid accounting fraud. Likewise, SOX covers other issues, including enhanced financial disclosures, internal control assessment, corporate governance, and auditor independence.

As long as you comprehend the purpose and reach of SOX and how it affects your organization's corporate governance and accounting process, you'll be able to achieve SOX compliance. However, an automated SOX compliance solution can help you follow the process step-by-step from a single place.

SOX automation 

SOX has several sections, and of particular concern for corporations and their IT departments is Section 404. This specific section requires the implementation of technical controls and continuous auditing and monitoring to ensure data reliability concerning financial transactions.

The process of achieving compliance is lengthy and time-consuming. However, automation can modernize your SOX program, establish controls, and avail of the benefits automation could bring.

The first step in automation is to establish controls. The entity-level controls (ELCs) are practices and controls that you can apply to the entire organization. The controls include fraud detection and prevention programs, segregation of duties, human resource policies, and risk management policies. The IT general controls (ITGCs) cover your IT environment and support the financial transaction recording through your IT systems. Controls for this level include change management, control of access at the system level, and general user access.

Working with your provider, you can define the controls you want to include in your system to centralize and automate the ITGC and ELC categories. For example, it could be assigning related functions to different persons. For example, you can set an employee to collect checks while another staff will deposit them.

Control automation of your SOX program can eliminate human errors, control bypass or override, and minimize human intervention. As a result, internal audit teams will spend less time auditing manual processes. Moreover, you can establish centralized management of SOX controls of different financial statement line items.

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SOX compliance testing

A company's management evaluates the internal controls in place regarding financial reporting. This process is part of SOX compliance testing. The compliance testing has different phases:

  1. Design testing phase. A walkthrough test where the steps in the transaction are followed from start to finish. In this phase, you check that all the processes and controls match what was shown in the walkthrough.
  2. Operational effectiveness phase. Testing a larger sample of all the transactions. The testing aims to check if the control works consistently according to their design.
  3. Year-end test. To ensure your organization meets all the compliance requirements. There should be documentation of all the assessments made by the management. It is the responsibility of the management to ensure that there are no errors, issues, and deficiencies in the program, and state that it accomplished the design testing, operational testing, and the last phase and that the controls are all working according to their design.

SOX compliance helps you improve business processes, prioritize risks, improve performance during audits, and have automated and centralized financial reporting that is efficient and of better quality.