The Sarbanes-Oxley Act of 2002 was passed by the United States Congress in order to protect consumers and the general public from companies that act maliciously or with less vigilance. The general requirements of SOX compliance are focused on ensuring that companies are vigilant and transparent when it comes to financial reporting and that there are more written and practiced rules in place to prevent fraud.

Section 404 of the act mandates that annual financial reports contain an Internal Control report specifying that management is responsible for an adequate internal control system, an evaluation of the system’s design and operating efficiency. External independent auditors must also attest to the accuracy of the company’s statement that internal controls are in place and operating effectively.

Advantages of SOX 404 Compliance:

One of the key changes implemented by SOX compliance was the transformation from self-regulation to independent oversight of the audit process by the Public Company Accounting Oversight Board (PCAOB). The PCAOB has the power of defining industry standards, investigating fraud allegations, and regulating audit firms. The key benefits that emerged from the implementation of SOX 404 compliance are:

1. Higher Accountability: SOX Compliance requires that executives are held more accountable and investors enjoy higher protection. The executives are expected to personally certify financial reports, and fraud is punishable severely.
2. Improved independence of Auditor: Auditor independence is improved by SOX compliance, which prohibits audit firms from performing bookkeeping, actuarial, or management roles for the organizations they audit.
3. Improved corporate governance: SOX compliance improved the minimum requirements for the composition of Audit Committees. Before SOX, audit committees of 49% of public companies did not have complete independence from management. SOX compliance mandated that the audit committees should be 100% independent of management and that at least one of the members is a financial expert. Hence, today the audit committees have a better eye on the accuracy, completeness, timeliness, and reliability of the financial reports.
4. Significant reduction in restatements of financials: Post-SOX, the number of financial restatements declined year-over-year, decreasing from 1,851 in 2006 to just 737 in 2015.