Sarbanes-Oxley Act
Financial reporting integrity through IT controls and audit requirements
// What is SOX?
The Sarbanes-Oxley Act was enacted following major corporate accounting scandals (Enron, WorldCom) to restore investor confidence through enhanced financial disclosure and corporate accountability. While primarily focused on financial reporting, SOX has significant cybersecurity implications through its internal controls requirements.
Section 404 requires management and external auditors to assess and report on the effectiveness of internal controls over financial reporting (ICFR). Because financial data flows through IT systems, this creates requirements for IT general controls—access management, change management, computer operations, and security controls protecting financial systems.
Auditors evaluating SOX compliance examine IT controls as part of the integrated audit. Weaknesses in IT security affecting financial systems can result in material weaknesses or significant deficiencies that must be reported to investors.
// Inside the Regulation
SOX addresses corporate governance and financial reporting, with Section 404 creating the primary connection to IT and cybersecurity controls. IT General Controls (ITGCs) are essential to demonstrating effective internal controls over financial reporting.
Section 302: Corporate Responsibility
CEO and CFO certification requirements creating personal accountability for financial statement accuracy.
CEO/CFO Certification
Executives must personally certify financial statements fairly present the company's financial condition.
Disclosure Controls
Executives responsible for establishing and maintaining disclosure controls and procedures.
Internal Control Responsibility
Executives responsible for internal controls and must report significant deficiencies.
Section 404: Internal Controls
Management Assessment and Auditor AttestationThe section with the most significant IT implications—requiring assessment and reporting on internal controls over financial reporting.
Management Assessment
Management must assess and report on the effectiveness of internal controls over financial reporting annually.
Auditor Attestation
External auditors must attest to and report on management's assessment (for larger accelerated filers).
Material Weakness Reporting
Material weaknesses in internal controls must be disclosed publicly, impacting investor confidence.
Remediation Requirements
Identified control deficiencies must be remediated with progress tracked and reported.
IT General Controls (ITGCs)
The IT controls auditors examine to support reliance on application controls for financial reporting.
Access Management
Controls ensuring only authorized personnel can access financial systems and data. Includes provisioning, deprovisioning, access reviews, and privileged access management.
Change Management
Controls governing changes to applications and infrastructure supporting financial reporting. Includes change authorization, testing, and segregation of duties.
Computer Operations
Controls for job scheduling, backup/recovery, and incident management for financial systems.
Program Development
Controls over development and acquisition of applications processing financial data.
Security Controls for Financial Systems
Cybersecurity controls protecting the integrity and availability of systems supporting financial reporting.
Logical Access Security
Authentication, authorization, and access controls for systems containing financial data.
Segregation of Duties
Controls preventing single individuals from controlling conflicting functions (e.g., development and production access).
Data Integrity
Controls ensuring financial data is complete, accurate, and protected from unauthorized modification.
Audit Logging
Logging and monitoring of access to and changes in financial systems to support audit trails.
Note: SOX compliance is typically evaluated using the COSO Internal Control Framework and COBIT for IT controls. Auditors test IT general controls to determine the extent they can rely on application controls for substantive testing of financial statement assertions.
// Who Must Comply
- 1 US publicly traded companies (SEC registrants)
- 2 Foreign companies listed on US exchanges
- 3 Subsidiaries of public companies whose controls affect consolidated reporting
- 4 Companies preparing for IPO
- 5 Private companies with SOX-style requirements from investors or lenders
// Key Requirements
Management Assessment
Annual assessment and report on internal controls over financial reporting effectiveness
Access Controls
Implement and maintain access management controls for systems supporting financial reporting
Change Management
Formal change control processes for applications and infrastructure supporting financial systems
Segregation of Duties
Separate incompatible functions to prevent fraud and errors in financial processes
Audit Logging
Maintain audit trails for access to and changes in financial systems and data
Data Protection
Protect integrity and confidentiality of financial data throughout its lifecycle
// Enforcement & Penalties
SOX violations can result in criminal penalties for executives who knowingly certify false financial statements, civil penalties from the SEC, and delisting from exchanges. IT control failures typically surface as material weaknesses affecting investor confidence rather than direct penalties.
Up to $5 million and 20 years imprisonment for willful violations
Examples:
- Criminal prosecution of executives for false certifications (Enron, WorldCom executives)
- Material weakness disclosures impacting stock prices and investor confidence
- SEC enforcement actions for internal control failures
- Auditor requirements for control remediation before clean opinions
// Cyber Insurance Impact
D&O insurance is critical for executives making SOX certifications. Cyber insurance policies may cover incident response for breaches affecting financial system integrity. IT control failures can increase D&O claims exposure. Some policies exclude coverage for intentional misrepresentation of controls.
// How Breach Craft Helps
We help organizations achieve SOX compliance through genuine security improvements—not checkbox exercises. Our services address the specific requirements and challenges of SOX.
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