As a business, protecting your financial integrity and building trust with stakeholders is essential. This means you have to stay compliant.
One way to do that is focusing on the accuracy and reliability of financial reporting. Enter SOX 404, a key part of the Sarbanes-Oxley Act.
SOX 404 sets the expectation for all businesses that fall under its scope that you must document your internal controls, test them regularly, and be ready to prove their effectiveness at any time.
In this article, we’ll cover everything you need to know about SOX 404 compliance, including what it is, who needs to comply, and how document management systems like PandaDoc can help you stay organized, secure, and audit-ready.
Let’s get into it!
What is SOX 404 compliance?
SOX 404 compliance is a requirement under the Sarbanes-Oxley Act that mandates companies to document and test their internal controls over financial reporting (ICFR).
Broken down, this means companies have to:
- Identify key financial processes
- Document how these processes are controlled
- Test those controls for effectiveness
- Report the results annually in their financial filings
SOX 404 is there to make sure you have reliable, accurate financial statements and that the systems producing those statements can be trusted.
Why is SOX 404 compliance important?
SOX 404 compliance helps you prevent fraud, reduce financial risk, and increase transparency for your investors. Additionally, having to clearly define and test your internal controls means you’ll be able to improve internal accountability. This is because you’ll be able to find inefficiencies, catch errors, and strengthen overall governance.
If you fail to comply, you may have to deal with penalties, restatements, and the loss of investor confidence. So it’s best to avoid these consequences by staying compliant.
Who needs to comply with SOX 404?
Generally, here’s who needs to comply:
- Public companies listed in the U.S.
- Foreign companies registered with the SEC
- Subsidiaries of public companies
If you’re a smaller reporting company (SRC), you may have reduced requirements. But you still have to establish and maintain internal controls and disclose any issues that come up.
What are the key requirements of SOX 404 compliance?
Let’s break down the key requirements needed to be compliant with SOX 404.
To comply, you have to:
- Document internal controls over financial reporting
- Assess the design and effectiveness of those controls
- Remediate deficiencies
- Include a management assessment in annual reports
- If you’re a larger company, undergo an external auditor’s review of the same controls
These steps will help you make sure controls are both documented and functioning as they should.
What are internal controls in SOX 404?
When we’re talking about internal controls over financial reporting (ICFR), we’re talking about the policies and procedures that are designed to make sure financial data is accurate, complete, and secure.
Here are some examples:
- Segregation of duties
- Approval workflows
- Access restrictions
- Reconciliation processes
- Audit trails for financial records
All of these controls make for more trustworthy financial reporting, which, as discussed, is key to protecting your integrity as a business.
What is the top-down risk assessment approach?
The top-down risk assessment is a method that you can use to identify where the greatest risk is in your financial reporting.
So, instead of documenting every process at the same depth, you can:
- Start at the financial statement level
- Identify significant accounts and disclosures
- Determine which processes affect those areas
- Focus testing efforts on the controls that matter most
This will make compliance smoother by targeting the resources that have the biggest impact.
How do companies achieve SOX 404 compliance?
Here are some steps that you can follow to achieve and maintain compliance:
- Map financial processes and document controls
- Evaluate risks and apply the top-down approach
- Test controls regularly, like design and operational effectiveness
- Fix control deficiencies before reporting deadlines
- Maintain proper documentation and evidence for audits
That might sound like a lot to keep track of, but using a well-organized document management system will make all of these steps much easier.
How? Let’s talk about it.
How does document management support SOX 404 compliance?
Document management is vital when trying to stay audit-ready, especially if you’re dealing with countless workflows, approvals, and evidence files that need to be tracked.
The importance of secure, auditable document workflows
SOX 404 has a heavy emphasis on documentation of both internal controls and the evidence that those controls work how they should.
Secure document workflows help you make sure that:
- Every step is logged
- Approvals are captured
- Documents are tamper-proof
- Evidence is centralised and easy to retrieve during audits
Having access to audit trails and version history will help you demonstrate consistent compliance.
How document management platforms support access control
One of the foundational SOX requirements is access control, and a document management platform will help you enforce:
- Role-based permissions
- Restricted access to sensitive files
- Monitoring of user activity
- Strong authentication practices
All of these things will help reduce the risk of unauthorized access or changes to important financial documents.
Benefits of using document management systems like PandaDoc that are SOX 404 compliant
PandaDoc has security and compliance features that will help you keep control over docs related to SOX 404 processes.
It also offers:
- Detailed audit trails for every document
- Role-based access and advanced permission settings
- Secure storage with encryption at rest and in transit
- Automated workflows that help with timely reviews and approvals
- Version control that maintains the integrity of evidence
With PandaDoc, you’ll find it easier to stay organized, reduce manual work, and keep reliable documentation that any auditor can trust.
Plus, we’ve got you covered with enterprise-grade security for all your sensitive agreements when using our eSignature software, including E-SIGN, UETA, and HIPAA. It’s even backed by SOC 2 certification.
Need more convincing? Our clients have reported time savings and less headaches with our easy-to-use platform.
“Very easy to use, while still being customizable. I really like the ability to import and edit templates. The tokens for inserting information are also a big time saver.”
– Sean D, CEO, Small-Business
Read the whole review here!
Features to look for in a SOX 404 compliant document management platform
When you’re choosing the right document management tool for your SOX 404 compliance needs, here’s what you should look for:
- End-to-end audit trails
- Granular access controls
- Secure storage and encryption
- Automated workflows
- Version history
- eSignature capabilities with compliance controls
- Integrations with ERP or financial systems
All of these features will make it much easier to stay compliant (while saving you time doing so!).
Stay compliant with PandaDoc
SOX 404 compliance might seem complex, but it’s crucial to financial governance. And with the right tools, like a secure, auditable document management system, you’ll have smoother workflows while reducing risk and staying fully audit-ready.
Ready to take the plunge and simplify your compliance? PandaDoc can help. Request a free demo today!
