Nearly 20 years after it came into existence, the Sarbanes-Oxley Act (also known as SOX) was designed to empower business enterprises with better insights into their risk relationships. Over these years, technology tools have played their part in improving the effectiveness and efficiency of SOX compliance processes.

However, a lot of work remains to be done. A recent survey found that the average SOX compliance costs in 2020 have increased by 30% over its 2019 numbers. Additionally, only 28% of the survey respondents say they are deploying technology for testing SOX processes.

Among their major challenges, companies continue to report spending more hours fulfilling SOX compliance requirements. This includes both internal teams and external auditors. In the aftermath of the 2020 global pandemic, organizations will need to change their approach towards risk assessment – with more dynamic and real-time assessments in place of the “traditional” annual structure.

Through this blog, we shall discuss how Data Analytics can play its part in risk management and SOX compliance. Let us see how.

SOX Compliance and its Role in Risk Management

Apart from being just a legal requirement, SOX compliance was designed as an effective business practice that can bring more transparency into any company’s financial reports. Besides providing financial transparency, companies adopted SOX practices to protect their customer data from online breaches and cyber thefts.

In the area of high-risk management, a SOX-compliant enterprise can benefit in multiple ways including:

• Providing a sufficient internal control structure for all the company’s financial records.
• Designing and formalizing data security policies that can be executed to secure all financial records.
• Ensuring on-time submission of accurate financial reports to the U.S Securities & Exchange Commission (SEC).
• Completing annual audits for U.S public-trading companies and delivering audit reports to all stakeholders.

How does Data Analytics enable financial compliance? In the next sections, we shall see how this technology can transform financial systems.

Data Analytics & Financial Compliance

In today’s data-driven economy, business enterprises are adopting data analytics as a tool for gathering valuable insights and making informed business decisions. For instance, data analytics tools allow financial auditors to consider the entire dataset instead of data samples.

According to FERF’s “Mitigating Increases in Audit Fees” report, “many companies are finding ways to work with their auditors to mitigate fee increases.” Automated analytics enables companies to find and eliminate any problem in their internal control environment process. In other words, using digital technologies, enterprises can build efficiency into their SOX compliance process and also achieve cost-saving.

Let us see how in the following section.

Data Analytics Improving Financial Risk Identification and Mitigation

Enhances insights into risk relationships.

The growing demands and complexities of industry regulations mean that companies need to stay on top of complying with these regulatory requirements to avoid any penalties. Through a centralized data repository, companies can gain visibility into these regulations along with the associated financial data.

Traditional software applications and “manual” spreadsheets are insufficient to provide a complete overview of the relationships between risks and their controls. On the other hand, data analytics enhances insights through:

• Integrating risk and control elements using technology to the prevailing accounting standards and frameworks.
• Providing better control and understanding of the risk controls to auditors.
• Examining every aspect of the SOX compliance process.
• Reflecting any change in control processes dynamically on the user dashboard.
• Understanding the status of the SOX compliance efforts.

Improves collaboration among the three lines of defense

Today’s enterprises manage their risk quotient through the popular “Three lines of defense” comprising of operational management, risk and compliance management, and internal audit. While each of these three lines brings a specific set of functions to risk management, what is required is a coordinated effort to ensure that all risk-related processes are operating as planned. Overall, the “Three Lines of Defense” model enables a simple mode of enhancing communications regarding risk management and control.

While a disjointed effort can lead to failures in risk control and testing inefficiencies, a centralized analytics-based system can bring collaboration among all three lines. This can, in turn, hold managers in each line to higher accountability and clear responsibility.

Improves internal and external audits

“The world hates change, yet it is the only thing that has brought progress.” – Charles Kettering, Inventor

Going by the 2017 report by the Institute of Internal Auditors, just around 20% of internal audit tasks are leveraging data analytics for their strategic goals. Andrew Simpson of CaseWare Analytics believes that there are loads of efficient data analytics tools, “but unless you create a culture of compliance-driven by understanding what went wrong and the associated root cause, then you are going to be right back where you started.”

While there are growing challenges to adopting technology, data analytics offer business value to both internal and external audits in terms of better audit quality, improved data mining, and efficient risk management. Additionally, effective analytics can present customers with more insights from their financial and operational data.

Reduces SOX-related costs

According to the Protiviti survey, business enterprises continue to spend more than $1 million each year on SOX compliance-related activities. The survey also found organizations spend around 5.8 hours testing each risk control – which also adds to their overall spending.

On its part, automated control testing and advanced analytics can reduce both the time and costs involved with SOX compliance. Organizations can also reduce external auditing costs through an improved SOX compliance process.

Overall, automation techniques like Robotic Process Automation (RPA) can significantly reduce operating costs by improving productivity – along with identifying and escalating any risks or anomalies.

Conclusion

Be it auditing service or risk management, today’s organizations understand the need for efficiency in SOX compliance processes. Regulations like the 2002 SOX Act help safeguard organizations and their customers from fraudulent financial practices. As discussed in this article, data analytics is empowering business leaders with the right insights to make accurate decisions.

With its focus on Risk assurance and Compliance, Pierian Services has been successful in enabling its global customers to achieve growth acceleration in today’s competitive market. We offer the right analytics solutions that can digitally assist in the risk identification and mitigation across your business functions.

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