SOX 404 is known as the Sarbanes-Oxley Act 404, and it is an internal control requirement aimed at providing the guarantee that the financial statements reports are accurate and presented in a timely manner. The purpose of SOX 404 is to help the shareholder and entity in preventing corporate fraud and develop the internal control associated with SOX 404 also helps to detect errors or misstatements in financial figure, enhance the internal control and the internal accounting operations and procedures operate as intended.
SOX 404 is under US legislation, and it requires strong internal control in the public-trade companies which are operating in the USA and the subsidiary companies which are not based in the USA. SOX 404 requires the companies to have internal auditing in place which defined the different measures of internal control in terms of preventive, detective and corrective measures. Those internal control measures help to detect any mistakes in figure reporting process and help to prevent any fraudulent activities.
SOX 404 requires a set of internal controls which are designed to ensure that the entities’ internal controls on the processing to prepare the financial statements are complied with its designated reporting processes.
SOX 404 requires the management of entities to provide reasonable assurance by evaluating the internal control effectiveness and assessing the requirements documents. Thus, SOX 404 requires the entities to implement internal control over financial statements (ICFS).
The component of Internal control consists of both as below:
- Preventive control (staff training and procedures) and;
2. Detective control (audits and other monitoring activities).
What does the sox 404 help to entities
SOX 404 requires the entities to ensure the there are internal control systems are in place and the related internal control over financial reporting are effective and the financial figures are recording accurate against with any fraudulent activities.
SOX 404 helps the entities though the requirements of effectiveness of internal controls which the components of internal controls system as preventive control measures, detective controls measure and corrective control measure to be implemented in the timely manner and are in place.
- Preventive Control Measures: SOX 404 requires the entities to set up a good internal control environments surrounding the financial report processing in order to ensure the reliable of financial report and reliable of obtained information for shareholder, creditor, and there related parties who are involved with the entities.
- Detective Control Measures: SOX 404 requires having the internal auditing to perform the period reviewing and assessment over the design of internal control environment to identify where the mistakes and potentially fraudulent activities have occurred.
- Corrective Control Measure: SOX 404 requires the companies or entities to have the corrective control procedures to resolve any control deficiencies
The implementation of SOX 404 can be internally to protect and against the risk of fraud, mistake and error of the entities / companies and improving the reliable and accurate of the internal control over financial reporting. On the other hand, the implementing of SOX 404 is an important step to retain the entities or company in the integrity manner and also to maintain about the public interest and trust.