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SOX Compliance Internal Control Considerations During COVID-19

  1. SOX Audit Services
  2. SOX Compliance Internal Control Considerations During COVID-19
SOX Compliance Internal Control Considerations During COVID-19

To say that COVID-19 has impacted the way we do business would be an understatement. For many businesses, the effects of the coronavirus pandemic will be felt in waves. One such wave will be felt as accounting teams prepare to close the financial quarter and adhere to SOX compliance. Reporting issues, changes in operations, and increased scrutiny for public companies will all bring new challenges during 2020. This will make SOX compliance even more of a challenge in today’s business environment.

As operations are altered and supply chains disrupted, it is important to evaluate the reporting and accounting processes for a business. Shifts to remote work have caused major disruptions and require considerations for internal controls and SOX compliance.

Recognize the Key Impacts on SOX Compliance – The impacts of COVID-19 are far reaching and continue to develop in real-time. Recognizing the key impacts of the virus on a business is an essential first step for examining internal controls and accounting processes. To make the necessary evaluations and modifications, you must first understand what has been altered.

For many businesses, production has been interrupted, supply chains are disrupted, and typical personnel is unavailable. From remote work practices to entire production halts, the exact impacts are different for every organization. These changes may have led to a decrease in sales and earnings, a reduction in productivity, or closure of facilities.

Inability to Perform Control Duties – Absences may lead to an inability to perform control duties, which severely impacts SOX compliance. Employee illness or caring for a sick relative are typically covered as paid leave, especially as companies expand their leave policies to account for COVID-19. Office closures, layoffs, or furloughs can also result in unavailable individuals who typically perform certain control duties.

Review current internal controls and determine if the necessary personnel are in place to carry out control duties. If individuals are not available due to COVID-19 implications, it may be necessary to reassign control duties or modify current internal controls.

Impact of Lack of Information Required For SOX Compliance – COVID-19 has a global impact, making processes more difficult for international organizations. If a business has office locations, retail stores, facilities, or key contacts in other parts of the world, they may not be available at this time. A lack of information can impact the ability to operate controls, especially as offices around the world close or move to remote work. Sudden and constant changes in operations can lead to significant gaps in information. If essential information to effectively operate an internal control is not available, an alternate control may be necessary.  

Ability to Complete Reports – The timeliness of control operation is likely to be impacted by COVID-19. It is necessary to evaluate the close calendar and prioritize essential activities. Activities that are not considered essential can be postponed until a more appropriate time. The calendar may also need to be adjusted to account for missing information or delays in gathering information and data.

By evaluating the timeliness of control operation, you can determine whether SEC report filing extensions are necessary and plan for the domino effect of changes. As some items are prioritized and others are pushed back, the close calendar and internal controls will be impacted.

Adjust Current Controls to Meet SOX Compliance – Controls that require manual approvals may be difficult or impossible to execute during this time. COVID-19 has required many organizations to shift to remote work, so individuals are not readily available to provide signatures or review hard copies. The approval process for controls that require manual approval must be altered to accommodate these changes.

Implement digital approval processes to maintain current internal controls while working remotely. Incorporate digital signature capture into the approval process and set up approvals via email communication. Consider creating a template for document review and approval to make sure that all necessary data is captured, review steps are properly followed, and applications are consistent. Approval emails can help maintain documentation and ensure the entire process is tracked from start to finish.

Identify Alternate Controls – New controls may be necessary if existing controls cannot be adapted. Digital signatures or processes may not be realistic for all controls with remote work. In these cases, determine if other controls can be added or reclassified as key to compensate for the missing controls.

Document Changes – Documenting changes and deviations to controls is essential for reporting and documentation. Deviation lists can be used to compare with the control environment and assess the impact of changes due to COVID-19. In many cases, documentation of changes to internal controls is necessary for reporting and filing. This documentation can help support disclosures that are required for changes to internal controls.

Engage with External Auditors on SOX Compliance Issues – Communication and regular engagement have never been more important than it is now. The close process is likely to be difficult when conducted remote, especially for the first time. This process can be made a little smoother with open lines of communication. Make sure to communicate regularly with your team and external auditors to ensure everyone is on the same page and prevent disconnects within your team.

Seek Outside SOX Compliance Support – COVID-19 has brought new challenges for all businesses. For many, remote work is a new environment and causes major disruptions to internal controls. You can support your accounting processes and financials during this time by relying on outside experts. At K-38 Consulting, our financial consultants are ready to guide you through the challenges of COVID-19. With experience in a wide range of industries and SOX audit services, you can receive the best information to navigate these uncertain times.