When it comes to governance and risk management for public companies, SOX and internal audit are two of the terms which come into play. Internal auditors generally use Sarbanes Oxley standards to cope with issues like governance and risk management.
SOX is an act of 2002 enacted in the US. It is compliance and standard and enforcement for public companies. On the other hand, internal audit is a profession in which help is provided to an organization to achieve its objectives. The differences do not end here many other differences are mentioned in this article.
SOX vs Internal Audit
The main difference between SOX and internal audit is that SOX focuses on creating accountability of financial statements preparation. On the other hand, internal audit focuses on safety, profitability, and efficiency. SOX Is not applied to private companies, whereas internal audit is applied to all organizations.
The abbreviation for Sarbanes Oxley Act is SOX. In the United States, SOX is a federal law that aims to protect investors with the help of corporate disclosures mainly more accurate and reliable. The act was spurred by mainly accounting scandals like WorldCom and Enron.
Internal audits generally evaluate the internal control of a company, including accounting processes and corporate governance. It ensures compliance with regulations and laws. Also, help to maintain timely and accurate data collection and financial reporting.
Comparison Table Between SOX and Internal Audit
| Parameters of Comparison | SOX | Internal Audit |
|---|---|---|
| Interpretation | It is a law to protect investors from corporations engaged in fraudulent accounting activities | It is a consulting activity, independent and objective assurance to improve and add value to an organization’s operation |
| Requirements | Regulatory | Internal |
| Concern | Financial reporting risk | Operational and financial risk |
| Reliance | Yes | No |
| Focus | On creating accountability of financial statements preparation | On safety, profitability, and efficiency |
What is SOX?
The Sarbanes Oxley or simply SOX Act of 2002. In the United States, SOX is a federal law that mandates practices and financial records reporting for corporations and keeping them. This law was enacted by 107th United States Congress.
This act is commonly called SOX and is also known as the “Corporate and Auditing Accountability, Responsibility and Transparency Act” and “Public Company Accounting Reform and Investor Protection Act”. It contains eleven sections that generally place requirements on all public companies of the United States boards of management and directors and public accounting firms.
SOX act protects investors by improving the reliability and accuracy of corporate disclosures. They are made under the purposes of securities laws and for others. Several provisions also apply to private companies like evidence’s willful destruction to impede a federal investigation.
In response to major accounting and corporate scandals, such as WorldCom and Enron this law was enacted. President George W. Bush signed SOX law on July 30, 2002. The co-sponsors of the SOX act were Rep. Michael G. Oxley and Sen. Paul Sarbanes.
What is Internal Audit?
Internal audit can be referred to as an independent service that evaluates an organization’s corporate practices, internal controls, methods, and processes. It helps in securing compliance with several laws which apply to an organization. The organization can prepare its records and accounts as per the applicable legal reporting and requirements.
The main purpose is to check the operational standards and effectiveness framed by an organization. An internal audit also helps to know whether the internal operational standards are followed by employees. Rules for operations may also be set by an organization such as making payments, making deliveries, and receiving orders.
An internal audit can identify inefficiencies or problems and take necessary corrective steps. It can identify frauds by employees like embezzlement of funds. It also figures out whether there is an overrun of deliberate cost. Internal audit has a wider scope as it covers every aspect of a business whether it is hiring or business strategy.
There might be a need to identify the rotation of employees between different functions and roles. Financial losses or potential threats are also checked by an internal audit. Financial leakage can be plug by an organization. The process enables the correction and identification of a lapse and procedures.
Main Differences Between SOX and Internal Audit
- SOX brought changes in the governance and internal control of companies listed in the NYSE to determine to fix risk-related problems, whereas internal audit helps to improve and evaluate the company effectiveness by evaluating the internal assessment.
- When it comes to application, SOX is not applied to private companies. On the other hand, internal audit is applied to all organizations.
- Testing SOX control is a full-time job and has to be done without fail every single year. On the flip side, in an internal audit, there is no need to audit the organization every single year.
- SOX department design the transaction level controls, as well as all controls, report on the operating effectiveness in place to manage, while internal audit departments perform operating effectiveness on independent assessment.
- SOX’s scope is limited to the financial statement preparation control. But internal audit has a wider scope as it covers every aspect of a business whether it is hiring or business strategy.
Conclusion
It can be concluded that in terms of governance and risk management of public companies, internal auditors generally use Sarbanes Oxley standards to cope with it. SOX is concerned with financial reporting risks. On the other hand, internal audit is concerned with operational and financial risk.
SOX is a law to protect investors from corporations engaged in fraudulent accounting activities. On the flip side, internal audit is a consulting activity, independent and objective assurance to improve and add value to an organization’s operation. The requirements of SOX are regulatory, while internal audit requirements are internal. SOX is not applied to private companies, whereas internal audit is applied to all organizations.
References
- https://ieeexplore.ieee.org/abstract/document/8760666/
- https://www.emerald.com/insight/content/doi/10.1108/02686901111151332/full/html