Does SOX Apply to Private Companies?

Yes, specific provisions of the SOX Act can also apply to private companies under specific situations. These include rules around document retention, fraud, and certain reporting requirements. Failure to comply with regulations can result in severe penalties and even criminal charges.

What Is the SOX Compliance Program?

The SOX compliance program is a structured approach that companies employ to combat the risk of errors, fraud, and misstatements in their financial reporting. They design, implement, and monitor internal controls over financial reporting to prove that their financial data is accurate and reliable. All this activity aligns with the main objective of the program: to protect investors, reassure stakeholders, and give leadership confidence that the numbers they are presenting truly reflect the company’s performance.

Here are the core activities (end-to-end cycle) of the SOX compliance program:

1. Identify risks: Start by identifying the areas where financial misstatements or fraud could happen. Conduct interviews, surveys, or risk assessments with different teams to gather insights.
2. Design controls: Once risks are known, design controls to prevent or detect them. This calls for a collaborative effort between finance, IT, compliance, and business teams.
3. Test effectiveness: Controls do not add value unless they work. That is why companies must test their design (is the control well thought out?) and performance (is it being carried out properly?).
4. Certify environment: Finally, leadership certifies that the company has an effective control environment that measures up to SOX requirements.

An SOX compliance program can bring clear benefits. It establishes accountability, assures stakeholders that the company’s financial statements are trustworthy, and drives efficiency across the business.

Why Should Private Companies Comply With SOX?

There are several good reasons why private companies should comply with SOX:

• Private companies can incur legal and financial trouble if they fail to comply with SOX provisions that apply to them.
• If a private company plans to IPO in the future, adopting SOX practices early can facilitate the transition.
• Technology has eased compliance. With SOX compliance software and automation tools, compliance is no longer as burdensome as it once was.
• Following SOX standards is a token of transparency and good governance. This strengthens the organization’s relations with investors and other stakeholders.

Let’s have a closer look at these.

Private Companies Fall Within the SOX Scope

SOX provisions affect private companies in several key areas as follows:

SOX Scope for Private Companies	Description
Compliance with federal and state securities laws	Fraudulent activities in private placements (such as misrepresentations or omissions of material facts) or other securities transactions can fall under SOX rules.
Record tampering	Deliberately destroying, altering, or falsifying records to obstruct federal investigations or bankruptcy proceedings can result in severe penalties, including fines and imprisonment up to 20 years.
Whistle-blower retaliation	SOX’s whistle-blower rules protect employees at private companies that work with public companies if they report concerns about potential wrongdoing at the public company. Penalties may include fines and up to 10 years in prison.

Companies can avoid legal troubles related to these issues by implementing a strong SOX compliance program. Such a program helps identify risks, develop mitigation strategies, and allows companies to stay on the right side of the law.

Strong Groundwork for Buy-Outs or IPOs

When a private company follows SOX practices, it sends a strong message to investors, regulators, and potential buyers that the company takes governance, policymaking, oversight, and transparency seriously. Hence, compliant companies opting for buy-outs or IPOs can expect higher valuations and quicker deal closures as compared to non-compliant entities.

Reasons are:

• Investors do not have to spend a lot of time or money to verify financial accuracy.
• Investors feel more secure and confident about companies that maintain effective internal controls.
• SOX-compliant buyers or public markets can more easily integrate with a company that already meets compliance standards.

SOX Compliance is Easier with Technology

Not a very long time ago, complying with SOX was more painful than productive. Companies handled SOX compliance manually using spreadsheets that were not designed to handle large-scale tasks, such as control management and testing. Version control issues, incomplete data pulls, typos, and accidental data deletions resulted in misleading audit data, leaving process owners with little visibility despite all the efforts.

Thanks to today’s technology, implementing and maintaining an SOX compliance program is no longer as hefty a task as it once was. With tools and automation, the effort is manageable, efficient, and transparent. For example:

• Ready-to-use frameworks such as COSO and COBIT provide risk and control libraries, giving companies a head start.
• End-to-end Audit Management Solutions (AMS) streamline the entire audit process by centralizing all audit information in a secure cloud-based repository, automating internal audit tasks and compliance responsibilities, and delivering real-time reports.
• Data Analytics tools can analyze large sets of data, both financial and non-financial, to flag anomalies as well as control gaps.
• Robotic Process Automation (RPA) reduces manual work by automating repetitive tasks such as control testing, evidence collection, and data validation.

Concrete Business Advantages

A 2017 SOX survey by Protiviti highlighted that companies witness increased business benefits when they adopt SOX practices, such as:

• 70% of companies reported marked improvements in their internal control over financial reporting (ICFR) structure.
• Half saw continuous improvements in business processes.

Over time, the benefits of SOX go beyond financial reporting to deliver real business value. Value-added offerings include cost reduction, elimination of duplicate effort, risk mitigation, time saving, continuous improvement, and even guidance for strategy execution.

To reap these benefits, control owners must stay engaged throughout the audit cycle, ensuring they maintain visibility into their controls year-round. Modern Audit Management Solutions (AMS) also play a significant role by providing pre-built templates, automated workflows, and dynamic reporting that make compliance more efficient and less prone to error.

SOX for Public vs. Private Companies

SOX requirements differ depending on whether a company is public or private. The following table highlights the key distinctions, including when each type of company is subject to the law and how it impacts their operations and accountability.

Aspect	Public Companies	Private Companies
Applicability	Full compliance required. Must follow all SOX provisions (financial reporting, internal controls, audits).	Subject to some provisions, especially those involving criminal penalties for fraud, record tampering, and misleading auditors.
Trigger for full applicability	Automatically applies if publicly listed in the U.S.	If they register debt securities with the Securities and Exchange Commission (SEC), they become subject to SOX rules for that issuance.
Subsidiaries & Foreign Firms	Applies to wholly owned subsidiaries and foreign companies that are publicly traded and operating in the U.S.	Not applicable unless they register debt securities.
Third Parties	Vendors or outsourcing firms handling financial work for the public company must also comply.	Not usually applicable, unless tied to public-company reporting.
Confidence Impact	Transparency reduces fraud and misstatements, increasing investor confidence.	Limited impact, but good governance practices still improve trust.
Example	The Enron scandal highlighted the need for SOX.	Theranos shows penalties apply even without full SOX coverage. The company faced serious legal consequences when fraudulent financial and operational claims came to light.

Penalties and Obligations for Private Companies

While private companies are largely exempt from SOX, they must be aware that some provisions carrying heavy penalties still apply to them, as discussed below:

Crime	Penalties
Document destruction	If a private company intentionally destroys, manipulates, or hides documents to hinder a federal investigation or bankruptcy case, it can face up to 20 years in prison, fines, or both. This applies to individuals at all levels, not just executives and senior officers.
Whistle-blower retaliation	It is illegal to punish employees who report potential federal offenses. Executives or managers who knowingly retaliate (for example, by firing, demoting, or threatening the whistle-blower) can face fines and up to 10 years in prison.
White-collar crime	SOX imposes harsh penalties for crimes like employee benefits (ERISA) reporting violations, securities fraud, and mail or wire fraud. For example, the maximum sentence for wire or mail fraud is now 20 years in prison.
Late 401(k) blackout notices	A 401(k) blackout notice must be issued to plan participants, informing them that they temporarily cannot change their 401(k) investments, usually due to plan updates. The Department of Labor requires that this notice be given at least 30 days in advance. Late or missing notices can result in civil penalties.

Why Private Companies Voluntarily Adopt SOX-Like Practices

Private companies choose to implement SOX-like practices for the following purposes:

• Investor Relations and IPO Preparation. Adopting SOX-style controls shows that a company takes transparency in financial reporting seriously. This helps build investor trust and smooths the path for the company to go public later, since the foundation for compliance is already in place.
• Corporate Governance and Risk Management. SOX-like practices encourage accountability and oversight. This guides the directors and leadership towards informed decisions and reduces the likelihood of financial errors, fraud, and mismanagement.
• Operational Efficiency. Internal controls can streamline processes, reduce duplication, and improve overall efficiency.
• Employee Confidence. Transparent policies and strong governance reassure employees that they are working in a stable, ethical, and trustworthy organization.
• Risk Assessment. Regular internal reviews and audits are an effective way for companies to identify weaknesses or high-risk areas before they become significant problems.
• Industry Expectations and Partnership Requirements. In many industries, large public companies or government agencies prefer or even require their partners and vendors to follow strict financial control standards. A private company that voluntarily adopts SOX-like measures gains a competitive advantage and access to bigger opportunities.
• State-Level Compliance Pressure. Some states have their own rules that align with or encourage the principles of SOX. By implementing SOX-like standards, companies can stay ahead of state-level standards.
• Favorable Relationship with Regulatory Bodies. Law enforcement and regulators look more favorably on private companies that voluntarily adopt SOX-like controls. If an issue arises, having these internal controls shows good faith, reduces suspicion, and works to the company’s advantage during investigations.

Stakeholders Beyond Finance

SOX is not limited to finance teams; it also impacts other stakeholders, such as accounting firms and HR departments. It is their responsibility to adapt their practices to meet compliance standards and strengthen accountability.

Accounting Firms

Under SOX, an accounting firm that audits a public company is prohibited from also providing certain non-audit services to that same client. This includes:

• Bookkeeping
• Non-financial audits
• Business evaluations
• Design and implementation of information systems
• Investment advisory and banking
• Management consulting

The rule prevents conflicts of interest and ensures that auditors remain independent when reviewing financial statements. It also ensures that they do not profit from non-audit services that could influence their judgment.

HR Departments Within Public Companies

Human Resources departments also play a role in SOX compliance. HR must implement controls for payroll systems to validate that they are accurate, secure, and properly managed. This is because SOX Section 404 internal control requirements extend to workforce costs, like salaries, benefits, incentives, paid time off, and training expenses. HR must work closely with finance and IT teams to document controls, monitor payroll processes, and entertain auditor requests. In this way, HR can prevent errors or fraud in employee-related expenses.

Planning for a Future IPO

If your company plans to go public within the next two to three years, now is the time to begin preparing for SOX compliance. Implementing the proper controls is no small feat and cannot happen overnight. Instead, it takes time to design, test, and refine controls so that they are effective and reliable by the time you reach IPO. Starting early not only ensures compliance but also gives investors confidence that the business is well-managed and ready for the public stage.

Here are some practical steps for enhanced results:

• Create a dedicated internal audit team to map out your company’s financial controls and identify gaps.
• Document key processes, such as how financial data flows through your organization, from transaction recording to reporting. Clear documentation makes it easier to spot weaknesses.
• Invest in compliance software as it can help automate testing, track approvals, and reduce manual compliance activities.
• Run ‘trial audits’ to test your systems in advance and fix issues in good time.
• Ensure that executives and department heads understand their role in compliance, since a strong tone at the top drives accountability.

Selecting and Leveraging an Audit Management Solution (AMS)

Manually managing audits and compliance can be hectic, especially as your business grows and prepares for an IPO. Consider an Audit Management Solution (AMS) to automate the audit cycle, from planning to testing and reporting. Instead of wasting time in repetitive tasks and trawling through spreadsheets, teams can focus on higher-value work, like improving controls and reducing risk. In short, AMS reduces the administrative burden and makes compliance more efficient and reliable.

When evaluating an AMS, choose one that best delivers the following:

• A single, integrated platform: Everyone across finance, IT, operations, and compliance should be able to work in one system instead of using disconnected tools.
• Enterprise-wide risk management: The solution should allow you to assess and manage risks across all areas of the business, from vendors and IT systems to broader enterprise risks.
• Built-in risk mitigation tools: Effective AMS systems help map risks to internal controls and audit programs, providing visibility into how risks are addressed.
• Regulatory coverage: The solution should provide alignment with key frameworks like SOX, NIST, PCI, and ISO. This facilitates compliance with multiple requirements without duplicating effort.

How Pathlock Cloud Helps with SOX Compliance

Pathlock Cloud is a leading technology solution designed to help organizations automate compliance processes. It addresses important SOX requirements, especially in financial reporting, access management, and audit trails.

Implement Internal Control Over Financial Reporting (ICFR) with Pathlock

This is the core of SOX compliance. Auditors assess the effectiveness of controls designed to ensure the accuracy and reliability of your financial reporting. Key areas within ICFR include:

• Risk Assessment: How the company identifies and analyzes risks to financial reporting, and how it manages those risks. Pathlock AAG helps identify and assess access-related risks, while CCM allows for ongoing monitoring and analysis of those risks.
• Control Activities: The specific actions taken to address risks, such as approvals, authorizations, verifications, reconciliations, reviews of operating performance, and segregation of duties. AAG automates key control activities, including user provisioning, movement, and deprovisioning of users. It provides elevated access management, user access reviews, certifications, and role management, which improves efficiency and accuracy. CCM consolidates controls, continuously monitors their effectiveness, and provides risk quantification in financial terms.
• Information and Communication: How the company communicates financial reporting responsibilities and information, both internally and externally. Pathlock provides reporting information that supports audit responses for specific compliance requirements, such as the U.S. Securities and Exchange Commission’s cybersecurity rule of July 2023, which requires the rapid disclosure of material breach information.
• Monitoring Activities: Ongoing evaluations of the effectiveness of internal controls, including periodic audits and reviews. Pathlock provides real-time monitoring of violations of business process controls and IT general controls. Monitoring of changes to configurations, settings, and master data, and the ability to configure custom events to monitor across all transactions, is a key differentiator.

Implement IT General Controls (ITGCs) with Pathlock

These controls support the effective operation of the ICFR by ensuring the reliability of IT systems. Key areas within ITGCs often include:

• Access Controls: Restricting access to systems and data to authorized personnel only. This includes logical access (passwords, multi-factor authentication). Pathlock provides access restrictions based upon access risk analysis and compliant provision supported by role management.
• Change Management: Ensuring that changes to IT systems are authorized, tested, and implemented in a controlled manner to prevent unintended consequences. Pathlock monitors changes to IT configuration settings and master data, including the original value, the adjusted value, and values that have been deleted.
• IT Security: Implementing measures to protect IT systems and data from unauthorized access, use, disclosure, disruption, modification, or destruction. This includes things like firewalls, intrusion detection systems, and security awareness training. Pathlock provides Cybersecurity Application Controls that include vulnerability management, threat detection and response, and transport control to protect IT systems and data. Some areas of IT Security, like firewall and security awareness training, are covered by other solutions.

Implement Entity-Level Controls (ELCs) with Pathlock

These are controls that operate across the entire organization and have a pervasive impact on the control environment. For example:

• Fraud Prevention Program: Implementing measures to deter, detect, and prevent fraud. Pathlock provides Continuous Controls Monitoring to monitor Separation of Duties violations that a user actually did do, supported by risk quantification and mitigation steps to prevent fraud.

Implement Disclosure Controls and Procedures with Pathlock

These controls ensure that the company meets its obligations to disclose material information to investors in a timely and accurate manner. This includes:

• Completeness and Accuracy of Financial Reporting: Ensuring that all material information is included in financial reports and that it is free from material misstatements. Financial Reporting includes reporting of financial transactions that occur outside of the Governance, Risk, and Compliance area.
• Timeliness of Reporting: Meeting deadlines for filing financial reports with the SEC. Pathlock provides real-time reporting that supports SEC reporting, specifically related to compliance with disclosure material breaches within the SEC’s cybersecurity rules.
• Internal Reporting: Providing management with the information it needs to make informed decisions about financial reporting. Pathlock provides information about Separation of Duties violations and the monitored transactions to support accurate reporting.

Conduct SOX Audits with Pathlock

SOX audits may also cover areas such as:

• Remediation of Deficiencies: Developing and implementing plans to correct any control deficiencies identified during the audit. Pathlock provides the ability to identify control deficiencies and correct them in advance of an audit. Accountability provides management with tools to confirm the accuracy of financial reports and instill confidence.
• Fraud Risk Assessment: Identifying and assessing the risk of fraud within the organization. Pathlock provides Continuous Controls Monitoring to detect Separation of Duties violations that a user actually committed, supported by risk quantification and mitigation steps to prevent fraud.

Conclusion

So, does Sarbanes Oxley apply to private companies? Obviously, yes. SOX does affect private companies through specific provisions and penalties. It can shape their strategy for managing risk and accountability. A strong SOX-focused compliance program not only helps avoid penalties but comes with significant reputational and operational benefits. Additionally, it conveys a strong signal to the market that your business is committed to financial integrity, trust, and transparency.