Although it may seem like overkill, every process needs to be documented if you want to maintain consistency in your operations.
Your current team might know exactly how to do things, but what happens when they leave? What would you do if your key people left the company and nobody else knew your processes? This scenario won’t be an issue when you have up-to-date financial reporting documentation. However, you also need a set process for creating documentation, especially where statutory reporting is concerned where incorrect financial reporting can lead to a hefty fine.
If your business is subject to annual SOX compliance audits, you need to pay special attention to documentation for compliant, audit-ready financial reporting, and here’s why.
1. Accurate financial records are imperative
How accurate are your financial records? It’s not just about making the numbers match – it’s also about the accuracy of key facts and other financial data.
During an inspection, the PCAOB and SEC are heavily focused on subjective processes like revenue recognition, accounting estimates, and one-time transactions. If you need help with meeting these demands, this SOX compliance checklist will help. For instance, one of the key best practices outlined in the checklist is to maintain proper documentation, without this, your control efforts are nearly invisible to entities like PCAOB and SEC.
You need all your gears moving in the same direction to pass annual SOX compliance audits. This requires condensing all of your files into one location, naming them properly, and having a system in place that standardizes every process so that all team members manage files and data the same way.
To pass these increasingly strict compliance audits, you also need to have strong documentation regarding what, specifically, has been reviewed. In the past, it was enough to have a manager sign off on the review, but now the PCAOB wants to know precisely what has been reviewed, demonstrating that concurrent control evidence is becoming more expected.
2. Documentation ensures consistency
Your financial documentation will only be accurate when it’s consistently created in the same manner by all employees. Disorganization is one of the biggest reasons companies fail statutory financial audits. To maintain compliance on paper, you need to document all of your processes so they are audit-ready for statutory or stakeholder reporting.
From the moment you onboard a new employee, they should have unrestricted access to documentation concerning how to do their job. This includes the following:
- The file storage account where they should upload new files
- The proper naming convention to use for files
- How to update and save a document (are files to be edited directly in the file storage account, or should they save a new file and upload that version separately?)
3. Documentation can prevent fraud
If you’re worried about fraud in your company, you’re not alone. This is a problem many organizations face, but you can mitigate this potential risk by educating your employees on the risks of fraud and emphasizing their role in fraud prevention. While you can’t prevent every instance of fraud, you can create deterrents that will make many people less likely to do it.
The way documentation supports fraud prevention is simple. First, document exactly how you want all processes to be completed, and require your team to sign off to confirm that they have performed their duties truthfully. When internal processes are documented, they become part of your company’s procedures and deviation can be a fireable offense. Most people won’t risk losing their jobs if they know they can’t get away with straying from an outlined process.
It’s also important to document attempted security breaches so you can handle them quickly and implement stronger cybersecurity measures, especially for financial records and statutory reporting. For instance, if an attempted breach comes from an insider, you can immediately implement stricter access controls for users along with multi-factor authentication to prevent account sharing and reduce potential internal control risks.
4. Documentation can protect your business in case of fraud
When team members are reviewing financial documents and signing off on their accuracy for annual statutory reports, you should also require each employee to attach specific evidence along with their signatures. If fraud is discovered later on, this will help protect your company and ensure accountability where corrective action is needed.
It’s also wise to have documented processes for your risk assessments and update your risk management strategy each time you find a more efficient way of mitigating risk. Don’t leave anything to chance. Create an internal process that ensures everything is done the same way each time, but always be updating and evolving those processes for improved efficiency and reporting accuracy.
Compliant financial reporting isn’t hard to achieve
With organized, structured documentation, it shouldn’t be hard to achieve compliant financial reporting, so that your next annual SOX audit is compliant and well-recorded. Although, every business is different so you’ll need to create and document your processes in a way that makes sense for your specific needs.
