The Importance of Sarbanes-Oxley Compliance in Contract Management

The Sarbanes-Oxley Act of 2002 (SOX) was enacted as a reaction to the aftermath from the Enron and WorldCom financial disasters. While there had been serious bankruptcies before, what happened with those two companies had severe repercussions in the U.S. stock market. Congressman Oxley estimates a loss of $8 trillion during 5 years for loss of investor confidence in the U.S. stock market.

The main objective of the Sarbanes-Oxley Act was to restore the investor confidence that was lost due to financial scandals. However, SOX also had the effect of increasing record keeping costs for companies of all sizes.

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In this article, we will discuss the importance of Sarbanes-Oxley compliance in contract management.

Higher Compliance Costs

An Ohio State University study found that the U.S. market system has a premium of 32% in cost for company listing due to the higher standards of required corporate due diligence. Advocates of SOX point out that the increased due diligence is a good thing because it increases customer confidence in the U.S. stock market.

Critics of SOX point out the costs of implementation can be extreme due to the lack of guidance for first-time implementors. Given SOX’s steep learning curve, it is still a big burden for U.S. corporations. This compliance cost is especially challenging for young U.S. companies trying to go public. Many would prefer to get acquired by bigger corporations who can handle the compliance costs or go public in foreign markets.

Supporters of SOX argue that the companies that are not able to comply with it, are not ready to take part in the U.S. stock market and that may be a good thing.

Effects of SOX in Contract Management

The Sarbanes-Oxley Act is quite lengthy. Its main provisions are 302, 401, 404, 409, and 802. By focusing on these specific sections, you develop a good overview of the core requirements of SOX.

When it comes to contract management, section 802 requires special attention. In that section SOX requires all business records, including electronic records and electronic messages, must be saved for “not less than five years.”  The consequences for noncompliance are fines, imprisonment, or both.

This means companies need to develop a cost-effective way to keep record archives to satisfy the requirements set forth by SOX. A rule of thumb for companies is to follow guidelines used by public accountants for keeping an audit trail of business records and communications, including electronic communications.

Leveraging Contract Management Software

While SOX has been around for over 15 years, several sections, such as Section 404: Assessment of Internal Control, could be more specific. Instead of second guessing whether or not your organization is meeting compliance requirements through manual record keeping, it is a good idea to automate the process using a contract management system.

Built-in history and audit trail functionality help produce more accurate company records and track all modifications to contract data. With contract management software, your company can build consistent contracts, keep accurate records for SOX Compliance, and maintain compliance for other legislation in case of a company audit.

Takeaway

The Sarbanes-Oxley Act provides several benefits to shareholders and companies. However, SOX also results in high implementation and compliance costs. Ensuring SOX compliance is critical and contract management software  can help ease that burden by automating your record keeping process for auditing purposes.

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