UK SOX compliance is just around the corner. But what does this mean for UK businesses (and finance teams specifically)? There’s yet to be a full release of information, but we’ve compiled the key facts we know so far in a useful guide.
What is UK SOX?
In essence, UK SOX is the British version of the original US SOX. While it is yet to be implemented, it will ensure UK corporate regulations are more aligned to the Sarbanes-Oxley framework. The purpose of UK SOX is the same, to enhance controls around financial reporting, while also increasing accountability for senior figures.
The idea of UK SOX was born around 2019 following a review of auditing practices. Sir Donald Brydon was a key part of this, publishing a report that called for better legal definitions around auditing. Reform in this area is now underway, with the Financial Reporting Council (FRC) initially taking the lead.
Why is the FRC being replaced?
In early 2023, the FRC will be replaced by the Audit, Reporting, and Governance Authority (ARGA) as the main UK SOX regulator. This is to ensure there’s a dedicated regulatory body that can solely focus on the enforcement of honest financial reporting.
The FRC have welcomed the governance reforms, recognising that auditing and reporting standards must improve.
Maintaining compliance won’t be simple, so directors must be committed in terms of the time and energy they put into this initiative. The FRC are yet to provide all the intricacies surrounding UK SOX, but they have at least provided some projected deadlines.
When does this new compliance regulation begin?
The key UK SOX deadline that has been revealed so far is that the new regulations will apply to any financial years ending in December 2023 or later. The following dates are estimated timeframes and are still subject to change:
- Spring 2023– New regulatory body (ARGA) takes control of proceedings.
- Late 2023– The final version of the UK SOX legislation is agreed upon.
- Late 2024– UK SOX is in full effect. This estimation considers the time it will take to finalise and implement the legislation for all companies. It also considers the grace period businesses were given during the US rollout.
Is UK SOX the same as US SOX?
The SOX legislation was passed in 2002 in the United States. The term SOX is an abbreviation of the Sarbanes-Oxley Act, which is credited to Paul Sarbanes and Michael Oxley (two congressmen in the US).
The purpose of this legislation is to improve corporate governance, while also boosting the security, accuracy, and accountability around financial reporting. It was designed to protect investors and the public from fraudulent activity within organisations.
Due to an increased pressure for transparent and honest financial disclosures, business leaders need to ensure accounting processes are completed competently. They must also prioritise transparency when it comes to financial governance.
SOX ultimately came about as a response to a series of financial scandals in corporate America. Many stakeholders were impacted negatively by this unchecked fraudulent behaviour.
Which businesses will be affected by UK SOX?
This legislation will shine a light on the largest companies to begin with, due to the impact they have on the wider corporate climate. And this won’t be limited to businesses listed on the stock exchange. It is designed to restore trust in big businesses, placing greater accountability on their leaders (as well as the governing body itself).
Unlisted organisations that have more than 750 employees (and a turnover greater than £750m) will come under scrutiny. It seems that, at this moment, smaller companies won’t face any regulation changes around the way they operate.
In addition to adhering to tighter rules, business leaders will be required to publish an annual report demonstrating the controls they have put in place, as well as any other actions taken to eliminate fraudulent behaviour.
What are the benefits of implementing SOX in the UK?
In terms of the importance of SOX compliance, non-compliance is equivalent to breaking the law for businesses in the US, so it must be taken seriously. Punishment may not end up being quite as severe in the UK, but it is still likely to lead to heavy financial penalties.
As well as being a legal obligation, it makes business sense for organisations to operate in the manner suggested by the legislation. For a start, prospective partners, customers, and employees are more likely to work with a company that operates ethically. Watertight financial reporting also helps finance teams to keep their business’s sensitive data more secure.
Some of the benefits created by the UK SOX legislation will include:
- Increased transparency for shareholders
- Greater control around auditing
- Easier identification of risks
- More clarity around financial performance
- More accurate reporting
- Decreased fraudulent behaviour
How to prepare for UK SOX
Study the rules in detail
The first part of becoming compliant is to fully understand the legislation. Be sure to keep up with the latest updates as and when they're announced. Remember that UK SOX will be different to US SOX, so don’t use the original Sarbanes Oxley Act as a definitive guide. But it warrants full adherence and should be given the full attention it deserves.
Assess the requirements for your business
Not only is compliance enforced uniquely in different countries, but it will also apply differently depending on the size of the company in question. It’s sensible to conduct some self-analysis. By determining your employee numbers, turnover, etc, you should be able to figure out exactly how UK SOX will apply to you (and therefore what preparatory action you need to take).
Look at your existing resources and processes
It’s also wise to conduct a risk assessment when thinking about this new legislation. Carry out a thorough analysis of your current financial processes in relation to auditing and reporting, then figure out if there are any areas where you fall short.
When you know what actions need to be taken to incorporate UK SOX, you can determine whether you have the necessary staff, systems, processes, and structures to achieve this successfully. Once you have identified weaknesses around resources and financial controls, you can look to rectify these as quickly as possible to ensure compliance is reached by the deadline.
Make employees accountable
The scheduled actions should be organised like a change management project. This means there should be a range of responsibilities assigned to employees to ensure it is implemented in a timely fashion.
As with any project, it’s beneficial to have leaders who can hold others accountable and drive everyone in the right direction. Not only will individuals be tasked with actioning these changes, but there will also be a series of lasting responsibilities once the new framework is in place.
Create an adequate control framework
Perhaps the most important aspect of UK SOX is implementing new controls around the monitoring and processing of financial data. Although the controls should adhere to the legislation, they should also be tailored to your unique operational needs. You’ll also want the most efficient and cost-effective controls in place, so they don’t hinder you from a financial perspective.
Communicate clearly and concisely
When it comes to communicating changes and expectations, strong leadership is needed. Board-level directors should be authoritative in this regard, leading from the front with their actions. If senior figures demonstrate the magnitude of this legislation, the importance will likely come across to others. For optimal transparency, ensure there are adequate channels for sharing updates.
Change the business culture
Tight financial controls must become part of the organisational culture. This can begin as early as the recruitment process. Ensure that vigilance around controls is prioritised during selection and emphasised within job descriptions.
You should ensure appropriate training is provided for this element of their role too, so they know which tools to use and where they fit within the framework. If legislative compliance is viewed as a core responsibility across all levels of seniority, universal buy-in for UK SOX becomes a possibility.
Lean on technology for assistance
Technology helps businesses to be compliant, and thus will assist in making the journey to UK SOX compliance easier. By automating financial tasks with the likes of Cloud technology and financial management software, activities can be completed much quicker and with fewer errors.
With digital solutions it’s easier to control the flow and storage of data, as well as tracking which user has taken certain actions. This ensures a detailed audit trail can be maintained and fraudulent behaviour can be rooted out. Technology boosts efficiency around controls and corporate governance, which ultimately cuts costs for the business. You should choose a system that supports your specific reporting and auditing needs.
Begin right away
Although there’s a substantial amount of time before UK SOX is in full effect, you should look to make the most of this. The length of the grace period has been put in place for good reason (as this is how long it will take for businesses to put the necessary framework in place). If you don’t begin right away, there’s a chance you won’t hit the compliance deadline. These types of change don’t happen overnight, so start researching and restructuring now.
Keep up to date with new regulations
Our Cloud-based accounting software, Financials, enables finance teams to have a bigger say on strategy thanks to powerful reporting capabilities. It also ensures they can work faster and cut costs through streamlined processes. Not only this, but with regular updates included, the system is continuously tweaked to take into account the latest legislative changes, from Making Tax Digital to the upcoming UK SOX compliance.
All the nuances of UK SOX are yet to be revealed, so deadlines will continue to change, and aspects of the legislation will be amended over time. We’re here to keep you in the loop as and when new information comes to light. Follow our financial management LinkedIn page to stay up to date with the latest finance news.