This guide provides scope, methodology and importance of integrating Sarbanes-Oxley (SOX) Sections 302 and 404. Management should think of compliance with SOX Sections 302 and 404 as a single requirement of continuous reporting. This guide highlights strategies for integrating compliance activities around SOX Sections 302 and 404 with the objective of achieving sustainability of the internal control structure.
Reasons for integrating compliance activities around SOX Section 302 and Section 404 include:
- There is significant overlap between “disclosure controls and procedures” (addressed by Section 302) and “internal control over financial reporting” (addressed by Section 404), as the SEC defines the two terms.
- There are important interrelationships between SOX Sections 302 and 404 with respect to timely reporting of significant deficiencies in internal control over financial reporting to auditors and audit committees as well as timely disclosure of material weaknesses to investors. Therefore, deficiencies relating to internal control over financial reporting, the focus of Section 404, may require disclosure under Section 302; this process may ultimately lead to public disclosure.
- Quarterly reporting is as important as annual reporting because material weaknesses in internal control over financial reporting can arise from risks of misstatement to both.
- Certifying officers should reduce the risk of disclosing control failures in the fourth quarter after issuing “clean” certifications during the first three quarters.