How Sarbanes-Oxley Impacts HR Departments

In today’s increasingly disruptive world, it is imperative to employ effective software systems to ensure compliance and control. Compliance with the Sarbanes-Oxley Act (also known as Sarbox or SOX) is a business made for private and public U.S. companies. Since its implementation, human resource and finance departments have been tasked with more responsibilities. It is crucial for human resources departments that want to ensure transparency regarding the hiring process, compensation, and expenses of their companies.  

In this article, you will discover how the Sarbanes-Oxley (Sarbox) compliance process impacts the human resources function.

What Is the Sarbanes-Oxley Act (Sarbox or SOX)?

SOX is a U.S. federal law that was passed in 2002 following a spate of high-profile corporate scandals. The legislation was aimed at improving the corporate disclosure accuracy and protecting stakeholders and the general public from financial errors and fraudulent practices. The act addresses corporate securities and compensation and ensures that companies with public shareholders present their financial state accurately. This helps investors identify the true picture of the company’s performance.

To achieve these objectives, SOX mandates greater auditor independence, increased corporate governance, and documentation of corporate internal controls. To comply with SOX, companies must ensure that their financial statements are well audited and accurate. For example, it requires the company’s senior management to attest to the accuracy of their financial reports under penalty of law.

Critics assert that SOX increases the cost of doing business for American companies and has introduced onerous restrictions that hurt their global competitiveness. However, supporters contend that the law has brought credibility and transparency to the financial world. They point that several other large countries have introduced laws with similar scope and reach, which suggest that these regulations were, in fact, long overdue.

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How Does Sarbanes-Oxley Act Affect a Company’s HR Department?

While the SOX act primarily regulates accounting and financial reporting, the act also impacts many human resource management (HRM) operations; these include recruitment and selection, training and development, performance appraisals and feedback, compensation, and labor relations. In addition, SOX mandates the establishment of payroll system controls, and section 404 of the act requires companies to account for their workforce, salaries, benefits, incentives, paid time off, and training costs.

SOX also includes whistleblower protection that prohibits publicly-traded companies from taking adverse action against employees involved in whistleblowing. The act also created codes of ethics, increased penalties and fines for unethical actions (thus promoting independence), restricted compensation programs, and increased fiduciary responsibilities and employment provisions.

When implementing SOX, HR departments may need to:

  • Hire and coordinate additional auditors during implementation and audits
  • Act as the frontline for handling employee disclosures or whistle-blowing 
  • Keep accurate payroll accounting records that comply with SOX rules
  • Record all decisions that affect company records (such as decisions about payroll or about who approves employee expenses, etc.); verbal approval of payroll and records is not sufficient for SOX compliance

The Onus Is on the HR Departments

HR departments have found that Section 404 (the costliest, most time-intensive aspect of the SOX act) strongly impacts their operations and procedures, as it mandates financial reporting accuracy. Since most company’s workforce, salaries, benefits, incentives, and training account for 40–60% of HR budgets, these significant expenditures must be carefully accounted for under Section 404.

As a result, SOX has made it crucial for HR departments to account for paid time off – any time not worked by an employee, for which a fixed (or prorated) amount of pay is accrued and paid out, often as vacation time or paid holidays. This time is a financial liability on a company’s balance sheet, so it must be stringently accounted for. Complying with Section 404 of SOX helps avoid potential litigation and penalties. This is the main reason many companies are adopting automated time and attendance solutions such as Replicon TimeOff.

TimeOff is a centralized, cloud-based system that provides workforce-related information anytime, anywhere. These features allow HR departments to quickly and accurately account for their paid time off liabilities and obtain up-to-the-minute reports. Moreover, its reporting capabilities can be integrated with all leading business ERP applications, minimizing the time and hassle involved in complying with SOX and other workforce regulations under FLSA and FMLA.

Conclusion

When the Sarbanes-Oxley Act (SOX) was first passed, it necessitated the need for accurate recordkeeping and payroll accounting. Twenty years later, American corporations are still searching for solutions to help simplify their financial reporting processes.

Web-based time and expense management apps are a welcome solution. With these apps, financial officers can generate accurate audit trails and financial summaries and can even accurately track liabilities since they eliminate error-prone paper trails and manual processes.

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Sathya Gajendran

ABOUT THE AUTHOR

Sathya Gajendran

Sathya is an Assistant Content Marketing Manager at Replicon. She is a tech enthusiast who loves to learn about new, emerging technologies. Replicon provides award-winning products that make it easy to manage your workforce. With complete solution sets for client billing, project costing, and time and attendance management, Replicon enables the capture, administration, and optimization of your most underutilized and important asset: time.

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