Easy Sarbanes-Oxley Act (SOX) compliance through secure protocols

Words By John V.
See how JSCAPE helps organizations achieve SOX compliance by ensuring financial data's confidentiality, integrity and availability through secure file transfers.
  1. Blog

Following major corporate scandals, most notably the high-profile cases of Enron, WorldCom and Tyco, the United States Congress responded by enacting the Sarbanes-Oxley Act of 2002 (SOX). The rationale for this federal law, which introduces provisions for stringent financial reporting, internal controls and corporate governance, was to restore investor confidence in the capital markets and prevent corporate fraud. Today, publicly traded companies must ensure the accuracy of their financial statements to avoid regulatory penalties, reputational damage and legal repercussions.

As a managed file transfer (MFT) solution, JSCAPE by Redwood plays a crucial role in helping organizations achieve SOX compliance. By conducting file transfers through JSCAPE, corporations ensure the confidentiality, integrity and availability of financial data and meet SOX financial reporting requirements.

Key provisions and compliance requirements of SOX

The SOX introduces critical provisions to enhance corporate accountability, strengthen internal controls and improve financial reporting. Let’s review some of the key regulatory bodies, provisions and requirements of this legislation. 

Regulatory bodies and their roles

  • Public Company Accounting Oversight Board (PCAOB): Established under Title I of SOX, PCAOB enforces auditing standards, monitors public accounting firms and conducts investigations and disciplinary actions for noncompliance. At the same time, the board ensures auditor independence, adherence to fundamental accounting principles and quality control in audits conducted by external auditors. 
  • Securities and Exchange Commission (SEC): The SEC enforces SOX mandates by overseeing corporate governance and investigating improper influence in audits. It ensures that companies follow securities laws, including the securities exchange act of 1934, and initiates enforcement actions when necessary.

Key provisions and compliance requirements

  • Section 302 – Corporate responsibility for financial reports: Holds CEOs and CFOs personally accountable for the accuracy of financial statements and annual reports. These signing officers must ensure that internal controls are in place so that material information related to the company’s financial condition is accurately recorded, disclosed and made known to them and the audit committee. 
  • Section 401 – Disclosures in periodic reports: Requires that financial statements and other periodic reports provide an accurate and comprehensive representation of a company’s financial condition. It ensures transparency by mandating that any material off-balance sheet transactions are disclosed.
  • Section 404 – Management assessment of internal controls: Requires companies to implement internal control structures and undergo independent audits to ensure financial reporting integrity.
  • Section 501 – Treatment of securities analysts: Ensures that registered securities associations and national securities exchanges implement policies to prevent conflicts of interest between securities analysts and the companies they cover. This provision is designed to maintain the integrity of financial analysis and protect investors from biased recommendations.
  • Section 802 – Criminal penalties for altering documents: Imposes criminal penalties for tampering with financial information, which includes fines and imprisonment up to 20 years. This section also underscores the importance of proper data retention policies to ensure financial records are preserved and accessible for audits and investigations. 
  • Section 806 – Whistleblower protection: Protects employees who report fraudulent activities, reinforcing corporate governance.
  • Section 906 – Certification of financial reports: Establishes liability for corporate officers who fraudulently certify financial disclosures.
  • Title II – Auditor independence: Prohibits non-audit services that create conflicts of interest and mandates auditor rotation to ensure impartiality.
  • Audit committees and financial expertise: Requires independent audit committees, including at least one financial expert, to oversee compliance and management assessment efforts.
  • Governance and compliance management: Requires oversight from the board of directors.
  • Audit and risk management: Establishes guidelines to assess issuer compliance, generate audit reports and manage financial risks effectively.

While SOX provisions set the legal framework for financial reporting and internal controls, they do not provide specific guidance on how to implement and maintain those controls in, say, an IT environment. Since the corporations that need to comply with SOX rely heavily on IT systems for financial reporting, they require additional frameworks to ensure their IT controls align with SOX requirements.

This is where COBIT (Control Objectives for Information and Related Technologies), COSO (Committee of Sponsoring Organizations of the Treadway Commission) and similar frameworks come into play.

In the next section, we’ll explain how you can use COBIT to establish robust file transfer workflows that align with SOX requirements. 

COBIT 2019: A framework for SOX compliance

COBIT is a globally recognized framework that provides a structured approach to aligning IT processes — including file transfer workflows — with business and regulatory requirements. As such, you can use it to align IT processes with SOX requirements. Its latest version, COBIT 2019, consists of four key guidance documents:

  1. Introduction and methodology
  2. Governance and management objectives
  3. Design guide
  4. Implementation guide

While COBIT covers a broad spectrum of IT governance and management principles, certain concepts are particularly relevant to secure file transfer workflows in the context of SOX compliance. We can’t cover COBIT in detail in this post, but here’s an overview of the concepts that are most relevant to us in the current context. 

COBIT involves governance objectives and management objectives. These are essentially objectives that you must aim for if you seek to manage and govern your IT systems — including those used for file transfers — effectively. Governance objectives are typically the responsibility of your organization’s governing body, such as your board of directors and executive management. Management objectives, on the other hand, fall under the domain of senior and middle management, including your IT managers. 

Since we’re here to explain how JSCAPE helps in SOX compliance, we’ll be focusing more on management objectives. In fact, we’ll be drilling down deeper into what are known as management practices. These are specific activities that COBIT recommends to achieve certain objectives. 

Let’s take the management objective DSS05, for example. DSS05 or the Managed Security Services management objective stipulates: 

“Protect enterprise information to maintain the level of information security risk acceptable to the enterprise in accordance with the security policy. Establish and maintain information security roles and access privileges. Perform security monitoring.”

Since the objective is quite broad, COBIT further recommends activities known as management practices. Some of the management practices under DSS05 include the following:

  • DSS05.01 Protect against malicious software
  • DSS05.02 Manage network and connectivity security
  • DSS05.03 Manage endpoint security
  • DSS05.04 Manage user identity and logical access
  • DSS05.05 Manage physical access to I&T assets
  • DSS05.06 Manage sensitive documents and output devices
  • DSS05.07 Manage vulnerabilities and monitor the infrastructure for security-related events

All these practices mitigate risks that might compromise the integrity of financial data critical to financial reporting. Let’s pick out a few of these practices and explain in more detail how they help in meeting SOX requirements. 

COBIT DSS05.02: Manage network and connectivity security

DSS05.02 suggests applying security measures and management practices to keep information safe across all types of connections. Some of the specific actions recommended under this practice include the following:

  • Implementing network filtering mechanisms, such as firewalls, and enforce appropriate policies to control inbound and outbound traffic
  • Applying approved security protocols to network connectivity
  • Encrypting information in transit according to classification

How DSS05.02 helps in meeting SOX requirements

Firewalls and other filtering mechanisms prevent external threat actors from accessing financial data through the internet. Secure, encrypted protocols, on the other hand, prevent threat actors from intercepting data sent across the network. This is important because if threat actors manage to intercept login credentials, they can use those credentials to login to your servers and access financial data stored there. 

DSS05.03: Manage endpoint security

DSS05.03 advises IT practitioners to ensure that endpoints are secured at a level that is equal to or greater than the defined security requirements for the information processed, stored or transmitted. It recommends the following actions:

  • Configure operating systems in a secure manner
  • Protect system integrity
  • Encrypt information in storage according to classification

How DSS05.03 helps in meeting SOX requirements

By hardening operating systems and applying security patches, you can minimize vulnerabilities that might otherwise be exploited by attackers to access and alter financial data. Data-at-rest encryption can add a layer of protection that prevents attackers from viewing your data should they somehow manage to gain access to it. If they can’t view your financial data, they can’t make any fraudulent alterations to it. 

COBIT DSS05.04: Manage user identity and logical access

DSS05.04 is designed to make sure that users can only access the information they need to perform their duties. Some of the actions recommended under DSS05.04 include the following:

  • Aligning access rights to defined roles and responsibilities, based on need-to-know principles. 
  • Authenticating all access to information assets.
  • Maintaining an audit trail of access to information.

How DSS05.04 helps in meeting SOX requirements

When you limit access to financial data on a need-to-know basis, it mitigates the risk of unauthorized access to that data. In addition, when you authenticate all access activities and maintain an audit trail of those activities, you can minimize fraud or at least have a way to track down the culprit if it occurs. 

COBIT DSS06.02: Control the processing of information

DSS06.02 suggests ensuring that information processing is valid, complete, accurate, timely and secure. Some of the actions recommended include the following:

  • Authenticating the transaction initiator and verifying that it has the authority to initiate the transaction
  • Maintain data integrity and validity throughout the processing cycle. 
  • Verifying that transactions are accurate, complete and valid.

How DSS06.02 helps in meeting SOX requirements

Data integrity controls minimize the risk of errors, omissions or manipulations that could compromise the accuracy of financial statements. Furthermore, by implementing controls such as data integrity mechanisms and validity checks, you can prevent material misstatements in financial reports, which is a key objective of SOX. 

So, how do you meet these objectives in a typical file transfer environment? If you’re using a traditional file transfer software, it can be quite challenging. 

Why traditional file transfer solutions aren’t suited for SOX compliance

Most traditional file transfer solutions lack the necessary controls to meet COBIT objectives that apply to file transfer environments. For example, a File Transfer Protocol (FTP) server doesn’t support encryption. That means it can’t meet DSS05.02 on its own. To align with DSS05.02, you would have to deploy an encryption solution like, say, a Virtual Private Network (VPN). Another alternative would be to encrypt files using a tool like Pretty Good Privacy (PGP) before sending them over FTP. 

That’s not all though. FTP doesn’t have any built-in data integrity mechanism nor does it have any functionality that supports need-to-know principles. Thus, it can’t meet DSS05.04 and DSS06.02 either. You’ll have to acquire additional security solutions to address those gaps. 

Even Secure File Transfer Protocol (SFTP), which is known to be more secure than FTP, has several deficiencies. Yes, it supports data-in-motion encryption and has data integrity functionality. However, it lacks the network filtering and the data-at-rest encryption mechanisms prescribed by DSS05.02 and DSS05.03, respectively.

When you have to integrate several other point solutions to meet COBIT objectives, it can lead to numerous issues. Here are some of them:

  1. Increased complexity: Managing multiple security tools adds operational overhead, making system administration and troubleshooting more challenging.
  2. Higher costs: Deploying additional solutions increases licensing, maintenance and training expenses.
  3. Integration challenges: Ensuring compatibility and smooth operation between disparate security solutions can be difficult, leading to configuration errors and additional security gaps. 
  4. Reduce performance: Layering multiple security mechanisms using disparate solutions may impact file transfer speed and system efficiency. 
  5. Compliance risks: A fragmented security approach can cause oversight or misconfigurations, making it even harder to maintain continuous compliance with COBIT or other similar frameworks.
  6. Lack of centralized visibility: With multiple tools in place, monitoring and auditing file transfers become cumbersome, increasing the risk of undetected incidents. 
  7. Security risks: Using separate security solutions can lead to policy inconsistencies and create exploitable vulnerabilities that are hard to detect. 

How JSCAPE simplifies SOX compliance

JSCAPE is a MFT software equipped with a comprehensive suite of security features that simplify regulatory compliance. These features include the following:

  • Data-in-motion encryption: Preserves data confidentiality during transmission
  • Data-at-rest encryption: Ensures data confidentiality during storage
  • Access control measures: Prevents unauthorized access
  • Data Loss Prevention (DLP): Detects and prevents unauthorized transmission of sensitive data
  • Antivirus integration: Supports integration with antivirus solutions to scan inbound files
  • Reverse proxy functionality: Shields internal servers from direct exposure to the internet
  • IP-based access rules: Restricts connections from specific IP addresses or ranges
  • Multi-factor authentication (MFA): Requires multiple forms of verification for user access
  • Comprehensive logging and monitoring:  Provides detailed logs that simplify auditing purposes

JSCAPE incorporates all these features in a single platform. Moreover, it allows you to consolidate all your file transfer workflows — whether manual or automated — onto that same platform. This comprehensive and centralized approach eliminates many, if not all, of the issues outlined above. As a result, SOX compliance is much easier. 

Let’s review the management practices discussed earlier and see how you can use JSCAPE to implement them. 

How to align with DSS05.02 using JSCAPE

How to align with DSS05.03 using JSCAPE 

How to align with DSS05.04 using JSCAPE 

  • Every MFT user is required to authenticate before they are granted access. That’s by design. 
  • Every MFT user action is also automatically logged. Thus, you don’t need to do anything in this regard. 

How to align with DSS06.02 using JSCAPE 

  • All MFT file transfers are authenticated. This is by design. 
  • When performing data exchanges involving financial data, use file transfer protocols that have data integrity capabilities. Some examples are SFTP, HTTPS, AS2 and FTPS.
  •  Use AS2 and enable Message Disposition Notification (MDN) if you need to verify that transactions are accurate, complete and valid. AS2 MDNs act as electronic receipts. 

This is by no means an exhaustive list, but we hope it demonstrates how easy it is to achieve SOX compliance with JSCAPE. JSCAPE has an extensive array of security features that can help you align with various data protection/data privacy laws and regulations, not just SOX. You can leverage these features to meet regulatory compliance mandates when transferring sensitive data. 

If you’re looking for specific security features required for compliance and want to know if those features are supported, feel free to contact us. Our representatives are always happy to assist.

Conclusion

Ensuring compliance with SOX is critical for maintaining transparency, accountability and investor confidence in the securities markets. You must implement robust internal controls, data protection measures and audit mechanisms to meet statutory requirements and mitigate the risk of financial misstatements and fraud. 

As shown earlier, it’s not easy to achieve SOX compliance with traditional file transfer solutions. To do so, you’ll have to bring in additional third-party solutions, which increases costs, complexity and risks, while reducing performance, visibility and efficiency. JSCAPE simplifies things. It seamlessly aligns with several COBIT 2019 best practices and SOX requirements on its own.

Would you like to experience JSCAPE firsthand and see how it simplifies SOX compliance? Request a quick demo now.