Categories
Contract Management

How Corporate Legal Team Uses Contract Lifecycle Management (CLM) for Sarbanes-Oxley Compliance?

Publicly traded companies in the U.S. must comply with the significant financial reporting and internal procedural requirements of the Sarbanes-Oxley Act (SOX or SOX Act). When you think about it, the essence of financial reporting is contracts – the records of a company’s transactions.

This makes contract management essential for SOX compliance. To help with the heavy lifting of SOX compliance, organizations now use contract lifecycle management (CLM) technology to systematize internal controls and reporting.

What Prompted the Sarbanes-Oxley Act?

In the early 2000s, under the weight of egregious corporate mismanagement and public accounting firms’ shortcomings, two massive U.S. companies – Enron and Worldcom – suddenly collapsed into bankruptcy. Other large-scale bankruptcies followed.

As Michael Oxley, a co-sponsor of the Sarbanes-Oxley Act in Congress, commented, the events were “… a severe shock to our system, to the core of the capital system that depends on honesty and integrity and on having investors believing in the companies they invest in.”

Congress Acts to Curb Corporate Fraud

In response to the fraud and financial reporting irregularities uncovered in the scandals, Congress passed the Sox Act in 2002. The law strengthened public company disclosure and auditing requirements to restore investor confidence.

SOX laid down new provisions on risk management, corporate governance, financial reporting, and auditing. Corporate legal and compliance teams were charged with ensuring compliance with the new law that contains serious deterrence and punishment provisions for corporate accounting fraud and corruption.

CLM and SOX Internal Procedure Requirements

SOX Section 404 mandates the establishment, assessment, and reporting of internal procedures to ensure the accuracy of financial statements. Under this section, CEOs and CFOs are held directly responsible for the internal control structures and the accuracy of their company’s financial reports.

This is serious business as executives are subject to severe penalties, including up to 20 years of imprisonment and a $5 million fine for willful noncompliance.

Legal teams use CLM (Contact Lifecycle Management) to implement and track internal SOX policies and procedures. For example, with CLM software, you can automate contract drafting, negotiations, approvals, and status. Your company will know exactly where it stands with its contracts. This supports the creation of accurate financial reporting and disclosures. You’ll also have a solid audit trail to report on compliance under Section 404 of the SOX Act.

Legal teams recommend their organizations get all contracts into a CLM central repository and out of filing cabinets or email folders to reduce the chance of a contract going unaccounted for in financial reporting. A CLM helps organizations accomplish both SOX and contract management.

Internal Controls Report Requirement

Under Sarbanes-Oxley Section 7262, executives at public companies must include an internal control report in the company’s annual report. This report must describe management’s responsibility for establishing and maintaining procedures for financial reporting and internal control structures.

This report must also contain management’s assessment of the effectiveness of the internal controls and reporting procedures for the most recent fiscal year.

This report is a massive priority for an organization’s legal and compliance teams. CLM software can help you comply with this important annual internal control assessment. Your executives’ report can describe how the CLM provides real-time visibility into all contracts’ status, dollar amount, renewal dates, and more.

It’s also easy to assess the effectiveness of your organization’s internal controls and contract reporting with your CLM. Documented workflows in the CLM and automated reports on contract types, values, costs, terms, and rights readily provide data for the generation of the internal control report.

You can also search all your contracts in seconds to double-check the value of a contract or an upcoming renewal date on a large contract. These are all good ways to assess and prove the effectiveness of your internal controls and procedures in an SOX report.

A CLM should enable an organization to bring security, transparency, and effectiveness in communication, collaboration, and reporting of business transaction documents. The CLM should provide flexibility to design real-time monitoring and dashboarding of ongoing works on the contracts. With advanced analytical capabilities, a CLM should provide a handful of tools to monitor, analyze, and work on contracts and other business documents.

Document Altering or Destruction SOX Compliance

SOX Section 802 lays out harsh strictures and penalties concerning document destruction or falsification. Anyone who alters, mutilates, destroys, conceals, or falsifies records, documents, or tangible objects intending to obstruct, impede, or influence a legal investigation faces up to 20 years of imprisonment. Accountants, auditors, or others who knowingly and willfully violate the requirements for retaining all audit or review papers for five years can be imprisoned for up to ten years. These hefty penalties weigh heavily on the minds of general counsels.

Having a single source of truth for your contracts in a secure CLM system will help you comply with SOX anti-destruction rules. With CLM software, you can restrict access to the contract repository to avoid any accidental or untoward deletion or alteration of a contract. Robust CLM systems have the best encryption and two-factor authentication to secure data.

Getting Contracts Under Control for SOX Compliance

The Sarbanes-Oxley Act created enormous compliance work for legal and compliance teams at public companies. At the same time, however, it helped restore investor confidence to keep our capital markets working.

Organizations are finding a connection between SOX compliance and contract management. If you work in a legal or compliance team at a public company, you’ll want to explore how a contract lifecycle management solution can help your organization not only optimize contracts but also comply with the Sarbanes-Oxley Act.

Categories
Data Management

How to Protect Intellectual Property (IP) Data from Modern Bad Actors?

Intellectual Property (IP) is an intangible or heritage asset that brings uniqueness and innovation to an enterprise. These intangible assets are legally protected and yield commercial value for an enterprise.

Intellectual Property adds not only commercial value to an enterprise but also aids in protecting its assets by providing due recognition. However, Intellectual Property contains sensitive information like trade secrets, including business strategies and formulas, patents showcasing technical aspects, copyrights, and trademarks, among others. When such sensitive IP data is acquired without any authorization through theft, the organization is put in a vulnerable position, which includes the destruction of its reputation and financial loss.

Moreover, highly regulated industries like pharmaceuticals, automobiles, and defense need to be extra cautious while dealing with their IP data, as it contains extremely vulnerable data. These sensitive details are crucial to an enterprise, and IP data protection from potential modern bad actors is undoubtedly the need of the hour.

Understanding the Potential Modern Bad Actors

Modern bad actors are numerous, and it is essential to understand them and implement foolproof IP data protection strategies in order to safeguard IP across the organization. The potential bad actors could be insiders or outsiders.

  • Insider Threats: These threats include employees or partners having access to and dealing with sensitive information and stealing, misusing, leaking, or dealing with the same negligently. Furthermore, former employees and temporary contractors who are given access mistakenly may also increase the IP data security threat.
  • Outsider Threats: Outsiders who tamper with sensitive information include hackers, cyberpunks, thrill seekers, and cyber criminals engaging in cyberattacks and phishing activities. Competitors and spies trying to copy and replicate sensitive information, they may mishandle the Intellectual Property of an organization. SQL injections, Unsecured Wifi, Cloud, IoT devices or VPN could be their soft entry points for getting into the data sphere.

These are only instances that showcase potential bad actors and their malicious activities whereby they abuse, misuse, and exploit sensitive intellectual property, causing IP data security pitfalls. An organization needs to understand these potential bad actors and their intentions to prevent them from exploiting and misusing sensitive intellectual property.

6 Effective Strategies to Ensure IP Data Security

  1. Educating Employees and Implementing Best IP Data Security Practices: Employees need to have a basic understanding of best security practices to avoid insider threats. Outside actors often apply social engineering tactic to crack employees’ passwords. Educating and creating awareness among employees regarding best practices to maintain data hygiene, various tactics bad actors use to steal sensitive data, and proper implementation of information governance policies will enhance the protection of intellectual property data. Furthermore, when employees are kept in check through monitoring and observation, unauthorized activities are prevented. Harmony between people, processes, and technologies is imperative for effective data governance. In my opinion, people is the lifeblood of this because processes will be followed and technologies will be used by humans (~ employees).
  2. Administering Proper User Access Controls: Data breaches can be prevented by implementing robust access control mechanism. Enterprise IT team should have a clear visibility over who access what and for what time. Multi-factor authentication, digital rights management, upgrading password protection, and updating security policies add value to the efforts. Zero-tolerance approach for POLP (Principle of least privilege) is imperative for safeguarding IP data.
  3. Encrypting Intellectual Property Data: In order to prevent the leakage of data, the organization must protect the IP Data through the process of encryption. Legible IP data is converted into a futile unreadable format and this refers to the process of encryption. Enforcing encryption through advanced cryptographic protocols for data in transit and data at rest is very essential in today’s digital world. Conduct a specialized audit of encryption standards all communication channels follow. Information Rights Management (IRM) should not be overlooked while redefining the IP data security practice. It is very prominent tool for preventing unauthorized use of IP documents. By leveraging IRM technology, you can limit access rights (view, edit, download, print, copy, etc.) of business document even after it leaves your company network.
  4. Third-Party or Outside Contractors Must Pass a Security Evaluation: When organizations carry out security assessments on third-party contractors and vendors, IP data protection is assured on a huge level. Another possible way to achieve the same is through crafting and implementing security benchmarks and standards for third-party contractors and vendors. You should park an SOP that stops vendors blindly forward an email chain that contains email addresses of your team members and other sensitive information of your company.
  5. Protecting IP Data through Data Loss Elimination Solutions: Implementing a loss of data elimination solution is an essential activity that needs to be carried out to protect IP data. To achieve this, the implementation of appropriate data segmentation and proper safeguard mechanisms to protect sensitive information is carried out. Further, if the organization makes use of an automated or rule-based backup, it will aid in the recovery of data and prevention of data loss that may occur due to unforeseen events and also ensure compliance with retention policies.
  6. Intellectual Property Preservation through Data Archival – Data breaches and attacks can be prevented by segregating and securing past data from current data. Data archival for an organization plays a crucial role in becoming compliant with prevalent data retention laws.

Conclusion

IP (Intellectual Property) is the lifeblood of today’s businesses. Fine-tune your people, processes, and technologies for implementing a zero-tolerance IP data security measures. Management should define the KPIs, and a regular assessment of the company’s state of IP (Intellectual Property) data protection needs to be conducted.

“Fill the gaps within and tap on emerging threats by keeping eyes and ears open- A mantra to succeed & grow.