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

December 27, 2023
contract lifecycle management (CLM) for Sarbanes-Oxley Act

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.


Vishwarup Dhagat
Vishwarup Dhagat, Senior Manager of Customer Success at Knovos, has over 16 years of experience serving and tailoring solutions to Knovos customers as per their unique needs. Vishwarup contributes his knowledge and experience across the customer lifecycle, from requirement analysis to implementation and beyond. Knovos clients endorse his expertise in Enterprise Data Management, Risk Mitigation, Process Management, Information Governance, eDiscovery, etc.