Your company is planning an IPO. Or maybe you just raised a Series C and your investors want SOX-compliant controls. Either way, you’re about to discover that your reconciliation process—the spreadsheets, the manual matching, the “we’ll document it later” approach—won’t pass muster.
SOX 404 compliance isn’t just a checkbox exercise. It’s a comprehensive evaluation of your internal controls over financial reporting. And reconciliation sits right at the heart of it.
Here’s what you need to know, what auditors actually look for, and how to build controls that won’t fail your first audit.
What is SOX Section 404? (The Short Version)
Sarbanes-Oxley Section 404 requires public companies (and those planning to go public) to:
- Document internal controls over financial reporting
- Test controls regularly to ensure they’re working
- Prove to auditors that controls are effective
- Get auditors to attest that your controls are properly designed and operating
For fintech companies, transaction reconciliation is one of the most scrutinized control areas. Why? Because it directly impacts the accuracy and completeness of your financial statements.
⚠️ Warning:
If your reconciliation process has gaps, your SOX audit will fail—and that can derail your IPO or damage investor confidence.
Why Reconciliation is Critical for SOX Compliance
Reconciliation ensures four key control objectives that SOX auditors care about:
1. Completeness
All transactions that occurred are recorded in your system. Nothing is missing.
Why it matters: If 1,000 transactions hit your bank account but only 995 show up in your ledger, you have a completeness issue. Money went somewhere—but where?
2. Accuracy
Transaction amounts in your system match external records (bank statements, processor reports, etc.).
Why it matters: If your ledger shows $100,000 in revenue but your payment processor shows $105,000 was collected, which number is correct? This is a material issue.
3. Validity
Transactions in your system represent real economic events (not fraud, errors, or duplicates).
Why it matters: If someone can create fake transactions in your system without detection, your financial statements are unreliable.
4. Timeliness
Reconciliation happens on a predictable schedule (daily, weekly, or monthly—not “eventually”).
Why it matters: If you discover a $50K discrepancy three months later, you can’t reliably fix it. And auditors lose confidence in your controls.
If your reconciliation process can’t demonstrate these four objectives, your SOX audit will fail.
The 5 Most Common SOX Control Failures (And How to Avoid Them)
1. Inadequate Documentation and Audit Trails
❌ The Problem:
Your analyst reconciles transactions in Excel. They email the final file to their manager. The manager reviews it (maybe) and files it somewhere. Three months later, an auditor asks: “Prove this reconciliation happened.”
You can’t. There’s no trail.
What auditors ask:
- “Who performed the reconciliation?”
- “When did they do it?”
- “What matched and what didn’t?”
- “Who reviewed and approved the results?”
- “Where’s the evidence?”
Why it fails:
Spreadsheets and email threads aren’t sufficient audit trails. You need:
- Timestamped records of who did what
- Immutable logs (that can’t be changed after the fact)
- Complete history of all actions taken
- Evidence of supervisory review
✅ The Fix:
Use a system that automatically logs every action:
- • File uploads (who uploaded what file, when)
- • Matching execution (when the reconciliation ran)
- • Match results (which transactions matched, which didn’t)
- • Exception resolution (who approved unmatched items, why)
- • Report exports (when final reports were generated)
Modern reconciliation platforms create these audit trails automatically—no manual documentation required.
2. Lack of Segregation of Duties
❌ The Problem:
The same person who processes payments also reconciles them. Or worse, the same person who can create journal entries in your accounting system is also responsible for reconciliation.
This violates a fundamental SOX principle: one person shouldn’t be able to commit fraud AND cover it up.
Why it fails:
If the fox guards the henhouse, auditors can’t trust your controls—even if your team is perfectly trustworthy. It’s about the design of the control, not the integrity of your employees.
✅ The Fix: Implement Role-Based Access Controls
- • Analyst — Can upload files and review matches, but can’t approve exceptions
- • Manager — Can approve exceptions and export reports, but doesn’t do day-to-day matching
- • Admin — Can configure system settings, but can’t process transactions
- • Auditor — Read-only access to everything, can’t make changes
With proper RBAC, no single person can both commit an error and hide it.
3. Missing Exception Management Process
❌ The Problem:
Your team reconciles transactions, identifies 50 unmatched items, notes them in a spreadsheet, and… does nothing. The exceptions sit there, unresolved, month after month.
Why it fails:
Identifying issues isn’t enough—you need a closed-loop process for resolving them.
Required Exception Workflow:
- Exception identified
- Exception assigned to someone
- Investigation performed
- Resolution documented
- Manager approves resolution
- Exception marked complete
⚠️ Critical:
If exceptions just sit in a spreadsheet with no accountability, you don’t have effective controls.
✅ The Fix: Formal Exception Workflow
- • Auto-assign — Unmatched transactions to specific users
- • Track status — New → Investigating → Resolved → Approved
- • Require documentation — Why didn’t it match? What action was taken?
- • Manager approval — Exceptions can’t close without supervisory review
- • Aging reports — Flag exceptions older than X days
This creates accountability and ensures nothing falls through the cracks.
4. Untimely Reconciliation
❌ The Problem:
Your company reconciles transactions quarterly. Or worse, “as needed” (which usually means “when the auditors ask for it”).
Why it fails:
SOX distinguishes between preventive controls (catch issues before they impact financials) and detective controls (find issues after the fact).
Quarterly reconciliation is barely a detective control. Errors compound for three months before you notice them. That’s not acceptable.
✅ The Fix: Reconcile Frequently
- • Daily (recommended) — For high-volume fintechs processing 1M+ transactions/month
- • Weekly — For mid-volume companies (100K-1M transactions/month)
- • Monthly (minimum) — Minimum acceptable frequency for SOX compliance
Automated reconciliation makes daily reconciliation feasible—it runs in the background, matching transactions as they occur, and only alerts you to exceptions.
5. No Evidence of Management Review
❌ The Problem:
Your analyst finishes reconciliation, saves the file, and moves on. No one reviews their work. When auditors ask for evidence of supervisory review, there is none.
Why it fails:
Without management review, how do you know the reconciliation was done correctly? One person’s mistakes become your company’s mistakes.
✅ The Fix: Formal Approval Workflow
- Analyst completes reconciliation
- System notifies manager for review
- Manager reviews match results and exception resolutions
- Manager approves (or rejects with comments)
- System logs approval with timestamp
⚠️ Critical Requirement:
The approval step must be documented and traceable—not just a verbal “looks good.”
Building a SOX-Compliant Reconciliation Process
A compliant reconciliation process needs both system controls (technology) and process controls (people and procedures).
System Controls (Technology Layer)
- User authentication — Know who accessed the system and when
- Role-based access control (RBAC) — Segregation of duties enforced by the system
- Immutable audit logs — Complete history that can’t be altered
- Data integrity controls — Prevent unauthorized changes to matched transactions
- Automated workflows — Ensure steps aren’t skipped
- Retention policies — Keep records for 7+ years (SOX requirement)
Process Controls (People & Procedures)
- Documented procedures — Written reconciliation steps that anyone can follow
- Defined frequency — Daily, weekly, or monthly—and actually stick to it
- Exception management — Formal process for tracking and resolving unmatched items
- Management review — Supervisory approval required before closing
- Periodic testing — Internal audit or finance leadership tests the control quarterly
✅ When system controls and process controls work together, you have a defensible SOX-compliant reconciliation process.
What Auditors Will Ask For
When your SOX auditors show up, they’ll ask for specific evidence. Here’s what you need to provide:
1. Control Documentation
A written description of your reconciliation process:
- Who does what (roles and responsibilities)
- How often it happens (frequency)
- What systems are used (tooling)
- How exceptions are handled (workflow)
2. Sample Reconciliations
Evidence that the control is actually operating:
- Pick 3-5 months at random
- Show the full reconciliation for each month
- Prove it was completed on time
- Demonstrate exceptions were resolved
- Show management approval
3. Exception Reports
Proof that you track and resolve issues:
- List of unmatched transactions
- Documentation of why they didn’t match
- Actions taken to resolve them
- Manager sign-off on resolutions
4. Approval Evidence
Proof of supervisory review:
- Manager approval timestamp
- What the manager reviewed
- Comments or questions raised
- Final sign-off
5. System Access Logs
Proof of segregation of duties:
- Who has access to the reconciliation system
- What each person can do (RBAC)
- Audit trail showing who did what
- Evidence that no one person can both record AND reconcile
✅ If you can produce all five of these, you’ll pass the SOX audit for reconciliation.
How Automation Helps You Pass SOX Audits
Manual reconciliation processes—spreadsheets, emails, tribal knowledge—make SOX compliance nearly impossible. You can’t produce audit trails that don’t exist.
Automated reconciliation systems are designed with SOX compliance in mind:
1. Built-In Audit Trails
Every action is logged automatically:
- File uploads (who, when, what)
- Reconciliation execution
- Match results
- Exception handling
- Approvals with timestamp
System does it for you.
2. Role-Based Access Control
Segregation of duties enforced by the system:
- Analysts: Upload files, review matches
- Managers: Approve exceptions, export reports
- Admins: Configure system, but can’t process
- Auditors: Read-only access
No one can bypass controls.
3. Exception Workflow
Unmatched transactions are automatically:
- Flagged for review
- Assigned to specific users
- Tracked until resolution
- Escalated if they age
- Approved by management
Nothing falls through the cracks.
4. Scheduled Reconciliation
You can’t “forget” to reconcile:
- Runs automatically on schedule
- Email alerts if it fails
- Dashboard shows real-time status
Timeliness built into system.
5. One-Click Audit Reports
When auditors ask for evidence, export it with one click:
- Full audit trail for any time period
- Exception reports with resolutions
- Approval evidence
- System access logs
- Match/unmatch statistics
Export in 5 minutes, not a week.
A Real SOX Audit Scenario
Let’s walk through what a SOX audit looks like with and without automated reconciliation.
Auditor Request: “Show me your reconciliation for June 2024.”
Manual Process (Spreadsheet-Based)
You: “Let me find the file…”
- Searches email for “June reconciliation”
- Finds 5 different versions of the spreadsheet
- Not sure which one is final
- No evidence of who did it or when
- No clear approval trail
Auditor: “How do I know this reconciliation actually happened in June? This file could have been created yesterday.”
You: “Um… I’ll ask the analyst who did it?”
Result:
- Control deficiency
- More testing required
- Higher audit costs
- Risk of material weakness
Automated Process (SOX-Compliant System)
You: “One moment…”
- Logs into reconciliation platform
- Selects June 2024
- Clicks “Export Audit Report”
Report includes:
- Files uploaded June 1, 2024 at 9:03 AM by analyst@company.com
- Reconciliation ran June 1, 2024 at 9:15 AM
- 1,000,000 transactions processed
- 950,000 (95%) matched automatically
- 50,000 exceptions flagged for review
- All exceptions resolved by June 5, 2024
- Manager approved reconciliation June 5, 2024 at 3:24 PM
- Complete audit trail attached
Auditor: “Perfect. This meets our requirements.”
Result:
- Control is effective
- No additional testing
- Lower audit costs
- Clean SOX report
Implementation Roadmap: Getting SOX-Ready in 90 Days
If you’re preparing for a SOX audit, here’s a practical timeline:
Days 0-30: Document Current State
- • Map your current reconciliation process
- • Identify gaps (audit trails, segregation of duties, etc.)
- • Decide: fix manually or implement automation
Days 31-60: Implement SOX Controls
- • If automating: select and implement reconciliation platform
- • Set up role-based access controls
- • Configure exception workflows
- • Establish formal approval process
- • Document procedures
Days 61-90: Test and Refine
- • Run parallel reconciliation (old process + new system)
- • Test controls (do they work as designed?)
- • Train team on SOX requirements
- • Collect sample evidence for auditors
- • Fine-tune processes
✅ By day 90, you’re audit-ready.
All controls documented, tested, and ready for auditor review.
The Bottom Line: SOX Compliance Isn’t Optional
If you’re planning an IPO, raising late-stage funding, or growing your fintech beyond the early stages, SOX compliance is in your future.
Reconciliation is one of the most important—and most scrutinized—SOX controls. You need:
- Complete audit trails (who, what, when)
- Segregation of duties (no one can commit fraud and hide it)
- Exception management (track and resolve issues)
- Timely reconciliation (at least monthly, ideally daily)
- Evidence of review (manager approval)
Reality Check: Manual processes can’t deliver these controls at scale. Automated reconciliation systems are built specifically to meet SOX requirements—with audit trails, RBAC, exception workflows, and one-click reporting.