It's neatly contained in only two paragraphs on page 45 of the Sarbanes-Oxley Act, but Section 404 has been the most fearsome part of the regulation and responsible for the greatest portion of the total national cost of compliance, which could amount to $35 billion for new IT systems and people to run them. And a good share of that investment is now moving from manual processes to new technology to automate the processes behind Section 404 compliance.
The significance of Section 404 is that it "re-emphasizes the important relationship between the maintenance of effective internal control over financial reporting and the preparation of reliable financial statements," according to the SEC statement issued May 16, 2005 that gave "Feedback on the Implementation of Internal Control Reporting Provisions."
Internal control over financial reporting is a process designed and maintained to provide reasonable assurance about the reliability of financial reporting. Good internal controls are one of the most effective deterrents to fraud and a key factor in preventing financial misstatement.
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