Establishing a Robust Contract Control Environment Under SOX 404(b)

Contracts are the foundation of revenue – but if not properly managed, they can become a company’s biggest compliance risk. Under Section 404(b) of the Sarbanes-Oxley Act, SEC-registered companies must establish and maintain strong internal controls over financial reporting, with external auditors independently evaluating their effectiveness.

One of the most common areas of focus? Revenue recognition and contract-related controls, particularly under ASC 606.

Contract Processes Proven to Pose Compliance Challenges

At CBIZ, we regularly identify deficiencies in the design and implementation of these processes. Challenges often arise because the foundational steps for ASC 606 compliance are not robustly established at the outset, leading to significant difficulties for companies in subsequent reporting periods.

In fact, recent data shows that 5% to 7% of SEC-registered companies report SOX material weaknesses in their audit reports, and 35% to 40% receive findings from the PCAOB. Among private companies, 5% to 10% receive modified audit opinions due to internal control failures, and 10% to 15% receive internal control comments from the AICPA. Most of these findings stem from weaknesses in how companies identify, implement, and update revenue contract processes.

Read on to explore practical strategies for strengthening your contract control environment – and preparing an organization to maintain compliance with ASC 606.

Maintaining Compliance Throughout the Contract Process

The areas below are key to ensuring contract processes comply with ASC 606 and SOX Section 404(b) – and should be addressed with clear, consistent controls.

Preliminary Negotiations

Contract negotiations often start with informal or formal discussions, usually led by sales, marketing, or other initiating teams. These initial negotiations, including any verbal approvals to proceed, should be thoroughly documented.

In addition, the initial authorization to formally draft a contract and move forward with further negotiations must be recorded in a controlled and organized manner, ensuring a clear audit trail and adherence to internal control procedures. Proper controls should be designed and implemented surrounding this initial step before the contract draft is created.

Formal Documentation of Contract

After preliminary discussions, the next stage of the contract process involves the formal drafting of the contract or engagement letter. This draft may follow a standardized company template or be tailored to the specific engagement, but in all cases, it must clearly specify the main contract terms and comply with ASC 606 requirements.

Every contract draft should include:

• Pricing and Payment Terms: Clearly state pricing, payment schedules, unit rates, and total contract value.
• Scope, Timing, and Nature of Deliverables: Detail the specific services and/or products to be provided, timelines for delivery or performance, and any relevant units or quantities.
• ASC 606 Specifications: Explicitly define performance obligations, variable consideration, payment contingencies, cancellation clauses, and any other terms required by ASC 606 for proper revenue recognition.
• Additional Legal and Commercial Terms: Include provisions such as delivery (FOB/shipping), warranties, and other company or industry-required legal clauses.

All draft contracts should be supported by documentation of initial negotiations and authorizations, and proper controls should be designed and implemented surrounding the drafting of the contract.

Contract Approval

Once the contract is drafted, it proceeds through the established approval workflow. Approval is a critical step in the contract process, as a contract cannot be implemented or considered valid – and the related sale cannot be recognized under ASC 606 (US GAAP) – until approval is complete. 

Policy Documentation

Before progressing to the approval stage, ensure the company’s pricing policy is formally documented. This is a core requirement under the Sarbanes-Oxley Act for maintaining an effective internal control environment. All key policies – including pricing – must be documented, regularly reviewed, and approved by the appropriate level of management, and, when necessary, by the board of directors.

Maintaining a current, well-documented, and properly authorized pricing policy provides clear guidance for contract negotiations and supports compliance with internal control and regulatory standards.

Approval Workflow

It’s also crucial to document and enforce a proper approval workflow, ensuring that each required department is involved at the appropriate stage. Every level of approval should be clearly reflected in the contract documentation. The typical approval workflow may include:

• Departmental Approval: Initial review and sign-off by relevant operational or sales department.
• Legal/Marketing Approval: Review to ensure contract compliance, risk management, and alignment with company policies.
• Finance/Accounting Approval: Confirmation of pricing, terms, and financial implications.
• Executive Approval and Execution: Final authorization by company leadership, followed by contract execution.

Each approval should be documented with clear evidence, such as signatures, timestamps, or system audit trails, to support a strong internal control environment.

Record of Approval

Every stage of the approval process should be thoroughly documented and recorded. If the company uses an Enterprise Resource Planning (ERP) system or contract management software, an audit trail with timestamps, user actions, and electronic approvals will be available.

For manual processes, approvals must be evidenced with signatures and dates. Supporting documentation, such as email approvals and electronic signatures, should be securely maintained, preferably in a cloud-based repository.

Monitor Renewals, Track Milestones & Manage Updates

Lastly, robust controls should be established to monitor contract renewals, track milestone achievements, and manage contract updates. The company should implement systematic processes to:

• Monitor Contract Expirations and Renewals: Regularly review contracts to identify those approaching expiration, ensuring timely renewals or renegotiations as necessary to avoid service disruptions or lapses in compliance.
• Track and Validate Milestones: Maintain procedures to verify the achievement of contractual milestones, including the collection of supporting documentation before recognizing related revenue or proceeding to the next phase of the contract.
• Manage Contract Amendments and Updates: Ensure that any modifications to existing contracts are thoroughly reviewed, documented, and approved according to established workflows.
• Initiate New Contract Processes: When new contracts or significant amendments are required, the company should follow the standardized contract initiation and approval process to maintain consistency and compliance.

Additional Considerations for Compliance

Segregation of Duties

Throughout the entire contract process, it’s critical to maintain strong segregation of duties at every control level. Access to the draft contract should be restricted to authorized individuals, and those involved in preliminary, informal negotiations should not be responsible for drafting the formal contract.

Additionally, the drafting process itself should involve multiple layers of review and responsibility, with different individuals handling various aspects of the contract to prevent manipulation or circumvention of controls. Only designated personnel should have access to draft contracts – before and after approval – to preserve the integrity of the contract management process.

Contract Storage

It’s essential for a company to establish a robust policy for maintaining a centralized contract repository. This repository should be integrated within the company’s ERP system or, alternatively, managed through secure cloud storage or specialized contract management software.

Both draft and finalized contracts must be stored with restricted access, and the system should clearly distinguish between drafts and approved contracts. The repository should also provide features such as contract expiration alerts, renewal notifications, and a summary of key contract terms.

Enhance Control & Mitigate Risk with CBIZ

Establishing strong contract controls isn’t just a compliance necessity – it’s a smart business move that supports accuracy in financial reporting, reduces audit risk, and builds stakeholder trust. By embedding these practices into the contract management lifecycle, organizations can strengthen internal controls and stay ahead of regulatory requirements.

CBIZ is here to help you assess your current control environment, identify gaps, and implement practical solutions that align with ASC 606 and SOX 404(b). Connect with us today to learn more.