5 Steps to Improve SOX 404 Implementation for Digital Asset Companies
Key Takeaways
- Start early to identify control gaps, reduce remediation challenges, and establish a strong foundation for SOX 404 compliance.
- Set the tone at the top by fostering accountability and ensuring stakeholders understand their role in the control environment.
- Focus on key controls that address significant risks rather than building an overly complex compliance program.
- Engage auditors and advisors early to improve coordination, streamline implementation, and avoid surprises.
- Continuously evaluate and update controls to keep pace with evolving business operations, technology, and regulatory requirements.
Determining when a company becomes subject to the auditor attestation requirements of Sarbanes-Oxley Section 404(b) depends on its filer status and other applicable accommodations. The Securities and Exchange Commission (SEC) has proposed changes that would simplify filer classifications and potentially reduce the number of companies subject to SOX 404(b), but those changes are not yet effective. Companies should continue to evaluate their obligations under the current rules while monitoring the proposal.
Even when an auditor attestation is not required, management may remain responsible for establishing and maintaining internal control over financial reporting and assessing its effectiveness under SOX Section 404(a).
Implementing a SOX program can be a costly and time-consuming process, particularly for digital asset companies that rely on blockchain data, custodians, exchanges, wallet infrastructure, pricing providers, and specialized accounting systems. We’ve compiled a few key takeaways companies can reduce the cost, time, and stress of implementing a SOX compliance program.
1. Start Early
It’s never too early to begin documenting your financial reporting controls. Proactively beginning this process gives you more time to address issues with control design, identify and resolve control gaps, and reduce the strain on the employees involved. If you wait until SOX compliance is required, significant deficiencies or material weaknesses may be identified during the financial statement audit, when there may not be enough time to remediate them.
For digital asset companies, starting early is particularly important because transactions may pass through several systems before reaching the general ledger. A transaction may originate on a blockchain, be reflected by an exchange or custodian, flow through a digital asset subledger, and then be recorded in the accounting system. Understanding how that information moves, where it changes, and how it is reconciled can help management identify gaps before they become larger financial reporting issues.
Companies should also have a process for monitoring new accounting and regulatory developments. The Financial Accounting Standards Board has proposed guidance addressing the application of the cash-equivalent definition to certain digital assets and is separately considering guidance involving wrapped tokens and transfers of crypto assets. These projects are not current GAAP, but companies should be prepared to evaluate new guidance if and when it becomes effective.
2. Set the Tone at the Top
Controls over financial reporting affect employees throughout a company, whether directly or indirectly through entity-level and information technology controls. It’s important that the board of directors and executive management foster an environment of accountability throughout the organization. While management is responsible for assessing the effectiveness of the company’s controls, employees should understand their roles and how their work may affect the SOX program.
For digital asset companies, that responsibility often extends beyond the accounting department. Treasury, operations, information technology, information security, compliance, and legal personnel may each play a role in the transaction process.
Responsibilities should be clearly defined for areas such as wallet administration, private-key access, transaction authorization, custody arrangements, and exchange access. Appropriate segregation of duties should also be considered so that incompatible responsibilities are not concentrated with one person or team.
3. Quality Over Quantity
Documenting and testing key internal controls over financial reporting can become cost prohibitive and difficult to manage. When it comes to key controls, having the right controls is more important than having a large number of controls. An unmanageable SOX program often results from documenting every control and business process. Choosing an appropriate framework, such as the COSO Internal Control–Integrated Framework, can help companies focus on the controls that address their significant financial reporting risks.
Digital asset companies should tailor their controls to their business and custody model. Depending on the company’s activities, relevant controls may address wallet and private-key administration, authorization of asset transfers, completeness and accuracy of blockchain or custodian data, reconciliation to the general ledger, ownership rights, valuation sources, staking or lending activity, customer assets, and financial statement disclosures.
Third-party service providers may also play an important role in financial reporting. When a SOC report is relevant, management should understand the services and controls it covers, the period covered, applicable complementary user entity controls, and the involvement of subservice organizations. Obtaining a SOC report does not replace management’s responsibility to understand how the service affects the company’s financial reporting.
4. Involve Your Financial Statement Auditors
Involve your external auditors early in the process. To express an opinion on the effectiveness of internal control over financial reporting, the auditor must perform independent procedures and obtain sufficient evidence to determine whether material weaknesses exist. Management remains responsible for designing, implementing, and evaluating the company’s controls, and any assistance provided by the auditor must remain consistent with applicable independence requirements.
Good communication among the company’s internal team, any third-party internal audit or consulting group, and the external auditor can help prevent delays. An effective communication strategy should address the financial reporting cycles and systems in scope, the expected deliverables, and the project timeline. Regular planning and status discussions can help identify issues before they affect the overall implementation.
For digital asset companies, these discussions may also cover wallet structures, custody arrangements, transaction flows, off-chain activity, internal subledgers, blockchain information, valuation sources, and reliance on third parties.
Blockchain information may help show that a transaction occurred at a particular address, but additional evidence may be needed to address the company’s rights to that address, the completeness of its wallet population, and the appropriate accounting for the transaction.
5. Keep Your Controls Up to Date
Once controls are identified, documented, and implemented, they should be revisited periodically to ensure they remain current. In an environment of rapidly developing technology, products, and regulation, controls may change quickly and create financial reporting risks that were not anticipated during the initial implementation.
For digital asset companies, this reassessment may be appropriate when the company adds a new token or blockchain, changes custodians, introduces staking or lending, deploys a smart contract, modifies its wallet structure, or enters a new line of business. Cybersecurity incidents, protocol failures, and service-provider disruptions may also affect the company’s controls and disclosures.
The SEC’s recent digital asset actions demonstrate how quickly the regulatory environment can change. In 2026, the SEC issued an interpretation addressing the application of federal securities laws to certain crypto assets and transactions, including protocol mining, protocol staking, airdrops, and wrapping.
The SEC also proposed a tailored offering framework for certain investment contracts involving crypto assets, granted temporary conditional relief involving certain tokenized securities venues, and proposed modernizing its transfer-agent rules. These actions do not directly change SOX 404, but they may affect a company’s products, processes, systems, and disclosures.
The SEC has also proposed allowing reporting companies to elect to file a new Form 10-S in lieu of quarterly reports on Form 10-Q. Because the proposal is not effective, companies should continue to follow the current reporting framework while monitoring the rulemaking. Even if reporting frequency changes, internal controls should continue to operate at a frequency appropriate for the risks they address.
What Can I Do Now?
One option that can make the process more manageable, while allowing management to continue focusing on operating and growing the company, is to engage a qualified third-party consultant to assist with the identification and documentation of SOX controls.
A third party can help identify key financial reporting cycles, document existing controls, identify control gaps, and assist with remediation. A third-party can also provide training to the board and management so they understand their responsibilities in implementing and maintaining SOX 404.
For digital asset companies, the advisor should understand traditional SOX requirements as well as the company’s custody arrangements, wallet activity, blockchain and off-chain records, specialized accounting systems, valuation sources, and related financial statement disclosures.
Starting early and focusing on the controls that address the company’s actual risks can reduce disruption, improve financial reporting, and create a stronger foundation as the company grows.
Build a Stronger Foundation for SOX 404 Compliance
SOX 404 compliance doesn’t have to slow your growth. With the right approach, companies can establish a strong internal control framework that supports scalable, reliable financial reporting.
Wolf & Company’s Digital Assets team helps organizations identify key risks, document and evaluate controls, address gaps, and strengthen governance practices. Our team brings deep experience across complex financial reporting environments, helping clients build sustainable compliance programs and prepare for future growth with confidence.
Whether you’re enhancing an existing program or preparing for new compliance requirements, we provide practical guidance tailored to your business.
Reach out to learn how Wolf can help you build a stronger control environment.
