SOX ups public companies' audit costs by 135%

Arkansas Business, Sept 19, 2005 by Mark Friedman

DELTIC TIMBER CORP. OF El Dorado might have discovered one of its employees falsifying documents earlier if the Sarbanes-Oxley Act of 2002 had been in place sooner.

The Sarbanes-Oxley Act of 2002, which went into effect in 2004, requires publicly traded companies to adopt more and stricter accounting practices. As a result, Arkansas' public companies shelled out tens of thousands--in some cases millions--more dollars to auditors in 2004 than they had in 2002 to comply with SOX.

Deltic has complied with SOX since 2004 but didn't discover until the summer of 2005 that it had misstated its earnings for 2002 through 2004 by a total of $1.3 million.

In documents filed with the Securities & Exchange Commission, Deltic said it learned of the error when the procurement manager for the company's Ola sawmill told senior managers that he overstated some of the volume of the tracts of timber inventory.

Deltic fired the manager and redid its audits for 2002 through 2004, which brought to light the loss. The restatement increased the company's loss in 2002 to $13.9 million and lowered its net income to $8.2 million in 2003 and $11 million in 2004.

Deltic's investor relations manager, Matthew Hegi, said the concealment might have surfaced earlier if SOX had been around in 2001.

"The longer time period that something is under investigation, the better chance that it would be caught," Hegi said.

But the stricter accounting rules come at a much higher cost.

Arkansas Business reviewed the proxy statements for fiscal years 2002, 2003 and 2004 of 10 publicly traded companies headquartered in Arkansas and found the companies paid a total of more than $12.3 million in audit fees alone between 2002 and 2004--an increase of nearly 135 percent.

"Sarbanes-Oxley requires significantly more audit work, and I think audit firms view it as a chance to differentiate their product and substantially increase the audit fee," said Vernon Richardson, an accounting professor at the University of Arkansas at Fayetteville's Sam M. Walton College of Business. "And I think that's happening across the board for everyone subject to Sarbanes-Oxley."

Public companies have to keep in mind that work required by auditors has increased "many times over," said Christi Harlan, a spokeswoman for the Public Company Accounting Oversight Board of Washington, D.C., which was created to oversee audits of public companies filing reports with the SEC.

"And we've heard in some cases it could be rather expensive steps," Harlan said.

The goal of the process is to provide investors and potential investors with the most accurate and reliable financial statements.

Costs

Simmons First National Corp. in Pine Bluff spent nearly $290,000 in audit fees in 2004, about 68 percent more than it paid its auditor, BKD LLP of Springfield, Mo., in 2002.

"Whether it's worth it or not is yet to be determined," said Bob Fehlman, Simmons chief financial officer.

While there may have been some additional costs involved in ramping up the new levels of compliance and internal control, Fehlman said he doesn't expect the audit fees to drop anytime soon.

Simmons also spent 2,000 hours setting up the procedures to meet SOX requirements, he said.

SOX's Section 404 requires managers to report on their assessment of the company's internal control systems. Then the auditors swoop in and audit the managers' assessment.

Because Simmons is a bank holding company with both state and national charters, it is subject to several regulatory agencies anyway, from the Federal Deposit Insurance Corp. to the Office of the Comptroller of the Currency to the Arkansas State Bank Department.

"So we had a pretty established strong internal control system in place, but we did have to do quite a bit with SOX 404," he said. "It's just the cost of doing business. It's another expense."

Other companies have blasted the expense of the new accounting burdens.

"The considerable additional external costs of Sarbanes-Oxley Section 404 compliance hit us particularly hard in the fourth quarter, with expenses of over $700,000," T. J. "Skip" Falgout HI, chairman and CEO of America's Car-Mart Inc. of Bentonville, said in a July news release. "If it wasn't for these Sarbanes-Oxley expenses, our year-over-year (earnings-per-share) growth would have been comparable to our rate of revenue growth."

America's Car-Mart's most recent proxy shows it paid Grant Thornton LLP of Chicago $154,189 in audit fees for the fiscal year that ended April 30, 2004, and $138,450 for its fiscal year that ended in April 2003.

Public companies had to comply with SOX Section 404 rules if their fiscal year ended on or after Nov. 15, 2004. Arkansas Business did not chart the growth in audit fees for Tyson Foods Inc. of Springdale because its last fiscal year ended Oct. 2, 2004, before Section 404 took effect. However, its auditing fees rose 40 percent between 2002 and 2004--from $2 million to $2.7 million--according to its proxy statement.

Rise of SOX

After several corporate financial scandals revealed weaknesses in accounting regulation and compliance, Congress adopted the Sarbanes-Oxley Act in 2002.