SOX Costs Sock Small Firms

Smaller companies may have received multiple extensions for full compliance with the Sarbanes-Oxley Act of 2002 (SOX), but they aren't getting any favors when it comes to its costs.

"The Cost of Being Public in the Era of Sarbanes-Oxley," a study from Foley & Lardner LLP, found that since 2001, the average cost of SOX compliance for companies with under $1 billion in annual revenue has increased more than $1.7 million to about $2.8 million.

Foley's fifth annual study on SOX costs revealed that while internal costs have gone down, other out-of-pocket expenses, such as audit fees, board compensation, and legal fees, rose over the past year, and, on average, external audit fees have increased 271 percent between fiscal years 2001 and 2006 for companies with under $1 billion in revenue.

The study actually found that SOX compliance costs decreased during fiscal year 2006. But despite the decrease, compliance costs have been rising since 2003, with Section 404 compliance costs responsible for most of the uptick. According to Foley, total fees paid to auditors jumped 59 percent between FY 2003 and FY 2006.

While overall SOX compliance costs have "plateaued," Foley said the out-of-pocket costs facing public companies increased between FY 2005 and FY 2006, driven by increased audit fees, board compensation, and legal fees.

Audit fees alone now represent more than 47 percent of out-of-pocket costs associated with corporate governance compliance for public companies with less than $1 billion in annual revenue and 60 percent for companies earning more than $1 billion annually. In FY 2006, audit fees leveled off for companies of all sizes with relatively modest year-over-year increases, Foley found. Also, the percentage increase in average audit fees was relatively consistent for all companies analyzed, with a five-percent increase for small-cap companies, a four-percent increase for midcaps, and a six-percent increase for S&P 500 firms.

Copyright ARMA International Mar/Apr 2008
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