VideoLegal costs are also on the rise, although CFOs say they are not generally as onerous as audit fees. Magma Design Automation Inc. CFO Greg Walker expects to spend an incremental $200,000 to $300,000 for legal work in the next 12 to 18 months, including efforts to monitor compliance, set up a whistle-blower program, and train employees. That's on top of an additional $750,000 in audit and consulting fees. On average, legal fees nearly doubled, to $404,000, between 2002 and 2003, according to an April survey by law firm Foley & Lardner.
Ranking low on the list of costs is software. Forty percent of finance executives say compliance will not affect their IT budgets, while another 25 percent say it will involve minimal IT costs, according to a CFO IT survey. "Tools are often bundled with consulting fees; I don't think [software is] an integral part of the solution," says Kim Roll-Wallace, vice president of consulting for The Johnsson Group Inc. EMC, in fact, uses Excel. "We've found it works quite well in this regard," says chief accounting officer Mark Link, largely because "everyone already knows how to use it."
Multiple Price Tags
Then there are the indirect costs. The requirement to disclose off-balance-sheet structures more clearly has encouraged some companies to bring these structures on the balance sheet and others to collapse them entirely. Financial experts have become hot properties now that companies are required to disclose if they have one on their board. Restrictions on nonaudit work that a company's auditor can perform has left CFOs scrambling for new tax consultants. Meanwhile, the whistle-blower provision has sparked untold numbers of costly internal investigations.
Of course, there's also an opportunity cost associated with compliance activities. In fact, 33 percent of respondents say they've delayed or canceled projects as a result of Sarbanes-Oxley. Internal staff development is the most common casualty. Moreover, executives say the focus on compliance has also left them frazzled, with less time to mull strategic decisions, as compliance efforts absorb more than 10 percent of a CFO's time in roughly 4 out of 10 companies.
One example of the strain: LCC's Perkins says he has made more lengthy and complicated trips, partly to spearhead compliance efforts across operations at more than 10 locations in six countries. "Instead of being a business partner and doing all the positive things you'd like to do, you're doing the negative things, like triple-checking a filing," says Perkins. In fact, he says he might have thought twice about taking his job at the $100 million wireless-services firm last January if he had known how much compliance-related work it would involve. "I did not anticipate when I joined this company that I would become a surrogate for the SEC," he says.
And this is just the beginning. About 35 percent of survey respondents expect annual compliance efforts to absorb at least $500,000 of their revenues and more than 10 percent of their time going forward, thanks in large part to Section 404's mandate for ongoing controls testing and auditor attestation. That's not counting, of course, the price of changing auditors every five years, as Sarbanes-Oxley mandates.
No one should look for additional relief from the SEC. Glassman says she believes changes could be a possibility "if we start hearing that companies are spending a lot of money to comply but there are no apparent benefits, or if we hear there are more efficient ways to accomplish the same objectives." However, there are no formal efforts under way within the government to test cost assumptions, and she says such a study would be hard to design. "It's a very difficult equation. The costs are explicit. There's also some distraction from running the business. But the benefits are very intangible."
No Guarantees
Indeed, survey respondents are about evenly split on whether going through the compliance process has yielded internal benefits, such as more-efficient processes or more respect for the finance department. "It's a constant struggle to try to get benefit out of 404 work," says consultant Roll-Wallace. "In any given company, about 50 percent is work that puts in best practices and the other 50 percent is a dog-and-pony show, putting everything into a neat package for the auditors."
There may be some external benefits, however, says Magma's Walker. The legislation has sped up his time frame for reporting improvements at the $75 million company, he says, but to good effect. "I probably do better deals with customers — the earlier you can detect issues, the better you can structure a contract," he says. And there may be spillover effects, says Borland's Hahn, who is hoping to leverage his new director of financial governance as a "process-improvement specialist."
As for the SEC's larger goal of improving investor confidence, though, there's little agreement on how that will be achieved. On one hand, "you're more confident that senior people are taking extra care to derive the best possible information," says Robert D. Spremulli, a TIAA-CREF senior analyst. But it's hard to see the direct effects of those sentiments, given the multivariate nature of the market. Indeed, major indices showed varying degrees of improvement on Sarbanes-Oxley's one-year anniversary, with the Nasdaq composite index closing up 30 percent from its year-earlier level, but the New York Stock Exchange, the S&P 500, and the Dow Jones Industrial Average up by only 8, 8, and 6 percent, respectively.
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