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The Cost of Being Public

A new study calculates that compliance and governance costs eased this year for companies of all sizes, though they remain much higher than they were before Sarbanes-Oxley.
Marie Leone, CFO.com | US
June 15, 2006

What does it cost a company to be public? A new study estimates that companies with less than $1 billion in revenues spent $2.9 million in 2005 for the privilege of a listing, down 16 percent from the previous year, when the total added up to $3.4 million. Companies with more than $1 billion in revenues paid on average $11.5 million in 2005 to be public, a drop of 6 percent from the prior year, when being public cost $12.3 million.

The report was released Thursday morning by the law firm Foley and Lardner, which has conducted the study annually since 2002. The firm's cost-of-being-public calculation includes the cost of directors and officers insurance, audit and legal fees, board compensation, lost productivity, corporate governance setup costs, and "other" Sarbanes-Oxley-related costs.

Before the wave of reforms that culminated in the passage of the Sarbanes-Oxley Act, smaller companies paid an average of $1 million to be publicly-held, the study notes. That cost jumped 80 percent to $1.9 million in 2002, the year the Sarbanes-Oxley Act passed. The rise continued for the next two years, hitting $2.6 million in 2003, and peaking at $3.4 million in 2004. All in, smaller companies saw the cost of being public jump 174 percent since passage of the Sarbanes-Oxley Act, says study author Thomas Hartman.

In 2002 and 2003, D&O insurance was the most costly item for smaller companies, reaching $639,000 and $850,000 in those years, respectively. By 2004, audit fees outpaced D&O insurance premiums, reaching $1 million in 2004, and then $1.2 million in 2005. Audit fees have continued to rise, indicating that the initial implementation costs of Section 404 of the Sarbanes-Oxley Act in 2004 have not eased in 2005, noted the study. On average, audit fees have increased 270 percent between 2001 and 2005 for smaller companies.

Governance set-up costs, by contrast, are now relatively low, costing smaller companies $77,000 in 2005, down 58 percent from the previous year. The set-up fees proved to be one-time expenses, rising in years in which various provisions of the Act were phased in. In 2005, average legal fees for smaller companies were $131,000, while board compensation averaged $295,000, and lost productivity added up to $563,000 per company.

Since 2001, lost productivity at smaller companies has increased more than 1,100 percent, and represents the second-highest cost area for companies with under $1 billion in revenue, behind audit fees.

For larger companies, audit fees topped the list in 2005, costing them, on average, $5.8 million. Lost productivity came in at $2.5 million that same year, while large companies shelled out $1.8 million in D&O insurance, and $743,000 in board compensation in 2005. Governance set-up costs for big companies averaged only $226,000 last year, about a 50 percent decrease from 2004. Legal fees and lost productivity for large companies also declined from the 2004 estimates, dropping by 44 percent and 16 percent, respectively. As with smaller companies, lost productivity represented the second-highest cost for big companies. Audit fee costs were number one.




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