Risk & Compliance

Sarbox 404 Costs 63 Percent Higher than Expected

Companies are spending more on consulting, auditing, and labor than they projected in January, according to a new survey by Financial Executives In...
Stephen TaubAugust 12, 2004

Companies seem to be shelling out much more money than they had figured on to comply with Section 404 of The Sarbanes-Oxley Act.

The provision, which goes into effect Nov. 15, will cost public companies 63 percent on average more than they had previously thought, according to a new survey by Financial Executives International (FEI).

FEI in July surveyed 224 public companies with average revenues of $2.5 billion. According to the trade group, the total cost of compliance with 404 is now estimated at $3.14 million. That’s almost 63 percent more than the $1.93 million estimate identified in FEI’s January 2004 survey.

The increase in Section 404 compliance costs stems from unexpected burdens experienced in connection with the two major requirements of the provisions. First, each company’s annual report must contain a statement of management’s responsibility for an adequate internal-controls structure and procedures for financial reporting and management’s assessment of the effectiveness of those procedures.

Second, the provision requires the company’s auditor to report and sign off on that assessment of the effectiveness, in accordance with standards set up by the Public Company Accounting Oversight Board (PCAOB).

For the first requirement, many companies are documenting internal controls for 92 percent of total revenue, the survey showed. Moreover, it turns out compliance with 404 will take up twice as many employee hours as they thought — 25,667 versus the 12,265 projected in January. These increases contribute to a 109-percent rise in the internal costs.

In addition, companies also expect to pay 40 percent more in fees to external auditors, the study found. In January, survey respondents estimated an average $590,100 in fees to their auditors to attest their internal controls. In July, the average projection for attestation fees was $823,200 — on top of annual audit fees.

Another reason for the revised compliance costs is a 42-percent jump in other external costs, such as an average added $1.037 million for software and IT consulting.

Over the past year or so, some studies have documented the large added costs that companies have incurred from complying with the provision, whose implementation has already been delayed twice.

The delays contributed in large part to executives’ higher cost projections in July. “When we conducted our January survey, audit firms hadn’t yet provided their clients with complete estimates for Section 404 work because the auditing standards had not been finalized,” said Colleen Sayther, president and CEO of FEI, in a statement. “Now that the standards are finalized and implementation efforts are further along, compliance costs can be more accurately determined.”