Risk & Compliance

Study: Costs of 404 Drop 23 Percent

The amount of time and money spent inside companies saw double-digit declines, but external audit fees for 404 remained high.
Stephen TaubMay 16, 2007

The cost of compliance with Section 404 of the Sarbanes-Oxley Act continues to decline, according to a new study by Financial Executives International.

FEI surveyed 172 accelerated filers — companies with a market capitalization above $75 million — and found that the average cost in 2006 was $2.9 million, 23 percent lower than a year earlier. More specifically:

• Survey respondents said they required an average of 18,070 internal employee-hours to comply with 404, a 10 percent decrease compared with 2005.
• Respondents also cited an average of 3,382 external worker-hours (other than from their external auditor), a 14 percent decrease.
• Auditor attestation fees for Section 404, paid in addition to annual financial-statement audit fees, averaged $1.2 million, a decline of only 0.8 percent from a year earlier.

In year three of Sarbanes-Oxley compliance, total compliance costs were 35 percent lower than in year one, “largely attributed to increased efficiencies, a positive learning curve, and technical systems and software rollouts,” said FEI president and chief executive officer Michael Cangemi, in a statement. “We are hopeful that pending guidance from the SEC and PCAOB will further reduce 404 expenses.”

Other notable survey findings:

• Total compliance costs for respondents with centralized operations averaged $1.7 million in 2006; companies with decentralized operations shelled out an average of $4 million.
• Though only 22 percent believe the benefits of 404 outweigh the costs, that number is half again as much as the 15 percent who said so in last year’s survey.
• 60 percent agree that compliance with 404 has resulted in more investor confidence in their financial reports.
• 46 percent say that financial reports are more accurate, and 48 percent say that financial reports are more reliable.
• 34 percent agree that compliance with 404 has helped prevent or detect fraud.