Risk & Compliance

What’s Next? Investor Thoughts on Sarbox Costs

The costs of the Sarbanes-Oxley Act have leveled off a bit, but companies and investors differ on what should happen next.
Alan RappeportAugust 3, 2007

The cost of complying with the Sarbanes-Oxley Act may be tapering off, but the expense still weighs down some balance sheets, according to a new report by Foley and Lardner, a law firm specializing in corporate compliance. Investors, however, do not seem to mind.

From 2005 to 2006, average Sarbox-related audit fees increased by between 4 percent and 6 percent after years of double-digit hikes, says the report. Still, fees to auditors increased by 59 percent between 2003 and 2006.

The slowing increase has been widely attributed to companies acclimating to the new regulations. Indeed, a study released in May by Financial Executives International found that the cost of complying with Sarbox fell by 23 percent in 2006 as audit fees began to flatten. Yet the Foley report finds that Sarbox costs continue to creep up, albeit at a slower pace. For example, “out-of-pocket” expenses — such as audit fees, board compensation, insurance, and legal fees — increased by 12 percent in 2006 after a decline of 5 percent the year before (for large companies). “The increase in out-of-pocket costs has been high,” said Tom Hartman, director of the study, during a conference call Thursday. “In fact, there has been an increase that exceeds that of inflation.”

Audit fees represent more than 47 percent of the compliance costs for public companies with less than $1 billion in annual revenue, and more than 60 percent for firms making more than $1 billion, according to the report. “We have an oligarchy in the market right now,” Hartman said of auditors. “I think absolutely these costs make U.S. companies less competitive.”

Hartman did acknowledge that the controversial Section 404 shoulders most of the blame for Sarbox’s high-cost reputation; however, he also pointed out that the increased regulation has improved the reputation and trust investors have in American companies. Further, large companies have proven to be better equipped to handle the tougher scrutiny, he said.

Despite the corporate backlash against Sarbox, many investors seem pleased with the law. Last week, in advance of Sarbox’s fifth anniversary, the Center for Audit Quality released a report that found that 79 percent of investors felt Sarbox has bolstered their confidence in financial information, while 62 percent said the act should not be changed. More specifically, the survey of 1,000 investors found that 79 percent think the required independent audit committees have been effective, 76 percent think the Public Company Accounting Oversight Board does a good job, 76 percent approve of companies disclosing their internal controls, and 74 percent think CFOs and CEOs should continue to certify financial reports.

The sentiment of the CAQ findings was confirmed by another survey released last week by Pepperdine University’s Graziadio School of Business and Management. That survey found that 57 percent of investors believe the Sarbox requirements that hold senior executives and managers responsible for accurate financial information are effective, and 32 percent think the rules could be tougher. Just 8 percent said Sarbox goes too far.

“Sarbanes-Oxley’s intent aligns well with investors’ expectations that corporate management adhere to higher standards of conduct and transparency,” says Dr. Linda A. Livingstone, dean of Graziadio, “and that there should be serious consequences for wrongdoing.”

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