Risk & Compliance

Audit-rate Spurt Tempers Sarbox Savings

FEI study finds that companies continue to spend less on 404 compliance, and audit fees, but hourly audit rates climb 5 percent.
Stephen TaubApril 30, 2008

Corporate spending on compliance with the Sarbanes-Oxley Act’s Section 404 fell sharply again last year, and so did overall auditor costs. But a 5-percent spurt in average audit fees cut deep into the savings, according to a new survey from Financial Executives International.

The average cost for Section 404 compliance was $1.7 million during fiscal 2007, the FEI study said. While the group noted that direct comparisons with prior-year costs couldn’t be made because of variations in the respondent pool, it suggested that the average compliance cost was around $2.9 million in 2006, and $3.8 million in 2005.

“As companies continue to find efficiencies in complying with Section 404 and make compliance part of a routine practice, we have seen a continued decline in costs,” said FEI President and CEO Michael P. Cangemi. “While 404 auditor costs also declined 5.4 percent as the auditor scope of work narrowed, these costs were offset by a reported 5 percent increase in the average hourly audit rate charged by auditors.”

For accellerated filers — those with market capitalization above $75 million — overall audit fees did rise 1.8 percent, averaging $3.6 million, however, the study showed.

FEI polled 185 companies to gauge experiences in complying with Section 404. This included 168 filers of the accelerated type. Responding companies had average annual revenues of $4.7 billion.

The Securities and Exchange Commission, too, is working to develop cost/benefit information on Section 404. Its survey is supposed to be released this summer, reflect a delay reflecting that smaller, nonaccelerated filers don’t yet have to comply with part of 404.

How did companies cut their compliance costs? One way, the FEI survey found, was that the reported a drop in both internal and external person-hours, and well as auditor attestation fees. For example, companies reported requiring an average of 11,100 person-hours internally to comply with Section 404 in 2007, a decrease of 8.6 percent from the previous year.

In addition, companies reported requiring an average of 1,244 external person-hours to comply with Section 404 in 2007, down 13.7 percent from the prior year of compliance.

In general, auditor attestation fees paid by accelerated filers in 2007 constituted 23.7 percent of the filers’ total annual audit fees, and averaged $846,000, representing a 5.4 percent decrease from 2006.

FEI’s survey also found that respondents with centralized operations had lower total costs of compliance in 2007 than did those with decentralized operations. For example, total average 2007 compliance costs for companies with centralized operations were $1.3 million. Total average 2007 compliance costs for companies with decentralized operations were $1.9 million, 30.1 percent higher than for those with centralized operations.

“FEI has championed a number of suggested improvements to increase efficiency in Section 404 compliance, while maintaining effectiveness,” said Cangemi. “The results from this survey demonstrate that, overall, auditors appear to be on course to achieve that goal.”

Survey participants also seemingly gave Section 404 in general the thumbs up for effectiveness. This is significant, since many finance executives and attorneys had to be dragged into the process kicking and complaining.

For example, roughly half of the respondents agreed that financial reports are more accurate; up from 46 percent in 2006.

About 56 percent agreed that financial reports are more reliable, up from 48 percent in 2006.

Interestingly, nearly 44 percent agreed that compliance with Section 404 has helped prevent or detect fraud, up from about one-third the prior year.

And perhaps most significantly, nearly 7 of 10 respondents said that compliance with Section 404 has resulted in more investor confidence in their financial reports, up from 60 percent in 2006.