Sarbanes-Oxley Implementation: Painful And Costly

Implementation of the Sarbanes-Oxley Act of 2002 is costing corporate America a bundle, for everything from public relations to insurance to fees for attorneys, directors and auditors. Some companies will double their expenses in these areas this year as they struggle to comply with the sweeping reform legislation.

The Financial Executives Institute reported earlier this year that a poll of $1 billion firms headquartered in Chicago and New York found that most are finding compliance with the mandates to be painful and costly. The study, conducted by the Johnsson Group, reported that companies are adding management layers and their board’s auditing committees are undertaking unprecedented reviews of accounting policies.

Companies with sales under $3 billion annually are spending as much as twice what they did in the past in their attempt to comply with the legislation, which was passed to eliminate conflicts of interest among corporate executives, accountants and directors.

A recent survey by the law firm of Foley & Lardner confirms the increase in the cost of being a public company. In their survey of mid-cap companies, Foley & Lardner discovered the following:

  • The average price of being a publicly traded company has close to doubled, from $1.3 million to almost $2.5 million
  • Two-thirds of the increase is attributable to Directors and Owners Insurance, which has grown from an average of $329,000 per year to $639,000 per year
  • Accounting fees have doubled from $243,000 to $499,000 on average
  • Legal fees have jumped from an average of $210,000 to $404,000

"The law was intended to address high-profile scandals at very large companies," said Michael A. King, a partner at Weil Gotshal & Manges, "yet it is having the unintended consequence of hurting the small-cap and mid-cap companies."

"There are more "I"s to dot and "T"s to cross under Sarbanes-Oxley," said James Cox, a professor of law at Duke University. "It's a lot harder than it was in the old days to blow smoke."

Vishay Intertechnology Inc., maker of computer chips, expects to spend as much as $4 million this year on Sarbanes compliance.

Premiums on insurance to protect corporate executives and officers from lawsuits are expected to climb by 1000 percent, according to Aon Corp., the second-largest insurance broker.

"The increases have been enormous," said Lance Kimmel, a partner at Foley & Lardner. "Are companies grousing about it? Yes."

It seems also that the new corporate accountability culture is causing companies to spend more time as well as money to make sure the mandates are met.

"With a number of our clients, meetings with audit committees that occurred three to four times a year for 1 hour, are now taking place five to six times a year for 3 to 4 hours," said Robert Wade, a spokesman for accounting firm KPMG LLP.

Not wanting to appear less than forthcoming in complying with the law’s strict disclosure provisions, some companies, like McClatchy Co., owner of the Sacramento Bee newspaper, ponder appearances of impropriety under the law.

"We're always mindful of the disclosure climate under Sarbanes-Oxley, so I wanted to report that one of our reporters gave a sheep and 30 chickens to Peshmerga rebels in northern Iraq," McClatchy CEO Gary Pruitt said on the company's quarterly earnings conference call April 15.

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