SOX Accounting Expensive for Fortune 1000 Companies
Sarbanes-Oxley Act (SOX) has increased the auditing costs by $1.4 billion, collectively, for Fortune 1000 firms based on figures reported as of April 27, 2005. Two professors at the University of Nebraska-Omaha (UNO), report that 633 Fortune 1000 firms have paid more than $3.6 billion for 2004 audits so far, compared to $2.2 billion the previous year.
To comply with SOX, public firms, including those in the Fortune 1000, were required to complete their first audit of internal controls as well as audits of their historical financial statements, in 2004. The Securities and Exchange Commission (SEC) previously estimated that internal controls requirements costs would add $91,000 to auditing costs excluding the fees for internal control audits. At $2.2 million, the average audit fee was considerably higher than SEC estimates. Audit fee increases are only part of the effect SOX compliance has had on publicly traded companies, however, not all increases in audit fees are attributable to SOX, according to the UNO professors.
“One limitation of our analysis is our inability to clearly identify what portion of the audit fee increase is due to the SOX internal control audit fees,” Dr. Susan Eldridge, Assistant Professor in Accounting, told Newswise. “We had hoped to find most companies providing disclosures of those SOX audit costs, but only slightly more than 10 percent of companies actually reported the portion of their 2004 audit fee that was attributable to the new internal control audit requirement. For the 71 companies in our sample that did report actual internal-control (SOX) audit fees, these fees averaged $2.6 million. These firms had an average total audit fee increases of $2.6 million, indicating that for these firms, their entire audit fee increase was due to the new SOX internal control audits.”
Twelve of the 633 firms analyzed had audit increases exceeding $10 million. One company reported no change from 2003 fees. Eleven companies actually had lower audit fees than they reported in the previous year.
Drs. Susan Eldridge and Burch Kealey of UNO’s accounting department helped develop the text-mining and data extraction software that made the hundreds of hours of data collection manageable, also looked at whether increases varied by industry. They found that key industries experienced the following audit fee increases:
- Retail – up 180 percent
- Utilities – up 105 percent
- Energy – up 100 percent
- Pharmaceutical – up90 percent
- Insurance – up 72 percent
- Banks – up 65 percent
“Patterns of increase seem to vary by industry in a predictable manner,” Dr. Healey told Newswise. “You would expect insurance companies and banks to have strong internal controls because of regulatory financial audits, relatively centralized transactions and increased automation. These companies face greater risk from fraud attempts than perhaps retail companies and this likely had stronger internal controls and documentation of these controls than other industry groups.”