SOX Causes Jump In Audit Costs, But Benefits Seen

As companies struggle to meet the demanding mandates of the 2002 Sarbanes-Oxley Act, some executives are griping that the costs outweigh the benefits.

But of course not everyone agrees, and some business leaders say the benefits of increased transparency are worth the costs.

Not only are companies watching their audit bills rise – 45 percent was the average increase at the 100 largest U.S. companies – but the costs are also seen in stress and lost productivity, as employees divert attention away from their usual activities and focus on the details of their company's books.

According to a survey of 321 companies by Financial Executives International, which represents CFOs and treasurers, companies spent an average of $4.3 million to meet the internal-control requirements of Sarbanes-Oxley last year, Bloomberg News reported.

Executives from big and small companies attended a roundtable discussion on the law hosted by the Securities and Exchange Commission Wednesday in Washington, D.C. The U.S. Chamber of Commerce lobby is pushing the SEC and the Public Company Accounting Oversight Board to ease the rules, which were created in the wake of a series of accounting scandals at Enron and other companies.

While the authors of the law and SEC Chairman William Donaldson have said it is unlikely the rules will be weakened, Donaldson has been open to criticism, especially by smaller businesses that had the hardest time meeting the new deadlines.

Most of the complaints center on Section 404, which require auditors to verify that a company's internal controls are effective. That meant reviewing the control systems, which took audits more time and cost companies more money.

The higher costs hit smaller companies hard. According to USA Today, Priority Healthcare, a pharmacy and health-treatment distributor, saw 491 percent higher audit and audit-related fees of $1.1 million in 2004. That figure includes $811,200 to comply with Section 404. Aaron Rents, which rents everything from consumer electronics to office furniture, saw audit and audit-related fees jump 287 percent.

General Electric Co. spent $33 million in 2004 on Section 404 controls, and the audit fee it paid to KPMG rose 41 percent to $78.2 million, according to GE. “One reason for that increase is the Sarbanes-Oxley process,” GE spokesman David Frail told Bloomberg. “But on the whole, after all the scandals, Sarbanes-Oxley has been a good thing.'”

In fact, the Huron Consulting Group Inc., said that the Sarbanes-Oxley rules led to financial restatements of about 200 companies last year.

“Given everything I've seen to date, it seems to me that the wisdom of Section 404 has been reinforced 100 times over,” says SEC Chief Accountant Don Nicolaisen

“Section 404 is really the glue that holds the different parts of Sarbanes-Oxley together,'' says Bob Lipstein, national partner at New York-based KPMG. “But it was a steep learning curve for everyone."

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