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Compliance Costs Continue to Rise

By ALM Staff | Law Journal Newsletters |
July 29, 2004

The law firm of Foley & Lardner has just completed its second annual survey detailing the financial implications of the Sarbanes-Oxley Act (SOX). The survey shows that the average cost of being public for a company with annual revenue under $1 billion in the wake of corporate governance reform has increased $1.6 million (130%) from the inception of SOA through fiscal year 2003, including an increase of $736,000 during FY 2003.

Some of the other more significant findings are that:

  • Contrary to some predictions, the overall costs increases associated with corporate governance reform in FY 2002 were not a one-time event. Costs continued to increase in FY 2003 and, in the case of director compensation, actually accelerated.
  • Not only do the costs associated with corporate governance reform continue to be significant, but executives surveyed feel these costs are increasingly unpredictable.
  • Section 404 compliance was overwhelmingly cited by survey respondents as the area having the most significant financial impact on public companies, followed by legal expenses and D&O insurance.
  • Fees paid to outside auditors have continued to increase by double digits year over year since the enactment of the SOA in 2002. In fact, of the companies analyzed, audit fees increased an average of 23% between FY 2002 and FY 2003.
  • Non-audit fees paid to accountants continued to decline between FY 2002 and FY 2003 for the companies studied, averaging a 20% decrease between FY 2002 and FY 2003.
  • The increase in accounting fees witnessed in FY 2002 was not a one-time event. The increase in accounting fees related to SOA compliance has been steady and sustained.
  • The requirements of Section 404 are one element that is having an impact on accounting fees, particularly for the S&P 500 companies. The increase is likely to continue to have an impact as companies prepare for their FY 2004 audit.
  • The increase in annual director fees is increasing at a faster rate in FY 2003 than they did in FY 2002. For small-cap companies, director fees increased by 9% in FY 2002 and 19% in FY 2003. For mid-cap companies, director fees increased by 12% in FY 2002 and 16% in FY 2003. For S&P 500 companies, the increase in director fees was 9% in 2002 and 15% in 2003.
  • Based on a survey of public company executives, the average costs associated with lost productivity, board compensation and D&O insurance experienced the largest percentage increase between FY 2002 and FY 2003 for public companies surveyed with annual revenue under $1 billion. Those fees increased by an average of 72% (lost productivity), 48% (board compensation) and 33% (D&O).
  • 54% of respondents feel that corporate governance and public disclosure reforms have increased their company's overall administrative expenses, as compared with 33% of respondents in the 2003 study agreeing with this statement.

The survey is available at the Foley & Lardner Web site: www.foley.com.

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