Compliance Hotline

GAO Study Shows Higher Compliance Costs for Smaller Public Companies

In a report issued on May 8, the Government Accountability Office analyzed the impact of the Sarbanes-Oxley Act (SOX) on smaller public companies. The report focused on compliance costs; described suggested responses of the Securities and Exchange Commission and Public Company Accounting Oversight Board to concerns raised by smaller public companies; and analyzed smaller public companies' access to auditing services and the extent to which the share of public companies audited by mid-sized and small accounting firms has changed since SOX was passed. The report found that for smaller public companies ($700 million or less in market capitalization), the cost of compliance was disproportionately higher (as a percentage of revenues) than for large public companies, particularly with respect to the internal control reporting provisions in ' 404 and related audit fees. The report further stated that the costs associated with complying with SOX, along with other market factors, may be encouraging some companies to become private. Though the number of companies going private was small (2% of public companies in 2004), the full impact of SOX on smaller public companies remains unclear because most have not fully implemented ' 404.

Regarding access to accounting services, the report stated that smaller public companies have been able to obtain audit services and that many moved from the largest accounting firms to mid-sized and small firms. The reasons for these changes range from audit cost and service concerns cited by companies to client profitability and risk concerns cited by accounting firms, including capacity constraints and assessments of client risk. Overall, mid-sized and small accounting firms conducted 30% of total public company audits in 2004 ' up from 22% in 2002. However, large accounting firms continue to dominate the overall market, auditing 98% of U.S. publicly traded company sales or revenues.

The suggested responses recommended by the report are that the SEC: 1) assess sufficiency of internal control guidance for smaller public companies, 2) coordinate with PCAOB to ensure consistency of section 404 auditing standards with any additional internal control guidance for public companies, and 3) if further relief is deemed appropriate, analyze the unique characteristics of smaller public companies and their investors to ensure that the objectives of investor protection are met and any relief provided is targeted and limited. See www.gao.gov/new.items/d06361.pdf to view the full report.

Big Four Survey show ' 404 Costs Declined in Year Two

The Big Four accounting firms released a report to the SEC on April 17 showing that second-year implementation costs of the internal controls reporting requirements of ' 403 of Sarbanes-Oxley declined significantly for both large and small market capitalization companies. The report, which was commissioned by CRA International Inc., a consulting group for the Big Four, stated that the ' 404 compliance costs for larger companies declined by 43% to an average of $4.8 million in Year Two. For smaller companies (those with a market capitalization between $75 and $700 million) the costs of compliance with ' 404 decreased by 30% to an average of $860,000 in year two, including internal, consulting and audit costs. This survey is a follow-up to two previous surveys conducted by CRA, one in the fall and the other in the spring of 2005. This survey includes an analysis of total ' 404 issuer costs and audit fee information derived from proxy materials. The survey distinguished between total ' 404 costs and total audit fees publicly reported in corporate proxy materials, a portion of which are attributable to the 404 internal control audit and a portion of which are attributable to the audit of the issuer's financial statements (and other 'audit services' as defined for proxy disclosure purposes). In the earlier surveys the implementation cost estimates were based primarily upon projected costs. See www.s-oxinternalcontrolinfo.com/pdfs/
CRA_III.pdf.

GAO Study Shows Higher Compliance Costs for Smaller Public Companies

In a report issued on May 8, the Government Accountability Office analyzed the impact of the Sarbanes-Oxley Act (SOX) on smaller public companies. The report focused on compliance costs; described suggested responses of the Securities and Exchange Commission and Public Company Accounting Oversight Board to concerns raised by smaller public companies; and analyzed smaller public companies' access to auditing services and the extent to which the share of public companies audited by mid-sized and small accounting firms has changed since SOX was passed. The report found that for smaller public companies ($700 million or less in market capitalization), the cost of compliance was disproportionately higher (as a percentage of revenues) than for large public companies, particularly with respect to the internal control reporting provisions in ' 404 and related audit fees. The report further stated that the costs associated with complying with SOX, along with other market factors, may be encouraging some companies to become private. Though the number of companies going private was small (2% of public companies in 2004), the full impact of SOX on smaller public companies remains unclear because most have not fully implemented ' 404.

Regarding access to accounting services, the report stated that smaller public companies have been able to obtain audit services and that many moved from the largest accounting firms to mid-sized and small firms. The reasons for these changes range from audit cost and service concerns cited by companies to client profitability and risk concerns cited by accounting firms, including capacity constraints and assessments of client risk. Overall, mid-sized and small accounting firms conducted 30% of total public company audits in 2004 ' up from 22% in 2002. However, large accounting firms continue to dominate the overall market, auditing 98% of U.S. publicly traded company sales or revenues.

The suggested responses recommended by the report are that the SEC: 1) assess sufficiency of internal control guidance for smaller public companies, 2) coordinate with PCAOB to ensure consistency of section 404 auditing standards with any additional internal control guidance for public companies, and 3) if further relief is deemed appropriate, analyze the unique characteristics of smaller public companies and their investors to ensure that the objectives of investor protection are met and any relief provided is targeted and limited. See www.gao.gov/new.items/d06361.pdf to view the full report.

Big Four Survey show ' 404 Costs Declined in Year Two

The Big Four accounting firms released a report to the SEC on April 17 showing that second-year implementation costs of the internal controls reporting requirements of ' 403 of Sarbanes-Oxley declined significantly for both large and small market capitalization companies. The report, which was commissioned by CRA International Inc., a consulting group for the Big Four, stated that the ' 404 compliance costs for larger companies declined by 43% to an average of $4.8 million in Year Two. For smaller companies (those with a market capitalization between $75 and $700 million) the costs of compliance with ' 404 decreased by 30% to an average of $860,000 in year two, including internal, consulting and audit costs. This survey is a follow-up to two previous surveys conducted by CRA, one in the fall and the other in the spring of 2005. This survey includes an analysis of total ' 404 issuer costs and audit fee information derived from proxy materials. The survey distinguished between total ' 404 costs and total audit fees publicly reported in corporate proxy materials, a portion of which are attributable to the 404 internal control audit and a portion of which are attributable to the audit of the issuer's financial statements (and other 'audit services' as defined for proxy disclosure purposes). In the earlier surveys the implementation cost estimates were based primarily upon projected costs. See www.s-oxinternalcontrolinfo.com/pdfs/
CRA_III.pdf.