Upfront: Price of Sarbanes-Oxley Compliance Declines

There seems to be light at the end of the tunnel for companies that have spent large sums of money to comply with Sarbanes-Oxley's Section 404 requirements. And, as the old joke goes, it's not a train.

According to a new survey released by Financial Executives International (FEI), compliance cost corporate America less in year two of adoption than in year one. FEI polled 274 companies in the organization's fourth Sarbanes-Oxley compliance survey, 238 of which were accelerated filers with average revenues of $6 billion. This group's total average cost for Section 404 compliance was $3.8 million during fiscal year 2005, down 16.3 percent from 2004. The decline can be attributed largely to lower staff and consultant time and reduced auditors' fees. Respondents say that they required an average of 22,786 people hours internally to comply with Section 404 in 2005 -- an average 11.8 percent fewer hours than they required during 2004. Companies with a market cap between $75 million and $699 million reduced internal hours by 8.5 percent.

Respondents also say that they have benefited from a reduction in external costs, including software, consultants and other vendors. External costs in 2005 averaged 22.7 percent less than in 2004, including a reduction of 4,888 external people hours last year, representing an average of 18.9 percent fewer hours.

While the news of lower costs is positive, 85 percent of respondents still don't believe that the benefits of compliance outweigh the costs, even though they recognize that investor confidence has risen. Not surprisingly, larger companies tend to view the benefits more favorably than smaller companies, which typically have had fewer resources to devote to compliance with Sarbanes-Oxley.

Participants have several ideas for improving Section 404 implementation (see accompanying graph below). "We've made strides during the second year of Section 404 implementation, but there is still room for improvement," says FEI president and CEO Colleen Cunningham. "Based on the feedback from our members, it is clear that the degree of documentation is the number-one issue."

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