Economic Cost of Sarbanes-Oxley

Discussion in 'Economics' started by Avalanche, Jun 21, 2005.

  1. Unbelievable how because of a couple of Enron's and bad apples hundreds of thousands of companies now have to suffer spending millions more on compliance than before.

    What a collosal waste of productivity, the tax code is bad enough. I had no idea it was this bad. Why set up a business in America these days given the choice between us and somewhere like Hong Kong were they actually make an attempt to attract new business not repel it like were doing. :(

    Full report:

    June 16, 2005 11:00 AM US Eastern Timezone

    Foley & Lardner Sarbanes-Oxley Study Finds Cost of Being Public Rose 33 Percent for Small and Mid-Sized Companies in 2004

    CHICAGO--(BUSINESS WIRE)--June 16, 2005--
    SOX's Section 404 Hits Hard: Average Audit Fees for Small Companies Increased 96 percent to $1 million in FY 2004

    The third annual study conducted by Foley & Lardner LLP on the costs associated with corporate governance reform shows that the average cost of being public in 2004 increased 33 percent over 2003 for a company with annual revenue under $1 billion.

    Audit fees accounted for the largest out-of-pocket costs increases, with average audit fees for public companies with less than $1 billion of annual revenues increasing 96 percent to $1 million in FY 2004 from $532,000 in FY 2003. The study attributes this increase to the phase-in of Section 404 of the Sarbanes-Oxley Act, as the dramatic rise in audit costs exceed the rate of average audit fee increases witnessed in FY 2002, the year Sarbanes-Oxley was enacted.

    Beyond ballooning audit costs, a significant shift occurred for the first time as lost productivity skyrocketed and the overwhelming majority of public companies reported that the Sarbanes-Oxley Act had impacted administrative expenses "a great deal." The study found lost productivity costs soared 556 percent to $1.1 million in 2004 from $160,000 in 2003 for companies with annual revenue under $1 billion.

    "As predicted, Section 404 dominated corporate governance concerns for public companies in 2004," said Tom Hartman, study director and partner with Foley & Lardner. "The magnitude of the average audit fee increases, coupled with the reported lost productivity numbers, confirm that the economic costs of the Sarbanes-Oxley Act are not trivial or immaterial, particularly for smaller public companies."

    Rollout of Section 404 Proves Costly

    Foley & Lardner's study found that the average cost of being public has increased 223 percent for public companies with under $1 billion in annual revenue since the enactment of Sarbanes-Oxley. The study also includes the following key findings:

    -- For companies with annual revenue over $1 billion, the cost of being a public company averaged $14.3 million in 2004, an increase of 45 percent over 2003.

    -- Costs associated with lost productivity increased by nearly $900,000 in 2004 for respondents with annual revenue under $1 billion and nearly $440,000 in 2004 for respondents with annual revenue over $1 billion.

    -- 70 percent of survey respondents said that Sarbanes-Oxley impacted administrative expenses "a great deal," up from 54 percent in Foley & Lardner's 2004 study.

    -- 82 percent of public companies surveyed responded that corporate governance and public disclosure reforms are too strict, an increase of 15 percent compared to 2004.

    -- 20 percent of responding public companies are considering going private as a result of corporate governance costs, consistent with study results from last year. 14 percent of responding companies surveyed are also considering merging with another company as a potential option.

    -- With Sarbanes-Oxley related reforms now in their third year, 56 percent of respondents did not feel they were better able to predict associated corporate governance reform costs.

    Audit Fees Soar for Public Companies of All Sizes

    An analysis of data obtained from Standard & Poor's reveals that audit fees for public companies increased an average of 61 percent between FY 2003 and 2004, broken down by market capitalization as follows:

    -- Small-cap company audit fees rose 84 percent from $567,000 in FY 2003 to $1,042,000 in FY 2004

    -- Mid-cap company audit fees rose 92 percent from $1,135,000 in FY 2003 to $2,177,000 in FY 2004

    -- Large-cap company audit fees rose 55 percent from $4,809,000 in FY 2003 to $7,443,000 in FY 2004

    Furthermore, respondents to the 2005 survey indicated that the dynamic between public companies and their auditing firms has shifted dramatically from strategic business consultant to vendor or even adversary. One respondent wrote, "...the Big Four seem to want to be treated as the IRS, but at premium fees." Another respondent stated, "...Public company auditors are now privatized regulators for the SEC."

    To review the full study results, please visit


    In January of 2005, Foley & Lardner distributed public company and private organization surveys via mail and e-mail to approximately 9,000 CEOs, CFOs, General Counsel, Chief Compliance Officers, Board Members, Directors and other executives of both public companies and private organizations. A total of 147 public company surveys were returned. The firm also commissioned a statistical analysis of proxy statement data compiled and maintained by Standard and Poor's Investment Services Custom Business Unit. This database contains information from more than 700 public companies included in the S&P 500, S&P Mid-Cap 400 and S&P Small-Cap 600 indices.

    About Foley & Lardner LLP
  2. I am sure the Sarbanes-Oxley will be water down pretty soon. Some of the measures are plain stupid!
  3. I noticed Cablevision is going private. And their credit is about get hit too. What a coincidence.
  4. that seems to be the new "trend" - going private.
  5. The best quote I've heard about SarOX:

    "There is no return on investment in this. All it generates is more paper, more storage, more auditors and more lawyers."
  6. I used to use Foley and Lardner. And I was going to post something about the lawyers' job security and prosperity act.

    which, being interpreted, means that one group that won't suffer tremendously is the group of lawyers that will be billing hours by the thousands navigating firms around this.

    which, I suppose, was your point to begin with.
  7. Just another wonderful job accomplished by the brilliant and priviledged US bureaucratic crony system.....

    Oh well...when they are finished there´s still hope...

    The IMF in 2006...
  8. I smell an economic boom for Accoutants.
  9. I couldn't disagree more about this. I think the extra costs are trivial compared to corporate budgets. An extra million or two to ensure that earnings statements are actually accurate and believable? My question is what responsible CEO wouldn't demand that the money be spent?

    The CEO's and their boardroom enablers don't seem to have any trouble finding extra money when it is to be lavished on them as compensation or perks. How much do they piss away on the CEO's favorite charity or expensive artwork from the CEO's girlfriend's gallery? How about expensive suites at pro sports venues? Let's not forget the private air forces, the lodges at Vail, the golf outings, need I continue? Let's see, which is more important, accurate financials or seeing a couple of games a year?

    This moaning and groaning disgusts me. There are certain basic obligations to running a public company. One is accurate reporting. And what exactly is their point? That's it's too difficult to be accurate? So we, the investors , should run the risk rather than them, who are supposedly running the companies and in a position to see that the reports are accurate?

    I have a fresh suggestion. Any CEO who finds it too difficult or risky should just resign. That way he won't be exposing himself to any liability. I'm not holding my breath.
  10. Well said AAA.
    #10     Jun 22, 2005