An independent report, backed by data from Big Four clients, shows that corporate auditing costs for Sarbanes-Oxley 404 compliance dropped significantly in 2005.
Gregory Bell, a group vice president at CRA International, the Boston-based economic consulting firm which conducted the study, said the biggest reason for the decline was the learning curve effect. "This is their second year working under Sarbanes-Oxley, so it makes sense [public companies] realized significant efficiencies from handling it the second time around," he said.
The report found that the average costs for 58 Fortune 1000 companies dropped 44 percent last year, to $4.8 million. That was slightly higher than the consulting firm's December prediction of 42 percent.
Meanwhile, the study found that the 66 publicly traded companies surveyed (with market capitalization between $75 million and $700 million) saw a smaller decrease in costs. Compliance costs dropped 31 percent, to $860,000 last year. CRA's December study had expected a drop of 39 percent.
The report is the third in a series of reports sponsored by the Big Four to examine the costs of implementing the internal controls provisions of the Sarbanes-Oxley Act. The firm's have profited enormously from the law, which requires public companies to have outside auditors attest to the soundness of internal financial controls annually. The Securities and Exchange Commission received a copy of the report, and is due in the coming weeks to consider a proposal from an advisory panel to loosen the internal controls provisions for companies with market capitalization less than $780 million.
Bell noted that the 404 controls appear to already be bearing fruit for the firms. He said that overall, the companies reported a significant decline in the weaknesses and deficiencies found in controls, and in the letter presenting the report to the SEC, the Big Four noted a number of other recent executive surveys praising the results of 404 work.
Specifically, Bell said that the larger companies said the number of deficiencies had been cut in half, while the number had decreased by two-thirds for small companies.
In addition to the learning curve, the major two reasons cited by both large and small companies for the drop was the reduction in new documentation required. To a lesser extent, the companies also said that they had a reduced need to hire additional workers to cope with the added work -- whether that was for internal work needing to be performed within a company or the hiring of additional outside auditors.
For the first time, the report breaks out total audit fees as presented for proxy statement disclosure purposes into two components: a Section 404 component attributable to the audit internal control over financial reporting and a non-404 component attributable to the financial statement audit. The change is part of an attempt to clarify the relationship between total issuer costs related to Section 404 total audit fees.
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