The Sarbanes-Oxley Act has brought about tremendous improvements in corporate governance and internal control, but the changes haven't come cheap.

According to a survey recently released by Financial Executives International, 46 of the 100 largest U.S. public companies have exceeded the new requirements on independent board directors. Costs, however, have been 62 percent higher than anticipated, with a 109 percent rise in internal expenses, a 42 percent rise in external costs, and a 40 percent increase in auditor fees.

The survey reflects the first year in which most public companies had to comply with various provisions of Sarbanes-Oxley, the more stringent listing standards at the New York Stock Exchange and Nasdaq, and new disclosure rules issued by the Securities and Exchange Commission.

The survey, conducted in July, is the profession's first look at the practical and financial effects of SOX 404.

"When we conducted our January survey, audit firms hadn't yet provided their clients with complete estimates for Section 404 work, because the auditing standards had not been finalized," said Colleen Sayther, FEI's president and chief executive. "Now that the standards are finalized and implementation efforts are further along, compliance costs can be more accurately determined."

The determinations have not all been pleasant. While companies are hoping that better governance and internal controls will improve public perception and attract investment, some see the measures as not much more than cost without benefit.

William R. Walker, chief financial officer and secretary of Hi/fn, a company that provides computer security solutions that has 150 employees and revenues of about $40 million, said that his company saved money by doing all SOX 404 documentation in-house, but it was still expensed at $200,000. At the same time, he expects audit fees to rise by 50 percent.

Are the improved governance and internal controls worth the cost?

"No," Walker said. "I'm doing things like I did before. I probably have better documentation, but procedurally, it's the same. I've added hundreds of thousands of dollars to my operating expenses, and I'm not doing anything differently."

While Walker said that changes in governance at his company were not significant, the FEI survey found larger companies making more drastic changes. The survey found that 81 of the top 100 companies had boards with at least three quarters of their directors independent from management. At 35 companies, the chief executive was the only management member of the board. The major stock exchanges only require half of the board to be independent.

In an apparent effort to improve public perception, 42 percent of the companies disclosed the names of more than one financial expert on the corporate audit committee. Audit committees also met more often than before. At 46 companies, they met nine times or more in 2003. In 2002, only 23 audit committees met that often.

As companies demanded more of their boards of directors, retainers for directors increased significantly. Nine of the top companies paid more than $80,000 in 2003, compared to only three in 2002. The majority of companies paid between $20,000 and $80,000. In 2002, the majority of companies paid between $15,000 and $50,000. Only a small minority - 4 percent - paid an additional retainer to members of the audit committee.

The survey also found increases in the use of guidelines for stock ownership by board directors, with a majority of companies requiring directors to hold stock valued at a percentage of the individual's salary or retainer. More than half allowed directors to receive part of their retainer or salary in stock.

The options question

Though Sarbanes-Oxley has nothing to do with the controversy over the expensing of stock option compensation, 41 percent of the top 100 companies voluntarily expensed stock compensation in 2003, compared to only 9 percent in 2002.

The voluntary move by so many companies is significant, in that several industry groups, especially in new technology, are resisting a likely new rule from the Financial Accounting Standards Board that would require such expensing. Under current rules, financial reports need only disclose the estimated impact on the balance sheet if options were expensed.

The survey found estimates in the cost of complying with SOX to have risen over the past six months. Among the 224 companies that responded to the FEI poll, the average number of employee hours spent to comply with requirements for internal control was 25,667 hours, plus 5,037 hours by external, non-employee personnel. In January of this year, the averages were 12,265 and 3,059, respectively.

Hi/fn's Walker said that the survey was generally reflective of his company's experience.

"[SOX Section 404] is a very expensive operation for small companies," he said. "It's hard intellectually to argue against good internal controls, but the costs, with minimal value, are significant."

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