Compliance with Section 404 of the Sarbanes-Oxley Act has become a far more expensive proposition than originally thought, as the average cost of complying with the internal controls mandate has hit $4.36 million, a 39 percent jump from 2004 estimates, according to a recent survey from Financial Executives International. The organization of financial professionals, which surveyed 217 public companies with average revenues of $5 billion and asked them to gauge their Section 404 compliance costs, said that the out-of-pocket increase stems from a 66 percent leap in external costs for consulting, software and other vendors, and a 58 percent increase in the fees charged by external auditors. In a breakdown, FEI said that 404 compliance averaged $1.34 million for internal costs, $1.72 million for external costs and $1.30 million for auditor fees. The auditor fees are in addition to companies' financial statement audit fees. Some 55 percent of the participants in the FEI poll indicated that Section 404 gives investors and other external audiences more confidence in a company's financial reports. However, 94 percent of all companies surveyed said that the costs of 404 compliance exceed the benefits. In order to improve the effectiveness and efficiency of the Section 404 compliance process, the companies participating in the poll issued the following recommendations: o Allow for a more risk-based audit approach (71 percent); o Reduce the degree of documentation (66 percent); o Provide flexibility for remediating control problems in the fourth quarter (60 percent); o Increase the judgment allowed in aggregating deficiencies (55 percent); and, o Permit roll-forward procedures (54 percent).

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