Florham Park, N.J. (Aug. 12, 2004) -- Estimates of the cost of complying with Section 404 will hit public companies even harder in the wallet than previously expected, according to a survey by Financial Executives International.

Complying with Section 404 of the Sarbanes-Oxley Act will cost public companies an average 62 percent more than previously anticipated, according to the FEI survey of 224 public companies with average revenues of $2.5 billion. FEI said that the increase stems from a 109 percent rise in internal costs, a 42 percent jump in external costs and a 40 percent increase in the fees charged by external auditors.

Section 404 requires a company’s annual report to contain a statement of management's responsibility for establishing and maintaining an adequate internal control structure and procedures for financial reporting, as well as management's assessment of the effectiveness of the company's internal control structure and procedures for financial reporting. It also requires the company's auditor to attest to and report on management's assessment of the effectiveness of the company's internal controls and procedures for financial reporting in accordance with standards established by the Public Company Accounting Oversight Board.

The total cost of compliance rose to an estimated $3.14 million -- 62 percent more than the $1.93 million estimate identified in FEI’s January 2004 survey. FEI calculated the dollar amount by adding the cost of the attestation fee, the external technology cost and the internal cost, which assumes full-time professionals (at 2,000 hours per year) at a compensation rate (salary plus benefits) of $100,000 per year per individual.

Companies now expect to pay their auditors $823,200 in fees for attestation of their internal controls, in addition to the annual audit fees, compared to the $590,100 companies expected that auditors would charge for attestation in January 2004.

FEI chief executive Colleen Sayther noted that when the group conducted the January survey, audit firms hadn’t yet provided clients with complete estimates for 404 work because the auditing standards hadn't been finalized. “Now that the standards are finalized and implementation efforts are further along, compliance costs can be more accurately determined,” said Sayther.

As part of management’s attestation process, the survey showed that companies are documenting internal controls for 92 percent of total revenue. Public companies expect to spend an average of 25,667 internal employee hours (against the 12,265 hours estimated in January) and 5,037 external hours (against the previous estimate of 3,059). Companies also expect to spend an additional $1,037,100 on software and IT consulting, FEI reported.

-- WebCPA staff

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