In a good news/bad news scenario for many publicly traded companies, a recent poll of financial executives showed that while the costs of audit fees rose in year-over-year comparisons, there was a marked decline in Sarbanes-Oxley 404 compliance expenses.According to a recent survey of 185 companies conducted by Financial Executives International, larger companies, or accelerated public filers — which comprised about 90 percent of the respondents — spent an average of $3.6 million on total audit fees last year, up nearly 2 percent from 2006.
However, that was accompanied by a decline of 5.4 percent in auditor attestation fees to an average of $846,000, a figure that represented roughly 23.7 percent of the filer’s total annual audit fees.
Prior to this year’s results, costs for SOX 404 compliance had already been on the decline, according to the report.
“The internal costs are decreasing,” confirmed Christine DiFabio, vice president of technical activities for the 15,000-member FEI. “Companies are not outsourcing as much now and they’re getting more efficient.” She added that companies are also making better use of judgment, and making internal control audits more risk-based, which adds to efficiency.
For those companies with at least $75 million in market capitalization, 2007 marked the fourth year of having to comply with the 404 mandate.
For smaller companies, total audit fees averaged about $500,000 in 2007, up 5.4 percent from the prior year, according to the survey. But just 9 percent of those audit fees were earmarked for the SOX-mandated internal controls reviews. FEI said that many of those same companies are not yet required to comply with SOX 404.
However, as more small companies and non-accelerated filers begin to comply with all the Section 404 requirements, DiFabio expects to see the costs go up for them as well.
“In general there’s been a decline, but there’s some points that need to be considered — specifically who that applies to,” said George Victor, partner-in-charge of quality control for the New York CPA firm of Holtz Rubenstein Reminick LLP. “The larger companies have had the experience and resources to adequately prepare and go through the learning curve. Smaller companies, many of whom have not had to comply, may not be as organized in trying to get their arms around the 404 bear. Now they’re going to bear the brunt of it.”
The report also showed that companies with centralized operations had lower total costs of compliance in 2007 than companies with decentralized operations. The total average 2007 compliance costs for companies with centralized operations were $1.3 million. For those companies with decentralized operations, the costs were $1.9 million.
Predictably, one of the reasons for the lower compliance costs for accelerated filers was a decrease in man hours needed for compliance.
In 2007, public issuers required an average of 11,100 internal man hours to comply with SOX Section 404, a drop of 8.6 percent from the prior year. An average of 1,244 external people hours were required to comply with Section 404 in 2007, a decrease of 13.7 percent from the prior year.
FEI said that higher hourly rates may explain the jump in total auditor fees, in spite of the decline in compliance costs. According to the poll, larger companies paid an average of $210 an hour to auditors last year, up 5 percent in a year-over-year comparison.
Nearly 70 percent of the executives surveyed reported that their auditors had slashed the number of key internal controls that they examined over the past year, with auditors leaning toward the adoption of a risk-based approach when evaluating controls.
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