According to a recent study conducted by Financial Executives International, complying with Section 404 of The Sarbanes-Oxley Act will cost public companies over 60 percent more than previously anticipated.
The study, which surveyed 224 public companies with average revenues of $2.5 billion, pegged the total cost of "year one" compliance at $3.14 million.
That's a 62 percent increase over a similar survey FEI conducted in January, when the number was estimated to be $1.93 million.
Sayther
According to FEI President and CEO Colleen Sayther, the increases is partially due to the better data available to companies from their auditor. “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 Sayther.
“Now that the standards are finalized and implementation efforts are further along, compliance costs can be more accurately determined.”
Three Areas
According to the report, there are three primary reasons for the increase in projected SOX 404 costs.
The first is due to a 109 percent rise in internal costs. In the January survey, companies expected to spend just over 12,000 people hours complying with Section 404. By July, that number had more than doubled, to over 25,000 hours.
The second factor contributing to the rise in estimated costs was related to a increase in external costs. In January, companies expected to pay for about 3,000 external people hours. In the July survey, that number was over 5,000.
As would be expected, the number of total hours outsourced to external resources was heavily dependent on the size of the company. Smaller companies with under $100 million in revenue, for example, expected to pay for 837 external hours, while companies with over $5 billion in revenue expected to pay for over 10,000 hours.
Companies also expected to pay slightly more than $1 million for external consulting and software, a 42 percent increase from January when the number was estimated to be less than $750,000.
The third factor contributing to the rise in 404 compliance was a 40 percent increase in fees charged by external auditors. Companies surveyed said they expect to pay their auditors $823,200 in fees for attestation of their internal controls, in addition to the annual audit fees. In the January survey, the number was $590,100.
"Million Per Billion" Still Valid?
Hagerty
The total costs, while higher, are still within the range of the "million per billion" estimate, first articulated by John Hagerty of AMR Research. The estimate predicted SOX costs would be approximately 0.001 percent of revenue, or "one million in expenses per billion of revenue."
For example, FEI's new cost estimate for companies with over $5 billion in revenue is approximately $8 million.
However, that number will likely vary widely depending on company size.
For example, smaller companies will likely bit hit harder. The law firm of Foley & Lardner released a study earlier this year stating that SOX had added more than $1.5 million in costs to public companies with sales of less than $1 billion.
And larger companies will likely see economies of scale to bring their compliance costs below the "million per billion" ratio.
If the model were applied to $132.9 billion General Electric, for example, the company could expect to pay over $130 million in compliance costs. However, the company disclosed earlier this year that it was spending about $30 million on SOX compliance.
FEI's summary data, as well as related documents and other studies mentioned above, can be downloaded from the box above, right.
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