SOX’s Section 404 Hits Hard: Average Audit Fees for Small Companies Increased 96 percent to $1 million in FY 2004
CHICAGO — LAWFUEL – The Law News Network – The third annual study conducted by Foley & Lardner LLP on the costs associated with corporate governance reform shows that the average cost of being public in 2004 increased 33 percent over 2003 for a company with annual revenue under $1 billion.
Audit fees accounted for the largest out-of-pocket costs increases, with average audit fees for public companies with less than $1 billion of annual revenues increasing 96 percent to $1 million in FY 2004 from $532,000 in FY 2003. The study attributes this increase to the phase-in of Section 404 of the Sarbanes-Oxley Act, as the dramatic rise in audit costs exceed the rate of average audit fee increases witnessed in FY 2002, the year Sarbanes-Oxley was enacted.
Beyond ballooning audit costs, a significant shift occurred for the first time as lost productivity skyrocketed and the overwhelming majority of public companies reported that the Sarbanes-Oxley Act had impacted administrative expenses “a great deal.” The study found lost productivity costs soared 556 percent to $1.1 million in 2004 from $160,000 in 2003 for companies with annual revenue under $1 billion.
“As predicted, Section 404 dominated corporate governance concerns for public companies in 2004,” said Tom Hartman, study director and partner with Foley & Lardner. “The magnitude of the average audit fee increases, coupled with the reported lost productivity numbers, confirm that the economic costs of the Sarbanes-Oxley Act are not trivial or immaterial, particularly for smaller public companies.”
Rollout of Section 404 Proves Costly
Foley & Lardner’s study found that the average cost of being public has increased 223 percent for public companies with under $1 billion in annual revenue since the enactment of Sarbanes-Oxley. The study also includes the following key findings:
* For companies with annual revenue over $1 billion, the cost of being a public company averaged $14.3 million in 2004, an increase of 45 percent over 2003.
* Costs associated with lost productivity increased by nearly $900,000 in 2004 for respondents with annual revenue under $1 billion and nearly $440,000 in 2004 for respondents with annual revenue over $1 billion.
* 70 percent of survey respondents said that Sarbanes-Oxley impacted administrative expenses “a great deal,” up from 54 percent in Foley & Lardner’s 2004 study.
* 82 percent of public companies surveyed responded that corporate governance and public disclosure reforms are too strict, an increase of 15 percent compared to 2004.
* 20 percent of responding public companies are considering going private as a result of corporate governance costs, consistent with study results from last year.14 percent of responding companies surveyed are also considering merging with another company as a potential option.
* With Sarbanes-Oxley related reforms now in their third year, 56 percent of respondents did not feel they were better able to predict associated corporate governance reform costs.
Audit Fees Soar for Public Companies of All Sizes
An analysis of data obtained from Standard & Poor’s reveals that audit fees for public companies increased an average of 61 percent between FY 2003 and 2004, broken down by market capitalization as follows:
* Small-cap company audit fees rose 84 percent from $567,000 in FY 2003 to $1,042,000 in FY 2004
* Mid-cap company audit fees rose 92 percent from $1,135,000 in FY 2003 to $2,177,000 in FY 2004
* Large-cap company audit fees rose 55 percent from $4,809,000 in FY 2003 to $7,443,000 in FY 2004
Furthermore, respondents to the 2005 survey indicated that the dynamic between public companies and their auditing firms has shifted dramatically from strategic business consultant to vendor or even adversary. One respondent wrote, “…the Big Four seem to want to be treated as the IRS, but at premium fees.” Another respondent stated, “…Public company auditors are now privatized regulators for the SEC.”
To review the full study results, please download The Cost of Being Public in the Era of Sarbanes Oxley.
Methodology
In January of 2005, Foley & Lardner distributed public company and private organization surveys via mail and e-mail to approximately 9,000 CEOs, CFOs, General Counsel, Chief Compliance Officers, Board Members, Directors and other executives of both public companies and private organizations. A total of 147 public company surveys were returned. The firm also commissioned a statistical analysis of proxy statement data compiled and maintained by Standard and Poor’s Investment Services Custom Business Unit. This database contains information from more than 700 public companies included in the S&P 500, S&P Mid-Cap 400 and S&P Small-Cap 600 indices.
About Foley & Lardner LLP
Foley & Lardner LLP is a provider of legal counsel to global companies. The firm’s experience encompasses a full range of corporate legal services. Foley & Lardner’s nearly 1,000 attorneys understand today’s most complex business issues including corporate governance, securities enforcement, litigation, mergers and acquisitions, intellectual property and IP litigation, labor and employment, and tax. The firm offers total solutions in the automotive, e-business and information technology, energy, entertainment and media, financial services, food, golf and resort services, insurance, health care, life sciences, nanotechnology, and sports industries. The firm’s Web site can be found at www.foley.com.
