Sarbox Costs ”Unpredictable,” Still Rising

As a result of new governance and disclosure reforms, 21 percent of public companies who responded to a recent survey are considering going private.

The cost increases associated with Sarbanes-Oxley compliance were not a one-time event, according to a study from Foley & Lardner. In fact, added the law firm, as a result of new governance and disclosure reforms, 21 percent of the public companies it surveyed are considering going private.

Compliance costs continue to be especially painful for smaller companies. The 85 companies with annual revenue under $1 billion (out of 115 total respondents to the survey) reported that their average cost of being public climbed from $1.24 million before the passage of Sarbanes-Oxley to $2.13 million in 2002 and $2.86 million in 2003. All told, the average cost for these companies increased $1.6 million, or 130 percent, since Sarbox was enacted.

“Not only do the costs associated with corporate governance reform continue to be significant,” stressed the study, “but executives surveyed feel these costs are increasingly unpredictable.” Specifically, despite the fact that they are coping with Sarbanes-Oxley for a second year, fully 60 percent of all respondents said that they are not better able to predict these costs. That’s likely a big reason why 21 percent of surveyed companies are considering going private, compared with 13 percent in a similar study last year.

Far and away, Section 404 compliance was the area with the most significant financial impact on public companies, followed by legal expenses and D&O insurance. Foley & Lardner also noted that the cost increase for director fees actually accelerated last year.

On the other hand, non-audit fees paid to accountants fell 20 percent from 2002 to 2003. Said the report, “We believe this decline is primarily because certain consulting work done in prior years has been shifted away from the accountants because of Sarbanes-Oxley regulations, heightened sensitivity surrounding such work and the divestiture by large accounting firms of their consulting businesses.”

In this year’s study, reported Foley & Lardner, 67 percent of respondents said the new corporate governance and public disclosure reforms were too strict, compared with 55 percent who felt this way last year. Just 27 percent said the reforms were “about right,” compared with 38 percent last year; and only 2 percent of this year’s respondents felt that the new rules are not strict enough, compared with 5 percent last year.

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