SOX News

First-of-Its-Kind Report Quantifies Actual Cost of Sarbanes-Oxley Section 404 Com

(Jan 09, 2008)-- Lord & Benoit, a SOX research and consulting firm, recently gathered empirical cost data to answer a crucial question that government officials, legislators, and business executives have been asking since June of 2007: "what exactly is the cost for a smaller public company to comply with Sarbanes-Oxley Section 404(a) and Section 404(b) regulations using the latest guidance issued by the SEC and PCAOB?" The data reveal that for non-accelerated filers, the total average first-year cost for management assessment and additional audit fees is $78,474, which is 13.8% less than the $91,000 cost the SEC initially predicted.

The new Lord & Benoit Report, entitled "The Sarbanes-Oxley Investment: A Section 404 Cost Study for Smaller Public Companies," is based on a cross-section of 29 smaller public companies in the semiconductor, manufacturing, distribution, banking and finance, real estate, food and beverage, transportation, mining, software, energy, services, and biotech industries. The Report is also based on an Audit Analytics study of actual audit fees reported by nearly 5,500 public companies.

From a public policy perspective, this newest Lord & Benoit Report is very relevant and timely. Concerned that the cost of Section 404(b) on small companies is still unknown and could therefore be disproportionally high for smaller publicly-held companies, the US. House of Representatives Committee on Small Business recently requested cost estimates prior to enforcement of the law. In order to honor this request, SEC Chairman Christopher Cox is considering extending the delay in the auditor attestation requirement of Section
404(b) for non-accelerated filers until years ending after December 15, 2009. The empirical data in the Lord & Benoit Report may provide government officials with the cost information they need now.

While analyzing the compliance cost data, the research team at Lord & Benoit discovered a paradoxical, unintended consequence of past delays in Section 404 compliance: the American Institute of CPA auditing standards governing the audit of internal controls for private companies and non-profit organizations are now
greater than PCOAB auditing standards for smaller public companies in years 2007 and 2008, and possibly 2009 should the SEC grant an extension of Section 404(b).

In the summary, the Report states that compliance costs are not without corresponding benefits. The improvement in procedures has removed volatility in reporting and this, in turn, has contributed to the recent dramatic decrease in security class action claims against companies. In addition, the Market Capitalization to Revenue Ratio of companies with good financial reporting procedures and filings results in higher stock values.

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