By Brian E. Clark
The cost for publicly held companies to comply with Sarbanes-Oxley (SOX) legislation dropped in 2005, but the decline was less than many expected.
That was one of the main conclusions of a report issued Thursday by the Foley & Lardner law firm on SOX, which was passed by Congress in 2002 in response to major corporate and accounting scandals involving prominent U.S. companies.
According to the study, the cost of being public for companies with under $1 billion in annual revenue dropped by 16 percent. For companies with more than $1 billion in annual revenue, the costs dropped 6 percent.
“Contrary to many predictions made in 2005 and anecdotal stories reported this year, average audit fees did not drop in the second year after Section 404 requirements phased in for U.S. companies with $75 million of more in market capitalization,” the report said.
Steve Barth, a Foley & Lardner partner in Milwaukee, said SOX is particularly onerous for small-cap companies. In fiscal year 2005, he said, the percentage increase in average audit fees was significantly higher for small-cap (22 percent) than mid-cap (6 percent) and S&P 500 companies (4 percent.)
“While some of the one-time setup costs have gone away, we are seeing trends that offset that and costs that are going up significantly,” he said.
“It will be interesting to see what happens next year. Though this year was showed a dip, I think they may be up next year. It is going to cost more for audits, especially if you are a small cap or a high-risk company.”
Barth said some accounting firms now view companies they audit as adversaries because of the scandals at companies such as Enron.
“Perhaps that is as it should be,” he said. “But the bottom line is has made things much more expensive. That is not going to abate.
“There are many, many new requirements, not only on the audit side, but also on the internal control side and the disclosure control side. Because of the sins of the past, auditors are extremely careful as they are preparing their audits for public companies.”
Similarly, he said insurance costs for public companies are continuing to rise.
“It is a very litigious environment out there and the costs of defending a typical public company lawsuit can are astronomical, in the millions of dollars.”
With the recent conviction of Ken Lay and Jeff Skilling, two top executives at Enron, Barth said the political environment is not right for changes in SOX anytime soon.
“There certainly are a number of efforts out there to soften SOX for smaller cap companies because the costs of being public are so disproportionately high for them that it is inhibiting, we think, capital formation for small-cap firms.
“I don’t think that is good for the economy,” he added. “But even with those efforts, the political realities – especially with Lay and Skilling’s convictions and the new stock options scandal – are that public companies keep shooting themselves in the foot for self-regulating.”
The push for reform of SOX may have a better chance in a few years, but by then it may be too late, he said.
“Right now, no one wants to be seen as being soft on corporate corruption,” he said.