Five years after its passage, the federal Sarbanes-Oxley Act’s costs are still a subject for debate and confusion.
A national study released in August reported that SOX’s auditing requirements are still jacking up costs for public companies: the law firm Foley & Lardner said external audit fees increased by 271 percent between 2001 and 2006 for companies with less than $1 billion in revenue.
That external audit costs have gone up dramatically since 2001 isn’t a point of contention, but the study also reported a 4 percent jump between 2005 and 2006 – insisting that out-of-pocket audit costs are still rising. But local accountants and public companies aren’t so sure.
“I’m not convinced that they know what they’re talking about,” said Steve Jackson, a Hartford-based partner at accounting firm UHY. “My experience is that costs have come down.”
Sarbanes-Oxley, the sweeping act passed in 2002 in the wake of the Enron scandals, required much more exhaustive auditing measurements and checkups on internal controls. The first few years after it passed saw a major spike in fees relating to the new rules, but those costs were expected to level off or decline as companies put in processes to deal with all the new reporting.
The law firm’s study showed a major cost increase in 2004, the year that SOX’s Section 404 took effect for most public companies. That provision set new standards where auditors must test companies’ methods for compiling balance sheets, which has turned out to be one of the most groan-inducing elements of SOX. The question now is whether compliance costs are continuing to rise.
Tom Hartman, a senior partner with Foley & Lardner and the director of the August costs study, said the study leaders were careful to account for anomalies that might falsely drive up the fee reports, such as if a company made a new acquisition or took on a new project that heaped on extra auditing expenses.
“We have over 1,000 companies included in this data. I’m very comfortable [with the results], given the size of the sample,” he said.
Yet Carl Paschetag, CFO of waste management services company TRC in Windsor agreed with Jackson that an increase in SOX-related fees didn’t match up with his experience. Audit fees can grow in any number of ways based on a company’s activities. When companies grow, for example, their expenses tend to grow with them – so SOX, now a part of the annual custom, would go up as a consequence of the company’s changes, not because auditors were doing more with the same material.
No Rest
But accountants and financial managers can’t settle into routine just yet, as the law is still getting tweaked. In late July, the national committee that oversees standards for public companies’ accounting issued new guidelines affecting Section 404. The new rule allows accountants to target areas that are more likely to be vulnerable and eliminate unnecessary procedures.
Previously, “Auditors were auditing to death every little control,” Jackson said; because the original rule had left a lot open to interpretation, accountants were being extra thorough just to e on the safe side, and driving up costs in the process.
Hartman said it remains to be seen whether the new guideline for Section 404 will help lower costs in the next few years. Thus far, it’s been difficult to know what to expect from the requirements, he said.
