The cost of compliance with Sarbanes-Oxley corporate governance reforms for public companies with revenue of at least $1 billion — including audit fees and director compensation and director-and-officer insurance — averaged $14.2 million in 2004, up 45% from the previous year, according to a study by the law firm of Foley & Lardner released today.
For public companies with less than $1 billion in revenue, the costs averaged $3.4 million in 2004, up 33% from the previous year and up 223% from 2001, a year before the Sarbanes-Oxley law was enacted, according to the study. Foley & Lardner analyzed data from 700 companies in the S&P 1500 index and surveyed executives and directors at 147 public companies.
Audit fees rose to an average $7.443 million in 2004 for S&P 500 companies, up 55% from 2003 and 153% from 2001. For S&P midcap companies, the average audit fee rose to $2.177 million in 2004, up 92% from the previous year and 204% from 2001. For S&P small-cap companies, the average audit fee rose to $1.042 million in 2004, up 84% from the previous year and 188% from 2001.
Annual director fees rose 43% between 2001 and 2004 for S&P 500 companies, 45% for S&P midcap companies and 46% for S&P small-cap companies.
In a webcast today, Thomas E. Hartman, partner with Foley & Lardner, attributed the increase in compliance costs to the financial impact of the phase-in of Section 404 in 2004. The provision requires that management assess the effectiveness of a company's internal control over financial reporting and that a company's external auditor attest to and report on that assessment.
"Section 404 needs to be changed from ‘one size fits all' to a more tailored approach," Mr. Hartman said, easing its requirements for small companies and foreign companies. "Fees don't range as much between smaller and large companies; therefore, smaller companies tend to be impacted more," said Mr. Hartman. The burden of compliance might cause foreign companies to delist from U.S. exchanges, he added.