Companies Say Section 404 Improves Investor Confidence,
But Question Cost vs. Benefit;
Suggest Improvements
FLORHAM PARK, N.J., March 21 /PRNewswire/ -- Public companies have had to
dig even deeper than previously estimated to pay the costs of complying with
Section 404 of the Sarbanes-Oxley Act, according to a just-completed survey by
Financial Executives International (FEI). FEI is the leading professional
organization of Chief Financial Officers (CFOs) and other senior financial
executives.
Companies' total costs for year one Section 404 compliance averaged $4.36
million, up 39 percent from the $3.14 million they expected to pay, based on
FEI's earlier July 2004 cost survey. The increase stems largely from a 66
percent leap in external costs for consulting, software and other vendors and
a 58 percent increase in the fees charged by external auditors.
With March 16 as the general deadline for public companies to complete an
assessment of their internal controls over financial reporting, FEI recently
surveyed 217 public companies with average revenues of $5 billion to gauge
Section 404 compliance costs. Their total cost of compliance averaged $1.34
million for internal costs, $1.72 million for external costs and $1.30 million
for auditor fees. The auditor fees are in addition to companies' financial
statement audit fees, on average 57 percent higher. (See table below for a
comparison of actual costs to previously estimated costs and
http://www.fei.org for more details.)
Companies Say Costs Exceed Benefits
Just over half, 55 percent, of companies surveyed believe Section 404
gives investors and other external audiences more confidence in a company's
financial reports, and 83 percent of large companies (over $25 billion) agree.
Significantly, however, 94 percent of all respondents said the costs of
compliance exceed the benefits.
In general, companies applaud the added focus on internal controls, but
many respondents believe that the level of detail required is impractical and
bureaucratic. "The spirit was right on," wrote a respondent. "However, the
execution to the level of detail that was required was much more than
necessary."
"Now that we've gone through the first run of this mammoth compliance
effort, it's time to review what we have learned and identify ways to improve
the annual assessment process going forward," said Colleen Cunningham,
President and CEO of FEI. "Essentially, Section 404 is well intentioned, but
the implementation effort is guilty of over-kill.
"FEI was one of the first business groups to support Sarbanes-Oxley, but
we recommend a more efficient implementation of the existing rules," continued
Ms. Cunningham. "Going forward, we recommend that regulators allow auditors
to rely on the cumulative knowledge gained from earlier 404 work, and not
simply start from scratch when it is time to re-assess companies. Further, we
suggest a true risk-based audit approach that defines key controls, allowing
for auditors to obtain a reasonable assurance of the integrity of a company's
systems."
Back to the Future
When asked about year-two costs, 85 percent of respondents said they
expect non-auditor expenditures to decrease (by an average of 39 percent), and
68 percent said they believe the costs of their primary auditor will also
decrease (by an average of 25 percent).
In order to improve the effectiveness and efficiency of the Section 404
process, companies identified the following top recommendations (more than one
answer permitted):
* Allow for a more risk-based audit approach (71 percent)
* Reduce degree of documentation (66 percent)
* Provide flexibility for remediating control problems in Q4 (60 percent)
* Increase judgment allowed in aggregating deficiencies (55 percent)
* Permit roll-forward procedures (54 percent)
About Sarbanes-Oxley Section 404
Section 404 requires each company's annual report to contain (1) a
statement of management's responsibility for establishing and maintaining an
adequate internal control structure and procedures for financial reporting;
and (2) management's assessment, as of the end of the company's most recent
fiscal year, of the effectiveness of the company's internal control structure
and procedures for financial reporting. Section 404 also requires the
company's auditor to attest to and report on management's assessment of the
effectiveness of the company's internal controls and procedures for financial
reporting.
Year One Costs of Sarbanes-Oxley Section 404 Compliance
March 2005 Estimated in Estimated in
July 2004 January 2004
Internal Costs* $1,337,935 $1,283,385 $613,250
External Costs $1,716,987 $1,037,100 $732,100
Auditor Attestation Fees $1,301,050 $ 823,200 $590,100
Total $4,355,972 $3,143,685 $1,935,450
* Internal costs assumes full-time professionals (at 2,000 hours per
year) at a compensation rate (salary plus benefits) of $100,000 per
year.
About FEI
Financial Executives International (FEI) is the leading advocate for the
views of corporate financial management. Its 15,400 members hold
policy-making positions as chief financial officers, treasurers, and
controllers. FEI enhances member professional development through peer
networking, career planning services, conferences, publications, and special
reports and research. Members participate in the activities of 86 chapters,
75 of which are in the United States and 11 in Canada. For more information
about FEI, visit http://www.fei.org.
Contact:
Scott Sunshine Chris Allen
TowersGroup FEI
(212) 354-5020 (973) 765-1058
scottsunshine@towerspr.com callen@fei.org
SOURCE Financial Executives International
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Related links:
http://www.fei.org
Company News On-Call:
http://www.prnewswire.com/comp/310650.html
CONTACT:
Scott Sunshine, TowersGroup, +1-212-354-5020,
scottsunshine@towerspr.com; or Chris Allen, FEI, +1-973-765-1058,
or callen@fei.org
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