THE HEAVY BURDEN OF SOX
December 26, 2006
Sarbanes-Oxley (SOX) legislation is costing businesses more than anybody anticipated, putting many at risk, and forcing some to go private, or worse, go broke, says Stephen Bainbridge, William D. Warren Professor of Law at the University of California, Los Angeles.
- According to the Wall Street Journal, publicly traded companies routinely report that their audit costs have gone up as much as 30 percent, or even more, as a result of the tougher audit and accounting standards imposed by SOX.
- Just paying the fees now required to fund the Public Company Accounting Oversight Board can run as much as $2 million for the largest firms.
- Corporate law firm Foley & Lardner, for example, found that senior managers of public middle-market companies expect costs to increase by almost 100 percent as a result of SOX.
The most costly part appears to be Section 404, which requires inclusion of internal control disclosures, says Bainbridge:
- The Securities and Exchange Commission initially estimated that Section 404 would require only 383 staff hours per company per year.
- But according to a Financial Executives International survey, projected expenditures of staff hours reach 35,000 -- almost 100 times the SEC's estimate.
- In addition, the survey estimates that firms will spend $1.3 million on external consultants and software, and an extra $1.5 million in audit fees -- a jump of 35 percent.
The most troubling aspect is that the costs are disproportionately borne by smaller public firms. For many of these, the additional cost is a significant percentage of their annual revenues. Some have chosen to go private. But for those who stay public and are operating on thin margins, SOX compliance costs can make the difference between profitability and losing money, says Bainbridge.
Source: Stephen Bainbridge, "Legislate in Haste, Repent at Leisure," Hoover Institution, Hoover Digest 2006 No. 3, Adapted from a speech given by the author at the Hoover Institution spring retreat, May 1, 2006.
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