Ask FERF about ... Sarbanes-Oxley Section 404 compliance costs.

• Author: Sinnett, William M.
• Position: Financial Executives Research Foundation

The good news: Since January 2004, FEI has been monitoring the costs incurred by member companies to comply with Section 404 of the Sarbanes-Oxley Act of 2002, and these costs seem to have finally stabilized. The "costs" referred to are those incurred to document and test internal controls, which were then audited by external auditors. The bad news: Costs have not declined as significantly as estimated--even by the "Big Four."

FEI Compliance Costs Surveys

The FEI homepage (www.fei.org) right menu provides links to several important "Issues in Depth," one of which is the Sarbanes-Oxley Act, and which has its own Web page. On this page are links to FEI Compliance Costs surveys conducted in January 2004, July 2004, March 2005 and, most recently, March 2006.

The surveys conducted in January and July 2004 included primarily cost estimates, because the first internal control audits under Section 404 were not completed until early 2005. In July 2004, average total costs of compliance were estimated to be $3.14 million, or 62 percent more than the $1.93 million average estimate indicated in FEI's January 2004 survey.

By March 2005, when all costs were presumably accounted for, average total costs of compliance had ballooned to $4.36 million, up 39 percent from the $3.14 million estimate in July 2004.

FEI staff questioned whether these consecutive estimates of average total costs were comparable, because the same FEI members did not necessarily respond to each previous consecutive survey. So, for the March 2006 survey, members were asked for their costs during 2005 ("year two") and the percentage change from their costs during 2004 ("year one"). Responses were also segregated between accelerated filers (public float between $75 and $699 million) and large accelerated filers (public float equal to or greater than $700 million), who presumably had filed management reports on internal controls in both 2004 and 2005, from "non-accelerated" filers.

The accelerated and large accelerated filers indicated that their average total costs of compliance in 2005 were $3.8 million, and that these costs were, on average, 16.3 percent less than their total costs of compliance during 2004. Average 2005 costs of $3.8 million are 16.3 percent less than $4.5 million, just slightly more than the March 2005 average survey responses of $4.36 million. FEI staff was satisfied that their earlier cost estimates were on target.

Total costs of compliance include three...