Sarbanes-Oxley Spending In 2004 More Than Expected

The first year of complying with section 404 of the Sarbanes-Oxley Act has come at a steep cost for many businesses, with greater-than-anticipated personnel, consulting, auditing, and software expenses, according to a survey by Financial Executives International, a professional association of CFOs, treasurers, and financial controllers.

The good news is that the cost of compliance efforts is expected to decrease this year as IT projects undertaken to meeting the financial-reporting requirements of section 404 progress.

The survey, conducted in March among companies with average revenue of $5 billion, showed that spending for section 404 compliance averaged $4.4 million in 2004. That's higher than the average $3.1 million companies estimated that they would spend in 2004 in a similar survey conducted last July.

Expenditures for external services such as consulting averaged $1.7 million in 2004, up from an expected $1 million in the July survey, while auditing costs averaged $1.3 million, compared with the $820,000 expected in July.

Section 404 requires companies to include with their annual reports a statement from management assessing the effectiveness of internal financial-reporting controls. Companies like Eastman Kodak, SunTrust Banks, and Toys R Us have reported accounting problems that may preclude their issuing such a statement in their 2004 annual reports. Uncertainty over auditing procedures for section 404--final guidelines weren't adopted by the Securities and Exchange Commission until late last year--was cited as a major reason for the variance between estimated and actual costs.

Ninety-four percent of the March survey respondents say the costs of Sarbanes-Oxley compliance exceeded the benefits. Still, more than half (55%) agreed that section 404 gives investors more confidence in financial statements.

Some 85% of respondents surveyed in March say they expect section 404 compliance costs to drop in 2005. Personnel and external costs are expected to decline by 39% on average through adoption of more-efficient compliance processes and procedures.

Many companies have installed database and workflow software aimed specifically at Sarbanes-Oxley compliance. Coca-Cola HBC, one of the largest bottlers of nonalcoholic beverages in Europe, has tapped Sox Express compliance software from Open Pages Inc. to automate review processes for its internal controls documentation. (The company is required to comply with Sarbanes-Oxley because its stock is traded on U.S. exchanges.) The SEC has extended the compliance deadline for such "foreign filers" until 2006 in order to give them time to comply with the International Financial Reporting Standards, a set of accounting rules that takes effect in Europe this year.

Coca-Cola HBC is migrating its existing internal controls documentation from Internal Controls Workbench to Sox Express using FastMap, OpenPages' data-migration facility. OpenPages bought Internal Controls Workbench from PricewaterhouseCoopers last year and is integrating it with Sox Express.