Study: Audit Fee Hikes Balancing Out SOX Savings

June 16, 2006 ( - The cost of coping with Sarbanes-Oxley (SOX) corporate governance reform measures decreased in 2005 from the record levels of a year earlier, a new survey has found.

A news release from Chicago law firm Foley & Lardner said its research shows that costs associated with corporate governance reform dropped 16% for companies generating less than $1 billion in annual revenue and 6% for those with more than $1 billion in annual revenue. Significant decreases in costs associated with lost productivity, legal fees and initial set-up measures drove down most of the cost, the report found.

However, year-over-year audit fee hikes, D&O insurance expenses and board compensation for companies of all sizes are balancing out much of those cost cuts.

“Because many of the provisions of the Sarbanes-Oxley Act required initial one-time implementation expenses, we expected to see an overall decrease in the cost of being public this year,” said Tom Hartman, study director and Foley partner, in the news release. “However, we did not expect to see the continued increase in audit fees over fiscal year 2004 – a year in which Section 404 drove costs to an already unprecedented level.”

Fee Hikes

The study analyzed data from more than 850 proxy statements of public companies for fiscal year 2005 and found that audit fees increased 22% for S&P small-cap companies, 6% for S&P mid-cap companies and 4% for S&P 500 companies.

“The S&P small-cap companies were the only group analyzed to experience double-digit increases in average audit fees for fiscal year 2005,” explained Hartman. “Corporate governance reform continues to present a more significant financial burden for smaller public companies than it does for larger ones.”

The announcement said that Foley’s data over four years showed that percentage increases in average audit fees year over year were generally the same for companies of all sizes until the Section 404 requirements were enacted in 2004. Since that time, S&P small-cap and S&P mid-cap companies have experienced larger percentage increases in average audit fees compared to S&P 500 companies.

Between 2003 and 2005, average audit fees increased by $786,000 on average for S&P small-cap companies and $1.14 million for S&P mid-cap firms, a 141% increase for S&P small-cap companies and a 104% increase for S&P mid-cap companies. In comparison, S&P 500 companies experienced a 62% increase during this same period.

The study also reported that the average cost of compliance for companies with less than $1 billion in annual revenue has increased more than $1.8 million to about $2.9 million since SOX was enacted, a 174% overall increase.

In January 2006, Foley distributed public company and private organization surveys through mail and e-mail to about 9,000 chief executive officers, chief financial officers, general counsel, chief compliance officers, board members, directors and other executives of both public companies and private organizations. Recipients returned 114 public company surveys.

The report is  here