Sarbanes Oxley Costs Overrun Expectations
By CHRIS CZIBORR
Companies nearing the end of their first full year of meeting a key Sarbanes-Oxley provision share a similar conclusion: The cost of complying is far more than expected.
Section 404 is perhaps the most notorious part of the Sarbanes-Oxley Act of 2002. The section requires annual reports to detail and evaluate a company’s financial reporting controls and procedures.
The compliance deadline for most public companies is Nov. 15. That means most companies will have to show compliance in their year-end results.
“I would say that for Fluor, the costs of compliance so far have exceeded the benefits,” said Gary Smalley, vice president of internal audits for Aliso Viejo engineering services company Fluor Corp. “The level of effort and costs involved in 404 compliance is somewhere between two and three times higher than what we had expected.”
It’s not just Fluor, according to Smalley.
“We do a lot of benchmarking with others in our industry as well as companies in other industries,” he said. “And people are seeing higher-than-expected costs.”
This year’s Sarbanes-Oxley compliance costs will be about double than what was expected at Autobytel Inc., according to Hoshi Printer (photo), chief financial officer for the Irvine-based car buying Web site.
“I’ve been telling investors that it will cost us $2 million this year,$1 million for consultants and the auditors and then $1 million internally for adding additional resources,” Printer said. “At the start of the year, I was estimating the total costs would be in the $600,000 to $800,000 range.”
The good news, according to Printer, is that compliance costs should fall after this year to $500,000 to $700,000 per year.
“The scope is much larger than what I had anticipated,” he said. “It’s similar to the Y2K situation where you could not get enough programmers in those days. Right now there are not enough people who are skilled in the 404. Plus, remember that all of us are going through this for the first time. There is no body of knowledge that was already out there.”
Bob Grant, managing partner of the Costa Mesa office of Deloitte & Touche LLP, said resources are being stretched thin.
“With Sarbanes-Oxley, and particularly 404 certification work, the resources are tight,” he said. “This is a new effort and a significant effort. So it’s garnered a lot of resources in the firm. We are continuing to hire additional people to focus on this effort.”
Spiked demand for consultants and external auditors is in part what’s driving up costs, according to Fluor’s Smalley.
“Public accounting firms have struggled to meet the demands of their clients,” he said. “This has had an impact on costs. We’re seeing the public accounting firms asking for higher rates per hour for compliance work. This is supply and demand.”
Return on investment for Fluor is marginal, Smalley said.
“We already were a well-controlled company, and perhaps we didn’t achieve the benefits that other companies did,” he said.
Part of the fault lies with regulators, according to Autobytel’s Printer.
“I wish they would’ve issued the guidelines a little sooner,” he said, referring to the Securities Exchange Commission and the Public Company Accounting Oversight Board. “Even our auditors and auditing companies did not have clear guidelines as to what is to be expected of them.”
The last set of guidelines came out only a few months ago, Printer said.
“If they had given guidance to the auditing firms and to us maybe six months prior to that, we would’ve been able to come up with a more accurate estimate” on the cost of compliance, Printer said.
Aliso Viejo-based health insurer SafeGuard Health Enterprises Inc. cited the high costs of compliance when it went private in July.
“Sarbanes-Oxley played a pretty significant role in our decision to go private,” said Ron Brendzel, the company’s vice president and general counsel. “We figure we’re saving $1.2 million a year by not being public, and Sarbanes-Oxley would’ve been a good third of that. That’s money we felt we’d rather spend on investing in the company, rather than just paying those additional fees and costs.”
As of late last year, SafeGuard counted a market value of about $100 million.
Not everyone is surprised by the cost of compliance. Officials at Santa Ana-based MSC.Software Corp. said their costs are about in line with what had been expected.
“It’s not cheap, but I think anything that helps you better document and ensure your processes are good is money well spent,” MSC spokesman Todd Evans said. “But we’re just a small-cap software company. One can only imagine what someone like General Motors is going through.”
MSC counted a market value of $230 million last week.
But MSC might be an exception. Tom Crane, a member of the executive committee and partner in the corporate practice at Costa Mesa law firm Rutan & Tucker LLP, said clients are telling him that compliance costs are more onerous than what they had anticipated.
“They’ve been warned that the costs were going to be high by both the law firms and accounting firms,” Crane said. “But this was beyond what they expected. The jury’s still out as to whether Sarbanes-Oxley will produce a net benefit for the public. It certainly has ratcheted up the level of concern on the part of corporate executive officers and directors.”
