SOX Survey Says:  Compliance Costs Down, Audit Fees Up

Section 404 compliance costs declined in 2007 even as audit fees for accelerated filers crept up in the fourth year of Sarbanes-Oxley adoption.

The seventh annual Sarbanes-Oxley compliance survey by Financial Executives International (FEI) found that the total cost for Section 404 compliance was $1.7 million during fiscal year 2007.  Although direct comparisons cannot be made to 2006 costs due to variances in the respondent pool, the results indicated a continued decline from previous years.

The FEI survey of 185 companies, including 168 accelerated filers, also revealed a slight increase in audit fees, which averaged $3.6 million in 2007, up less than 2 percent over 2006.

“As companies continue to find efficiencies in complying with Section 404 and make compliance part of a routine practice, we have seen a continued decline in costs,” said FEI President and CEO Michael P. Cangemi.  “While 404 auditor costs also declined 5.4 percent as the auditor scope of work narrowed, these costs were offset by a reported 5 percent increase in the average hourly audit rate charged by auditors.”

Accelerated filers reported a reduction of costs within direct control of their companies, with drops in both internal and external people hours and well as auditor attestation fees.  Companies reported requiring an average of 11,100 internal and 1,244 external people hours to comply with Section 404 in 2007, which represents a decline of 8.6 percent and 13.7 percent, respectively, from 2006.

Auditor attestation fees paid by accelerated filers in 2007 constituted 23.7 percent of the accelerated filer’s total annual audit fees and averaged $846,000, a 5.4 percent decrease from 2006.

The FEI survey also found that respondents with centralized operations had lower total costs of compliance in 2007 than did those with decentralized operations.  Those with centralized operations paid an average of $1.3 million versus the $1.9 million paid by those with decentralized operations.

Respondents also reported an increased level of confidence in the value of Section 404 over 2006 respondents:
• 50.3 percent agreed that financial reports are more accurate, up from 46 percent in 2006
• 56 percent agreed that financial reports are more reliable, up from 48 percent
• 43.6 percent agreed that compliance with Section 404 has helped prevent or detect fraud, up from 34 percent
• 69.1 percent agreed that compliance with Section 404 has resulted in more investor confidence in their financial reports, up from 60 percent

Respondents also noted improvements in their 2007 audit for a number of areas related to Section 404, with 71.3 percent reporting more integration of Section 404 and the financial statement audit and 69.8 percent reporting more auditor use of a risk-based approach.  More than 68 percent reported that less key controls were identified, while 58.4 percent reported increased use of judgment by auditors and 68.5 percent reported greater auditor reliance on the work of others.

“FEI has championed a number of suggested improvements to increase efficiency in Section 404 compliance, while maintaining effectiveness.  The results from this survey demonstrate that, overall, auditors appear to be on course to achieve that goal,” said Cangemi.  “The majority of respondents reported Section 404 work, and work to prepare the annual audit is now more integrated, with auditors using a more risk-based approach to 404 adoption.”