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SOX compliance raises
audit fees for
Fortune 1000 companies
Figures analyzed by Susan Eldridge and
Burch Kealey for the 543 Fortune 1000
firms that had reported audit fees by
April 12 indicate that these firms paid more
than $3 billion for their 2004 audits compared
to slightly more than $2 billion in 2003. Kealey
and Eldridge, accounting department faculty
at the University of Nebraska at Omaha (UNO),
have been closely monitoring the reported audit
fees of the Fortune 1000 companies to
evaluate the costs of the internal control audit
requirement imposed by the Sarbanes-Oxley
Act of 2002 (SOX).
In compliance with SOX, these companies had
their first required internal control audits in
2004. The average audit fee increase of more
than $2.3 million is significantly higher than
the early estimates offered by the Securities
and Exchange Commission (SEC). The SEC,
at one point, suggested that companies faced
an additional $91,000 in costs to meet the new
internal controls requirements of SOX, and this
estimate excluded internal control audit fees.
These audit fee increases are only part of the
true effect of SOX on costs of publicly listed
companies.
“All we can capture in our analysis are the
amounts reported in the financial statements
and proxies,” Eldridge said. “Companies are
not required to collect or report the other significant
SOX compliance costs, such as fees
paid to outside consulting firms and wages and
benefits paid to existing and newly hired staff
to document, implement and test internal controls
over financial reporting. However, results
of surveys by the Financial Executives Institute
during 2004 indicated that the expected
internal audit costs would be only about 26 to
30 percent of total compliance costs.”
Kealey said that anyone looking at these figures
should be cautious in interpreting these
fee increases because not all are directly attributable
to SOX compliance.
For example,
audit fees for Cabela’s, a Sydney, Nebraskabased
outdoor outfitter, increased from around
$177,000 in 2003 to more than $1.3 million
in 2004. While Cabela’s does not directly disclose
its SOX audit fees, it does indicate in its
annual report that it paid its auditors $935,000
for services associated with its initial public
offering in 2004. Even after factoring out that
amount, Cabela’s saw audit fees increase by
more than 140 percent while its assets increased
by one-third and net income
increased by more than 20 percent.
As part of their analysis, Eldridge and Kealey
looked to see whether or not fee increases
differed by industry. “Patterns of increase
seem to vary by industry in a predictable
manner,” Kealey said. “You would expect insurance
companies and banks to have strong
internal controls because of regulatory financial
audits, relatively centralized transactions
and increased automation. These companies
faced greater risk from fraud attempts
than perhaps retail companies and thus likely
had stronger internal controls and documentation
of these controls than firms in other
industry groups.”
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