[ISN] Study: Sarbanes-Oxley forcing some companies to consider going private

InfoSec News isn at c4i.org
Fri Jun 16 04:30:56 EDT 2006


By Ann Bednarz

Faced with the costs to comply with the Sarbanes-Oxley Act, some
public companies are looking at going private, even though the costs
fell slightly in 2005.

Fed up with the Sarbanes-Oxley burden, 21% of companies that responded
to law firm Foley & Lardner's latest study said they are considering
going private. Other options respondents are considering include
selling the company (10%) and merging with another company (8%).

Meanwhile, costs associated with corporate governance reform dropped
16% for companies with less than $1 billion in annual revenue and 6%
for companies with greater than $1 billion in annual revenue, reports
Foley & Lardner in its fourth annual Sarbanes-Oxley study, released

The savings stem from decreased productivity losses, legal fees and
initial setup costs. However, audit fees increased, as did the cost of
board compensation and liability insurance for directors and officers.

Many industry watchers expected audit fees would drop during public
companies' second year of complying with Sarbanes-Oxley Section 404,
which requires companies to attest to the effectiveness of controls
put in place to protect financial reporting systems and processes.  
Instead, they increased: Audit fees rose 22% for small companies, 6%
for midsize companies and 4% for large companies (as defined by
Standard & Poor's indices).

Smaller public companies, in particular, felt the burden of increased
audit costs, said Tom Hartman, corporate governance study director and
business law partner at Foley & Lardner, in a teleconference. "The
increase is disproportionately impacting smaller companies," he said.

The fees companies pay their directors also have climbed considerably
as a result of corporate governance and public disclosure reforms
implemented since the enactment of Sarbanes-Oxley. Overall annual
director fees have increased an average of 71% for small companies,
64% for midsize companies, and 58% for large companies between 2001
and 2005.

When all the expenses are tallied, companies with under $1 billion in
revenue spent an average of $2.9 million to comply with Sarbanes-Oxley
in 2005, and companies with greater than $1 billion in revenue spent
$11.5 million.

For companies of all sizes, audit fees represent the biggest portion
of those expenses, followed by the cost of lost productivity. While
down from 2004 levels, lost productivity nonetheless cost each small
company $563,000 and each large company $2.5 million in 2005, on
average, Hartman said.

Many companies polled think the Sarbanes-Oxley legislation is
overkill. A clear majority (82%) said corporate governance and public
disclosure reforms are too strict. For the first time in four years,
not a single respondent said the reforms are not strict enough,
Hartman said.

Foley & Lardner's study includes data from 114 survey respondents and
850 proxy statements of public companies. Full study results are
available on Foley & Lardner's Web site [1].

[1] http://www.foley.com/2006publicstudy

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