For many of the nation's biggest companies, the verdict is in on the centerpiece of recent corporate reforms: too expensive. And they claim it's partly the fault of accounting firms who are charging top dollar to carry out reviews mandated by the law.
Corporate executives and trade groups have complained about what they view as unnecessarily detailed reviews by their auditors and the high costs charged for reviews in letters to the Securities and Exchange Commission, which will hold a public meeting Wednesday to talk about ways to streamline the controversial reforms.
The law sponsored by Sen. Paul S. Sarbanes (D-Md.), left, and Rep. Michael G. Oxley (R-Ohio) frustrates some companies.
The 2002 Sarbanes-Oxley Act, passed after the collapse of Enron Corp. and WorldCom Inc., for the first time required top executives to vouch for the adequacy of corporate financial controls -- checks and balances that help prevent fraud and mistakes on the books. The reviews cover everything from who deposits checks at the bank to how many people approve employee expense reports. Among other things, the law's provisions are intended to assure investors that what they see in a company's annual report and other filings reflects the true state of the company.
Officials at PricewaterhouseCoopers LLP, the nation's biggest accounting firm, said the law has resulted in "profound changes in behavior." About 140 companies had reported finding serious control weaknesses as of March 30, according to the audit firm Deloitte & Touche LLP. That number will rise as more companies file annual reports with the SEC in the months ahead.
Regulators estimated that the internal control effort would cost $1.24 billion, or about $91,000 per publicly traded company. But the costs of assessing fiscal controls have skyrocketed to an average of $4.3 million per company, according to a study last month by Financial Executives International. Big firms with multinational operations are paying far more. Microsoft Corp. said it has spent $15 million to date, and its work is not yet complete. Heavy equipment maker Caterpillar Inc. reported its costs reached $30 million and resulted in a 63 percent increase in audit fees over last year.
Regulators and shareholder advocates predict that the cost of the reviews will decline steadily as companies and auditors get used to the process. Moreover, they say, the benefits of preventing another massive accounting failure far outweigh cries from industry.
"While costs have been heavy in the past year, I believe they've been heavy because firms are repairing corporate infrastructures that have been neglected for years," said Jack T. Ciesielski, author of a Baltimore-based accounting newsletter.
Top regulators have nodded to complaints about how accounting firms are conducting the reviews. William J. McDonough, head of the Public Company Accounting Oversight Board, which reviews the work of auditors, said at a board meeting March 31 that "instead of using judgment to tailor audit programs to the nature and size of an audit client, some auditors are applying a checklist approach to all audit clients, regardless of their complexity."
Companies that submitted comment letters to the agency in advance of next week's meeting are asking for auditors to use a lighter hand -- to rely more on the work of in-house accountants and to focus on the biggest issues and sources of financial risk rather than going overboard on the small things.
The SEC and accounting board will respond soon, said Donald T. Nicolaisen, the SEC's chief accountant.