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Audit Compliance Deadline Proves Costly to Companies

By Carrie Johnson
Washington Post Staff Writer
Monday, November 15, 2004; Page A14

Some of the nation's biggest companies face a deadline today for completing reviews of their internal financial controls, a labor-intensive, costly effort that has created intense friction between corporate managers and auditors.

Top regulatory officials repeatedly have warned that a significant minority of companies, from a few hundred to a thousand, may report serious weaknesses in their fiscal checks and balances, which could have repercussions in the price of stock shares.

Controls are the backbone of a company's finance system. They include such things as whether multiple officials are required to sign off on company checks and whether employee expense reports are scrutinized by managers.

Corporate scandals of the past several years prompted Congress to require the reviews in hopes of preventing future fraud.

Major companies with fiscal years ending today are supposed to have completed their reviews, imposed under the 2002 Sarbanes-Oxley Act, by now -- the first in a series of deadlines. Other large firms will face deadlines as their fiscal years come to an end, rolling through the next 12 months. Smaller and foreign companies are required to finish documenting controls by July 15.

The law requires chief executives and finance chiefs to attest to the strength of their financial controls, and it compels auditors to review the way companies document their systems.

PricewaterhouseCoopers LLP, the largest accounting firm in the country, informally surveyed 700 clients, estimating that 10 percent of companies are at "severe risk" of not finishing the work on time and that another 20 percent might soon slip into that category, according to a speech last week by chief executive Dennis M. Nally.

"There's no question that [the control review] presents daunting challenges," Nally said.

Chief among them, corporate trade groups say, is the cost. Overall, the expense of complying with the Sarbanes-Oxley Act has reached $5.1 million for the average U.S. company, according to a study by executive recruiting firm Korn/Ferry International. That is a $2 million increase from an estimate released in July by a financial executives trade group.

For the largest companies, reviewing and documenting financial controls has cost far more. General Electric Co., which voluntarily adopted the process last year, spent $30 million on its effort. It expects to spend somewhat less this year, a spokesman said.


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