A survey conducted by The Nasdaq Stock Market, Inc. (Nasdaq: NDAQ) and the American Electronics Association (AeA) has found that public companies anticipate slight cost reductions during the second year of implementing the governance and financial reporting practices required by the Sarbanes-Oxley Act (SOX).
Companies expect the costs of implementing SOX 404 - intended to improve internal control over financial reporting - to decline 7.4% this year. Smaller companies, as defined as having market caps less than 120 million, will see virtually no change in their costs.
Executives from 298 companies of all sizes and from various industries responded to the survey, which was conducted in early August 2005. It focused on the second year costs of implementing SOX 404 and streamlining its implementation. This poll complements two prior surveys conducted by NASDAQ and the AeA.
The survey also found that auditors have improved their performance since SOX was first implemented. Companies believe their auditors are well-trained and qualified to complete the implementation of 404. This is in sharp contrast to findings in the April 2005 survey when 30% of the respondents believed the accounting industry had sufficiently trained staff to implement 404.
Experience and better training among auditors were cited as factors leading to expectations of lower costs. Another factor was the "Additional Guidance" memo the Public Company Accounting Oversight Board (PCAOB) presented to auditors in May 2005. The memo gives guidance as to how SOX 404 internal audit procedures can be streamlined. The most widely implemented suggestion from the memo and the highest perceived benefit is to integrate the 404 implementation with the financial audit.
While NASDAQ companies of various market capitalizations were surveyed, the results show that the costs of implementing 404 are still most serious for smaller companies. As a percent of revenue, smaller issuers in 2004 spent approximately 11 times more on SOX implementation than larger companies.
Additionally, the surveys confirmed that 74% of the respondents believe that the Sarbanes Oxley legislation was necessary, but the concern was in the implementation of the legislation.
"We believe that SOX is a necessary and beneficial act," said NASDAQ Executive Vice President Bruce Aust. That is why we hope these findings will spark a spirited discussion among key influencers who value the vital role smaller companies play in the capital formation process. If the PCAOB, the auditing community and companies work closely together, we firmly believe the costs of implementing 404 can be lowered over time."
"The survey confirms what we have been hearing, particularly from the small- and medium-sized companies," said William Archey, President and CEO of AeA. "Auditors are treating these smaller companies as if they were multi-billion dollar businesses and imposing the same auditing requirements. AeA has argued that a "one size fits all" approach to SOX 404 imposes unnecessary and costly burdens on smaller companies without improving investor confidence."