Section 404 of the Sarbanes-Oxley Act of 2002 requires all public companies to establish an ironclad method of developing and maintaining an internal control structure and procedures for financial reporting, as well as a way to assess the effectiveness of the structures and procedures.
Expected benefits from Section 404 compliance include more reliable and accurate financial reports, leading to greater investor confidence.
The survey of 217 public companies was conducted by FEI (Financial Executives International), an association of financial executives based in Florham Park, N.J. It found that in the first year of Section 404 compliance, costs averaged $4.36 million per company, 39 percent more than the $3.14 million companies expected to pay.
The increase was largely due to a significant rise in costs of consulting and software and fees charged by external auditors.
As executives delved more deeply into what it would take to fully comply with Section 404, estimates rose exponentially. The mean for estimates of internal costs to comply with Section 404 during Year One was $1.28 million last July, but rose to $1.34 this month when the survey was repeated.
Similarly, the mean for estimates of external costs necessary to comply with Section 404 during Year One was $1.04 million last July, compared to $1.7 million in the most recent survey.
Auditor fees also rose significantly. Respondents used an average of 8,340 external consultant, vendor and auditor hours.
Companies also devoted significant internal resources to comply with Section 404. On average, companies spent 26,758 hours, up 4 percent over previous estimates.
One reason costs are so much higher than originally predicted is because of the complexity of the process, said Bill Sinnett, FEIs manager of research.