Law's compliance cost may drop

A study commissioned by the "Big Four" accounting firms predicts a drop in the cost incurred by companies to have auditors sign off on their internal controls, a requirement of the Sarbanes-Oxley corporate governance law.

The study said the cost of complying with Section 404 of the law will decline 42 percent to an average of $4.3 million for large companies, and fall 39 percent to $900,000 for smaller companies in 2005, the provision's second year.

Section 404 requires that executives assess a company's internal controls in annual reports, and that auditors attest to the assessment.

The U.S. Securities and Exchange Commission is reviewing whether to ease or eliminate the requirements, especially for smaller companies, which have complained about the cost. In a letter to SEC Chairman Christopher Cox released with Thursday's report, the accounting firms defended the provisions as written.

"In addition to the encouraging information" on reduced second-year costs, "the firms believe there is a growing consensus among companies, investors and other third parties that Sarbanes-Oxley and Section 404 are delivering substantial benefits," the letter said.

The biggest reason auditors cite in predicting a drop in compliance costs is that some first-time documentation of internal controls won't have to be repeated in future years, the report said.

Also, auditors say their work will be more efficient because of lessons learned in year one, it said.

Internal controls refer to a company's responsibility for efficient operations, reliable financial reports and compliance with regulations.

The study was done by Boston-based consultant CRA International Inc. for accounting firms Deloitte & Touche LLP, Ernst & Young LLP, PricewaterhouseCoopers LLP and KPMG LLP. The report, like the SEC, defined large companies as those with market capitalization exceeding $700 million, and smaller companies as those with market caps of $75 million to $700 million.

Bob Litan, the CRA senior consultant who led the study, said he rushed to make sure it was released before next Wednesday's meeting of the SEC's Advisory Committee on Smaller Public Companies.