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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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November 5, 2007 12:01 AM ET
The Sarbanes-Oxley Act is more than five years old, but the cost of the landmark legislation to public companies continues to rise. That fact, well known in the corporate finance trenches, was confirmed last week by advisory firm Hackett Group’s 2007 Finance Book of Numbers, an annual benchmarking study that analyzes the efficiency and effectiveness of corporate finance departments. The Hackett study found that after nearly a decade of cost reductions in the finance department, the average “global 1000” company spent 12% more last year on its finance function than it did three years ago. And the biggest driver of that increased cost was compliance-related activities. “We expected costs to back off from where they were, but they’re not coming down,” said Bryan Hall, a managing director and practice leader of the finance executive advisory program at the Hackett Group. What’s more, the compliance cost-efficiency gap between what Hackett calls “world-class” organizations—the top 22 performers of the 220 companies studied—and the rest of the group is widening. Companies such as Alcoa, Dow and General Electric spent 47% less, on average, on external audit fees than their peers and operated with 44% fewer compliance staff. “The average global company is leaving about $138 million on the table,” said Mr. Hall. More than half that spending gap stems from greater labor costs at the average company compared with top performers. The study found that since the passage of Sarbanes-Oxley, internal audit staffing levels at the average company increased by 20%, and only 12% for the world-class group. And those fewer compliance personnel at the most efficient organizations are achieving more than their counterparts at other companies. “With highly standardized process environments, more automated controls and clearer lines of responsibility for internal audit, it’s dramatically easier for them to achieve compliance, and for external auditors to verify that compliance,” Mr. Hall and his colleague, William Marchionni, wrote in their report. Hackett’s research on external audit fees seems to bear that observation out. While the average company spent $584,000 per $1 billion in revenue on external audit, the world-beaters spent just $307,500 per billion. Mr. Hall suggested that companies should look to streamline their finance and reporting processes and take advantage of the Public Company Accounting Standards Board’s new audit standard (AS5) for internal controls. It allows external auditors to rely more on the work of client staff to perform their audits than under the previous Section 404 standard. “We recommend that companies invest in their internal audit resources and use AS5 to drive down external audit costs,” Mr. Hall said. Section 404, however, is just one element of the compliance burden that public companies are bearing in the post-SarbOx environment. Recent studies by groups like Financial Executives International and law firm Foley & Lardner show that some of the costs of the 404 audit have decreased over the last two years. However, total fees paid to external auditors, as well as overall compliance costs, are still rising. Foley & Lardner’s fifth annual survey of the costs of being a public company found, for example, that fees paid to external auditors for all sizes of companies in 2006 were 4% higher than in 2005. They were a staggering 271% higher than in 2001, the year before Sarbanes-Oxley was passed. “The amount that companies are paying out of pocket to their auditors has not declined as experts predicted it would,” said Tom Hartman, a partner at Foley & Lardner and director of the study for the last four years. “Many believed that as companies and audit firms progressed along the learning curve, the external audit costs would decline. That’s not the case.” And if other compliance-related costs such as legal fees, compensation for board directors and D&O liability insurance are thrown into the mix, the picture gets worse. The total cost of SarbOx compliance last year was 13% greater than in 2005 for companies with less than $1 billion in revenue, according to the Foley & Lardner study. It was 12% higher for larger companies. While implementation of AS5—the new and improved blueprint for the Section 404 audit—may help some companies, elevated compliance and finance department costs are likely here to stay. Public accounting board’s CFO departs for private company post 
MOVING ON PCAOB CFO Tom Hohman
At least he won’t have to gird himself for a Section 404 audit. Private companies do not have to comply with the audit of internal controls mandated by SarbOx and overseen by the PCAOB, created by the 2002 law. “I joined the PCAOB because I was attracted to the challenges and opportunities associated with a start-up organization,” Mr. Hohman said. “I don’t think I’ve ever seen such a high-caliber group of professionals assembled in one place.” Prior to joining the PCAOB, Mr. Hohman served as CFO for a number of technology companies and worked at a venture capital firm with $200 million in invested capital. He began his career as an auditor with Ernst & Young. “Tom was integral in developing a PCAOB infrastructure, helping the organization put in place sound financial systems and internal controls,” said PCAOB chairman Mark Olson. A PCAOB spokesman said the regulator, created in 2002 through Sarbanes-Oxley, has not yet named Mr. Hohman’s successor. FW
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