20091008 Cost Of SOX From Cost Advisors (C) 2009 All Rights Reserved

Study of the Sarbanes-Oxley Act of 2002 Section
404
Internal Control over Financial Reporting
Requirements
SEC Office of Economic Analysis
September 2009

Cost Advisors’ Background
Founded 10 years ago
Have b
H been d i SOX since A il
doing i April
2003
Managed numerous large SOX
projects
Developed SarbOxPro® software
www.sarboxpro.com

© 2009 Cost Advisors, Inc. All rights reserved

Bill Douglas’ Background
Founder of Cost Advisors, Inc.
30 years of experience
Management positions in A
M t iti i Accounting, IT Systems
ti S t
CFO, IPO, 'Big 4' public accounting, business processes, recovery
auditing, internal controls, fraud, internal auditing, Sarbanes-Oxley
(SOX)
Financial Project management at both large and small public
companies
Published SOX Illustrated – a 200-page book on SOX
Credentials:
Certified Fraud Examiner (CFE)
Certified Public Accountant (CPA)
Certified Internal Auditor (CIA)
Certified in Financial Forensics (CFF)
Licensed Private Investigator (PI)
Instructor for Oregon Society of CPAs
g y
Frequent speaker and writer about fraud and controls

Agenda
g
Background
Survey Methodology
S M th d l
Survey Data
Cost of Section 404
Benefits of Section 404
Effects of AS#5
Interviews with External Users of FS and
Auditors
Conclusions

4
© 2008 Cost Advisors, Inc. All rights reserved.

Background
g
Cost of SOX has been high
AS#5,
AS#5 SEC Guidance to management = 2007
G id t t
reforms
Best d t f
B t data from large and accelerated companies
l d l t d i
Non-Accelerated extended on 404(b)
General Findings
Small companies spent greater %
Fixed costs not scalable
2007 reforms (AS#5) cut costs

5

Agenda
g
Background
Survey Methodology
S M th d l
Survey Data
Cost of Section 404
Effects of AS#5
Auditors
Conclusions

6

Survey Methodology
y gy
Announced February 2008
Web Survey: December 2008 – January 2009
8215 companies eligible to participate (25% response
)
rate)
Time blocks:
Before AS#5
After
Aft AS#5
Next Year (year in progress at time of survey)
CEO, CFO, General Counsel (any could delegate)
, , ( y g )
Phone survey of 30 users of financial statements
Lenders, security analysts, credit rating agencies, others

7

Survey Methodology
3 Groups
Market Cap
(# Shares x Stock Price)

Large Accelerated
Filer
(10K in 60 days)
(10Q in 40 days)

$700M Most
Respondents
Accelerated 404(a) and (b)
Filer
(10K in 75 days)
(10Q in 40 days)

$75M
Non-Accelerated Filer 404(a) only
(10K in 90 days)
(10Q i 45 d
in days)
)


Survey Methodology
Data Collected
D t C ll t d

1. Internal Labor Hours
2. Audit Fees
3. Outside Vendor Fees
4. Non-labor Costs

9

Survey Methodology
Ti f
Timeframe C ll t d
Collected

Current year in progress
Most recent completed year
The year prior to that

10

Survey Methodology
C t
Caveats
Self-selection bias
Not found in sample
p
Response bias (no penalty for lying)
Can’t test for most of this
Only 100 non-accelerated comply with 404(b)
non accelerated
None of the costs were audited
Especially audit fees related to 404(b)
Internal labor at $121 per hour
FEI had used $50
Deferred maintenance of controls could be included in SOX
Controls already required by Section 13(b)(2) of the Exchange Act
Current Year estimates included

11

Agenda
g
Background
Survey Methodology
S M th d l
Survey Data
Cost of Section 404
Effects of AS#5
Auditors
Conclusions

12

Cost of Section 404
I t
Internal l b at $121/h
l labor t $121/hr.

Overall SOX Cost
Non-Labor
6% 404(b) audit
( )
27%

Internal Outside
labor*
l b * vendor
57% 10%

* Internal Labor at $121 per hour

Cost of Section 404
I t
Internal L b at $50/h
l Labor t $50/hr.

Overall SOX Cost

Non labor
Non-labor
9%
Internal 404(b) audit
labor* 41%
35% Outside
vendor
15%

* Internal Labor at $50 per hour (Approx rate per FEI, Robert Half, Salary.com)

Cost of Section 404 - Trend

$2500

$2000 $162 -30%
-13%
13%
$633
$ $138 Non-Labor
housands

$1500 $126
$557 Internal labor*
$438 $503 Outside vendor
$1000
Th

$311 404(b) audit
$222
$500 $821 $652 $584

$
Pre AS#5 After AS#5 Next Year


Cost of Section 404 – Non Accelerated (<$75M) (N= 60-
200)

$900 $56
$800 -33%
$41
$700 $327
$600 $318 $42 Non-Labor
housands

$194 $284
$400 Outside vendor
$144
Th

$300 404(b) audit
$99
$200 $311 $259
$100 $172
$


16

Cost of Section 404 – 404(a) only companies (N= 534-938)

$400
$35 -19%
$350
$36
$300 $37
Non-Labor
housands

$250 $258
$200 $196
Outside vendor
$150
Th

404(b) audit - None
$100
$50 $96 $98 $82
$


17

Cost of Section 404 – Accelerated ($75M-700M) (N= 600-970)

$1200
$90 -16%

$1000 $80
$79
$
$508
$800 Non-Labor
housands

$489
$600
$216 Outside vendor
Th

$400 $167 404(b) audit
$135

$200 $350 $281 $270

$


18

Cost of Section 404 – Large >$700M (N= 600-960)

$6000

$5000 $249
-26%

$208
$4000 $195 Non-Labor
housands

$2765
Internal labor*
$3000 $2351
$2193 Outside vendor
Th

$2000 $696 404(b) audit
$480 $344
$1000 $1400 $1127 $1045
$


19

Total Next Year Cost (Labor Recalculated)
( )

$2490
$2500
$2000
sands

$1500
Thous

$686
$1000
$429
$500 $200
$
404 (a) only Non- Accelerated Large
accelerated
Total $200 $429 $686 $2490
Non-Labor $37 $42 $79 $195
Internal labor* $81 $117 $202 $906
Outside vendor $82 $99 $135 $344
404(b) audit
( ) $ $
$172 $
$270 $
$1045
* Internal Labor at $50 per hour (Approx rate per FEI, Robert Half, Salary.com)

20

Predictors of SOX Cost
Market capitalization (public float)
Size f
Si of company (total assets)
(t t l t )
# of years SOX experience

21

SOX Cost vs. Co. Size (Total Assets)
( )
0.79%

0.80%
0.58%
0 58%
SOX Cost % of Assets
s

0.61%
0 61% 0.59%
0.70% 0.55%
0.60%
0.50% 0.39%
0.40%
0.33%
0.27%
0.30%
0.20% 0.14%
0.11%
0 11%
X

$50 - 150M
0.10% 0.11%

Public Float
0.00% 0.08% $150- 700M

1 $700M+
2
3
4+
Years of SOX Compliance

22

SOX Cost vs. Assets - $50 to 150M Float
1185

870 885
1200 825
790
SOX Cost $ Thousands

1000
580
550 590
800
395
600 290

housands
275 295
400 150,000
C

79

Asse Value in $ Th
100,000
58
200 55
40 59 50,000
29
0 28 10,000
30

et
1 5,000
2
3
4+
N= 83-97

23

SOX Cost vs. Assets - $150 to 700M Float
6100

7000
4575

3900
6000
3300
5000 3050 2925 2700
2475
4000 2025
1950

housands
3000 1650
1525 1350 1,000,000
2000 975
C

Asse Value in $ Th
915 825 750,000
1000 675
585 500,000
495
0 405 250,000

et
1 150,000
2
3
4+
N= 84-254

24

SOX Cost vs. Assets - > $700M Float
28000

22000 22000
30000

25000 16000
14000
20000 11000 11000

15000 7000 8000

housands
5500 5500
10000 4000 20,000,000
C

Asse Value in $ Th
1400 10,000,000
5000 1100
1050 1100 5,000,000
825 800
0 825 1,000,000
600

et
1 750,000
2
3
4+
N= 82-453

25

Cost of Section 404(b) – excluding non-accelerated filers
N 1331 – 1494 companies
N=1331 i

404(b) Audit Cost

40% 5 point decrease is 15%

35%
30%
% of To Audit

25%
38%*
otal

20% 35% 404(b) audit
( )
33%
15%
10%
5%
0%
*38% 404(b) audit, 62% traditional audit, indicates audit fees increased by 61% (38/62)
38% audit audit (38/62).
Researchers Kinney and Shepardson estimated first time 404(b) premium was about 100%.
26

Agenda
g
Background
Survey Methodology
S M th d l
Survey Data
Cost of Section 404
Effects of AS#5
Auditors
Conclusions

27

Benefits of SOX (mostly for large companies)
( y g p )

Investor Confidence

Other Co's Financials

Anti-Fraud

Quality Financial Reporting

Audit Committee confidence

Quality f C t l
Q lit of Controls

0% 10% 20% 30% 40% 50% 60% 70% 80%

28

Benefits of SOX Next Year - Optional Survey

Costs outweigh benefits Benefits outweigh costs
-3
3 -2 -1 0 1 2 3

< $75M float > $700M float
< $75M to
700M float

29

Benefits of SOX
Consider going private?

30

Benefits of SOX
Consider delisting?

31

Agenda
g
Background
Survey Methodology
S M th d l
Survey Data
Cost of Section 404
Effects of AS#5
Auditors
Conclusions

32

Effects of AS #5 (including 2007 SEC Guidance)
Relied on AS#5? AS#5 Useful?

No
No
6%
12%

Yes Yes
88% 94%

33

Effects of AS #5
(Including
(I l di 2007 SEC Guidance)
G id )
Evaluation of deficienciess

Reliance on direct testing Good!

Reliance on self-assessments Good!

Reliance on management's i t
R li t' interaction
ti Good!

Nature, timing, and extent of evidence gathered

Number of controls tested Good!

Level of documentation

Number of locations tested

Number of risks subject to testing Good!

-40%-30%-20%-10% 0% 10% 20% 30% 40%
(Decreased) Increased

AS#5 – Internal Work Structured for Auditors
(Next Year)

Not at all A great deal
1 2 3

All companies
i

35

Agenda
g
Background
Survey Methodology
S M th d l
Survey Data
Cost of Section 404
Effects of AS#5
Auditors
Conclusions

36

Users of Financial Statements
Phone survey of 30 users of financial statements
Positive ff t
P iti effect on their confidence
th i fid
Material Weakness disclosures beneficial
No difference based on size
404(b) is necessary

37

Users of Financial Statements
Auditors Noted Improvements Over Time
Reduction i d
R d ti in documentation effort
t ti ff t
Improved communications between auditors and
management
Increased use of professional judgment in scoping
and testing
More focus on higher risk areas
Streamlining of audits subsequent to the first-time
effort required by Section 404 compliance

38

Agenda
g
Background
Survey Methodology
S M th d l
Survey Data
Cost of Section 404
Effects of AS#5
Auditors
Conclusions

39

Conclusions
Costs vary based on size, experience
Higher
Hi h % costs in smaller companies
t i ll i
Internal Labor is most expensive, audit fee is
nextt
Benefits of SOX:
Quality
Q lit controls
t l
Audit Committee confidence

40

QUESTIONS?

Bill Douglas
bill.douglas@costadvisors.com
503-704-3719

www.sarboxpro.com
www.costadvisors.com

20091008 Cost Of SOX From Cost Advisors (C) 2009 All Rights Reserved

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