Sarbanes-Oxley Act: Consideration of Key Principles Needed in Addressing Implementation for Smaller Public Companies Page: 22 of 93
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Smaller Public Companies
Incurred Other Costs in
Complying with the ActAccording to executives of smaller public companies that we contacted,
smaller companies incurred substantial costs in addition to the fees they
paid to their external auditors to comply with section 404 and other
provisions of the act. For example, 128 of the 158 smaller public
companies that responded to our survey (81 percent of respondents) had
hired a separate accounting firm or consultant to assist them in meeting
section 404 requirements. Services provided included assistance with
developing methodologies to comply with section 404, documenting and
testing internal controls, and helping management assess the effectiveness
of internal controls and remediate identified internal control weaknesses.
These smaller companies reported paying fees to external consultants for
the period leading up to their first section 404 report that ranged from
$3,000 to more than $1.4 million. Many also reported costs related to
training and hiring of new or temporary staff to implement the act's
requirements. Additionally, some of the smaller companies that responded
to our survey reported that their CFOs and accounting staff spent as much
as 90 percent of their time for the period leading up to their first section
404 report on Sarbanes-Oxley Act compliance-related issues. Finally, many
of the smaller public companies incurred missed "opportunity costs" to
comply with the act that were significant. For example, nearly half (47
percent) of the companies that responded to our survey reported deferring
or canceling operational improvements and more than one-third (39
percent) indicated that they deferred or cancelled information technology
investments.
While most companies, including the majority of the smaller public
companies that responded to our survey and that we interviewed, cited
section 404 as the most difficult provision to implement, smaller public
companies reported challenges in complying with other Sarbanes-Oxley
Act provisions as well. Nearly 69 percent of the smaller public companies
that responded to our survey said that the act's auditor independence
requirements had decreased the amount of advice that they received from
their external auditor on accounting- and tax-related matters. About half
the companies that responded to our survey indicated that they incurred
additional expenses by hiring outside counsel for assistance in complying
with various requirements of the act. Examples mentioned included legal
assistance with drafting charters for board committees, drafting a code of
ethics, establishing whistleblower protection, and reviewing CEO and CFO
certification requirements. About 13 percent of the smaller public
companies reported incurring costs to appoint a financial expert to serve
on the audit committee, and about 6 percent reported incurring costs to
appoint other independent members to serve on the audit committee.
While these types of costs were consistent with those reported for largerGAO-06-361 Sarbanes-Oxley Act Challenges for Small Companies
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United States. Government Accountability Office. Sarbanes-Oxley Act: Consideration of Key Principles Needed in Addressing Implementation for Smaller Public Companies, report, April 13, 2006; Washington D.C.. (https://digital.library.unt.edu/ark:/67531/metadc302027/m1/22/: accessed March 29, 2024), University of North Texas Libraries, UNT Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.