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New federal compliance and disclosure laws are hiking corporate expenses far more than expected, making costs more unpredictable and causing lost productivity in areas such as corporate legal departments. Those conclusions come from a recent survey of corporations by Foley & Lardner. The poll, which covers fiscal year 2003, is the second one the firm has conducted in as many years. Attorney Thomas E. Hartman, who directed the survey, said it shows that the average cost of being a public company with annual revenues below $1 billion has increased by 130%, or $1.6 million, since the passage of the Sarbanes-Oxley Act in 2002. Nearly half of that cost came in 2003. Hartman, who chairs Foley & Lardner’s business law department in Washington, said in a recent interview that he was most surprised by the continuing increase in expenses. “People thought it would be down or at least level in 2003,” because so much of the start-up work for Sarbanes was done the year before, he said. Congress passed Sarbanes-Oxley in the wake of scandals like Enron to increase the accuracy of financial reporting by companies. “Most practitioners think Congress will be shocked at the cost” of compliance by the end of 2004, said Terry Roman, a Phoenix senior partner in the corporate and securities section of Snell & Wilmer. Roman said she had not seen the survey but was experiencing the same rising cost trend among her corporate clients. Costs will increase The poll does not purport to be a scientific study, but rather a gauge of trends, according to Hartman. He said a national research firm sent out some 9,000 surveys; public companies returned 115 surveys, private companies 30. In addition to the survey of top corporate executives, the study also uses a database compiled by Standard & Poor’s Investment Services Custom Business unit from recently filed proxy statements. Robert Grammig, a partner in the corporate and securities section of Holland & Knight’s Tampa, Fla., office, confirmed that the trend exists among his clients, adding that “costs will definitely continue to increase substantially this year” as more requirements go into effect. This year is the first for companies to comply with Sarbanes Section 404 standards requiring internal financial controls. Hartman said: “People are just starting to understand the extent of an audit over financial controls . . . .This will increase auditing fees substantially.” Hartman said that the internal control audit is a massive “process that involves digging into arcane data of every transaction, maybe up to 90% of all company transactions will be reviewed and documented.” Patrick Condon, a partner in the Chicago office of the auditing firm Deloitte & Touche, agreed with Hartman that two audits are now needed, one for finances and another one for the internal controls. Condon took part with Hartman in a recent conference call releasing the poll results, which showed that company auditing fees increased by an average of 23% from 2002 to 2003. Auditing costs are expected to surpass easily that increase in 2004. The poll indicated that other causes of rising costs due to Sarbanes were increased directors’ fees, higher insurance rates to cover directors and officers, and loss of productivity from departments tied up with compliance matters. Productivity issue On lost productivity, Hartman said, “[The poll] could very well be talking about in-house counsel,” although the study did not specifically ask that question. “We know that companies said internal costs increased dramatically and that legal costs increased dramatically. In both respects, I think a component of those involve in-house legal costs,” he added. Condon, the auditor, said rising directors’ fees reflect “increased risk and responsibility, especially on the auditing committee.” Anonymous comments In a section of the survey allowing companies to comment anonymously, executives complained that “outside auditing firms are less willing to provide guidance, assistance or insight into accounting or regulatory issues”; that auditors have become “more adversarial”; and that companies “have to turn more often to lawyers” for answers and advice. One question the poll asked: Is your company considering going private or selling itself as a result of new corporate governance and disclosure reforms? While the majority said no, 21% said yes, up from only 13% a year earlier. “We have experienced that, with some of our client base” wanting to explore going private, Roman said. She added that any private company considering going public needs to think seriously about compliance costs. Hartman and Roman both said that they are seeing an increasing number of private and nonprofit companies voluntarily implementing some of the Sarbanes compliance standards simply because they are good business practices, or because directors and auditors are demanding them. Among such measures are CEO/CFO financial-statement attestation, establishment of whistleblower procedures, outside audit of internal financial controls, board approval of nonaudit services by auditors and adoption of corporate governance policy guidelines. Grammig, in Tampa, said he has seen some public companies explore going private, but “it is such a difficult process to pull off that they most likely [decide to] sell out.” He added that some private companies have adopted Sarbanes standards, but usually the companies are thinking about going public in the future and want to put the structure in place.

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