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The cost of complying with the new corporate governance reforms continues to rise, according to a recent study. In particular, the fees that companies pay to their auditors and directors have soared since the Sarbanes-Oxley Act became law in 2002. As a result, the survey found that more public companies are thinking about going private or putting themselves up for sale. Released in May by Foley & Lardner, the study is the law firm’s second annual poll on the corporate governance costs for public companies. This year’s survey includes responses from executives at 26 public companies with annual revenue of $1 billion or more, and 85 public companies with annual revenue under $1 billion. According to Foley partner Thomas Hartman, the poll doesn’t purport to be a scientific study, but rather a gauge of trends. Hartman, who directed the survey, chairs Foley’s business law department in Washington, D.C. The study found that at public companies with revenue under $1 billion, corporate governance expenses have increased 130 percent since the passage of Sarbanes-Oxley, to almost $2.9 million in fiscal year 2003. And contrary to some predictions that corporations would only suffer a onetime hit in compliance costs after the law’s passage, the Foley study reported that expenses rose almost as much in 2003 as they did the year before. Hartman says he was surprised by this continuing increase. He explains that because so much SOX work was done in fiscal year 2002, “people thought [compliance costs] would be down or at least level [off] in 2003.” The biggest expense at public companies with revenue under $1 billion was for D&O insurance. These businesses also saw a rise in their accounting and legal expenses, as well as in board compensation. In fact, director fees increased at a higher rate in 2003 than in the previous year. Companies of all sizes saw board compensation go up 15-19 percent last year, versus 9-12 percent in 2002. Patrick Condon, a partner in the Chicago office of Deloitte & Touche, says this reflects “[directors'] increased risk and responsibility, especially on the auditing committee.” As for accounting fees, both Condon and Hartman agree that companies can expect to pay their outside auditors even more in fiscal year 2004. That’s because businesses must comply for the first time with section 404 of Sarbanes-Oxley, which requires internal financial controls. As a result, companies will have to perform two audits, Condon says � one for finances, and another for internal controls. According to Hartman, an internal control audit is a massive process that “involves digging into arcane data of every transaction � maybe up to 90 percent of all company transactions will be reviewed and documented.” He adds, “People are just starting to understand the extent of [such] an audit.” The continuing rise in costs for public companies may explain why more are thinking about going private or selling themselves. Among the respondents to this year’s Foley study, 21 percent said they were considering such an option, up from 13 percent the previous year. Robert Grammig, a Tampa-based partner with Holland & Knight, confirms that he has seen some public companies explore going private. But, he adds, “it is such a difficult process to pull off that they most likely [decide to] sell out.” On the flip side, Grammig says that some private companies are adopting Sarbanes-Oxley standards, despite the added expense. He explains that these businesses are usually thinking about going public in the future, and want to put the proper structures into place now. Other private businesses are implementing these measures because they are good business practices, or because directors and auditors are demanding them. Not surprisingly, a section of the Foley survey that allowed respondents to make anonymous comments was full of complaints. Executives griped 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.

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