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Accounting firms continue to rake in audit fees. The costs of complying with the audit provisions of the Sarbanes-Oxley Act, a law passed by Congress in 2002 to restore investor confidence after a series of accounting scandals, rose 22 percent in fiscal year 2005 for small-cap companies and 4 percent for larger companies, according to a Foley & Lardner study on the costs of corporate governance reform that surveyed more than 850 public companies. “While there has certainly been considerable public discussion about a dramatic reduction in costs associated with audit fees this year, our study finds the opposite to be true,” says Thomas Hartman, a partner in Foley’s Detroit office and the director of the study. Released June 15, the study further supports claims by small companies that Section 404 of the act, which requires company management to assess and publicly report on the effectiveness of the company’s internal controls to ensure accurate financial statements, disproportionately burdens them, Hartman says. The Securities and Exchange Commission made clear last month that it will not extend the deadline for compliance with Section 404 for companies with a market capitalization of less than $75 million beyond July 2007, or issue a blanket exemption for small companies. But there may be some relief forthcoming. Arthur Bill, a partner in Foley’s D.C. office who specializes in securities law, says the SEC and other regulatory agencies are busy formulating changes to the rules that could make them less expensive and complicated. The SEC could release the proposed regs and begin soliciting comments by the end of the summer or early autumn, Bill says. Meanwhile, the study did include good news about the cost of being a public company. It shows that the overall cost of being public dropped from historically high levels in 2004 — declining 16 percent for companies with under $1 billion in revenue and 6 percent for companies with more than $1 billion in revenue. Decreases in legal fees, initial setup costs for corporate governance, and lost productivity led to the dip in the overall cost, despite increases in audit fees, liability insurance for directors and officers, and board compensation. But the number of companies considering going private as a result of the corporate governance reforms remains relatively steady at 21 percent.
Alexia Garamfalvi can be contacted at [email protected].

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