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Large and midsize public companies will see the high cost of complying with post-Enron Corp. internal financial control rules drop considerably during the current fiscal year, according to a study sponsored by the world’s four biggest accounting firms. The largest public companies, those with market capitalizations exceeding $700 million, will see compliance costs for �404 of the Sarbanes-Oxley Act of 2002 fall an average of 42 percent this year, the second 12-month period the measures will be in effect. Smaller companies with $75 million to $700 million in market value could see costs drop by as much as 39 percent. The Big Four firms, PricewaterhouseCoopers LLP, Deloitte & Touche LLP, Ernst & Young LLP and KPMG LLP, sent the study along to the Securities and Exchange Commission and the Public Company Accounting Oversight Board, which together oversee and enforce SOX rules. “Companies made big investments in the first year doing remediation and maintenance of their systems,” said Ray Beier, managing director at PricewaterhouseCoopers, explaining the big drop in anticipated costs. “The companies and auditors have learned from year one and are using that increased efficiency and applying it in year two,” he added. However, some feel the Big Four figures are a bit overblown. Kelly Dreishpoon, audit manager of the internal control practice in the New York office of certified public accountant Rothstein, Kass & Co., said costs will no doubt fall but is skeptical such a sharp drop will occur. Dreishpoon noted that year one compliance with �404 was “such a scramble” during its initial year that no one had time to plan for making it better before the current fiscal year got underway. “A lot of people still aren’t familiar with tools that are available to them or are waiting for better tools or they’re waiting for more guidance” from government agencies and trade groups that enforce the law, including the SEC, PCAOB and COSO [Committee of Sponsoring Organizations of the Treadway Commission]. Since the law was adopted, the most controversial provision has been �404, which governs internal controls over financial reporting. The rule mandates that listed companies publicly explain their internal financial controls each year. And their auditors must attest to those controls’ effectiveness. The year one cost of compliance incurred by companies $700 million and up averaged about $7.3 million and is expected to drop to $4.3 million. For companies in the $75 million to 700 million range, costs came in at around $1.5 million and are expected to drop to $900,000. Based on a survey of 96 large companies and 120 smaller ones, the Big Four study “suggests what many observers have said for some time … that a significant portion of first-year costs of implementation was the result of start-up and one-time factors that will diminish over time,” the firms wrote in a letter addressed to SEC Chairman Christopher Cox. “We believe policy reviews should recognize the dynamic nature of the 404 process,” the letter said, adding that the firms see “a growing consensus among companies, investors and other third parties that Sarbanes-Oxley and Section 404 are delivering substantial benefits.” Nevertheless, �404 has been particularly onerous for smaller public companies that fear the costs will overwhelm them. They hope regulators will find an effective alternative that will satisfy both the intent of the law and the investor. The Big Four’s study comes in advance of a Dec. 14 public meeting of the Securities and Exchange Commission’s Advisory Committee on Smaller Public Companies, at which time the SEC is scheduled to consider possible changes to current rules for companies smaller than $75 million. The SEC is preparing to submit a final report on Sarbanes-Oxley’s impact on those companies. In September, the SEC gave them an extra year to come to grips with �404. The new compliance deadline for these companies is July 15, 2007. Copyright �2005 TDD, LLC. All rights reserved.

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