Study of the Sarbanes-Oxley Act of 2002 Section
                      404
   Internal Control over Financial Reporting
   ...
Cost Advisors’ Background
 Founded 10 years ago
 Have b
 H     been d i SOX since A il
            doing     i    April
 2...
Bill Douglas’ Background
         Founder of Cost Advisors, Inc.
         30 years of experience
            Management po...
Agenda
 g
 Background
 Survey Methodology
 S      M th d l
 Survey Data
   Cost of Section 404
   Benefits of Section 404
...
Background
    g
 Cost of SOX has been high
 AS#5,
 AS#5 SEC Guidance to management = 2007
            G id      t        ...
Agenda
 g
 Background
 Survey Methodology
 S      M th d l
 Survey Data
   Cost of Section 404
   Benefits of Section 404
...
Survey Methodology
     y          gy
 Announced February 2008
 Web Survey: December 2008 – January 2009
 8215 companies e...
Survey Methodology
3 Groups
                          Market Cap
                         (# Shares x Stock Price)



 Lar...
Survey Methodology
Data Collected
D t C ll t d

1.   Internal Labor Hours
2.   Audit Fees
3.   Outside Vendor Fees
4.   No...
Survey Methodology
Ti f
Timeframe C ll t d
          Collected

 Current year in progress
 Most recent completed year
 The...
Survey Methodology
C    t
Caveats
 Self-selection bias
    Not found in sample
                    p
 Response bias (no pe...
Agenda
 g
 Background
 Survey Methodology
 S      M th d l
 Survey Data
   Cost of Section 404
   Benefits of Section 404
...
Cost of Section 404
           I t
           Internal l b at $121/h
                  l labor t $121/hr.


      Overall ...
Cost of Section 404
                     I t
                     Internal L b at $50/h
                            l Labo...
Cost of Section 404 - Trend

            $2500

            $2000      $162                               -30%
           ...
Cost of Section 404 – Non Accelerated (<$75M) (N= 60-
200)


            $900      $56
            $800                   ...
Cost of Section 404 – 404(a) only companies (N= 534-938)

            $400
                      $35                      ...
Cost of Section 404 – Accelerated ($75M-700M) (N= 600-970)

            $1200
                       $90                  ...
Cost of Section 404 – Large >$700M (N= 600-960)

            $6000

            $5000      $249
                          ...
Total Next Year Cost (Labor Recalculated)
                     (                  )

                                     ...
Predictors of SOX Cost
 Market capitalization (public float)
 Size f
 Si of company (total assets)
                   (t t...
SOX Cost vs. Co. Size (Total Assets)
                                  (            )
                                    ...
SOX Cost vs. Assets - $50 to 150M Float
                                                      1185


                     ...
SOX Cost vs. Assets - $150 to 700M Float
                                                      6100

                     ...
SOX Cost vs. Assets - > $700M Float
                                                       28000

                        ...
Cost of Section 404(b) – excluding non-accelerated filers
N 1331 – 1494 companies
N=1331              i

                 ...
Agenda
 g
 Background
 Survey Methodology
 S      M th d l
 Survey Data
   Cost of Section 404
   Benefits of Section 404
...
Benefits of SOX (mostly for large companies)
                (     y        g     p     )

       Investor Confidence

   ...
Benefits of SOX Next Year - Optional Survey



Costs outweigh benefits                            Benefits outweigh costs
...
Benefits of SOX
 Consider going private?




                                                                     30
     ...
Benefits of SOX
 Consider delisting?




                                                                 31
             ...
Agenda
 g
 Background
 Survey Methodology
 S      M th d l
 Survey Data
   Cost of Section 404
   Benefits of Section 404
...
Effects of AS #5 (including 2007 SEC Guidance)
      Relied on AS#5?            AS#5 Useful?

                            ...
Effects of AS #5
(Including
(I l di 2007 SEC Guidance)
                 G id    )
                    Evaluation of defici...
AS#5 – Internal Work Structured for Auditors
(Next Year)


    Not at all                      A great deal
              ...
Agenda
 g
 Background
 Survey Methodology
 S      M th d l
 Survey Data
   Cost of Section 404
   Benefits of Section 404
...
Users of Financial Statements
 Phone survey of 30 users of financial statements
   Positive ff t
   P iti effect on their ...
Users of Financial Statements
 Auditors Noted Improvements Over Time
   Reduction i d
   R d ti in documentation effort
  ...
Agenda
 g
 Background
 Survey Methodology
 S      M th d l
 Survey Data
   Cost of Section 404
   Benefits of Section 404
...
Conclusions
 Costs vary based on size, experience
 Higher
 Hi h % costs in smaller companies
              t i       ll   ...
QUESTIONS?

          Bill Douglas
bill.douglas@costadvisors.com
          503-704-3719

    www.sarboxpro.com
   www.cost...
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20091008 Cost Of SOX From Cost Advisors (C) 2009 All Rights Reserved

  1. 1. Study of the Sarbanes-Oxley Act of 2002 Section 404 Internal Control over Financial Reporting Requirements SEC Office of Economic Analysis September 2009
  2. 2. Cost Advisors’ Background Founded 10 years ago Have b H been d i SOX since A il doing i April 2003 Managed numerous large SOX projects Developed SarbOxPro® software www.sarboxpro.com © 2009 Cost Advisors, Inc. All rights reserved
  3. 3. Bill Douglas’ Background Founder of Cost Advisors, Inc. 30 years of experience Management positions in A M t iti i Accounting, IT Systems ti S t CFO, IPO, 'Big 4' public accounting, business processes, recovery auditing, internal controls, fraud, internal auditing, Sarbanes-Oxley (SOX) Financial Project management at both large and small public companies Published SOX Illustrated – a 200-page book on SOX Credentials: Certified Fraud Examiner (CFE) Certified Public Accountant (CPA) Certified Internal Auditor (CIA) Certified in Financial Forensics (CFF) Licensed Private Investigator (PI) Instructor for Oregon Society of CPAs g y Frequent speaker and writer about fraud and controls © 2009 Cost Advisors, Inc. All rights reserved
  4. 4. Agenda g Background Survey Methodology S M th d l Survey Data Cost of Section 404 Benefits of Section 404 Effects of AS#5 Interviews with External Users of FS and Auditors Conclusions 4 © 2008 Cost Advisors, Inc. All rights reserved.
  5. 5. Background g Cost of SOX has been high AS#5, AS#5 SEC Guidance to management = 2007 G id t t reforms Best d t f B t data from large and accelerated companies l d l t d i Non-Accelerated extended on 404(b) General Findings Small companies spent greater % Fixed costs not scalable 2007 reforms (AS#5) cut costs 5 © 2008 Cost Advisors, Inc. All rights reserved.
  6. 6. Agenda g Background Survey Methodology S M th d l Survey Data Cost of Section 404 Benefits of Section 404 Effects of AS#5 Interviews with External Users of FS and Auditors Conclusions 6 © 2008 Cost Advisors, Inc. All rights reserved.
  7. 7. Survey Methodology y gy Announced February 2008 Web Survey: December 2008 – January 2009 8215 companies eligible to participate (25% response ) rate) Time blocks: Before AS#5 After Aft AS#5 Next Year (year in progress at time of survey) CEO, CFO, General Counsel (any could delegate) , , ( y g ) Phone survey of 30 users of financial statements Lenders, security analysts, credit rating agencies, others 7 © 2008 Cost Advisors, Inc. All rights reserved.
  8. 8. Survey Methodology 3 Groups Market Cap (# Shares x Stock Price) Large Accelerated Filer (10K in 60 days) (10Q in 40 days) $700M Most Respondents Accelerated 404(a) and (b) Filer (10K in 75 days) (10Q in 40 days) $75M Non-Accelerated Filer 404(a) only (10K in 90 days) (10Q i 45 d in days) ) © 2009 Cost Advisors, Inc. All rights reserved
  9. 9. Survey Methodology Data Collected D t C ll t d 1. Internal Labor Hours 2. Audit Fees 3. Outside Vendor Fees 4. Non-labor Costs 9 © 2008 Cost Advisors, Inc. All rights reserved.
  10. 10. Survey Methodology Ti f Timeframe C ll t d Collected Current year in progress Most recent completed year The year prior to that 10 © 2008 Cost Advisors, Inc. All rights reserved.
  11. 11. Survey Methodology C t Caveats Self-selection bias Not found in sample p Response bias (no penalty for lying) Can’t test for most of this Only 100 non-accelerated comply with 404(b) non accelerated None of the costs were audited Especially audit fees related to 404(b) Internal labor at $121 per hour FEI had used $50 Deferred maintenance of controls could be included in SOX Controls already required by Section 13(b)(2) of the Exchange Act Current Year estimates included 11 © 2008 Cost Advisors, Inc. All rights reserved.
  12. 12. Agenda g Background Survey Methodology S M th d l Survey Data Cost of Section 404 Benefits of Section 404 Effects of AS#5 Interviews with External Users of FS and Auditors Conclusions 12 © 2008 Cost Advisors, Inc. All rights reserved.
  13. 13. Cost of Section 404 I t Internal l b at $121/h l labor t $121/hr. Overall SOX Cost Non-Labor 6% 404(b) audit ( ) 27% Internal Outside labor* l b * vendor 57% 10% * Internal Labor at $121 per hour
  14. 14. Cost of Section 404 I t Internal L b at $50/h l Labor t $50/hr. Overall SOX Cost Non labor Non-labor 9% Internal 404(b) audit labor* 41% 35% Outside vendor 15% * Internal Labor at $50 per hour (Approx rate per FEI, Robert Half, Salary.com)
  15. 15. Cost of Section 404 - Trend $2500 $2000 $162 -30% -13% 13% $633 $ $138 Non-Labor housands $1500 $126 $557 Internal labor* $438 $503 Outside vendor $1000 Th $311 404(b) audit $222 $500 $821 $652 $584 $ Pre AS#5 After AS#5 Next Year * Internal Labor at $50 per hour
  16. 16. Cost of Section 404 – Non Accelerated (<$75M) (N= 60- 200) $900 $56 $800 -33% $41 $700 $327 $600 $318 $42 Non-Labor housands $500 Internal labor* $194 $284 $400 Outside vendor $144 Th $300 404(b) audit $99 $200 $311 $259 $100 $172 $ Pre AS#5 After AS#5 Next Year * Internal Labor at $121 per hour 16 © 2008 Cost Advisors, Inc. All rights reserved.
  17. 17. Cost of Section 404 – 404(a) only companies (N= 534-938) $400 $35 -19% $350 $36 $300 $37 Non-Labor housands $250 $258 $205 Internal labor* $200 $196 Outside vendor $150 Th 404(b) audit - None $100 $50 $96 $98 $82 $ Pre AS#5 After AS#5 Next Year * Internal Labor at $121 per hour 17 © 2008 Cost Advisors, Inc. All rights reserved.
  18. 18. Cost of Section 404 – Accelerated ($75M-700M) (N= 600-970) $1200 $90 -16% $1000 $80 $79 $ $508 $800 Non-Labor housands $489 $489 Internal labor* $600 $216 Outside vendor Th $400 $167 404(b) audit $135 $200 $350 $281 $270 $ Pre AS#5 After AS#5 Next Year * Internal Labor at $121 per hour 18 © 2008 Cost Advisors, Inc. All rights reserved.
  19. 19. Cost of Section 404 – Large >$700M (N= 600-960) $6000 $5000 $249 -26% $208 $4000 $195 Non-Labor housands $2765 Internal labor* $3000 $2351 $2193 Outside vendor Th $2000 $696 404(b) audit $480 $344 $1000 $1400 $1127 $1045 $ Pre AS#5 After AS#5 Next Year * Internal Labor at $121 per hour 19 © 2008 Cost Advisors, Inc. All rights reserved.
  20. 20. Total Next Year Cost (Labor Recalculated) ( ) $2490 $2500 $2000 sands $1500 Thous $686 $1000 $429 $500 $200 $ 404 (a) only Non- Accelerated Large accelerated Total $200 $429 $686 $2490 Non-Labor $37 $42 $79 $195 Internal labor* $81 $117 $202 $906 Outside vendor $82 $99 $135 $344 404(b) audit ( ) $ $ $172 $ $270 $ $1045 * Internal Labor at $50 per hour (Approx rate per FEI, Robert Half, Salary.com) 20 © 2008 Cost Advisors, Inc. All rights reserved.
  21. 21. Predictors of SOX Cost Market capitalization (public float) Size f Si of company (total assets) (t t l t ) # of years SOX experience 21 © 2008 Cost Advisors, Inc. All rights reserved.
  22. 22. SOX Cost vs. Co. Size (Total Assets) ( ) 0.79% 0.80% 0.58% 0 58% SOX Cost % of Assets s 0.61% 0 61% 0.59% 0.70% 0.55% 0.60% 0.50% 0.39% 0.40% 0.33% 0.27% 0.30% 0.20% 0.14% 0.11% 0 11% X $50 - 150M 0.10% 0.11% Public Float 0.00% 0.08% $150- 700M 1 $700M+ 2 3 4+ Years of SOX Compliance 22 © 2008 Cost Advisors, Inc. All rights reserved.
  23. 23. SOX Cost vs. Assets - $50 to 150M Float 1185 870 885 1200 825 790 SOX Cost $ Thousands 1000 580 550 590 800 395 600 290 housands 275 295 400 150,000 C 79 Asse Value in $ Th 100,000 58 200 55 40 59 50,000 29 0 28 10,000 30 et 1 5,000 2 3 4+ Years of SOX Compliance N= 83-97 23 © 2008 Cost Advisors, Inc. All rights reserved.
  24. 24. SOX Cost vs. Assets - $150 to 700M Float 6100 7000 4575 SOX Cost $ Thousands 3900 6000 3300 5000 3050 2925 2700 2475 4000 2025 1950 housands 3000 1650 1525 1350 1,000,000 2000 975 C Asse Value in $ Th 915 825 750,000 1000 675 585 500,000 495 0 405 250,000 et 1 150,000 2 3 4+ Years of SOX Compliance N= 84-254 24 © 2008 Cost Advisors, Inc. All rights reserved.
  25. 25. SOX Cost vs. Assets - > $700M Float 28000 22000 22000 30000 SOX Cost $ Thousands 25000 16000 14000 20000 11000 11000 15000 7000 8000 housands 5500 5500 10000 4000 20,000,000 C Asse Value in $ Th 1400 10,000,000 5000 1100 1050 1100 5,000,000 825 800 0 825 1,000,000 600 et 1 750,000 2 3 4+ Years of SOX Compliance N= 82-453 25 © 2008 Cost Advisors, Inc. All rights reserved.
  26. 26. Cost of Section 404(b) – excluding non-accelerated filers N 1331 – 1494 companies N=1331 i 404(b) Audit Cost 40% 5 point decrease is 15% 35% 30% % of To Audit 25% 38%* otal 20% 35% 404(b) audit ( ) 33% 15% 10% 5% 0% Pre AS#5 After AS#5 Next Year *38% 404(b) audit, 62% traditional audit, indicates audit fees increased by 61% (38/62) 38% audit audit (38/62). Researchers Kinney and Shepardson estimated first time 404(b) premium was about 100%. 26 © 2008 Cost Advisors, Inc. All rights reserved.
  27. 27. Agenda g Background Survey Methodology S M th d l Survey Data Cost of Section 404 Benefits of Section 404 Effects of AS#5 Interviews with External Users of FS and Auditors Conclusions 27 © 2008 Cost Advisors, Inc. All rights reserved.
  28. 28. Benefits of SOX (mostly for large companies) ( y g p ) Investor Confidence Other Co's Financials Anti-Fraud Quality Financial Reporting Audit Committee confidence Quality f C t l Q lit of Controls 0% 10% 20% 30% 40% 50% 60% 70% 80% 28 © 2008 Cost Advisors, Inc. All rights reserved.
  29. 29. Benefits of SOX Next Year - Optional Survey Costs outweigh benefits Benefits outweigh costs -3 3 -2 -1 0 1 2 3 < $75M float > $700M float < $75M to 700M float 29 © 2008 Cost Advisors, Inc. All rights reserved.
  30. 30. Benefits of SOX Consider going private? 30 © 2008 Cost Advisors, Inc. All rights reserved.
  31. 31. Benefits of SOX Consider delisting? 31 © 2008 Cost Advisors, Inc. All rights reserved.
  32. 32. Agenda g Background Survey Methodology S M th d l Survey Data Cost of Section 404 Benefits of Section 404 Effects of AS#5 Interviews with External Users of FS and Auditors Conclusions 32 © 2008 Cost Advisors, Inc. All rights reserved.
  33. 33. Effects of AS #5 (including 2007 SEC Guidance) Relied on AS#5? AS#5 Useful? No No 6% 12% Yes Yes 88% 94% 33 © 2008 Cost Advisors, Inc. All rights reserved.
  34. 34. Effects of AS #5 (Including (I l di 2007 SEC Guidance) G id ) Evaluation of deficienciess Reliance on direct testing Good! Reliance on self-assessments Good! Reliance on management's i t R li t' interaction ti Good! Nature, timing, and extent of evidence gathered Number of controls tested Good! Level of documentation Number of locations tested Number of risks subject to testing Good! -40%-30%-20%-10% 0% 10% 20% 30% 40% (Decreased) Increased
  35. 35. AS#5 – Internal Work Structured for Auditors (Next Year) Not at all A great deal 1 2 3 All companies i 35 © 2008 Cost Advisors, Inc. All rights reserved.
  36. 36. Agenda g Background Survey Methodology S M th d l Survey Data Cost of Section 404 Benefits of Section 404 Effects of AS#5 Interviews with External Users of FS and Auditors Conclusions 36 © 2008 Cost Advisors, Inc. All rights reserved.
  37. 37. Users of Financial Statements Phone survey of 30 users of financial statements Positive ff t P iti effect on their confidence th i fid Material Weakness disclosures beneficial No difference based on size 404(b) is necessary 37 © 2008 Cost Advisors, Inc. All rights reserved.
  38. 38. Users of Financial Statements Auditors Noted Improvements Over Time Reduction i d R d ti in documentation effort t ti ff t Improved communications between auditors and management Increased use of professional judgment in scoping and testing More focus on higher risk areas Streamlining of audits subsequent to the first-time effort required by Section 404 compliance 38 © 2009 Cost Advisors, Inc. All rights reserved.
  39. 39. Agenda g Background Survey Methodology S M th d l Survey Data Cost of Section 404 Benefits of Section 404 Effects of AS#5 Interviews with External Users of FS and Auditors Conclusions 39 © 2008 Cost Advisors, Inc. All rights reserved.
  40. 40. Conclusions Costs vary based on size, experience Higher Hi h % costs in smaller companies t i ll i Internal Labor is most expensive, audit fee is nextt Benefits of SOX: Quality Q lit controls t l Audit Committee confidence 40 © 2008 Cost Advisors, Inc. All rights reserved.
  41. 41. QUESTIONS? Bill Douglas bill.douglas@costadvisors.com 503-704-3719 www.sarboxpro.com www.costadvisors.com
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