Audit Fees Still Climbing

Section 404 compliance cost Corporate America less in year four of adoption than in each of the first three years, according to a survey of 185 companies conducted by Financial Executives International. However, overall audit costs climbed slightly from last year.

According to the FEI survey, which included 168 "accelerated filers" -- companies with market capitalizations above $75 million -- total average cost for Section 404 compliance was $1.7 million during fiscal year 2007. While a direct comparison cannot be made from 2006 costs, as the respondent pool varies year to year, the results show a continued decline in compliance costs. The responding companies had average annual revenues of $4.7 billion.

"As companies continue to find efficiencies in complying with Section 404 and make compliance part of a routine practice, we have seen a continued decline in costs." Michael Cangemi, FEI

The survey also revealed that total audit fees for U.S. accelerated filers averaged $3.6 million, representing a slight (1.8%) increase from the previous year.

"As companies continue to find efficiencies in complying with Section 404 and make compliance part of a routine practice, we have seen a continued decline in costs," said FEI President and CEO Michael P. Cangemi. "While 404 auditor costs also declined 5.4% as the auditor scope of work narrowed, these costs were offset by a reported five percent increase in the average hourly audit rate charged by auditors."

In the fourth year of Section 404 compliance, accelerated filers managed to reduce costs within direct control of their companies, reporting drops in both internal and external people hours, and well as auditor attestation fees.

• Companies reported requiring an average of 11,100 people hours internally to comply with Section 404 in 2007, representing a decrease of 8.6% from the previous year.
  
  
• Companies reported requiring an average of 1,244 external people hours to comply with Section 404 in 2007, representing a decrease of 13.7% from the prior year of compliance.
  
  
• Auditor attestation fees paid by accelerated filers in 2007 constituted 23.7% of the accelerated filer's total annual audit fees and averaged $846,000, representing a 5.4% decrease from 2006.

Similar to the previous year, the survey found that respondents with centralized operations had lower total costs of compliance in 2007 than did those respondents with decentralized operations.

• Total average 2007 compliance costs for companies with centralized operations were $1.3 million
  
  
• Total average 2007 compliance costs for companies with decentralized operations were $1.9 million, 30.1 percent higher than for those with centralized operations.

"FEI has championed a number of suggested improvements to increase efficiency in Section 404 compliance, while maintaining effectiveness. The results from this survey demonstrate that, overall, auditors appear to be on course to achieve that goal," added Cangemi. "The majority of respondents reported Section 404 work, and work to prepare the annual audit is now more integrated, with auditors using a more risk-based approach to 404 adoption."