The April 15, 2005 deadline is rapidly approaching: larger companies—with annual sales of between US$75 million and US$200 million—must comply with Section 404 of the US Sarbanes-Oxley Act of 2002 (“SOX”).

Smaller companies—with less than US$75 million of annual sales—have until June 15, 2005.

Of the 9,000 publicly traded companies on US stock exchanges, close to 5,000 companies have annual sales of less than US$200 million.

The Sarbanes-Oxley Act is named after its sponsors, Senator Paul S. Sarbanes and Representative Michael G. Oxley. It aims to prevent financial abuses by publicly held companies following the accounting scandals at Enron and WorldCom.

SOX established new standards for corporate boards and external auditors, and criminal penalties for failing to meet them.

Affected companies have found SOX compliance burdensome and costly. A large portion of the cost is related to the legislation’s Section 404, which requires annual evaluations of internal controls. SOX requires companies to evaluate internal processes and their resulting external effects.

Public companies’ auditing costs doubled and tripled. Puget Energy Inc. reported US$2.1 million in audit fees, an increase of about 145 percent over the previous year. In 2004, Weyerhaeuser Co. spent US$8.3 million in auditor fees, an increase of close to 160 percent over 2003.

A November 2004 survey of 266 American companies’ board members, conducted by RHR International for Directorship magazine, found that compliance costs are affected by size and company structure. Average compliance costs hit the US$16 million mark, up 77 percent from the previous year.

The cost for companies with earnings of less than US$1 billion averaged around US$1.8 million. Companies with earnings between US$1 billion and US$4 billion spent approximately US$4.8 million. For those earning above US$4 billion, costs averaged US$35 million.

Compliance costs must include both internal and external costs. All in all, cost factors include auditor costs, new software, consulting costs, and research and documentation evaluation by company staff.

Dow Chemical Co.’s SOX implementation team spent over 100,000 hours documenting, assessing, and correcting problems, at a cost of more than US$4.5 million.

The 2004 Sarbanes-Oxley Compliance Survey of 222 financial executives showed that 79 percent of those surveyed reported stronger internal controls within their companies, and 33 percent were unhappy with the cost burden. A majority, about 81 percent of those surveyed, wants Congress to revisit SOX.

Efforts are underway to water down the SOX act.

“Some are now downplaying the financial crisis the market suffered,” Sarbanes told corporate lawyers during a meeting last week. “The public should not fall victim to collective amnesia,” he added, referring to the financial finagling by Enron and WorldCom’s executives.

Oxley said, ”Restatements of company financial reports peaked at 414 last year, an indication that the new law is ferreting out problems. Just two months ago, earnings smoothing was confirmed at Fannie Mae. Fiscal mistakes uncovered by regulators resulted in Fannie Mae’s restatement of earnings by $9 billion. This should be sobering news for those who think Sarbanes-Oxley is no longer needed.”