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Costs of compliance

We’re coming up to the two year anniversary of Sarbanes-Oxley, the legislation of numerous changes in corporate governance. The Financial Times reports on a survey that found a 50% increase in the number of firms considering going private:

The survey of over 100 public companies by Foley & Lardner, the law firm, and KRC Research, highlights that smaller companies are particularly hard hit.

“The average cost of being public for a company with annual revenue under $1bn in the wake of corporate governance reform has increased…130 per cent from the inception of Sarbanes-Oxley through full-year 2003.”

The biggest effect of the Act itself is on company internal controls, mechanisms for ensuring that financial reporting is accurate and that a company is complying with regulations.

The Act mandates a new internal control regime in which processes are fully documented and tested, and then signed-off by the auditor. Audit fees, which the survey says are already rising steeply, are projected by accountants to rise in the next few months by a further 25-35 per cent for internal control work.

In the same survey last year, 13 per cent of companies said they were considering going private. That rose to 21 per cent this year. US regulators, however, say that the number of companies that have gone ahead and changed their status remains hard to quantify.

Talk is cheap. Saying you’re thinking of going private may reveal little. But it is an interesting side-effect of the legislation that it encourages firms to go private.