Clearly, the costs of audits have shot up, but perhaps they should grow even more. Part of the rationale for this observation is that previously audit firms low-balled their audit fees to gain consulting contracts. To make this work, the accountants had to price the consulting work not only to obtain a profit from that activity but also to make up for the discounts on the audit work. With the removal of some of the consulting work via Sarbanes-Oxley, auditors have to elevate their audit fees.

Additionally during the roaring 1990s, auditors tended to shave their auditing labors, a practice I have dubbed "the epidemic of underauditing." This resulted from the "commodification" of auditing by which auditors started asking what levels of audit risk were acceptable to them. Presumably, they were attempting to equate the marginal revenues from auditing with its marginal costs. This economic approach failed for at least two reasons. First, in their analysis they excluded some of the auditing fees from the marginal revenues because they perceived those proceeds as consulting in nature. This exclusion unfortunately lowered their target marginal costs. Second, and more importantly, the decision model changed their mind sets to believe that audit failures were tolerable. Instead of ferreting out accounting fraud, these public accountants thought it acceptable to allow some slippage to occur as long as they could limit the number of audit failures. The rub was that there was no way to contain the fireworks.

Worse, managers, directors, and auditors have forgotten that financial statements should serve the interests of stockholders. The 1933 and 1934 securities acts called for financial reports that conveyed financial information to the investment community, information that was accurate, fair, truthful, and complete. So the primary beneficiaries of transparent audited financial statements are investors and creditors, but not managers or their professional advisers.

To say this another way, some managers who are carping about the proliferation of the cost of governance are performing a naïve and self-interested economic analysis. They see their increased costs and they see no benefits to themselves, so they conclude the process is worthless. Unfortunately, they remain blind to the reality that while the costs are borne by the business enterprise, the benefits accrue to the investors and the creditors. This reality moves us away from traditional decision theory that maximizes the utility of the individual decision maker to the world of social welfare. These economic models become much tougher.

I concede that those managers who protest the soon coming Section 404 disclosures on internal controls have a valid point. I do not see that these disclosures will benefit managers, directors, auditors, or anybody in the investment community. However, what did you expect when Enron and Worldcom and Global Crossing imploded, as well as other corporations? What do you imagine when a thousand companies restate their earnings? Did you really assume that investors would not object? Did you really think that Congress could ignore the pleas of the public for justice? Maybe Section 404 disclosures have a benefit after all -- the benefit that public unrest becomes quelled and that the system is allowed to continue.

If anything, the cost of governance needs to rise even further. We need a system that is perceived fair to the individual investor. Without that perception, the little guy may exit the system. While individually they are small, collectively that's a lot of money. Instead of whining about the cost of governance, managers should be thankful that the system is still going and that they have their jobs. Always remember that you could be replaced by a government worker.

J. EDWARD KETZ is the MBA Faculty Director at the Smeal College of Business at The Pennsylvania State University. Dr. Ketz's teaching and research interests focus on financial accounting, accounting information systems, and accounting ethics. He is the author of Hidden Financial Risk, which explores the causes of recent accounting scandals, and columnist of The Accounting Cycle.