The study revealed that costs associated with corporate governance reform dropped 16 percent for companies with under $1 billion in annual revenue and 6 percent for companies with over $1 billion in annual revenue.

These reductions between 2004 and 2005 were driven by large decreases in costs associated with lost productivity, legal fees and initial corporate governance reform set-up costs. However, these decreases were largely offset by year-over-year increases in audit fees, D&O insurance and board compensation for companies of all sizes.

"Because many of the provisions of the Sarbanes-Oxley Act required initial one-time implementation expenses, we expected to see an overall decrease in the cost of being public this year," said Tom Hartman, study director and Foley partner. "However, we did not expect to see the continued increase in audit fees over fiscal year 2004 – a year in which Section 404 drove costs to an already unprecedented level."

The study revealed that average audit fees have continued to increase for large and small public companies alike. The increases in average audit fees seen in 2004 with the implementation of Section 404 have been sustained in 2005. The study, which analyzed data from more than 850 proxy statements of public companies for fiscal year 2005, found that audit fees increased 22 percent for S&P small-cap companies, 6 percent for S&P mid-cap companies and 4 percent for S&P 500 companies.

The study also supports the claim that smaller public companies are disproportionately impacted by the Section 404 costs. Based on four years of results from Foley's study, percentage increases in average audit fees year over year were generally the same for companies of all sizes until the Section 404 requirements phased-in during 2004. Since that time, S&P small-cap and S&P mid-cap companies have experienced larger percentage increases in average audit fees compared to S&P 500 companies.

Between 2003 and 2005, average audit fees increased an average total of $786,000 for S&P small-cap companies and $1.14 million for S&P mid-cap companies. These increases represented a 141 percent increase for S&P small-cap companies and a 104 percent increase for S&P mid-cap companies. Comparatively, S&P 500 companies experienced a 62 percent increase during this same period.

"There is no question that fees associated with Section 404 have driven up costs for companies of all sizes," said Hartman. "However, based on our data, large public companies are more readily able to absorb these costs while smaller companies are hit with larger percentage increases. These increases have leveled somewhat, but there is no indication that average audit fees are decreasing, particularly for smaller public companies."

Since the enactment of the Sarbanes-Oxley Act, the study reported that the average cost of compliance for companies with under $1 billion in annual revenue has increased more than $1.8 million to approximately $2.9 million, a 174 percent overall increase.

Download the study at
http://www.foley.com/publications/pub_detail.aspx?pubid=3420