The fifth annual study, The Cost of Being Public in the Era of Sarbanes-Oxley, conducted by Foley & Lardner LLP reports a 13 percent increase in fiscal year 2006 from fiscal year 2005 for public companies with annual revenue of under $1 billion, and a 12 percent increase over the same period for public companies with annual revenues over $1 billion.

The study also found that since 2001, the year prior to the enactment of the Sarbanes-Oxley Act, the average cost of compliance for companies with under $1 billion in annual revenue has increased more than $1.7 million to approximately $2.8 million since the enactment of the Sarbanes-Oxley Act.

This represents a 171 percent overall increase between fiscal years 2001 and 2006.

External audit fees have continued to increase and represent a significant expense for public companies. The increases seen in connection with the initial implementation of Section 404 in fiscal year 2004 have been sustained in fiscal years 2005 and 2006.

On average, external audit fees have increased 271 percent between fiscal years 2001 and 2006 for companies with under $1 billion in revenue. Between fiscal years 2005 and 2006, external audit fees for these companies increased by 4 percent.

"Some experts predicted that external audit fees would decrease after the initial implementation of Section 404 audits as external auditors became more familiar with their client's accounting controls and therefore more efficient in conducting their audits," said Tom Hartman, study director and Foley partner. "Our study results do not support this prediction. Indeed, external audit fees have been the only cost our study has shown to increase every year since the Sarbanes-Oxley Act was passed."

In fiscal year 2006, audit fees alone represent more than 47 percent of out-of-pocket costs associated with compliance for public companies with under $1 billion in annual revenue and 60 percent for companies with $1 billion and over in annual revenue.

Audit fees have, however, leveled off in 2006 for companies of all sizes with relatively modest year-over-year increases. The percentage increase in average audit fees was relatively consistent for all companies analyzed with a five percent increase for S&P Small-Cap companies, a four percent increase for S&P Mid-Cap companies and a six percent increase for S&P 500 companies.

Consistent with results from previous years, nearly one in four survey respondents, or 23 percent, are considering going-private transactions as a result of corporate governance and public disclosures reforms. Additionally, respondents to Foley's 2007 survey continue to consider other options, including selling the company (16 percent), and merging with another company (14 percent).

"It is no surprise that this year's respondents are increasingly seeking alternatives to going private transactions," said Hartman. "This is most likely due to increased awareness among the business community of the attractive prices being paid over the last year by private equity players in the mergers and acquisitions market."

The study consisted of a survey designed to measure attitudes toward current reform among top executives and a comprehensive review of a database compiled by Standard and Poor's Investment Services Custom Business Unit from proxy statements filed in 2007 for certain S&P Small-Cap, S&P Mid-Cap and S&P 500 companies.

See also:

• Foley's 2006 study (July 2006): Study: Sarbanes Costs Lower, Audit Fees Higher
• FEI's 2006 study (May 2007): Sarbanes Compliance Costs Decline Again, Auditor Fees Unchanged