Compliance is not cheap, companies say.

U.S. companies say complying with new rules stemming from the Sarbanes-Oxley Act of 2002 and aimed at improving corporate accountability is costing them millions in both time and money.

Additional regulations imposed by Congress and the Securities and Exchange Commission (SEC) are beginning to take a bite out of businesses' bottom lines. While companies agree that the government rules are needed, they say the cost of compliance is high. According to The Wall Street Journal, the rules are coming into effect at a time when corporations are already burdened with other increasing costs such as health care. In addition, companies say their audit costs are increasing by as much as 30 percent or more this year due to tougher audit and accounting standards, including complex rules to bring more off-balance-sheet items onto the books. They also are paying steep fees to fund a new accounting oversight board--as much as $2 million a piece annually for some large businesses, according to The Wall Street Journal.

Many companies say some of the rules force them to devote thousands of staff hours to formalize procedures already in place. The harshest criticism is aimed at Section 404 of the act, which is meant to improve internal controls over financial reporting. Beginning in June 2004, management at most large companies must have in place tight internal controls, assess the effectiveness of those controls, and then pay for an independent assessment by outside auditors.

A recent survey of 321 companies released by Financial Executives International, which represents top corporate officials, revealed that businesses with more than $5 billion in revenue expect to spend an average of $4.7 million each to implement the new 404 rule this year. Much of that will be spent on consultants, lawyers, auditors, and new software. Some costs, such as installing software and designing systems, will decrease after the first year. But other expenses are expected to stay constant, including paying an outside auditor to assess the controls annually. Companies with more than $5 billion in revenue expect those fees to reach $1.5 million annually, according to the survey.

Staff time is also a concern. According to the survey, companies with annual revenue of less than $25 million will devote almost 2,000 staff hours to first-year compliance efforts. Corporations earning more than $5 billion a year will dedicate 41,201 hours toward this goal.

While SEC issued its final internal-control rule in June, the Public Company Accounting Oversight Board, which regulates the accounting profession, has yet to finalize its rule for how auditors should assess the controls. The oversight board hopes to issue a final standard by the end of March, but that is not soon enough for companies that are already nervous about how another rule will affect their bottom line.

The Cost of Compliance

                                  REVENUE FIRST-YEAR        FIRST-YEAR
                                        COSTS                  HOURS

       Less than $25 million         $0.28 million             1,996
  $25 million to $99 million         $0.74 million             3,080
$100 million to $499 million         $0.78 million             5,118
$500 million to $999 million         $1.04 million             6,950
  $1 billion to $4.9 billion         $1.83 million            13,355
             Over $5 billion          $4.6 million            41,201

Source: Financial Executives International

Note: Table made from bar graph.