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Alex Castelli

 

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Almost a decade after Congress passed the Sarbanes-Oxley corporate accountability law, Maryland companies say it’s not nearly as costly and onerous as they initially feared.

And some say complying with the law has forced companies to adopt more efficient accounting procedures — and save money in the process.

What has particularly helped the smaller public companies — known as non-accelerated filers — is an exemption from a particular portion of the law in Section 404(b) that requires an auditor to verify the company’s internal controls, said Elizabeth S. Gantnier, director of quality control for Baltimore accounting and consulting firm Stegman & Co. Last year’s Dodd-Frank Wall Street Reform and Consumer Protection Act exempted these smaller companies.

Since receiving that exemption, “most smaller companies are not too excited about the law anymore,” Gantnier said this week. ”They still have to comply with 404(a), but the fact that [a company’s assessment] doesn’t get audited relieves them of much of the cost.”

Section 404(a) requires all public companies to include in their annual reports a report on the effectiveness of the company’s internal controls over financial reporting. Section 404(b) requires an independent auditor to support the company’s assessment of those controls.

The legislation was introduced by then-Sen. Paul S. Sarbanes (D) of Baltimore and then-Rep. Michael Oxley (R-Ohio). Congress passed it in 2002 in the wake of corporate scandals involving Enron and other large public companies. Its adoption sparked a hue and cry from public companies over its requirements.

In fact, by now even the larger accelerated filers — companies with a stock market value of $75 million to $700 million — have pretty much incorporated the law into their accounting and reporting procedures, Gantnier said.

“They don’t seem to be too concerned about the ongoing cost of compliance at this point,” she said.

Alex Castelli, managing principal of the Tysons Corner, Va., office of Bethesda accounting and consulting firm Reznick Group, agreed that most companies have adjusted.

“There were a lot of delays when it first came out. It was new and expensive,” Castelli said. “Nine years later, small companies aren’t required to do the auditing section. ... People have figured out how to comply.”

Members of the Maryland Association of CPAs have said that the burden of SOX has been reduced in recent years, said Tom Hood, executive director. But they are concerned about potential increases in the compliance burden from the federal health insurance reform law and Dodd-Frank, he said.

“Companies have figured out efficiencies and systems to reduce the compliance burden, while auditors have also gained efficiencies,” Hood said.

Still, some Maryland companies cited increased costs related to the law in recent financial and annual reports. Among those was Medifast, an Owings Mills weight-loss company that reported in its most recent annual report that audit fees paid to accounting firms for services that include Sarbanes-Oxley compliance increased by 72 percent to $316,000 in 2010 from the previous year.

Medifast, which recently opened a new weight control center in Silver Spring and two others in Northern Virginia, this year restated earnings statements for 2008 and 2009 to reflect “the recognition of certain expenses in the year in which they were incurred rather than when they were paid,” Executive Chairman Bradley T. MacDonald and CEO Michael S. McDevitt said in a statement. Net income jumped by 72 percent to $19.6 million last year over 2009, while revenues increased by 52 percent to $257.6 million.

Integral Systems, a Columbia satellite services company that has agreed to be bought by a San Diego military contractor, expected to spend $1 million in consulting fees alone during last year’s third quarter to resolve “previously disclosed Sarbanes-Oxley material weaknesses related to revenue recognition and internal controls in financial reporting,” Paul Casner, president and CEO, said in a conference call on the company’s fiscal 2010 earnings report. Spokesman Andrew Miller said company executives had no further comment.

Hard to account for accountability

The Public Company Accounting Oversight Board, a private nonprofit formed by the law to oversee auditors of public companies, does not keep statistics on the number of companies that have complied or how much they have spent to comply, said board spokeswoman Shauna Riley.

Surveys have found that companies are paying less to comply these days than in 2004, the first year many implemented controls. Publicly held companies paid an average of $3.3 million in total audit fees for fiscal 2010, down from $4.8 million for fiscal ’09, according to a survey by Financial Executives International. Those fees include more than just those stemming from Sarbanes-Oxley.

The average business paid $4.4 million just to comply with the law in 2004, a figure that dropped to $1.7 million by 2007, according to earlier surveys by the executives group that measured just SOX-compliance costs. More than 80 percent of companies with revenues of less than $100 million spent less than $100,000 in their most recent fiscal year to comply with Sarbanes-Oxley, according to another survey released in June by consulting and internal audit advisory firm Protiviti, which has a Baltimore office. Those costs have fallen as much as 50 percent from the first to the fourth year of compliance, according to the survey.

Most companies and organizations reduced their compliance costs by integrating information technology, operations and other regulatory efforts, said Karen Furstenberg, partner of risk advisory services with accounting firm Dixon Hughes Goodman. The Charlotte, N.C., firm has a Rockville office.

“Additional guidance allowing audit firms to rely on internal control work being performed internally was also a huge factor in reducing costs,” Furstenberg said.

Mergers, acquisitions and the introduction of new products can change a company’s risk profile and affect Sarbanes-Oxley documentation and testing requirements, she said.

“Stakeholders should continually challenge the approach and integration of testing to ensure the effort is providing accurate and meaningful results,” Furstenberg said.

Paying less is one thing. Gauging whether the law has helped curb the abuses that led to the Enron scandal and others is another.

“Every time you hear about a new corporate scandal, people ask about SOX and whether it has been effective,” Castelli said. “I think it has increased efficiency of operations and created greater accountability within companies and their board of directors. Management is more accountable for actions. ... But it’s hard to measure if ultimately the law stopped any of the abuses.”

In the Protiviti survey, about half of the corporate executives said the law had helped improve operational efficiency and their traditional audits, as well as helped them better understand their companies’ system of internal controls. Only 14 percent said there had been no benefits to their businesses.

While the law targets primarily companies that sell stock to the public, some private companies must comply with certain provisions. For instance, Reznick Group, the largest accounting firm in Maryland with fiscal 2010 revenues of $195.5 million, according to Inside Public Accounting, must register with the oversight board and undergo a peer review process to test quality controls every three years.

But that process is not a huge headache, Castelli said.

“It’s something we have to maintain regardless,” he said.

Boost to some businesses

The law has helped many accounting firms and software companies attract clients and generate revenues.

The largest certified public accounting firms experienced an increase in services in the early years of the law and continue to have work as they have to report on the mid-sized to large public companies’ internal controls, Hood said.

Prior to the Sarbanes-Oxley Act, clients turned to Owings Mills software provider Chesapeake System Solutions to assist them in increasing efficiencies by streamlining procedures and processing high volumes of data, said Sheila A. Vogelberger, vice president of accounting consulting and development. The law shifted industries’ demand so that companies aren’t focusing strictly on efficient data processing, she said.

“Instead, customers are seeking automated methods to strengthen their overall controls, identify potential risk and provide management with assurance that the financial statements that they are certifying are accurate,” Vogelberger said.

Chesapeake Systems’ products help lower compliance costs by replacing more time-consuming manual work with automated systems, she said.

“Previously, organizations relied on accountants ticking and tying numbers to various sources to verify accuracy, performing significant testing and using manual checklists to ensure that financial statements were accurate,” Vogelberger said.

Auditors’ costs also are reduced because they can rely on automated internal controls and conduct tests remotely, she said.

Companies have not only spent money to comply with the law, but saved money through compliance with greater efficiency, Vogelberger said.

“Money is saved, processes are streamlined and risks are minimized,” she said. “Financial transparency allows for organizations to make better, more informed business decisions. As a result, organizations benefit, as do investors.”

The accounting profession is having to deal with other regulatory efforts besides Sarbanes-Oxley, said Hood and Phyllis Burlage, president of Burlage Associates, a small accounting firm in Millersville. Those areas include new Extensible Business Reporting Language [XBRL] filing requirements for public companies and new accounting standards for private businesses.

“There is increased regulation on the accounting industry as a whole,” Burlage said. “Peer review has been around for a while. But the events that led to SOX put peer review on the forefront.”

kshay@gazette.net

Costs for SOX compliance decline

Publicly held companies paid an average of $3.3 million in total audit fees for fiscal 2010, down from $4.8 million for fiscal ’09, according to a survey by Financial Executives International. The fees include more than only those due to Sarbanes-Oxley.

The group’s last survey on SOX fees alone showed an average of $1.7 million spent in 2007, down from $2.9 million in 2006.

More than 80 percent of companies with revenues of less than $100 million spent less than $100,000 in their most recent fiscal year to comply with Sarbanes-Oxley, according to a survey by Protiviti.

About half of companies with revenues from $100 million to $10 billion spent from $100,000 to $500,000 to comply, according to Protiviti.