20091008 Cost Of SOX From Cost Advisors (C) 2009 All Rights Reserved

Study of the Sarbanes-Oxley Act of 2002 Section 404

Internal Control over Financial ReportingRequirements

SEC Office of Economic AnalysisSeptember 2009

Cost Advisors’ Background

Founded 10 years agoH b d i SOX i A ilHave been doing SOX since April 2003Managed numerous large SOXManaged numerous large SOX projectsDeveloped SarbOxPro® softwareDeveloped SarbOxPro® software www.sarboxpro.com

© 2009 Cost Advisors, Inc. All rights reserved

Bill Douglas’ BackgroundFounder of Cost Advisors, Inc. 30 years of experience

M t iti i A ti IT S tManagement positions in Accounting, IT SystemsCFO, IPO, 'Big 4' public accounting, business processes, recovery auditing, internal controls, fraud, internal auditing, Sarbanes-Oxley (SOX)Financial Project management at both large and small public companiesPublished SOX Illustrated – a 200-page book on SOX

Credentials:Credentials:Certified Fraud Examiner (CFE)Certified Public Accountant (CPA) Certified Internal Auditor (CIA)Certified Internal Auditor (CIA)Certified in Financial Forensics (CFF)Licensed Private Investigator (PI)

Instructor for Oregon Society of CPAs


g yFrequent speaker and writer about fraud and controls

AgendagBackgroundS M th d lSurvey MethodologySurvey Data

Cost of Section 404Benefits of Section 404Effects of AS#5Effects of AS#5

Interviews with External Users of FS and AuditorsAuditorsConclusions

© 2008 Cost Advisors, Inc. All rights reserved.

4

BackgroundgCost of SOX has been highAS#5 SEC G id t t 2007AS#5, SEC Guidance to management = 2007 reformsB t d t f l d l t d iBest data from large and accelerated companies

Non-Accelerated extended on 404(b)General FindingsGeneral Findings

Small companies spent greater % Fixed costs not scalableFixed costs not scalable2007 reforms (AS#5) cut costs


5





6

Survey Methodologyy gyAnnounced February 2008Web Survey: December 2008 January 2009Web Survey: December 2008 – January 20098215 companies eligible to participate (25% response rate))Time blocks:

Before AS#5Aft AS#5After AS#5Next Year (year in progress at time of survey)

CEO, CFO, General Counsel (any could delegate), , ( y g )Phone survey of 30 users of financial statements

Lenders, security analysts, credit rating agencies, others


7

Survey Methodology3 Groups3 Groups

Market Cap(# Shares x Stock Price)

Large Accelerated Filer

(10K in 60 days) (10Q in 40 days)

Accelerated

$700M(10Q in 40 days)

Most Respondents404(a) and (b)

Filer(10K in 75 days) (10Q in 40 days)

$75MNon-Accelerated Filer

(10K in 90 days) (10Q i 45 d )

404(a) only


(10Q in 45 days)

Survey MethodologyD t C ll t dData Collected

1. Internal Labor Hours2. Audit Fees3. Outside Vendor Fees4. Non-labor Costs


9

Survey MethodologyTi f C ll t dTimeframe Collected

Current year in progressCurrent year in progressMost recent completed yearThe year prior to thatThe year prior to that


10

Survey MethodologyC tCaveats

Self-selection biasNot found in samplep

Response bias (no penalty for lying)Can’t test for most of this

Only 100 non-accelerated comply with 404(b)Only 100 non accelerated comply with 404(b)None of the costs were audited

Especially audit fees related to 404(b)Internal labor at $121 per hourInternal labor at $121 per hour

FEI had used $50Deferred maintenance of controls could be included in SOX

Controls already required by Section 13(b)(2) of the Exchange Act

Current Year estimates included


11





12

Cost of Section 404 I t l l b t $121/hInternal labor at $121/hr.

Overall SOX Cost

404(b) auditNon-Labor

6%

Overall SOX Cost

( )27%

Outside vendorInternal

l b * vendor10%labor*

57%

* Internal Labor at $121 per hour

Cost of Section 404 I t l L b t $50/hInternal Labor at $50/hr.

Non-labor

Overall SOX Cost

404(b) audit41%

Internal labor*35%

Non labor9%

Outside vendor

15%

35%

* Internal Labor at $50 per hour (Approx rate per FEI, Robert Half, Salary.com)

Cost of Section 404 - Trend

$2500

$2000

$2500

$

$162

$138

-30%-13%

$1000

$1500

$438

$633

$557$503

$138$126

hous

ands Non-Labor

Internal labor*Outside vendor

13%

$500

$1000

$821 $652 $584

$311 $222Th 404(b) audit

$Pre AS#5 After AS#5 Next Year


Cost of Section 404 – Non Accelerated (<$75M) (N= 60-200)200)

$900 $56

$600$700$800$900

$327

$56

$41

$42

-33%

$400$500$600

$194$144

$318

$284

$42

hous

ands Non-Labor


$100$200$300

$311 $259$172

$144

$99

Th 404(b) audit

$$100

Pre AS#5 After AS#5 Next Year

$172


16


Cost of Section 404 – 404(a) only companies (N= 534-938)

$400 $35

$300

$350

$400 $35

$36$37

-19%

$150

$200

$250 $258$205

$196

hous

ands Non-Labor


$50

$100

$150

$96 $98 $82

Th 404(b) audit - None

$

$50

Pre AS#5 After AS#5 Next Year


17


Cost of Section 404 – Accelerated ($75M-700M) (N= 600-970)

$1200 $90

$800

$1000

$1200

$508

$90

$80 $79

-16%

$600

$800

$216

$$489 $489

hous

ands Non-Labor


$200

$400

$350 $281 $270

$216$167 $135Th 404(b) audit



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Cost of Section 404 – Large >$700M (N= 600-960)

$6000

$4000

$5000

$6000

$249

$208-26%

$3000

$4000$2765

$2351$2193

$208$195

hous

ands Non-Labor


$1000

$2000

$1400 $1127 $1045

$696$480 $344

Th 404(b) audit


$1127 $1045


19


Total Next Year Cost (Labor Recalculated)( )

$2500 $2490

$1500

$2000

sand

s

$500

$1000

$200$429

$686

Thou

s

$404 (a) only Non-

acceleratedAccelerated Large

Total $200 $429 $686 $2490Non-Labor $37 $42 $79 $195Internal labor* $81 $117 $202 $906Outside vendor $82 $99 $135 $344404(b) audit $ $172 $270 $1045( ) $ $ $ $


20

* Internal Labor at $50 per hour (Approx rate per FEI, Robert Half, Salary.com)

Predictors of SOX CostMarket capitalization (public float)Si f (t t l t )Size of company (total assets)# of years SOX experience


21

SOX Cost vs. Co. Size (Total Assets)( )

0.80%0 61%

0.79%

0 58%s

0.50%

0.60%

0.70%0.61%

0.39%

0.58%0.55% 0.59%

of A

sset

s

0.20%

0.30%

0.40%

0.14%0 11%

0.33%0.27%

X C

ost %

$700M+

$150- 700M

$50 - 150M

0.00%

0.10%

12

0.11%0.11%

0.08%

Publ

ic F

loat

SOX

23

4+

Years of SOX Compliance


22

SOX Cost vs. Assets - $50 to 150M Float

1200

1185

870825 885

800

1000

1200 790

580 550 590

825

ousa

nds

150,000 400

600

79

395290 275 295

hous

ands

Cos

t $ T

h

10,000

50,000

100,000

0

200 4029

2830

7958 55 59

et V

alue

in $

Th

SOX

C

5,000 1 2 34+

Ass

e

Years of SOX ComplianceYears of SOX Compliance


23

N= 83-97

SOX Cost vs. Assets - $150 to 700M Float

7000

6100

5000

6000

7000

3050

4575

29252475

39003300

2700

ousa

nds

1,000,000 2000

3000

4000

1525975

19501650

1350

24752025

hous

ands

Cos

t $ T

h

250,000

500,000

750,000

0

1000

2000915

585495

405

975825

675

et V

alue

in $

Th

SOX

C

150,000 1 2 34+

Ass

e



24

N= 84-254

SOX Cost vs. Assets - > $700M Float

30000

28000

22000 22000

20000

25000

30000

1400011000 11000

16000

ousa

nds

20,000,000 10000

15000 70005500 5500

4000

110008000

hous

ands

Cos

t $ T

h

1,000,000

5,000,000

10,000,000

0

5000 1050825 825

600

14001100 1100

800

et V

alue

in $

Th

SOX

C

750,000 1 2 34+

Ass

e



25

N= 82-453

Cost of Section 404(b) – excluding non-accelerated filersN 1331 1494 iN=1331 – 1494 companies

404(b) Audit Cost

35%40% 5 point decrease is 15%

20%25%30%

38% 35% 33%otal

Aud

it

404(b) audit*

5%10%15%

35% 33%

% o

f To ( )

0%5%

Pre AS#5 After AS#5 Next Year*38% 404(b) audit 62% traditional audit indicates audit fees increased by 61% (38/62)


26

38% 404(b) audit, 62% traditional audit, indicates audit fees increased by 61% (38/62). Researchers Kinney and Shepardson estimated first time 404(b) premium was about 100%.





27

Benefits of SOX (mostly for large companies)( y g p )

Investor Confidence

Other Co's Financials

Quality Financial Reporting

Anti-Fraud

Q lit f C t l

Audit Committee confidence

0% 10% 20% 30% 40% 50% 60% 70% 80%

Quality of Controls


28

Benefits of SOX Next Year - Optional Survey

-3 -2 -1 0 1 2 3Costs outweigh benefits Benefits outweigh costs

3 0 3

< $75M float

< $75M to

> $700M float

< $75M to700M float


29

Benefits of SOXConsider going private?


30

Benefits of SOXConsider delisting?


31





32

Effects of AS #5 (including 2007 SEC Guidance)

Relied on AS#5? AS#5 Useful?

No12%

No6%

Yes88%

Yes88% 94%


33

Effects of AS #5 (I l di 2007 SEC G id )(Including 2007 SEC Guidance)

Evaluation of deficienciess

R li t' i t ti

Reliance on self-assessments

Reliance on direct testing Good!

Good!

Good!

Number of controls tested

Nature, timing, and extent of evidence gathered

Reliance on management's interaction Good!

Good!

Number of locations tested

Level of documentation

Number of controls tested Good!

-40%-30%-20%-10% 0% 10% 20% 30% 40%

Number of risks subject to testing Good!

(Decreased) Increased

AS#5 – Internal Work Structured for Auditors (Next Year)(Next Year)

1 2 3Not at all A great deal

3

All iAll companies


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36

Users of Financial StatementsPhone survey of 30 users of financial statements

P iti ff t th i fidPositive effect on their confidenceMaterial Weakness disclosures beneficialNo difference based on sizeNo difference based on size404(b) is necessary


37

Users of Financial StatementsAuditors Noted Improvements Over Time

R d ti i d t ti ff tReduction in documentation effortImproved communications between auditors and managementmanagementIncreased use of professional judgment in scoping and testingMore focus on higher risk areasStreamlining of audits subsequent to the first-time effort required by Section 404 complianceeffort required by Section 404 compliance


38





39

ConclusionsCosts vary based on size, experienceHi h % t i ll iHigher % costs in smaller companiesInternal Labor is most expensive, audit fee is

tnextBenefits of SOX:

Q lit t lQuality controlsAudit Committee confidence


40

QUESTIONS?

Bill DouglasBill [email protected]

503-704-3719

www.sarboxpro.comwww.costadvisors.com

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20091008 Cost Of SOX From Cost Advisors (C) 2009 All Rights Reserved