The cost associated with corporate governance reform for public companies decreased slightly over the last year but still remain prohibitive, according to a study by the law firm Foley & Lardner LLP.
Foley's fourth annual study, "The Cost of Being Public in the Era of Sarbanes-Oxley," showed the total costs of being public for companies with annual revenue less than $1 billion dropped 16 percent from $3.44 million in 2004 to $2.88 million in 2005.
The overall costs for companies with more than $1 billion decreased 6 percent from $12.26 million in 2004 to $11.50 million in 2005.
Audit fees, however, continued to rise, especially for Standard & Poor's small capital companies, which experienced a 22 percent increase in 2005. Mid-cap companies audit fees rose 6 percent while Standard & Poor's 500 companies increased 4 percent.
In the last two years, the change has been even more dramatic.
Between 2003 and 2005, average audit fees increased $786,000 for S&P small-cap companies and $1.14 million for S&P mid-cap companies, representing a jump of 141 percent and 104 percent, respectively.
Comparatively, S&P 500 companies experienced a percentage increase of 62 percent during this same period.
The study revealed that audit fees alone now represent more than 50 percent of out-of-pocket costs associated with Sarbanes-Oxley Act compliance for public companies with under $1 billion in annual revenue, up from 33 percent of such costs in the last year before the Sarbanes-Oxley Act was enacted.
"It hits your profitability and will translate into some kind of movement on the street," said San Diego's Mike McCloskey, a partner in Foley's securities litigation, enforcement and regulation practice.
"It will translate into perhaps less than positive or even negative treatment on the street as far as investors are concerned."
The study included an analysis of proxy statement data from more than 850 public companies.
According to the results, since the Sarbanes-Oxley Act was introduced in 2001, 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, representing a 174 percent overall increase.
Approximately 20 percent of survey respondents are considering going private as a result of corporate governance and public disclosure forms.
"What kind of chilling effect is it going to have on larger (private) companies thinking of going public?" he asked. "That's an open question."
He pointed to local defense giant SAIC and its announced intention of going public.
"I can't imagine they're chomping at the bit," McCloskey said. "I don't know that their enthusiasm is as robust as it was prior to Sarbanes-Oxley coming out on street."
The legislation was introduced as a response to the alleged accounting fraud at Enron, WorldCom and other corporations.
It, in effect, requires a company's accounting practices and internal controls to be audited.
"The open question is, 'Did we go too far?'" McCloskey asked. "Certainly we have bitten off a lot and it costs public companies a lot of money.
"The jury is still out if it's doing all the good that it set out to do."