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Compliance efforts come with big accounting bills

By Kristina Shevory
Seattle Times Eastside business reporter

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Yet before he can devote his money and time to those concerns, there are tough new accounting standards under the Sarbanes-Oxley Act his company has to meet.

Redhook and other small public companies have until the end of next year to meet the tougher standards, but the process is long and expensive.

The brewery expects to swallow $500,000 in Sarbanes-Oxley related accounting expenses this year and an additional $250,000 in 2005. Shipman wouldn't mind if he thought the spending would help his business, which lost $1.8 million on sales of $38.7 million last year, but he doesn't believe it will.

"Sarbanes is a mess," said Shipman, who this year added two accountants to his nine-member accounting department to handle the new requirements. "I don't expect it to add to the accuracy or the quality of disclosure — it only adds costs."

Public companies across the country are getting hit with big accounting bills this year. The Securities and Exchange Commission estimates the new standards will cost companies a collective $4 billion or more. And it won't end this year.

The costs keep growing over the next few years because companies will have to monitor their internal controls and financial systems for compliance, as required under Section 404 of Sarbanes-Oxley. Deadlines vary depending on the end of the company's fiscal year, but all public companies in the country must be compliant by the end of 2005.

Meeting the new requirements is no easy task. The act, passed in 2002, imposed sweeping corporate and accounting reforms, expanded financial-disclosure requirements and set new legal and ethical standards for auditors, boards and attorneys.

Company executives now must certify the accuracy of their quarterly and annual reports, document internal controls, hire additional outside accountants, lawyers and auditors to ensure the independence of their financial statements, and often invest in pricey software for the new accounting guidelines.

"Companies are asking themselves, 'Is Sarbanes-Oxley too expensive?' " said Robert Felton, a Seattle-based consultant at McKinsey & Co. who focuses on corporate governance. "But for now, they're saying, 'Sarbanes is worth it, let's put it together and then see what happens.' "

Executives at larger public companies expect to pay an average of $3.14 million for Sarbanes-related expenses, according to a July survey of 224 public companies with an average of $2.5 billion in sales.
 
The survey by Financial Executives International, a group that represents chief financial officers, treasurers and controllers, found the anticipated expenses had risen 62 percent over the past seven months due to rising auditor fees and other internal and external costs.

Sarbanes-related expenses are rising for smaller companies, too, because they often have tiny accounting staffs that don't have the time or expertise to deal with the new rules.

"No one knows how to comply, and most of them are scrambling to figure out what to do," said Steve Yount, co-founder of Sarbox Solutions, a Bellevue consulting company that helps companies deal with the new rules.

A business with fewer than 400 employees will pay from $100,000 to $150,000 in compliance costs, while a midsize company can expect to spend from $200,000 to $500,000, Yount estimated.

The expenses won't end when companies become compliant, either. Businesses will have to monitor their internal controls every year and devote additional staff or consultant time.

Sarbanes-Oxley has translated into big business for financial consultants, software companies, lawyers and accountants. Software companies such as Microsoft, Oracle and PeopleSoft have released approximately 60 new programs over the past year tailored to help companies ensure their reporting and data collection meet the new accounting rules.

Accounting firms have hired hundreds of accountants and in some cases increased their prices by a third to handle the demand. Still, some firms say they are struggling to hire enough qualified CPAs — especially ones familiar with Sarbanes-Oxley's Section 404 requirements on financial controls.

"There's not enough accountants on the planet to do 404 work," said Ed Drosdick, the SEC Practice partner at Moss Adams in Seattle.

Kristina Shevory: 206-464-2039 or kshevory@seattletimes.com