The cost of complying with federal Sarbanes-Oxley regulations appears to be contributing to a surge in public companies becoming private, according to a study the Government Accountability Office released this week.
The study reported that smaller companies—those with $700 million or less in market capitalization—are seeing disproportionately higher audit costs in implementing the 2002 law that increased scrutiny on corporate spending, including travel and entertainment. For the smaller companies, higher costs sprung from increased audit fees and other factors associated with compliance, such as staff additions or outside consultants.
Companies with $75 million or less in market capitalization that filed internal control reports in 2004 saw median audit fees of 1.14 percent of their revenue, while those that did not file the reports had a median fee of only 0.79 percent of their revenue, according to the report. As company size increased, that disparity also decreased. The largest companies, those with market capitalization of more than $1 billion, saw a median audit cost of only 0.13 percent of their revenue if they filed internal control reports, the study indicated.
Meanwhile, the number of companies going private since Sarbanes-Oxley's passage has jumped significantly, the report showed. In 2004, 245 public companies went private compared to 143 in 2001, and those companies' sizes were disproportionately small. Companies cited the reporting costs of remaining public as their top reason to go private.
The report also indicated that the full impact of Sarbanes-Oxley is not yet known because most smaller public companies have yet to fully implement the internal control reporting provisions as required by the act.