The enormous cost of complying with Sarbanes-Oxley Section 404

The Securities and Exchange Commission is being asked to take another look at the cost of complying with Section 404 of the Sarbanes-Oxley Act. This section deals with internal controls in public companies, and a major criticism of SOX is the enormous cost of compliance.Proposed Accounting Standard No. 5 would decrease the costs of compliance, as compared to Accounting Standard No. 2, the current standard. says:

The costs will decrease because companies “will be able to focus on the areas that present the greatest risk of material misstatements in the financials” and their managers will be able to exert judgment concerning which part of their compliance efforts to stress.

Some critics complain that the costs are purported to be lower, but no proof has been offered.

How about this trip down memory lane? In 2003, the SEC estimated the total annual cost of implementing Section 404 at $1.24 billion. That was $91,000 per company. Critics of these numbers said the actual cost was probably 100 times higher.

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