Sarbanes Oxley: Compliance Costs Hit Most At Mid-Sized Companies

Sarbanes Oxley has been a controversial piece of legislation ever since it was enacted in 2002. Many dispute whether the results have been worth the seep costs, and nearly everyone agrees that the costs of compliance have been expensive. To date, compliance with Sarbanes Oxley has cost US companies more than $26 billion dollars.

Large companies have had to bite the bullet and adopt Sarbances Oxley across their organizations. While very small companies have been able to get by with one deferment after another, allowing them to continually postpone the inevitable requirements of Sarbanes Oxley. It has been the mid-sized companies that have been hit proportionately the largest in the costs of implementing compliance.

A report in the Sarbanes Oxley Compliance Journal looked in more detail at the costs that mid-sized companies needed to bear. Mid-sized companies were defined as those with revenues between $500 and $750 million and with market capitalizations between $500 million and $3 billion. The report identified 911 mid-sized companies in the United States, and roughly 10 percent of them (91) have disclosed their annual spendings towards Sarbanes Oxley compliance within their annual 10-K filings.

These companies spent on average .29% of their revenues on compliance. It is interesting that among the mid-sized companies, spending averaged around $1.2 million, but the number was highest for the smallest companies in the sampling, closer to $2 million. The results seem counter-intuitive. One would expect bigger companies to have larger and more complex operations and hence require a greater cost to properly audit and account for the larger operation.

The report cites one reason for why larger mid-sized companies can do more for less: economies of scale. Larger organizations have more structure and they’re more easily able to create a policy for one part of their organization and then transfer that process to other parts of the organization. Smaller companies are just less efficient since their processes may be less well defined and less homogeneous across the organization. Larger companies with centralized organizations have the smallest compliance costs.

This conclusion doesn’t bode well for very small companies. These companies have managed to escape having to come to terms with compliance, but when the time comes, because their organizations typically even more loosely structured than mid-sized organizations, they may have to face disproportionately higher compliance costs than do mid-sized and large companies.