Thousands of companies are now racing to comply by yearend with Section 404 of the Sarbanes-Oxley Act. The provision requires publicly traded corporations to vouch for internal controls over their financial transactions at every step of the way -- like terms of a product sale and when payments are recorded and by whom -- and flag any shortcomings.
"SIGNIFICANT COST." That's no small task. A recent survey of 224 companies by the Financial Executives International (FEI), which represents CFOs, finds that companies will spend an average of $3.1 million and some 30,700 hours to comply. That's up from estimates of $1.9 million and 15,300 in a January poll.
Yellow Roadway (YELL
) is typical. The Overland Park (Kan.) trucking outfit must check out 20,000 processes and has 200 employees assigned full-time to the job, plus 20 outsiders, mostly from its auditor, KPMG. The price tag: more than $3 million, figures Chief Executive William Zollars, or 8 cents a share from earnings. "It's a big deal," he gripes.
Eli Lilly & Co. (LLY
) will be out even more. The $12.5 billion pharmaceutical maker will spend between $5.5 million and $6.5 million to meet Section 404 requirements. "It has been an significant cost to our company," says Arnold Hanish, Lilly's chief accounting officer.
Much of that outgo is income for bookkeepers. Based on its survey, FEI calculates that accounting firms will collect roughly 50% more in audit fees in 2004 than in 2003, thanks to Section 404 reviews. Per client, that's an average of $825,000 in additional fees.
SMALL FRY, TOO To deal with this upsurge in business, the Big Four are hiring like crazy and logging extraordinary amounts of overtime. KPMG has added 650 experienced auditors in the last year, specifically for Section 404 reviews. It has also upped its college recruitment by 40%, or 400 hires, in the last two years. "This is not a Y2K issue, where it goes away," says Timothy Flynn, KPMG's vice chairman of audit, risk, and advisory services.
PricewaterhouseCoopers, meanwhile, has hired more than 1,600 auditors to go over clients' internal processes, and has even brought in 400 more from other English-speaking lands as temps. "It's a scramble," says Dennis Nally, PwC's U.S. chairman and senior partner.
The mad dash to beat the fast-approaching deadline will swell PwC's top line. It'll help the bottom line, too, Nally says, though the firm's expenses are up as well. For instance, he estimates that PwC has spent more than $40 million on employee training. "This whole effort is much more significant than anyone imagined 12 months ago," he says.
Smaller firms are raking it in, too. Grant Thornton has hired 50 people in Chicago, boosting its payroll by 10%, to handle Section 404 paperwork. "And we could use even more," adds Michael Hall, managing partner of the Chicago office. "Know anyone?" Dark clouds do hold silver linings. Arndt is a senior correspondent in BusinessWeek's Chicago bureau