The Journal “Accountancy Age” has reported that in connection with rushing to establish internal financial controls systems to comply with Section 404 of the Sarbanes Oxley Act (SOX), a number of companies have abandoned cost control and security concerns, and have no idea how much money they have spent on corporate compliance.

The report was based on a survey conducted by the Information Security Forum that indicated that Sarbanes-Oxley compliance was diverting spending away from addressing other security threats.

It is safe to assume that there is a certain amount of bias on the part of a group called the Information Security Forum against devoting money to SEC compliance at the expense of building up computer systems against viruses and hackers.

But the idea that companies are not tracking what they are spending to meet the obligations in SOX to be better at tracking what they are spending is a little troubling.

In all, Section 404 compliance continues to be a problem for companies.

Alex Davern, a CFO at a technology company who is part of an advisory committee of the AeA, as well as an SEC advisory committee that's involved in an ongoing study of the law, has already weighed in on the significant cost issues regarding Section 404.

He is quoted as saying, “Section 404 is greatly flawed and requires significant modification. Not only is the actual cost of implementing lit] 35 times more expensive than the SEC originally estimated, but it also has placed an undue burden on small and medium-sized businesses — the backbone of the American economy.”

Last month NASDAQ vice president Edward King told a Securities and Exchange Commission forum that the costs of Section 404 "are not always commensurate to its benefits, especially with regard to smaller public companies.” Some of the SEC commissioners have express interest in providing some regulatory relief, which may take some time to implement in light of the recent change-over in chairmen.

Section 404 has auditors working overtime and companies spending much more on accounting fees than anyone expected.

Compliance Week reports that Section 404 compliance costs are still running high this year, even though some had hoped the costs would decline compared to the large front-end investments companies made in 2004 to meet compliance deadlines.

Among other SOX cost impacts reported by Compliance Week:

In fiscal 2004, the average cost to be a public reporting company (for companies of annual sales of $1 billion or more) was $14.3 million, a 45 percent increase from 2003;

Audit fees, one of the key costs driven by Section 404 compliance, increased an average of 84 percent for small-cap companies, and 92 percent for mid-cap companies; and

Fees paid to directors at small-cap companies increased 17 percent.

There are also reports of companies that are leaving the public markets to avoid the increased SOX compliance costs.

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Bruce Dravis is a partner at Downey Brand LLP operating primarily in the firm's Sacramento and Roseville offices, specializing in corporate, securities and business law. His column appears in The Daily Recorder on the third Monday of each month.