Auditing Costs under Sarbanes-Oxley
In the wake of the Enron/Worldcom/Tyco/etc. fiascos, Congress got about the work of reforming the regulation of corporate accounting and reporting practices. The result is the now well-known Sarbanes-Oxley Act (full text .pdf) (here's a summary). By way of example only, Sarbanes-Oxley requires:
- [T]hat public companies evaluate and disclose the effectiveness of their internal controls as they relate to financial reporting, and that independent auditors for such companies "attest" (i.e., agree, or qualify) to such disclosure
- Certification of financial reports by chief executive officers and chief financial officers
- Independence, including outright bans on certain types of work for audit clients and pre-certification by the company's Audit Committee of all other non-audit work
- [T]hat companies listed on stock exchanges have fully independent audit committees that oversee the relationship between the company and its auditor
Berkshire-Hathaway spent $24 million on auditing this year, a figure he says would have been closer to $10 million without Sarbanes-Oxley.Based on Buffett's experience, then, Sarbanes-Oxley imposes a roughly 150% increase in auditing costs. Granted, Berkshire Hathaway is hardly representative of most other public companies and its substantial investment operations may contribute to its enormous auditing-related compliance cost. Nevertheless, if a public company -- no matter its size -- hasn't experienced a significant uptick in auditing costs under the Sarbanes-Oxley regime, the company might question whether it is employing best practices when it comes to the nitty gritty of compliance. With substantial civil and criminal penalties available for violators, Sarbanes-Oxley is not to be trifled with.
