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Foley Study Reveals Continued High Cost of Being Public

02 August 2007

More Companies Seek Alternative Means to Going Private; Out of pocket costs increase by double digit percentages.

According to the fifth annual study conducted by Foley on the costs associated with corporate governance reform, companies of all sizes experienced double-digit percentage increases in compliance costs during fiscal year 2006 in comparison to fiscal year 2001, the year prior to the enactment of the Sarbanes-Oxley Act.

Specifically, the Foley study reports that the average cost of compliance for companies with under $1 billion in annual revenue has increased more than $1.7 million to approximately $2.8 million since the enactment of the Sarbanes-Oxley Act. This represents a 171 percent overall increase between fiscal years 2001 and 2006.

“Compliance costs for all companies have continued to remain high, even after the impact of Section 404 of the Act has been realized and absorbed,” said Tom Hartman, study director and Foley partner. “We did see a decrease in certain costs during 2006, particularly in internal costs associated with Section 404 compliance. Nevertheless, out-of-pocket costs continued to rise at double-digit rates in 2006.”

Out-of-pocket costs associated with Sarbanes-Oxley compliance were up 13 percent in fiscal year 2006 from fiscal year 2005 for public companies with annual revenue of under $1 billion, and were up 12 percent over the same period for public companies with annual revenues over $1 billion. The increased cost of audit fees, board compensation and legal fees were the primary drivers of these out-of-pocket percentage increases.

Audit Fees Continue to Increase
External audit fees have continued to increase and represent a significant expense for public companies. The increases seen in connection with the initial implementation of Section 404 in fiscal year 2004 have been sustained in fiscal years 2005 and 2006.

On average, external audit fees have increased 271 percent between fiscal years 2001 and 2006 for companies with under $1 billion in revenue. Between fiscal years 2005 and 2006, external audit fees for these companies increased by 4 percent.

“Some experts predicted that external audit fees would decrease after the initial implementation of Section 404 audits as external auditors became more familiar with their client’s accounting controls and therefore more efficient in conducting their audits,” explained Hartman. “Our study results do not support this prediction. Indeed, external audit fees have been the only cost our study has shown to increase every year since the Sarbanes-Oxley Act was passed.”

In fiscal year 2006, audit fees alone represent more than 47 percent of out-of-pocket costs associated with compliance for public companies with under $1 billion in annual revenue and 60 percent for companies with $1 billion and over in annual revenue.

Audit fees have, however, leveled off in 2006 for companies of all sizes with relatively modest year-over-year increases. The percentage increase in average audit fees was relatively consistent for all companies analyzed with a five percent increase for S&P small-cap companies, a four percent increase for S&P mid-cap companies and a six percent increase for S&P 500 companies.

Going Private
Consistent with results from previous years, nearly one in four survey respondents, or 23 percent, are considering going-private transactions as a result of corporate governance and public disclosures reforms. Additionally, respondents to Foley’s 2007 survey continue to consider other options, including selling the company (16 percent), and merging with another company (14 percent).

“It is no surprise that this year’s respondents are increasingly seeking alternatives to going private transactions,” said Hartman. “This is most likely due to increased awareness among the business community of the attractive prices being paid over the last year by private equity players in the mergers and acquisitions market.”

To review the full study results, please visit www.foley.com/2007publicstudy.

Methodology
In 2007, Foley & Lardner LLP worked with national research firm KRC Research in a fifth annual study designed to gauge the true financial impact of corporate governance reform on public companies. Due to the complexities of current reforms and the myriad of governance issues facing companies today, a multi-tiered approach was used to gather the necessary data. The study consisted of a survey designed to measure attitudes toward current reform among top executives and a comprehensive review of a database compiled by Standard and Poor’s Investment Services Custom Business Unit from proxy statements filed in 2007 for certain S&P Small-Cap, S&P Mid-Cap and S&P 500 companies.

About Foley & Lardner
Foley & Lardner LLP provides the full range of corporate legal counsel. Our attorneys understand today’s most complex business issues, including corporate governance, securities enforcement, litigation, mergers and acquisitions, intellectual property counseling and litigation, outsourcing and information technology, labor and employment, and tax. The firm offers total solutions in the automotive, emerging technologies, energy, entertainment and media, financial services, food, golf and resort services, insurance, health care, life sciences, nanotechnology, and sports industries.