By Martin Sinderman
Contributing Writer

Like their counterparts nationwide, South Carolina-based public companies are spending big bucks to comply with federally-mandated reforms intended to protect shareholders.

At the same time, a number of their CFOs are wondering if these outlays will actually accomplish what the feds had in mind.

The Public Company Accounting Reform and Investment Protection Act of 2002, also known as the Sarbanes-Oxley Act or SOX, was enacted by Congress in response to the public outcry over corporate and accounting fraud and corruption after Enron, Worldcom and other scandals involving public companies emerged.

Aimed at issuers of publicly traded securities, corporate board members, management, auditors and lawyers, SOX includes provisions requiring public company CEOs and CFOs to personally certify the accuracy of all quarterly and annual reports.

Section 404 of the law also mandates that public companies annually test and document the effectiveness of their internal financial controls and accounting procedures, with the results reviewed and certified by independent outside auditors.

Section 404 compliance has turned out to be a particularly expensive proposition for companies. According to a report issued earlier this year by researchers at the University of Nebraska at Omaha, aggregate auditing costs for 633 Fortune 1,000 companies jumped from $1.4 billion between 2003 and 2004, to between $2.2 billion and $3.6 billion, with much of the increase attributed to implementation of SOX.

For the 71 companies in the survey that broke out SOX audit fees separately, the report notes that audit fees increased by an average of $2.6 million during this period, an increase attributed to SOX.

Closer to home, at SCANA Corp., “General audit fees for 2004 increased approximately 92 percent, or $1,065,723, over costs in 2003, with the significant majority of the increase being directly related to additional fees associated with SOX compliance,” says Bryan Hatchell, a spokesman for the Columbia-based energy holding company.

Big bucks

Sept. 30 will be the first time Coastal Financial Corp. reports on Section 404 compliance, according to Jerry Rexroad, CFO of the Myrtle Beach-based holding company of Coastal Federal Bank.

“I don’t know exactly what the impact will be on audit fees, but I do know they will be going up substantially. When the dust settles, our fees to outside auditors could be up 100 percent,” Rexroad says.

Thanks to Section 404, audit costs are up some 75% over historical averages at North Charleston-based Polymer Group Inc., another company that will be reporting its SOX compliance for the first time this year.

Complying with Section 404 is a particularly expensive proposition for a global company like Polymer Group, according to Willis Moore III, CFO of the developer, manufacturer and marketer of engineered materials for medical, hygiene, industrial and specialty uses.

“We operate in 10 different countries, including China, The Netherlands, France, Argentina and Mexico,” says Moore. The language barriers have necessitated that the company hire an outside consultant to do the documentation and testing required by Section 404, he says, “because it doesn’t make sense to hire a large staff in the U.S. that can read and write multiple languages.”

At Charleston-based Blackbaud Inc., a provider of software and related services designed specifically for nonprofit organizations, the cost figures related to the company’s first year of Section 404 compliance are not in yet, according to CFO Timothy Williams.

“But my guess is that the minimum incremental cost of this effort this year will be at least $1 million,” he says.

Worth it?

Spend an extra $1 million here, an extra $1 million there and factor in a 100% increase elsewhere, and, as the late Illinois Sen. Everett M. Dirksen allegedly noted, “pretty soon you’re talking about real money.”

Are the costs of SOX, and particularly Section 404 compliance, worth the benefits?

“It is hard for me to say every single dollar spent here in this effort is beneficial to investors,” says Williams. “But on the other hand, there have been plenty of ugly stories in the market about companies that have not operated in a totally transparent way and obviously didn’t have controls in place, so it is hard to argue that there isn’t some benefit.”

Coastal Financial’s Rexroad says he feels that, at least so far, the cost of SOX has outweighed any benefits.

“Over time, though, with some moderation and further interpretation of what was initially intended, I think we could reach a happy medium,” he says.

Says Polymer Group’s Moore: “I like the intentions of SOX—it was probably something that was appropriate and necessary to put into place. But like anything new, the implementation has had some rough edges. It’s been a learning experience and an expensive experience.”

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