SOX, Section 404 and the SEC: A Huge Estimation Error

  It was one of the worst SEC predicitons in its history.  In the SEC June 2003 release, the agency estimated the cost of complying with its new rules on Section 404, requiring a firm to implement "internal controls."  The estimate?  An average cost of $91,000 a company.  The SEC did not even add the cost of an auditor's attestation.  The additional auditor's fee to add the attestation to an normal audit would be "miminal."  The rules became effective in November of 2004 and early surveys show that  Section 404 cost an average of $4.3 Million per company to implement.  Audit fees increased by a whopping 58%, or an average of over $1Million per company.  The SEC was wrong by a factor of 70!  The SEC's response?  A delay in applying the rules for foreign companies and for companies with under $75Million in revenue.  Domestic companies, in competition with the foreign companies complained.  The SEC held a "roundtable" and then issued a May 15th Interpretative Release chiding auditors and companies to getting to technical in their compliance.  It is no wonder Donaldson resigned soon thereafter. This is one of the biggest blunders in the agency's history.