The cost of integrity is proving to be too high for some firms.

In recent weeks, several surveys have revealed that corporate governance costs have soared, as many companies, especially smaller and midcap firms, scramble to comply with the terms of the Sarbanes Oxley Act enacted last July.

The new data could help some business leaders to lobby Congress for amendments to the new regulations, which they see as too sweeping and unfair. Still, reform isn't likely to be forthcoming any time soon, particularly because some experts say rising fees are a necessary part of restoring trust and that companies could ultimately end up saving money on litigation costs.

Studies by three separate firms recently have shown a big jump in compliance expenses. Law firm Foley & Lardner surveyed 40 chief executives, finance chiefs and other executives (mostly from mid- and small-cap firms) and reviewed the proxy statements of 450 public companies to gauge how corporate governance outlays have risen since the new regulations were signed into law.

On the basis of a review of Securities and Exchange Commission filings, partner Lance Kimmel said director compensation and auditing fees rose at a much faster rate in 2002 compared with the prior year. He noted that fees to accountants were up between 27% and 35% last year, depending on the size of the firm. That compares with a year-over-year increase of just 2% to 11.7% in 2001.

"Many of these increases are considered 'leading edge' ... since results for fiscal 2002 do not include a full year of Sarbanes Oxley or full implementation of Sarbanes Oxley-related requirements," Foley & Lardner said in a report.

Kimmel noted that many small-cap companies are seeing double-digit percentage increases in legal fees and that many middle-market companies expect costs directly associated with being public to increase by almost 100% as a result of new SEC rules and changes to exchange listing requirements.

Meanwhile, a survey by management consulting firm Parson Consulting found that compliance costs have increased by up to 20% for more than half of the 100 companies it interviewed.

A separate study by software firm Axentis and consultants Christian & Timbers recently estimated that the cost of being public has risen by $8.6 billion from last year, with firms paying much more for outside directors and for implementing effective compliance solutions. The two companies also noted that insurance for directors and officers has increased sharply. General Electric ( GE), for example, recently said it paid $22.1 million for insurance for directors and officers in 2002, almost four times the $5.8 million it paid the year before.

While it's not clear what the true cost to corporate America will be from the new legislation, some say it is proving burdensome, particularly for smaller firms that are less able to absorb the expenses.

"We cannot afford to be public with 120% increases in costs," said one financial professional in response to Foley & Lardner's survey. Critics also contend that the new law has contributed to the weakness in the IPO market, as companies plump for the safer and cheaper option of remaining a private entity.

Another respondent to Foley's survey said he was unhappy with the "one-size-fits-all" solution, noting that "resources and controls are different for our 150-employee firm vs. a 15,000-employee ... company."

Still, Jeffrey Berg, chairman of the corporate practice at Luce Forward Hamilton & Scripps, disagrees with corporate-governance gripes. In fact, he believes that the costs of compliance are generally overstated and that "if they are significantly higher in a particular case, this is an unintended consequence of the new rules or the result of overreaction by the company or its board."

Dov Seidman, chief executive of legal research firm LRN, doesn't dispute the big rise in costs, and he feels companies aren't overreacting -- but he does believe that the new rules will benefit firms in the end. "I do think fees have gone up significantly in some areas," he said. "But the return on investment will be far greater."

Indeed, a recent study from General Counsel Roundtable found that, on average, an extra dollar allocated to the compliance budget decreases damages, settlements and fines by $1.37. After incorporating other costs of compliance-related failures, including damage to reputation and lost productivity, the return on investment may currently exceed 400%, the firm found.

"Companies can pay a few million now, or risk hundreds of millions, if not billions, lost in market cap with noncompliance if a company is publicly exposed," said Steve Lindseth, chairman of Axentis.

Gordon Kaiser, co-leader of the corporate practice for Squire, Sanders & Dempsey, also noted that the cost of corporate governance is "well worth it if the changes will restore investors' faith in the integrity of the market." He added, "The backbone of the economy is open access to the capital markets."

Proof that the increased scrutiny is working came on Wednesday, when Tyco ( TYC) said it had uncovered a 55-cent-per-share charge after conducting "intensified internal audits" and other reviews.

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