Four years ago, TeleCommunication Systems Inc., a wireless-data provider in Annapolis, Md., paid $250,000 to its outside accounting firm for an audit and other services. Last year, it paid more than $900,000.

The reason for the increase? The 2002 Sarbanes-Oxley Act.

When Congress ushered in the landmark corporate-reform legislation, much was said about its potential for improving governance and preventing a repeat of the rash of financial fraud that wreaked havoc on investors' pocketbooks in recent years. Three years later, regulators, legislators and many executives agree much of the law was needed.

But some critics also now argue that the costs of implementing key provisions of the law are beginning to exceed the benefits. Indeed, studies show that companies are paying bills that far outpace what regulators had predicted, prompting some -- particularly small businesses -- to argue that they can't afford the expense.

"The cost for smaller companies is enormous compared with what they earn, and they just don't have the resources to do the amount of detail that's been required," says Colleen Sayther Cunningham, chief executive of Financial Executives International, a Florham Park, N.J., advocacy group for financial executives.

In response to concerns about the costs for smaller businesses, the Securities and Exchange Commission has delayed implementation of a key section of Sarbanes-Oxley -- the internal-controls assessment requirements, known as Rule 404 -- until 2007 for companies with less than $75 million in market capitalization. Companies with less than $100 million in market capitalization, meanwhile, said in a survey by Financial Executives International last March that they expected to pay an average of more than $820,000 to comply with the internal-controls rule. And for companies with revenue of less than $1 billion, a January 2005 survey by the law firm Foley & Lardner LLP estimated that the average annual cost of being a public company in fiscal 2004 more than tripled since Sarbanes-Oxley was passed, to $3.4 million, with audit fees representing about a third of total costs.

According to the study, which based its conclusions on on analysis of proxy statements from more than 700 public companies, audit fees for companies in the Standard & Poor's Small-Cap 600 index surged an average of 84 percent in fiscal 2004, following increases of 17 percent in 2003 and 34 percent in 2002. Similarly, fees at S&P Mid-Cap 400 companies jumped 92 percent for 2004, while fees at S&P 500 companies rose 55 percent.

While Sarbanes-Oxley makes other requirements of public companies, such as setting up whistleblower hot lines and ensuring the presence of independent board members, by far the biggest part of compliance costs are those associated with Rule 404. The rule requires public companies to perform internal reviews of their control systems, then hire an outside auditor to verify the review's findings. Critis say this results in a duplication of efforts -- and a doubling of companies' costs.

"There's a lot of redundancy," says Alex Davern, chief financial officer at National Instruments Corp., Austin, Texas, and chairman of the Washington-based American Electronics Association's committee to reform Rule 404. "The external auditor comes along and retests" everything that management has already looked at, says Mr. Davern.

While no one disputes that strong controls are important, critics such as Mr. Davern say Rule 404 is overly burdensome. "The benefits of the rule remain completely unproven," says Mr. Davern. "Shareholders have never had an opportunity to vote that this is a good use of money. We are taxing shareholders without giving them any representation."

The mounting costs have prompted some public companies to consider taking their businesses private. Last month, Meredith Enterprises Inc., a real-estate investment trust with $13.3 million in market capitalization, filed an application with the SEC to delist its shares from the American Stock Exchange, citing, in part, increased costs attributed to Rule 404. In a survey of 147 public companies, Foley & Lardner, the New York law firm, found that 20 percent of respondents said they were considering going private, up from 13 percent in 2003. Respondents also indicated they were increasingly considering other options in response to increased corporate-governance and public-disclosure requirements, including selling the company (10 percent, up from 6 percent) or merging with another company (14 percent, up from 7 percent).

Annual Sarbanes-Oxley compliance bills for an individual company can add up to anywhere from a few hundred thousand dollars to more than $8 million, depending on the company's size. In a report commissioned by the Big Four accounting firms earlier this year, a survey of 90 large companies found that companies surveyed spent an average of $7.8 million, with audit fees accounting for about a quarter of the cost.

The process is expensive because companies must commit staff to determining everything from how revenue is collected to who possesses keys for offices around the globe. Many companies, particularly smaller firms, don't have enough staff, technology or expertise to perform such detailed reviews and end up outsourcing some or all this work to a consulting firm. Then, an outside auditor still must be hired.

A compliance industry has sprung up to service the demands created by Sarbanes-Oxley. While many of the consulting companies involved are privately held, those that are publicly traded or owned by a public parent are reporting strong sales. In July, Robert Half International Inc. reported record second-quarter revenue, boosted in part by the success of its Protiviti unit, a provider of internal audit and risk-consulting services. Revenue at Protiviti increased 52 percent to $111,908 from $73,449 in 2004.

The sector is so hot there are now conferences sponsored by the companies that offer these services. "It's beyond a cottage industry at this point," says Patrick McGurn, an executive vice president of Institutional Shareholder Services, a proxy-advisory firm based in Rockville, Md.

But it's a boom that may not last long. Some Sarbanes-Oxley costs are expected to decline as businesses move beyond the first few years of implementation. The study by the Big Four firms, for example, predicted that costs will fall on average about 46 percent within a few years.

Still, that's little relief right now. Responding to the concerns of small businesses, the SEC has established a small-business advisory committee to look into what type of relief -- if any -- smaller companies should receive. Meanwhile, to help contain costs, the SEC, along with the Washington-based Public Company Accounting Oversight Board, has issued guidance reminding auditors to use common sense in monitoring compliance efforts and not to adopt a one-size-fits-all interpretation of the rule.