Management Report: Opportunities for Improvements in SEC's	 
Internal Controls and Accounting Procedures (12-AUG-05, 	 
GAO-05-693R).							 
                                                                 
In May 2005, we issued our report expressing an opinion on the	 
Securities and Exchange Commission's (SEC) fiscal year 2004	 
financial statements and an opinion on SEC's internal control as 
of September 30, 2004. We also reported on the results of our	 
tests of SEC's compliance with selected provisions of laws and	 
regulations during fiscal year 2004. Our report on SEC's fiscal  
year 2004 financial statements identified reportable conditions  
in the internal controls over financial reporting that we	 
considered to be material weaknesses. These weaknesses related to
SEC's controls over (1) recording and reporting disgorgements and
penalties, (2) information security, and (3) preparing financial 
statements and related disclosures. We issued two separate	 
reports providing recommendations to address those weaknesses.	 
The purpose of this report is to provide recommendations for	 
those issues identified during our audit that, although not	 
material in relation to the financial statements, we believe	 
warrant management's attention. 				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-693R					        
    ACCNO:   A32880						        
  TITLE:     Management Report: Opportunities for Improvements in     
SEC's Internal Controls and Accounting Procedures		 
     DATE:   08/12/2005 
  SUBJECT:   Accountability					 
	     Accounting standards				 
	     Auditing standards 				 
	     Financial management				 
	     Financial records					 
	     Financial statement audits 			 
	     Financial statements				 
	     Internal controls					 
	     Reporting requirements				 
	     Reports management 				 
	     SEC Electronic Data Gathering, Analysis,		 
	     and Retrieval System				 
                                                                 
	     Federal Personnel and Payroll System		 

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GAO-05-693R

United States Government Accountability Office Washington, DC 20548

August 12, 2005

Margaret J. Carpenter
Associate Executive Director
Office of Financial Management
U.S. Securities and Exchange Commission

Subject: Management Report: Opportunities for Improvements in SEC's
Internal Controls and Accounting Procedures

Dear Ms. Carpenter:

In May 2005, we issued our report expressing an opinion on the Securities
and Exchange Commission's (SEC) fiscal year 2004 financial statements and
an opinion on SEC's internal control as of September 30, 2004.1 We also
reported on the results of our tests of SEC's compliance with selected
provisions of laws and regulations during fiscal year 2004. Our report on
SEC's fiscal year 2004 financial statements identified reportable
conditions in the internal controls over financial reporting that we
considered to be material weaknesses.2 These weaknesses related to SEC's
controls over (1) recording and reporting disgorgements3 and penalties,4
(2) information security, and (3) preparing financial statements and
related disclosures. We issued two separate reports providing
recommendations to address those

5

weaknesses.

The purpose of this report is to provide recommendations for those issues
identified during our audit that, although not material in relation to the
financial statements, we believe warrant management's attention. We are
making 16 recommendations in this

1 GAO, Financial Audit: SEC's Fiscal Year 2004 Financial Statements,
GAO-05-244 (Washington,
D.C.: May 26, 2005).
2 A material weakness is a condition in which the design or operation of
one or more of the internal
control components does not reduce, to a relatively low level, the risk
that errors, fraud, or
noncompliance in amounts that would be material to the financial
statements may occur and not be
detected promptly by employees in the normal course of their duties.
3 A disgorgement is the repayment of illegally earned profits.
4 A penalty is a monetary sum that is to be paid by the registrant to SEC
as a result of a security law
violation.
5 GAO, Material Internal Control Issues Reported in the SEC's Fiscal Year
2004 Financial Statement
Audit Report, GAO-05-691R (Washington, D.C.: Aug. 27, 2005), and GAO,
Information Security:
Securities and Exchange Commission Needs to Address Weak Controls over
Financial and Sensitive
Data, GAO-05-262 (Washington, D.C.: Mar. 23, 2005).

                       GAO-05-693R SEC Management Report

report for strengthening SEC's accounting procedures and internal controls
in the following 12 areas:

o  	maintaining detailed subsidiary ledgers and records to support
delivered and undelivered orders transactions;

o  segregation of duties and controls over cash receipts;

o  	verifying that all fee-bearing filings recorded in the Electronic Data
Gathering, Analysis, and Retrieval (EDGAR) system are recognized as
revenue in the general ledger;

o  management review of the Fund Balance with Treasury (FBWT)
reconciliation;

o  	review process to ensure that apportionments are accurately entered
into the general ledger;

o  	evaluation of equipment or property leases to determine if they meet
the capitalization criteria required by generally accepted accounting
principles;

o  	review of the final processed payroll data entered into the Federal
Personnel and Payroll System (FPPS) by the National Business Center (NBC)
for active employees;

o  documented policies and procedures governing the payroll process;

o  	documentation and review of the effectiveness of corrective actions
relating to audit recommendations addressing weaknesses reported under the
Federal Managers' Financial Integrity Act of 1982 (FMFIA);

o  charging expenditures to the proper Budget Object Class (BOC) codes;

o  	referral of eligible delinquent debt that was over 180 days due to
Treasury, as required by the Debt Collection Improvement Act (DCIA); and

o  establishing and documenting property and equipment capitalization
thresholds.

Our recommendations follow at the end of our discussion of each of these
issues in the following sections. These recommendations are intended to
bring SEC into conformance with the internal control standards that
federal agencies are required to follow.6 In its comments reprinted in
enclosure I, SEC described actions completed, ongoing, and planned to
address each of these issues. Further details on our scope and methodology
are included in our report on the results of our audit of the 2004
financial statements and are reproduced in enclosure II. We conducted our
audit in accordance with U.S. generally accepted government auditing
standards.

6GAO, Standards for Internal Control in the Federal Government,
GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).

                    Page 2 GAO-05-693R SEC Management Report

Recording Undelivered and Delivered Orders

SEC was initially unable to provide auditable detail for the fiscal year
2004 opening balances of undelivered and delivered orders recorded in the
general ledger. After extensive time and effort, SEC compiled schedules of
transactions. However, those schedules did not reconcile to the related
amounts recorded in the general ledger, and SEC staff could not readily
explain the differences. Similar problems occurred with the ending balance
for the amounts of delivered orders recorded in the general ledger as of
September 30, 2004. Through much time and effort on the part of SEC and
GAO staff, we were ultimately able to audit the amounts pertaining to
SEC's undelivered and delivered orders. However, GAO's Standards for
Internal Control in the Federal Government require that the documentation
of transactions should be complete, accurate, and sufficient to facilitate
the tracing of transactions and related information from authorization and
initiation through processing and recording. In addition, documentation
should be readily available for examination. Such documentation is
necessary to enable management's review of the related transactions.

Recommendation

1. 	We recommend that SEC maintain subsidiary schedules and documentation
supporting all delivered and undelivered orders transactions and related
amounts recorded in the general ledger. The documentation should be at a
detailed level sufficient to facilitate management review and the external
audit process.

Segregation of Duties and Controls over Cash Receipts

SEC does not have proper segregation of duties or controls over cash
receipts. Checks paid to SEC for disgorgements and other activities are
opened either by an individual in the mail room, who does not log in the
checks but forwards them to the Office of Financial Management (OFM), or
by two accounting technicians in OFM who manually log in the checks and
forward them and the log to the Supervisory Accounting Analyst. The
Supervisory Accounting Analyst has incompatible duties regarding cash
receipts by having custody of the checks, control over the original daily
cash receipts log, and access to the general ledger. Furthermore, SEC does
not reconcile the cash receipts log to the documentation supporting the
deposit amount in the general ledger. According to GAO's Standards for
Internal Control in the Federal Government, key duties and
responsibilities need to be divided or segregated between different people
to reduce the risk of error or fraud. This should include separating the
responsibilities for authorizing transactions, processing and recording
transactions, reviewing the transactions, and handling any related assets
so that no one individual controls all key aspects of a transaction or
event. In addition, periodic reconciliations should be performed to ensure
accountability over the assets. Because one individual performs
incompatible duties over cash receipts, which could result in checks never
being recorded into the general ledger, coupled with the lack of the
receipts' reconciliation with the deposit amounts, there is a risk of
error or fraud concerning cash receipts.

                    Page 3 GAO-05-693R SEC Management Report

Recommendations

We recommend that SEC take the following two actions:

2. 	Separate key responsibilities over the handling and recording of cash
receipts so that no one individual handles all key aspects concerning the
receipts.

3. 	Periodically reconcile the cash receipts log to the documentation
supporting the deposit amount in the general ledger.

Recording Filing Fee Revenue

SEC uses the Internet-based EDGAR system to collect, validate, index, and
accept the submissions of forms filed by SEC-registered companies. EDGAR,
along with the Fee Momentum module in EDGAR, recognizes revenue when
filings are submitted and completed, and transfers this information to the
general ledger through a nightly batch file. However, SEC does not perform
a comparison or reconciliation between successfully completed filings in
EDGAR and the amount recognized as revenue in the general ledger. During
our testing of filing fee revenue, we identified a difference of
approximately $154 million between the successful fee-bearing filings
recorded in EDGAR of about $390 million and the revenue for filing fees
recorded in the general ledger of about $236 million. This balance of $154
million had been recorded by SEC as transaction fee revenue in the general
ledger. SEC corrected the difference after we brought the matter to its
attention. Statement of Federal Financial Accounting Standards (SFFAS) No.
7, Accounting for Revenue and Other Financing Sources, states that revenue
should be recognized when earned, which, for filing fees, is when a
company's equity or debt offering has been successfully completed.
Consistent with GAO's Standards for Internal Control in the Federal
Government, SEC's internal controls should provide reasonable assurance
that its financial transactions are recorded properly and accurately.
Without controls over the recording of filing fees, there is a risk that
revenue amounts will be misstated.

Recommendations

We recommend that SEC take the following two actions:

4. 	Perform periodic reconciliations of successful fee-bearing filings in
EDGAR and revenue recorded in the general ledger.

5. 	Develop for this reconciliation process written policies and
procedures that address the maintenance of documentation supporting the
general ledger balances.

Fund Balance with Treasury Reconciliation

SEC performs monthly reconciliations of its FBWT as required. While
management has stated that reviews of the FBWT reconciliations are
performed by a management official, there is no evidence of such review.
GAO's Standards for Internal Control in the Federal Government requires
agencies to establish controls to enforce

                    Page 4 GAO-05-693R SEC Management Report

adherence to requirements, such as FBWT reconciliations, and to create and
maintain records providing evidence that these controls are executed. The
lack of such evidence increases the risk that the reviews are not being
performed, thereby increasing the risk of the untimely detection of errors
in related account balances.

Recommendation

6. 	We recommend that SEC management document its review of the monthly
FBWT reconciliation to help ensure the timeliness of these reconciliations
and the accuracy and validity of adjustments resulting from these
reconciliations. At a minimum, reviewers should sign and date the reviewed
documents and provide any comments that may be appropriate in the event
that their reviews identified problems or raised questions.

Reviewing Apportionment Entries

The Antideficiency Act prohibits agencies from obligating appropriated
funds in excess of what the Office of Management and Budget (OMB) has
apportioned. SEC budget analysts record apportionment amounts from
Standard Form (SF)-132, Apportionment and Reapportionment Schedule,
approved by OMB in the general ledger; however, there is no supervisory or
management review of these entries. GAO's Standards for Internal Control
in the Federal Government requires agencies to implement internal control
procedures to ensure the accurate and timely recording of transactions and
events. Without a review process to ensure that apportionments are
accurately entered into the general ledger, there is a risk that
apportionments will not be accurately recorded and that obligations will
be tracked against an inaccurate apportionment limit.

Recommendation

7. 	We recommend that appropriate SEC management officials review recorded
apportionment amounts to provide assurance over the accuracy of these
amounts. The review should be evidenced in some manner, such as a
signature and date.

Accounting for Property and Equipment Leases

During our audit, we found that SEC was not properly accounting for its
equipment or property leases. SFFAS No. 6, Accounting for Property, Plant,
and Equipment, requires management to determine if leases meet the
criteria for recognition as capital leases. If a lease meets any one of
the criteria, the cost of the property or equipment should be capitalized
and an equal amount should be recognized as a liability for the capital
lease at its inception. This standard also requires depreciation expense
to be recognized to allocate the cost of the property or equipment over
its estimated useful life. Financial Accounting Standards Board (FASB)
Standard No. 13, Accounting for Leases, requires assets acquired under
capital leases to be depreciated over the lease term, rather than the
asset's useful life, if the lease meets either the lease term or the
present value of the minimum lease payments criteria. For fiscal year
2004, we found that SEC expensed the lease payments for one of its
properties when the lease should have been capitalized and depreciated. We
also

                    Page 5 GAO-05-693R SEC Management Report

found two contracts for leasing equipment that SEC recorded as purchases
of equipment. Our evaluation determined that these equipment leases were
properly capitalized, but the related capital lease liability was not
recorded. In addition, depreciation expense was incorrectly calculated for
these leases, since these leases did not meet the lease term or the
present value of minimum lease payments criteria and the equipment was
depreciated over the assets' useful life rather than over the related
lease terms. As a result of these errors, leases were not properly
accounted for in the financial statements or related disclosures.

Recommendations

We recommend that SEC take the following two actions:

8. 	Review all existing leases for property and equipment to determine if
they should be capitalized or expensed and make any necessary adjustments
to the related general ledger balances.

9. 	Develop policies and procedures to properly account for future
property and equipment leases on an ongoing basis.

Review Federal Personnel and Payroll System Data

SEC payroll reports and transactions are created and managed under
contract by the NBC at the Department of the Interior (DOI) through FPPS.
On a biweekly basis, FPPS generates the Personnel Alphabetic Employee
List, which shows all active employees for each pay period. The Personnel
Alphabetic Employee List is used for budgeting purposes by SEC's Planning
and Budget Office in OFM. FPPS also generates the Organizational Employee
Report, listing all active employees within each SEC division and office.
However, SEC does not maintain an independent database of its payroll
information or perform tests to verify the information in FPPS. The
Organizational Employee Report is sent to all SEC divisions and offices,
but there is no documentation or other indication that the divisions and
offices review the Organizational Employee Report to determine if it
accurately reflects the current active employees, new hires, and recent
terminations. Neither SEC's Office of Human Resources and Administrative
Services nor OFM receives positive assurance from the divisions and
offices that the employees listed on the Organizational Employee Report
are currently active employees, thus offering no assurances that newly
hired staff will be paid timely or that pay for departing staff will be
stopped.

According to OMB Circular A-127, Financial Management Systems, an agency
should review and test all aspects of the time and attendance (T&A)
systems' processing procedures and controls with sufficient scope, depth,
and frequency to reasonably ensure that key procedures and controls are
effective in meeting legal and other requirements, and that data integrity
is maintained. Without the review of finalprocessed payroll data, there is
a risk that inaccurate or unauthorized transactions, such as those noted
above, could occur, or that fictitious employees could be entered into
FPPS, resulting in erroneous or fraudulent payments by SEC. Concerns over
payroll data integrity are compounded in the service auditor's report for
FPPS, which found that application security controls over FPPS were not
operating with sufficient effectiveness to reasonably ensure that access
to FPPS is restricted to properly

                    Page 6 GAO-05-693R SEC Management Report

authorized NBC Payroll Operations personnel and that incompatible duties
within Payroll Operations are properly segregated in the system.7 Since
SEC does not evidence a review of the active employees listed on the
Organizational Employee Report by the divisions and offices or perform
other checks and reconciling procedures between FPPS data and SEC records,
management does not have assurance regarding the accuracy of the active
employee information in FPPS.

Recommendation

10. 	We recommend that SEC periodically reconcile its active employees to
FPPS. To do this, consideration should be given to maintaining an
independent database of active employees and other payroll-related
information, wherein active employee data could be readily compared with
and reconciled to FPPSgenerated payroll records. This reconciliation
should be documented.

Payroll Processing Policies and Procedures

During our audit, we noted that SEC had only one trained individual who
performed the payroll file processing and reconciliation procedures each
pay period. These unwritten procedures consist of uploading and
reformatting information received from DOI into the general ledger,
comparing data in the general ledger with the Payroll Operations Division
Report generated by DOI for accuracy and completeness, researching any
errors, verifying payroll expenses by SEC organization code, making
necessary corrections to the data, recording the payroll disbursement in
the general ledger, and reconciling the Treasury Statement of Transactions
(SF-224) with the general ledger. Also during our audit, we did not find
evidence of supervisory review of the payroll file processing and
reconciliation procedures. Per OMB Circular A-127, Financial Management
Systems, an agency should have clearly written and communicated policies
and procedures setting forth the responsibilities of employees,
timekeepers, supervisors, and others regarding recording, examining,
approving, and reporting on T&A information. By having only one person
trained in the payroll process and not having documented policies and
procedures governing the process, there is a risk that the necessary
reconciliation will not be performed correctly or timely in the absence of
the one individual who is knowledgeable of the required procedure.
Furthermore, the lack of supervisory review of the payroll process
increases the risk that errors could occur and not be detected in a timely
manner.

Recommendations

We recommend that SEC take the following two actions:

11. 	Develop written policies and procedures governing the payroll
processing and reconciliation procedures, which would include requirements
for documenting

7 KPMG, Federal Personnel and Payroll System General Mainframe Information
Technology and Payroll Operations Controls: Third-Party Report on Controls
Placed in Operation and Test of Operating Effectiveness (SAS 70) for the
Period October 1, 2000-September 30, 2003 (Washington, D.C.: October
2003).

                    Page 7 GAO-05-693R SEC Management Report

supervisory review of the performance of the payroll procedures performed
during each pay period.

12. Train other individuals to perform this function.

Closing Recommendations to Address FMFIA Weaknesses

In fulfilling the reporting requirements of the Federal Managers'
Financial Integrity Act of 1982, SEC reports to the President of the
United States on whether the agency's management controls are adequate and
effective and are achieving their intended objectives in accordance with
the standards prescribed by the Comptroller General's Standards for
Internal Control in the Federal Government. SEC's FMFIA report to the
President is largely based on the knowledge of the operations and
evaluations conducted by SEC staff and the certification of management
controls by appropriate SEC officials. However, during our 2004 financial
statement audit, we found that weaknesses relating to the accountability
of property and internal controls over disgorgement funds, which were
cited in the fiscal year 2002 FMFIA report, still existed even though
SEC's fiscal year 2003 FMFIA report indicated that the recommendations to
address the related weaknesses were resolved. According to GAO's Standards
for Internal Control in the Federal Government, the resolution of audit
recommendations is completed only after action has been taken that (1)
corrects identified deficiencies, (2) produces improvements, or (3)
demonstrates that the findings and recommendations do not warrant
management's action. In addition, the standards state that records, which
provide evidence of the execution of such activities, and appropriate
documentation should be maintained. SEC's policies and procedures do not
require documented support for the resolution of audit issues before they
are closed in SEC's tracking system. Without adequate documentation or
review of the adequacy and the effectiveness of corrective actions, there
is a risk that previous audit findings continue to exist as problems after
SEC has considered audit findings to be closed.

Recommendation

13. 	We recommend that SEC require documented support and review of SEC's
corrective actions to provide evidence that actions taken in response to
audit recommendations fully correct identified deficiencies prior to
closing out the audit issues in the tracking system.

Charging Expenditures to BOC Codes

SEC records obligations and prepares its annual budget on the basis of
budget object class codes. Object classes are categories in a
classification system that present obligations by the items or services
purchased by the federal government. According to 31 U.S.C. 1104(b), the
President's budget is required to present obligations by object class for
each account. During our testing of nonpayroll expenditures, we noted
several incidences in which SEC did not properly or consistently record
the expenditures to the appropriate BOC code and noted incidences for
which we could not determine whether the correct BOC code was charged
because of a lack of detailed support for the expenditures. For example,
for one of the contracts we reviewed, we noted that detailed records were
not maintained for the expenditures

                    Page 8 GAO-05-693R SEC Management Report

related to the contract. While it appeared appropriate for the obligation
for this contract to be recorded in several BOC codes because of the broad
scope of work being performed under the contract, SEC did not obtain
sufficient detail on the expenditures to determine how they should be
allocated among the BOC codes. Therefore, SEC charged the entire
expenditure to one BOC code. On the other hand, for some contracts, SEC
allocated the expenditures among the BOC codes but was not able to support
the reason why the allocations were made.

Without sufficient detailed supporting records, the actual amount of
expenditures within each BOC code cannot be accurately determined, thus
increasing the risk that management does not have reliable information for
decision making. In addition, the lack of written policies and procedures
regarding recording expenditures to the proper BOC codes increases the
risk of inconsistently recorded expenditures.

Recommendation

14. 	We recommend that SEC develop policies and procedures to help ensure
that expenditures (1) are recorded in the proper BOC code on the basis of
the nature of the expenditure and (2) are properly allocated across BOC
codes as appropriate.

Timely Referral of Delinquent Debt

DCIA requires agencies to refer eligible debts that are delinquent over
180 days to Treasury for collection. Our test of SEC's compliance with
DCIA disclosed $285,626 in eligible debt that was over 180 days old but
had not been referred to Treasury as of September 30, 2004. While this
matter was not material to SEC's fiscal year 2004 financial statements,
timely referral of delinquent debts as DCIA requires would improve
opportunities to collect such debt.

Recommendation

15. 	We recommend that SEC refer eligible debt that is delinquent over 180
days to Treasury as required by DCIA.

Property and Equipment Capitalization Threshold

SEC does not have an analytical basis or other documented support for the
selection of its capitalization thresholds for property and equipment.
FASB requires that entities establish appropriate capitalization
thresholds by considering the entities' financial and operational
conditions, that the thresholds be consistently applied, and that they be
disclosed in the financial reports. The establishment of a capitalization
threshold policy must be supported by a detailed analysis anchored by the
two fundamental principles of matching and materiality. Inappropriate or
excessive capitalization thresholds have a significant impact on financial
reporting and related oversight issues, and may not comply with SFFAS No.
6 requirements to capitalize all items that meet certain characteristics.

                    Page 9 GAO-05-693R SEC Management Report

Recommendation

16. 	We recommend that SEC review its property and equipment
capitalization thresholds and document the analysis used to select the
capitalization thresholds.

Agency Comments

In written and oral comments provided to GAO on a draft of this report,
SEC indicated that it is taking, or has planned, actions pertaining to the
issues identified in this report. SEC's written comments are reprinted in
enclosure I of this report.

This report is intended for use by SEC management and the SEC Inspector
General.
We are sending copies of this report to the Chairmen and Ranking Members
of the
Senate Committee on Banking, Housing, and Urban Affairs; the Senate
Committee on
Homeland Security and Governmental Affairs; the House Committee on
Financial
Services; the House Committee on Government Reform; and other interested
parties.
In addition, this report will be available at no charge on GAO's Web site
at
http://www.gao.gov.

We acknowledge and appreciate the cooperation and assistance provided by
SEC
management and staff during our audit of SEC's fiscal year 2004 financial
statements.
If you have any questions about this report or need assistance in
addressing these
issues, please contact me at (202) 512-9471 or [email protected]. Contact
points for
our Offices of Congressional Relations and Public Affairs may be found on
the last
page of this report.

Jeanette M. Franzel
Director
Financial Management and Assurance

Enclosures - 2

                   Page 10 GAO-05-693R SEC Management Report

Enclosure I

              Comments from the Securities and Exchange Commission

          Enclosure I Enclosure I Enclosure I Enclosure I Enclosure I

Enclosure II

                     Details on Audit Scope and Methodology

To fulfill our responsibilities as auditor of the financial statements of
the Securities and Exchange Commission (SEC), we did the following:

o  	examined, on a test basis, evidence supporting the amounts and
disclosure in the financial statements;

o  	assessed the accounting principles used and significant estimates made
by management;

o  evaluated the overall presentation of the financial statements;

o  	obtained an understanding of internal controls related to financial
reporting and compliance with laws and regulations;

o  	obtained an understanding of the recording, processing, and
summarizing of performance measures as reported in Management's Discussion
and Analysis;

o  	tested relevant internal controls over financial reporting and
compliance, and evaluated the design and operating effectiveness of
internal controls;

o  	considered SEC's process for evaluating and reporting on internal
control and financial management systems under the Federal Managers'
Financial Integrity Act of 1982; and

o  	tested compliance with selected provisions of the following laws and
regulations: the Securities Exchange Act of 1934, as amended; the
Securities Act of 1933, as amended; the Antideficiency Act; laws governing
the pay and allowance system for SEC employees; and the Prompt Payment
Act. We performed our audit from February 2004 to February 2005 in
accordance with U.S. generally accepted government auditing standards.

(194506)

                   Page 17 GAO-05-693R SEC Management Report

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