Internal Control: Improvements Needed in SEC's Accounting and
Financial Reporting Procedures (21-APR-06, GAO-06-459R).
On November 15, 2005, we issued our report on the U.S. Securities
and Exchange Commission's (SEC) fiscal years 2005 and 2004
financial statements and on SEC's internal control as of
September 30, 2005. We also reported on the results of our tests
of SEC's compliance with selected provisions of laws and
regulations during fiscal year 2005. The purpose of this report
is to discuss issues identified during our fiscal year 2005 audit
concerning internal controls and accounting procedures that could
be improved.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-06-459R
ACCNO: A52359
TITLE: Internal Control: Improvements Needed in SEC's Accounting
and Financial Reporting Procedures
DATE: 04/21/2006
SUBJECT: Accounting
Accounting standards
Auditing standards
Financial management
Financial records
Financial statement audits
Financial statements
Information security
Internal controls
Reporting requirements
Reports management
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GAO-06-459R
* Financial Statement Preparation and Reporting
* Recommendations
* Responsibilities of Contracting Officer's Technical Represen
* Internal Review of Filing Fee Calculations
* Compliance with Prompt Payment Act
* PDF6-Ordering Information.pdf
* Order by Mail or Phone
April 21, 2006
The Honorable Christopher Cox
Chairman
U.S. Securities and Exchange Commission
Subject: Internal Control: Improvements Needed in SEC's Accounting and
Financial Reporting Procedures
Dear Mr. Cox:
On November 15, 2005, we issued our report1 on the U.S. Securities and
Exchange Commission's (SEC) fiscal years 2005 and 2004 financial
statements and on SEC's internal control as of September 30, 2005. We also
reported on the results of our tests of SEC's compliance with selected
provisions of laws and regulations during fiscal year 2005.
The purpose of this report is to discuss issues identified during our
fiscal year 2005 audit concerning internal controls and accounting
procedures that could be improved.2 This report contains 14
recommendations that we are proposing SEC implement in order to improve
its internal controls and accounting procedures. These recommendations are
in addition to those we already provided to SEC as a result of our prior
audit of SEC's financial statements.3
Results in Brief
Our November 15, 2005, report concluded that SEC continues to face the
same material weaknesses4 in internal control that we reported as part of
our audit of SEC's fiscal year 2004 financial statements. These weaknesses
related to SEC's controls over (1) preparing financial statements and
related disclosures, (2) recording and reporting disgorgement5 and
penalty6 activity, and (3) information security. SEC has made some
progress in resolving these issues; however, these matters remain material
weaknesses as of September 30, 2005, and therefore, increase the risk that
misstatements material in relation to the financial statements would not
be prevented or detected on a timely basis. Further details on the
implementation status of the recommendations from our prior audit of SEC's
financial statements are provided in enclosure I.7
1 GAO, Financial Audit: Securities and Exchange Commission's Financial
Statements for Fiscal Years 2005 and 2004, GAO-06-239 (Washington, D.C.:
Nov. 15, 2005).
2 The internal control issues concerning information security are
discussed in a separate report: GAO, Information Security: Securities and
Exchange Commission Needs to Continue to Improve Its Program, GAO-06-408
(Washington, D.C.: Mar. 31, 2006).
3 Recommendations were addressed in our internal control reports issued as
part of our fiscal year 2004 SEC financial statement audit: GAO, Material
Internal Control Issues Reported in SEC's Fiscal Year 2004 Financial
Statement Audit Report, GAO-05-691R (Washington, D.C.: July 27, 2005),
Management Report: Opportunities for Improvements in SEC's Internal
Controls and Accounting Procedures, GAO-05-693R (Washington, D.C.: Aug.
12, 2005).
4 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.
During our fiscal year 2005 audit, we also identified other internal
control issues that although not considered to be material weaknesses or
reportable conditions,8 we believe warrant management's consideration.
These issues concern (1) responsibilities of the contracting officer's
technical representative, (2) reviewing filing fee calculations, and (3)
compliance with the prompt payment act.
Our recommendations follow the discussion of each of these issues in the
following sections. In commenting on a draft of this report, the Chairman
generally agreed with our recommendations, and indicated that SEC made
progress in fiscal year 2005 in addressing its internal control weaknesses
and has redoubled its efforts in fiscal year 2006. The Chairman also
identified specific actions and initiatives undertaken since the
completion of our fiscal year 2005 audit.
Scope and Methodology
As part of our audit of SEC's fiscal years 2005 and 2004 financial
statements, we evaluated SEC's internal controls and tested its compliance
with selected provisions of laws and regulations. We designed our audit
procedures to test relevant controls over financial reporting, including
those designed to provide reasonable assurance that transactions are
properly recorded, processed, and summarized to permit the preparation of
the financial statements in conformity with U.S. generally accepted
accounting principles, and assets are safeguarded against loss from
unauthorized acquisition, use, or disposition. We requested comments on a
draft of this report from the Chairman of SEC or his designee. SEC's
written comments are reprinted in enclosure II. We conducted our audit in
accordance with U.S. generally accepted government auditing standards.
Further details on our scope and methodology are included in our report on
the results of our audits of SEC's fiscal years 2005 and 2004 financial
statements9 and are reproduced in enclosure III.
5 A disgorgement is the repayment of illegally gained profits (or avoided
losses) for distribution to harmed investors whenever feasible.
6 A penalty is a monetary payment from a violator of securities law that
SEC obtains pursuant to statutory authority. A penalty is fundamentally a
punitive measure, although penalties occasionally can be used to
compensate harmed investors.
7 GAO-05-691R and GAO-05-693R.
8 Reportable conditions are defined as significant deficiencies in the
design or operation of internal control that could adversely affect the
entity's ability to record, process, summarize, and report financial data
consistent with the assertions of management in financial statements.
9 GAO-06-239.
Financial Statement Preparation and Reporting
Fiscal year 2005 was the second year that SEC prepared a complete set of
financial statements to be audited. In response to the findings of our
fiscal year 2004 audit, SEC has taken some steps to address control
weaknesses over the preparation of financial statements and related
disclosures. For example, in August 2005, SEC drafted policies and
procedures for parts of its financial statements preparation process. SEC
also has improved its ability to produce subsidiary ledgers that support
financial statement amounts.
For both fiscal years 2004 and 2005, SEC's financial statement preparation
and reporting processes were manually intensive, time consuming, and
difficult to follow, and required numerous ad hoc procedures. For certain
financial statement line items and disclosures, the detailed support for
the balances and underlying transactions was not readily available and was
difficult to retrieve. The issues underlying the material weaknesses,
combined with SEC's practice of determining certain key account balances
only on a quarterly basis and preparing footnote disclosures only at
year-end, necessitated intensive efforts by both SEC and GAO to meet the
November 15 financial reporting date.
Key causes of material weakness in SEC's financial statement preparation
and reporting processes are that SEC did not have (1) finalized, written,
comprehensive policies and procedures for several significant accounts and
processes; (2) an adequate audit trail between the financial statements,
the general ledger, and supporting subsidiary schedules; and (3) an
integrated system for recording disgorgement and penalty transactions.
Although SEC has started to prepare policies and procedures for some of
its financial statement preparation processes, these policies and
procedures are still in draft and are not sufficiently comprehensive to
address accounting for significant activities, such as determining
disgorgement and penalty accounts receivable, recording investment
activity, and reconciling certain account balances such as the fiduciary
liability. Of the policies and procedures that do exist, some are outdated
and do not reflect SEC's current practices. Among these are SEC's policy
for recording disbursements into the case-tracking system used for
disgorgements and penalties.
These issues were further exacerbated by the fact that during fiscal year
2005, SEC's Office of Financial Management continued to operate with a
staffing shortage both in terms of number and expertise. These issues, if
not addressed, increase the risk and difficulty in meeting future
financial reporting dates and making measurable progress in improving
internal control over financial reporting.
SEC does not have a documented process or template for compiling financial
statement amounts to enable a crosswalk from the financial statements to
the general ledger and supporting subsidiary schedules. For example, some
numbers, including significant adjustments in the Statement of Custodial
Activity, were recorded on a spreadsheet but could not be easily traced to
the account balances that aggregate to the line items on the financial
statement. In other instances, the available audit trails included a
series of numbers in a formula without an explanation or a clear
explanation of the various general ledger accounts constituting the total.
Furthermore, in cases where SEC's financial statements deviate from
Treasury's standard form and content crosswalk because of adjustments and
certain unique activity, SEC did not show a clear link or audit trail.
SEC is in the process of establishing, but has not yet implemented, a
formalized Financial Management Oversight Committee to provide advice and
regularly review the agency's financial operations and policies. The
charter for the Financial Management Oversight Committee has been drafted.
The committee now needs to become operational. This is a critical step
that needs to be taken as SEC begins to take actions to address the
weaknesses in financial reporting.
SEC's interim quarterly financial statements do not reflect the proper
cutoff period for certain significant activity, such as disgorgement and
penalty receivables. This is primarily attributable to the lack of an
integrated system for recording disgorgement and penalty activity, which
results in SEC having to perform extensive, time-consuming, manual
calculations to arrive at the related end-of-quarter receivable amounts.
SEC's current practice of preparing footnote disclosures only with its
September 30 financial statements increases the amount of preparation,
review, and audit work necessary at year-end, increasing the risk that SEC
may not meet its financial reporting deadlines.
If properly designed and implemented, a financial statement preparation
process with documented comprehensive policies and procedures, a clear
audit trail between the financial statement balances and the detailed
support, an integrated core financial management system, and quality
assurance reviews should reasonably assure SEC management that the
balances presented in the financial statements and related disclosures are
supported by SEC's underlying accounting records and are fairly stated in
conformity with U.S. generally accepted accounting standards for the
federal government. The process should provide a discipline that
facilitates SEC's consistent preparation of financial statements without
having to go through the intensive efforts that were needed in fiscal year
2005.
Recommendations
We recommend that SEC take the following actions, in addition to our
previous recommendations, to improve controls over financial statement
preparation and reporting:
1. Staff the Office of Financial Management with the collective
knowledge, skills, and experience necessary to achieve effective
implementation of internal control over the financial statement
preparation and reporting process.
2. Finalize formal, written policies and procedures governing
financial reporting processes and related internal control and
quality assurance, including the basic documentation, audit
trails, and crosswalks needed to support financial statement
amounts, to facilitate management review of financial information.
3. Formalize and place into operation a senior management council
or committee to oversee financial reporting activities; provide
advice; and regularly review the agency's financial information,
operations, and policies.
4. Determine cutoff dates for significant account balances that
are both appropriate and practical to facilitate interim financial
reporting and meeting year-end financial reporting deadlines.
5. Prepare interim footnote disclosures to facilitate meeting
year-end financial reporting deadlines.
Disgorgements and Penalties
As part of its enforcement responsibilities, SEC issues and administers
judgments ordering, among other things, disgorgements, civil monetary
penalties, and interest against violators of federal securities laws.
These transactions involve material amounts of collections, which amounted
to more than $1.6 billion in fiscal year 2005, and the recording and
reporting of fiduciary and custodial liability balances on the financial
statements.10 As a result of this significant collection activity, SEC was
holding approximately $2 billion in a fiduciary capacity as of September
30, 2005, for potential distribution to harmed investors.
SEC has taken several actions to address the material weakness that we
reported in this area based on our fiscal year 2004 audit; however, these
actions have not been sufficient to provide reliable disgorgement and
penalty data. For example, SEC completed a comprehensive review of the
disgorgement and penalty financial data in its case-tracking system, which
includes data on over 12,000 parties in SEC enforcement actions. SEC's
review uncovered a significant amount of financial data inaccuracies.
During our audit, we noted a significant number of cases for which
inaccuracies had already been corrected; however, our audit continued to
identify additional errors in disgorgement and penalty data. During fiscal
year 2005, SEC's Office of Financial Management and Division of
Enforcement instituted weekly meetings to better coordinate and discuss
disgorgement issues. In addition, the Office of Financial Management began
comparing its financial information for disgorgement/penalty receivables
to data on enforcement actions maintained by the Division of Enforcement
to provide some assurance as to the completeness of the subsidiary data.
However, our audit continued to find instances in which the Office of
Financial Management, the office responsible for entering and maintaining
financial data on disgorgements and penalties in the case-tracking system
and making the necessary entries into the general ledger, was not made
aware of certain disgorgement activities by the Division of Enforcement in
a timely manner.
10 Fiduciary liabilities arise when SEC collects disgorgements, penalties,
and interest from securities law violators for the purpose of distributing
the funds to injured investors. When SEC collects fiduciary receipts, they
are held in Fund Balance With Treasury accounts or invested in Treasury
securities, pending distribution to injured investors. Custodial
liabilities arise in respect of accounts receivable for disgorgements,
penalties, and interest assessed against securities law violators. SEC
records a custodial liability in respect of the net amount of such
receivables, after taking into account the estimated allowance for
doubtful accounts. When SEC collects on the receivable, the collection is
either deposited to the Treasury as a government receipt or becomes a
fiduciary liability for future distribution to injured investors.
Although we were able to determine that SEC's estimated collectible amount
was not materially misstated, we continued to note significant errors and
misstatements in the recorded gross accounts receivable balance of $1.365
billion and the related allowance for loss of $1.269 billion, as well as
data inaccuracies in the case-tracking system. Specifically, we noted
errors, inconsistent treatment, or both in recording judgment and interest
amounts, terminated debts, waivers, and amounts paid by defendants. For
example, we reviewed several cases for which waiver or termination of the
debts had been approved several years prior but had not yet been recorded.
In addition, for many of the terminations that we reviewed, there was not
adequate documentation evidencing approval of the termination in the
official case file at the time of our review. We also found cases that
were incorrectly recorded in the case-tracking system as being payable to
SEC. Contributing to these errors is the lack of a clear formalized
policy, communication, and coordination between SEC's Office of Financial
Management and its Division of Enforcement, both responsible for various
portions of disgorgement and penalty activity.11 In addition, also
contributing to those errors is the lack of follow-up procedures to ensure
that the activity is being recorded in a timely fashion and in the proper
reporting period.
We also identified a new risk in this area associated with tracking
fiduciary balances, including corresponding investments, by case. SEC is
using spreadsheets as a subsidiary ledger for these amounts, and does not
have a policy that includes formal procedures to provide assurance that
cash collections and disbursements of disgorgements and penalties have
been properly recorded to the appropriate cases in the subsidiary
spreadsheets. In addition, during our testing of investments, we noted
problems with the accuracy of fiduciary amounts recorded in the
case-tracking system where the amounts recorded as collected in the
case-tracking system did not correspond to the amounts collected and
invested according to the investment balances from the Bureau of the
Public Debt statements. We also noted cases where disbursements of
fiduciary amounts had not been properly recorded in the case-tracking
system. A key cause of those issues is that SEC does not have formal,
comprehensive policies concerning the initiation, recording, and
monitoring of activity associated with investment accounts. In addition,
SEC's current practice of recording significant accounting activity, such
as disgorgement and investment activity, only on a quarterly basis
increases the risk of errors not being detected in a timely manner.
11 This finding is similar to a finding in a recent GAO review of SEC
penalties. See GAO, SEC and CFTC Penalties: Continued Progress Made in
Collection Efforts, but Greater SEC Management Attention Is Needed,
GAO-05-670 (Washington, D.C.: Aug. 31, 2005).
It is critical that SEC develop policies, procedures, and key controls in
the area of fiduciary accounting, so that it has adequate assurance that
balances for disgorgements and penalties by case are accurate in
preparation for distribution of funds to harmed investors.
According to GAO's Standards for Internal Control in the Federal
Government, internal control needs to be clearly documented through
management directives, administrative policies, or operating manuals, and
the documentation should be readily available for examination. As we have
again found during the fiscal year 2005 financial statement audit, not
having comprehensive policies and controls increases the risk that
disgorgement and penalty transactions will not be completely, accurately,
and consistently recorded and reported.
Recommendations
We recommend that SEC, in addition to our previous recommendations,
develop, document in writing, and implement comprehensive policies,
procedures, and controls over disgorgement and penalty transactions that
include the following:
1. An accounting policy for disgorgements and penalties that will
provide SEC management with reasonable assurance that the
subsidiary ledger for disgorgement/penalty receivables is accurate
and complete.
2. The type of documentation and procedures needed to record the
termination or waiver of a debt and the proper notification and
communication for approved terminations and waivers, such that
management has assurance that only valid and approved terminations
are recorded.
3. The recording of activity by case for fiduciary balances,
including monthly reconciliations and management review, to ensure
that balances by case are accurate.
4. The initiation, recording, and monitoring of investments,
including the monthly reconciliation of investment activity, to
provide assurance that these fiduciary amounts are accurate and
complete.
Other Issues
Although not considered to be reportable conditions, the following
weaknesses warrant management's consideration.
Responsibilities of Contracting Officer's Technical Representative
According to SEC Regulation SECR10-15, Contract Officer's Technical
Representative (COTR) and Inspection and Acceptance Official (IAO), a
COTR's responsibilities include the following:
o Reviewing vouchers for cost-reimbursement type work and
recommending approval by the contracting officer if the
contractor's costs are consistent with the contractor's proposal
or negotiated amounts, and if progress is satisfactory and
commensurate with the rate of expenditure.
o Verifying receipt of goods and services and reviewing and
approving invoices for fixed-price deliverables.
o Processing all invoices and vouchers within 5 days of receipt
by the COTR, and ensuring that payment is in accordance with the
contract payment schedule.
o Calculating the accurate amount owed to the contractor, and
documenting the decision when authorizing payment of an amount
different than the contractor's requested amount.
o Returning invoices to the Office of Financial Management with
discrepancies noted, if any.
o Submitting approved invoices to the Office of Financial
Management within the time required to avoid prompt payment
interest penalties.
o Marking the final invoice as "final" to facilitate closing the
obligation.
o Forwarding closeout documentation to the contracting officer in
a timely fashion following physical completion of the contract.
o Completing the Contract Completion Statement, Form SEC 2414,
required within 60 days of physical completion of the contract.
Further, SEC Regulation SECR10-8, Management Oversight of Service
Contracting, includes in the COTR's responsibilities "reporting the amount
of excess funds remaining at the end of a contractor's performance... to
the Branch, Procurement and Contracting. The contract will be modified to
deobligate excess funds."
During our testing of nonpayroll expenditures, we found evidence that all
the COTR responsibilities identified in SEC's regulations are not being
fully satisfied. In several cases, there was no evidence that the invoices
had been thoroughly reviewed and whether the invoices were paid at rates,
prices, or both exceeding those stipulated in the corresponding contract.
With respect to the timeliness of invoice processing, we found a number of
instances in which proper invoices were not returned to the Office of
Financial Management as approved within 5 days as SEC Regulation SECR10-15
provides. We also found that improper invoices were not always returned to
vendors in a timely manner. This has implications for prompt payment
penalties. Under the Prompt Payment Act and its implementing regulations,
an agency's payment due date for paying an invoice without incurring an
interest penalty is generally 30 days after the agency's receipt of a
proper invoice (5 C.F.R. S: 1315.4(f), (g)). Prompt Payment Act
regulations provide that the agency shall return an improper invoice to
the vendor with the reasons why the invoice is improper within 7 days of
receipt (5 C.F.R. S: 1315.4(c)(2)). To the extent SEC takes longer than 7
days to return an improper invoice to a vendor, SEC's 30-day period to pay
a resubmitted proper invoice is reduced by the excess days (5 C.F.R. S:
1315.4(g)(5)). Reducing the 30-day period increases the chance that
interest penalties will be incurred.
In addition, our review of accounts payable identified several
unliquidated obligations recorded as accounts payable for which the
corresponding purchasing documentation specified a period of performance
ending in a prior fiscal year. For example, a contract we reviewed for
expert witness services stipulated a period of performance from March 5,
2003, to March 4, 2004, and SEC has not received any invoices related to
this obligation since December 9, 2003. SEC regulations state that all
obligations should be deobligated in a timely manner, if physical
completion of the contract has occurred.
Recommendation
We recommend that SEC clarify guidance regarding policies and procedures
(as described in SECR10-8 and SECR10-15) for the COTR's responsibilities
and take actions to help ensure existing policies and procedures are being
followed consistently.
Internal Review of Filing Fee Calculations
SEC collects fees from registrants for fee-bearing filings they submit to
SEC, including securities registration, tender offers, mergers, and other
filings. According to SEC policy, the Office of Filings and Information
Services (OFIS) is responsible for recalculating each fee-bearing filing
submitted to SEC to verify the required fee amount to be charged to the
filer. OFIS recalculates the required fee based on data submitted by the
filer along with the official filing. If an error is noted, SEC corrects
the filing to reflect the correct required fee. For 10 of the 167 filing
fee amounts we reviewed, we identified errors in the amounts charged to
filers during fiscal year 2005 that were not identified by OFIS during its
review. In some cases the filer was charged a lesser amount than was
required, while in other cases the filer was charged a greater amount than
was required. In addition, we could not find documented evidence of the
OFIS recalculation for 8 of the 45 fee-bearing filings we reviewed.
GAO's Standards for Internal Control in the Federal Government requires
that all transactions be clearly documented and that the documentation be
accurate and readily available for examination. 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 incorrect revenue
amounts will be collected for filing fees.
Recommendations
We recommend that SEC take action to help ensure that
1. its policy on recalculating fee-bearing filing amounts is
consistently followed, and
2. the recalculation of the required filing fees is clearly
documented.
Compliance with Prompt Payment Act
Under the Prompt Payment Act and its implementing regulations, an agency's
payment due date for paying an invoice without incurring an interest
penalty is generally 30 days after the agency's receipt of a proper
invoice (5 C.F.R. S: 1315.4(f), (g)).12 If the agency does not pay a
proper invoice by the payment due date, the agency is to calculate a late
interest penalty from the day after the payment due date until the payment
is made (5 C.F.R. S: 1315.10(a)). The applicable interest rate is
established by the Secretary of the Treasury and is the rate in effect on
the day after the payment due date (5 C.F.R. S: 1315.2(d)).
During our audit we reviewed 45 nonpayroll expenditures for compliance
with the Prompt Payment Act. We identified seven instances in which SEC
incorrectly calculated the interest penalty for late payments. SEC's
incorrect interest calculations were attributable to using the wrong date
for SEC's receipt of a proper invoice, which caused an incorrect
determination of the payment due date after which interest was due.
Recommendations
We recommend that SEC
1. incorporate a review of the invoice receipt date as part of its
daily review of Momentum (SEC's general ledger) invoice entries to
ensure the invoice receipt dates are accurately entered into
Momentum, and
2. take action to help ensure that the policy requiring the timely
return of improper invoices to the vendor to allow for timely
payment is followed.
Agency Comments
In commenting on a draft of this report, the Chairman indicated that SEC
made progress in fiscal year 2005 in addressing its internal control
weaknesses and stated that SEC has redoubled its efforts in fiscal year
2006. The Chairman also identified specific actions and initiatives
undertaken since the completion of our fiscal year 2005 audit that are not
included in this report. The actions cited by the Chairman include:
o adding resources and expertise to the Office of Financial
Management;
o nearing completion of a comprehensive set of written procedures
governing the financial reporting processes and related internal
controls;
o beginning in the second quarter, implementation of SEC's
Financial Management Oversight Committee to provide
executive-level review of SEC's financial statements and regular
oversight of the agency's financial and accounting policies and
internal control; and
o convening a working group to address weaknesses in controls
over disgorgements and penalties. This group, which is comprised
of representatives from the Division of Enforcement and the
Offices of Financial Management, Information Technology, the
Secretary, and the Executive Director, has undertaken several
initiatives including clarifying and streamlining responsibilities
and documenting and implementing a comprehensive set of procedures
and controls, designing a new financial management system to
replace the financial portion of the existing Enforcement
database, eliminating inaccuracies in the existing database, and
clarifying SEC's policies with respect to debt terminations and
write-offs.
12 Different payment due dates may result from laws or contracts. Also,
invoices are not required for all payments.
The Chairman also stated that SEC's objective is to fully resolve the
material weaknesses in the areas of financial statement preparation and
disgorgements and penalties during fiscal year 2006. We will evaluate
SEC's actions and initiatives during our fiscal year 2006 audit.
SEC's written comments are reprinted in enclosure II of this report.
- - - - -
This report contains recommendations to you. The head of a federal agency
is required by 31 U.S.C. S: 720 to submit a written statement on actions
taken on our recommendations to the Senate Committee on Homeland Security
and Governmental Affairs and to the House Committee on Government Reform
not later than 60 days from the date of this report. A written statement
also must be sent to the House and Senate Committees on Appropriations
with agency's first request for appropriations made more than 60 days
after the date of this report.
This report is intended for use by management of SEC. We are sending
copies of this report to the Chairman and Ranking Minority Member 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; and the House Committee on Government
Reform. We are also sending copies to the Secretary of the Treasury, the
Director of the Office of Management and Budget, 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 years 2005 and
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 by e-mail at
[email protected]. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this report.
Sincerely yours,
Jeanette M. Franzel
Director
Financial Management and Assurance
Enclosures - 3
Enclosure I
Status of GAO Recommendations from Our Audit of SEC's 2004 Financial Statements
Table 1 provides the status of the Securities and Exchange Commission's
(SEC) efforts to implement our previous recommendations related to the
material weaknesses and other opportunities for improvements in SEC's
internal control and accounting procedures identified during our audit of
SEC's 2004 financial statements.113The table lists (1) recommendations
made, (2) the status of each recommendation and corrective action SEC has
taken or planned as of January 2006, and (3) our analysis of whether the
issues that gave rise to the recommendations have been effectively and
fully addressed based on the work performed during our fiscal year 2005
financial audit. As of January 2006, we concluded that SEC had taken
actions to close 13 of the 34 recommendations we made as a result of our
prior SEC financial audit. Effectively implementing recommendations is
critical for SEC to resolve its financial management challenges.
1 GAO, Material Internal Control Issues Reported in SEC's Fiscal Year 2004
Financial Statement Audit Report, GAO-05-691R (Washington, D.C.: July 27,
2005) and Management Report: Opportunities for Improvements in SEC's
Internal Controls and Accounting Procedures, GAO-05-693R (Washington,
D.C.: Aug. 12, 2005).
Table 1: GAO Recommendations and Status
Status of
Count Recommendation Source report recommendation
Per SEC Per GAO
1 Establish clearly Material Closed. Completed Closed. The draft
defined roles and Internal policies identify Financial
responsibilities Control Issues units and Statements
for the staff Reported in individuals Preparation
involved in SEC's Fiscal responsible for Guidance prepared
financial Year 2004 preparation of by the Office of
reporting and the elements of the Financial
preparation of Financial financial Management (OFM)
interim and Statement statements. establishes roles
year-end Audit Report Additional and
financial (GAO-05-691R, tactical plans responsibilities
statements. July 27, 2005) assign work to for the staff
individual staff involved in
members by name. financial
Any further reporting and the
specificity in preparation of
documenting financial
assignments is statements.
limited by
personnel policy
concerns.
2 Collect common Material Closed. Listing Closed. SEC's
closing and Internal is complete and journal voucher
adjusting entries Control Issues policies describe log master
in a formal Reported in how closing and collects common
listing, which is SEC's Fiscal adjusting entries closing and
used Year 2004 are compiled and adjusting entries
recorded. in a formal
in the general Financial listing.
ledger closing Statement
process and in Audit Report
preparing (GAO-05-691R,
financial July 27, 2005)
statements.
3 Maintain Management Closed. Closed. During
subsidiary Report: Subsidiary our 2005 audit,
schedules and Opportunities schedules for we noted that SEC
documentation for undelivered was able to
supporting all Improvements orders prior to reconcile the
delivered and in SEC's budget fiscal total delivered
undelivered Internal year 2002 are not orders balance
orders available at a and the
transactions and Controls and detailed level; undelivered
related amounts Accounting however, data are orders balance
recorded in the Procedures available for all for budget fiscal
general ledger. (GAO-05-693R, subsequent years years after 2002
The documentation Aug. 12, 2005) and are to subsidiary
should be at a reconciled to the schedules.
detailed level general ledger. Although detailed
sufficient to support is not
facilitate available for
management review undelivered
and the external orders
audit process. transactions for
budget fiscal
years prior to
2002, we were
able to reconcile
the summary-level
support to the
general ledger
with only an
immaterial
difference.
4 Separate key Management Closed. SEC has Closed. During
responsibilities Report: implemented our 2005 audit,
over the handling Opportunities procedures to we observed the
and recording of for ensure that two dual control
cash receipts so Improvements individuals are procedures over
that no one in SEC's present to open cash receipts
individual Internal mail, handle that SEC has
handles all key cash, and log in implemented.
aspects Controls and checks.
concerning the Accounting
receipts. Procedures
(GAO-05-693R,
Aug. 12, 2005)
5 Perform periodic Management Closed. SEC has Closed. During
reconciliations Report: implemented our 2005 audit,
of successful Opportunities procedures to we reviewed the
fee-bearing for perform periodic reconciliations
filings in EDGAR Improvements reconciliations prepared by SEC
and revenue in SEC's of the data in without
recorded in the Internal EDGAR and the exception.
general ledger. general ledger.
Controls and
Accounting
Procedures
(GAO-05-693R,
Aug. 12, 2005)
6 Develop for this Management Closed. Closed. During
reconciliation Report: Documentation and our 2005 audit,
process written Opportunities implementation of we reviewed the
policies and for the policies and written policies
procedures that Improvements procedures have and procedures
address the in SEC's been completed. prepared by SEC
maintenance of Internal for the filing
documentation fee revenue
supporting the Controls and reconciliation.
general ledger Accounting Our testing
balances. Procedures indicated that
(GAO-05-693R, these procedures
Aug. 12, 2005) have been
implemented.
7 Document its Management Closed. Closed. During
review of the Report: Documentation of our 2005 audit,
monthly Opportunities the policies and we noted
for procedures over documented review
Fund Balance With Improvements this review has of the monthly
Treasury (FBWT) in SEC's been completed. FBWT
reconciliation to Internal reconciliation.
help ensure the
timeliness of Controls and
these Accounting
reconciliations Procedures
and the accuracy (GAO-05-693R,
and validity of Aug. 12, 2005)
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.
8 Appropriate SEC Management Closed. The Closed. During
management Report: Planning and our 2005 audit,
officials review Opportunities Budget Office has we noted
recorded for been documented
apportionment Improvements restructured, evidence of
amounts to in SEC's creating an appropriate SEC
provide assurance Internal additional level management review
over the accuracy of checks and of recorded
of these amounts. Controls and balances, and the apportionment
The review should Accounting newly created amounts.
be evidenced in Procedures Budget Officer
some manner, such (GAO-05-693R, slot has been
as a signature Aug. 12, 2005) filled. The
and date. policy has been
changed to
include
verification and
approval by the
Assistant
Director,
Planning and
Budget, of the
apportionment
documents once
they are entered
into the general
ledger by the
Budget Officer.
9 Develop written Management Closed. SEC has Closed. During
policies and Report: completed our 2005 audit,
procedures Opportunities documentation of we noted that SEC
governing the for the payroll file developed written
payroll Improvements processing and policies and
processing and in SEC's reconciliation procedures for
reconciliation Internal process. payroll
procedures, which processing and
would include Controls and reconciliation.
requirements for Accounting Our testing
documenting Procedures indicated that
supervisory (GAO-05-693R, these procedures
review of the Aug. 12, 2005) have been
performance of implemented.
the payroll
procedures
performed during
each pay period.
10 Train other Management Closed. A new Closed. During
individuals to Report: staff person has our 2005 audit,
perform payroll Opportunities been trained and we noted that SEC
processing and for performs the has trained
reconciliation Improvements reconciliations another
procedures. in SEC's with supervisory individual to
Internal review. perform this
function.
Controls and
Accounting
Procedures
(GAO-05-693R,
Aug. 12, 2005)
11 Develop policies Management Closed. Closed. SEC staff
and procedures to Report: Contracting has been reminded
help ensure that Opportunities Officer's of existing SEC
expenditures (1) for Technical regulations
are recorded in Improvements Representative regarding
the proper Budget in SEC's and OFM staff assignment of
Object Class Internal have been invoice charges
(BOC) code on the reminded of the (SEC Regulation
basis of the Controls and requirement to 10-15). During
nature of the Accounting assign invoice our 2005 audit,
expenditure and Procedures charges to the we noted no
(2) are properly (GAO-05-693R, appropriate exceptions during
allocated across Aug. 12, 2005) contract our testing of
BOC codes as line/CLIN when BOC codes.
appropriate. approving and
processing
payments.
12 Refer eligible Management Closed. All Closed. During
debt that is Report: eligible debt is our 2005 audit,
delinquent over Opportunities being referred to we verified that
180 days to for Treasury as SEC is properly
Improvements required by DCIA. referring
Treasury as in SEC's eligible debt to
required by the Internal Treasury as
Debt Collection required by DCIA.
Improvement Act Controls and
(DCIA). Accounting
Procedures
(GAO-05-693R,
Aug. 12, 2005)
13 Review its Management Closed. SEC's Closed. During
property and Report: Property our 2005 audit,
equipment Opportunities Accountability we reviewed SEC's
capitalization for Task Force analysis and
thresholds and Improvements performed and concluded that
document the in SEC's documented this the
analysis used to Internal analysis. capitalization
select the thresholds are
capitalization Controls and reasonable.
thresholds. Accounting
Procedures
(GAO-05-693R,
Aug. 12, 2005)
14 Review the Material Closed. SEC has Open. SEC
disgorgement and Internal completed a completed a
penalty judgments Control Issues comprehensive comprehensive
and subsequent Reported in review of case review of case
activities SEC's Fiscal data. data and
documented in Year 2004 appropriate
each case file by adjustments have
defendant to Financial been recorded.
determine whether Statement However, our
the individual Audit Report audit continued
amounts recorded (GAO-05-691R, to find data
in the July 27, 2005) inaccuracies in
case-tracking the case-tracking
system are system.
accurate and
reliable.
15 Implement a Material Open. SEC has Open. We will
system that is Internal begun a evaluate SEC's
integrated with Control Issues replacement of corrective
the accounting Reported in the financial actions during
system or that SEC's Fiscal components of the our fiscal year
provides the Year 2004 Case Action 2006 financial
necessary input Tracking System. audit.
to the accounting Financial The replacement
system to Statement system will be
facilitate Audit Report integrated into
timely, accurate, (GAO-05-691R, the general
and efficient July 27, 2005) ledger. SEC
recording and estimates
reporting of completion in
disgorgement and fiscal year 2006.
penalty activity.
16 Implement Material Open. Staff from Open. We will
controls so that Internal the Division of evaluate SEC's
the ongoing Control Issues Enforcement and corrective
activities Reported in OFM meet weekly actions during
involving SEC's Fiscal to discuss our fiscal year
disgorgements and Year 2004 improvements in 2006 financial
penalties are business audit.
properly, Financial processes, and
accurately, and Statement staff have been
timely recorded Audit Report added or
in the accounting (GAO-05-691R, reorganized to
system. July 27, 2005) increase
assurance of
accurate and
timely
recordation in
the accounting
system.
17 Strengthen Material Open. Staff from Open. We will
coordination, Internal the Chairman's evaluate SEC's
communication, Control Issues Office, Division corrective
and data flow Reported in of Enforcement, actions during
among staff of SEC's Fiscal and the Offices our fiscal year
SEC's Division of Year 2004 of Financial 2006 financial
Enforcement and Management, audit.
OFM who share Financial Information
responsibility Statement Technology and
for recording and Audit Report Security, and the
maintaining (GAO-05-691R, Secretary meet
disgorgement and July 27, 2005) weekly to discuss
penalty data. operating
procedures and
plan for
development of
the new system.
The Division of
Enforcement is in
the process of
scanning
documents to
provide joint
electronic access
to both itself
and OFM in the
interim.
18 Develop and Material Open. Draft Open. We will
implement written Internal policies have evaluate SEC's
policies covering Control Issues been prepared but corrective
the procedures, Reported in must be updated. actions during
documentation, SEC's Fiscal The replacement our fiscal year
systems, and Year 2004 financial system 2006 financial
responsible is likely to audit.
personnel Financial trigger
involved in Statement improvements to
recording and Audit Report business
reporting (GAO-05-691R, processes which
disgorgement and July 27, 2005) will need to be
penalty financial documented.
information. The
written
procedures should
also address
quality control
and managerial
review
responsibilities
and documentation
of such a review.
19 Develop written Material Open. SEC has Open. We will
policies and Internal approved a plan evaluate SEC's
procedures that Control Issues to add a number corrective
provide Reported in of staff to OFM actions during
sufficient SEC's Fiscal and has awarded our fiscal year
guidance for the Year 2004 two task orders 2006 financial
year-end closing for accounting audit.
of the general Financial support to free
ledger as well as Statement up more senior
the preparation Audit Report staff to complete
and analysis of (GAO-05-691R, the documentation
quarterly and July 27, 2005) of policies and
annual financial procedures. Some
statements. policies have
already been
drafted.
20 Prepare a Material Open. The draft Open. The draft
crosswalk between Internal Financial Financial
the financial Control Issues Statements Statements
statements and Reported in Preparation Preparation
the source SEC's Fiscal Guidance provides Guidance refers
systems, general Year 2004 narrative on the to the Treasury
ledger accounts, crosswalk. Form and Content
and the various Financial Additional Crosswalks;
account queries Statement documentation however, several
and analyses that Audit Report will be completed of SEC's
make up key (GAO-05-691R, in 2006. financial
balances in the July 27, 2005) statement line
financial items deviate
statements. from the standard
crosswalk because
of adjustments
and certain
activity unique
to SEC.
21 Maintain Material Open. Subsidiary Open. We will
subsidiary Internal ledgers are evaluate SEC's
records or Control Issues maintained; corrective
ledgers for all Reported in however, full actions during
significant SEC's Fiscal documentation our fiscal year
accounts and Year 2004 must still be 2006 financial
disclosures so completed. audit.
that the amounts Financial
presented in the Statement
financial Audit Report
statements and (GAO-05-691R,
footnotes can be July 27, 2005)
supported by the
collective
transactions
making up the
balances.
22 Perform monthly Material Open. New staff Open. We will
reconciliations Internal have been hired, evaluate SEC's
of subsidiary Control Issues which will enable corrective
records and Reported in OFM to increase actions during
summary account SEC's Fiscal monthly our fiscal year
balances. Year 2004 reconciliations 2006 financial
and the audit.
Financial documentation of
Statement procedures for
Audit Report current and
(GAO-05-691R, future
July 27, 2005) reconciliations.
23 Consider a Material Open. SEC is Open. We will
``formal Internal considering evaluate SEC's
closing'' of all Control Issues workable corrective
accounts at an Reported in alternatives to actions during
interim date(s), SEC's Fiscal facilitate our fiscal year
which will reduce Year 2004 accelerating the 2006 financial
the level of audit process. audit.
accounting Financial
activity and Statement
analysis required Audit Report
at year-end. The (GAO-05-691R,
July 27, 2005)
formal closing
entails ensuring
that all
transactions are
recorded in the
proper
period through
month's end.
24 Require Material Open. OFM is Open. We will
supervisory Internal implementing evaluate SEC's
review for all Control Issues procedures to corrective
entries posted to Reported in document reviews. actions during
the general SEC's Fiscal These procedures our fiscal year
ledger and Year 2004 will become 2006 financial
financial standardized and audit.
statements, Financial fully
including closing Statement implemented.
entries. A Audit Report
supervisor should (GAO-05-691R,
review revisions July 27, 2005)
to previously
approved entries
and revised
financial
statements and
footnotes. All
entries and
reviews should be
documented.
25 Establish Material Open. OFM has a Open. We will
milestones for Internal work plan with evaluate SEC's
preparing and Control Issues milestones and corrective
reviewing the Reported in detailed tasks actions during
financial SEC's Fiscal for the financial our fiscal year
statements by Year 2004 statement 2006 financial
setting dates for preparation each audit.
critical phases, Financial fiscal quarter.
such as closing Statement OFM needs to work
the general Audit Report with other SEC
ledger; preparing (GAO-05-691R, divisions and
financial July 27, 2005) offices to
statements, prepare the same
footnotes, and for the
the performance preparation of
and the performance
accountability and
report; and accountability
performing report (PAR),
specific quality review of the
control review management
procedures. representation
letter, the
Federal Managers'
Financial
Integrity Act of
1982 process, and
other financial
reporting
functions.
26 Utilize Material Open. SEC needs Open. We will
established tools Internal to determine how evaluate SEC's
(i.e., checklists Control Issues this corrective
and Reported in recommendation actions during
implementation SEC's Fiscal can be our fiscal year
guides) available Year 2004 implemented and 2006 financial
for assistance in documented. audit.
compiling and Financial
reviewing Statement
financial Audit Report
statements. (GAO-05-691R,
July 27, 2005)
27 Maintain Material Open. As workload Open. We will
documentation Internal permits, new evaluate SEC's
supporting all Control Issues staff will be corrective
information Reported in assigned to tasks actions during
included in the SEC's Fiscal that may help to our fiscal year
financial Year 2004 simplify 2006 financial
statements and documentation and audit.
footnotes. This Financial maintain it in a
documentation Statement more
should be more Audit Report user-friendly
self-explanatory (GAO-05-691R, format.
than what has July 27, 2005)
been retained in
the past. The
documentation
should be at a
level of detail
to enable a third
party, such as an
auditor, to use
the documentation
for
substantiating
reported data
without extensive
explanation or
re-creation by
the original
preparer.
28 Take advantage of Material Closed. SEC has Open. The 2005
in-house Internal publicly financial
resources and Control Issues committed to the statements,
expertise in Reported in establishment of footnotes, and
establishing SEC's Fiscal a senior PAR were
financial Year 2004 financial extensively
reporting management reviewed by
policies, Financial oversight management and
internal Statement committee or staff in multiple
controls, and Audit Report audit committee. divisions and
business (GAO-05-691R, The 2004 and 2005 offices within
practices, as July 27, 2005) financial SEC, including
well as in the statements, the Offices of
review of footnotes, and the General
financial PAR were Counsel, the
statement and extensively Chief Accountant,
footnote reviewed by and the Chairman.
presentation. management and However, the
staff in multiple Financial
divisions and Management
offices within Oversight
SEC. Committee still
needs to become
operational.
29 Develop or Material Open. SEC has Open. We will
acquire an Internal considered evaluate SEC's
integrated Control Issues replacing the corrective
financial Reported in central actions during
management system SEC's Fiscal accounting our fiscal year
to provide timely Year 2004 system. This will 2006 financial
and accurate not be audit.
recording of Financial accomplished any
financial data Statement earlier than
for financial Audit Report 2008.
reporting and (GAO-05-691R,
management July 27, 2005)
decision making.
30 Periodically Management Closed. During Open. We will
reconcile the Report: the first quarter evaluate SEC's
cash receipts log Opportunities of fiscal year corrective
to the for 2006, SEC actions during
documentation Improvements implemented our fiscal year
supporting the in SEC's procedures to 2006 financial
deposit amount in Internal reconcile the audit.
the general daily receipts
ledger. Controls and ledger to the
Accounting transaction
Procedures journal on a
(GAO-05-693R, monthly basis.
Aug. 12, 2005)
31 Review all Management Open. Full Open. SEC has
existing leases Report: documentation of reviewed property
for property and Opportunities the evaluations leases but not
equipment to for of new property equipment leases.
determine if they Improvements leases has been During our 2005
should be in SEC's completed; audit, we noted
capitalized or Internal however, the that SEC properly
expensed and make documentation for reviewed all new
any necessary Controls and equipment leases property leases
adjustments to Accounting has not been and a sample of
the related Procedures completed. existing property
general ledger (GAO-05-693R, leases, as was
balances. Aug. 12, 2005) agreed to by SEC
and GAO staff.
Based on our
review of the
leases, it was
not deemed
necessary to
review all
existing property
leases. We will
evaluate SEC's
corrective
actions relating
to equipment
leases during our
fiscal year 2006
financial audit.
32 Develop policies Management Open. Open. We will
and procedures to Report: Documentation of evaluate SEC's
properly account Opportunities the policies and corrective
for future for procedures needs actions during
property and Improvements to be completed. our fiscal year
equipment leases in SEC's 2006 financial
on an ongoing Internal audit to ensure
basis. leases are
Controls and evaluated on a
Accounting timely basis and
Procedures are properly
(GAO-05-693R, recorded.
Aug. 12, 2005)
33 Periodically Management Open. SEC has Open. We will
reconcile its Report: instituted a evaluate SEC's
active employees Opportunities management corrective
to the Federal for process to verify actions during
Personnel and Improvements the listing of our fiscal year
Payroll System in SEC's active employees. 2006 financial
(FPPS). Internal Documentation of audit.
the
To do this, Controls and reconciliation
consideration Accounting with FPPS is in
should be given Procedures process.
to maintaining an (GAO-05-693R,
independent Aug. 12, 2005)
database of
active employees
and other
payroll-related
information,
wherein
active employee
data could be
readily compared
with and
reconciled to
FPPS-generated
payroll records.
This
reconciliation
should be
documented.
34 Require Management Open. The Open. We will
documented Report: Executive evaluate SEC's
support and Opportunities Director's office corrective
review of SEC's for now requires actions during
corrective Improvements additional our fiscal year
actions to in SEC's support to 2006 financial
provide evidence Internal document audit to ensure
that actions corrective proper
taken in response Controls and actions. Formal documentation.
to audit Accounting policies and
recommendations Procedures procedures remain
fully correct (GAO-05-693R, to be issued.
identified Aug. 12, 2005)
deficiencies
prior to closing
out the audit
issues in the
tracking system.
Source: GAO.
Enclosure II
Comments from the Securities and Exchange Commission
Enclosure III
Details on Audit Scope and Methodology1
1 For further explanation of our audit scope and methodology, see the
financial audit report (GAO-06-239).
To fulfill our responsibilities as auditor of the financial statements of
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 control.
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.
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
Anti-Deficiency Act; laws governing the pay and allowance system
for SEC employees; and the Prompt Payment Act.
We requested comments on a draft of this report from the Chairman of SEC
or his designee. We received written comments from the Chairman of SEC. We
conducted our audit in accordance with U.S. generally accepted government
auditing standards.
(194570)
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