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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