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GAO to SEC: Improve Your Controls

The accountability office sent the securities watchdog 18 recommendations for remedying weaknesses involving disgorgements and penalties and financial reporting.
Craig Schneider, CFO.com | US
July 28, 2005

The Government Accountability Office has issued a follow-up report to the Securities and Exchange Commission detailing 18 suggestions the GAO believes would repair "material" weaknesses in the SEC's financial internal controls.

On Wednesday the GAO made recommendations covering the commission's internal controls over disgorgements and penalties for those who violate securities laws. It also proposed improvements in the SEC's controls over financial-statement preparation and reporting.

The GAO report asserts the SEC didn't perform procedures to reasonably assure the completeness and reliability of financial information about disgorgements and penalties in its case-tracking system. Further, there's an amplified risk of incomplete or inaccurate data because of inefficient communication among various SEC divisions and offices.

During their review, the GAO officials witnessed a case in which the SEC's enforcement division entered disgorgements into the system, but the finance staff responsible for the accounting entries didn't have the documentation needed to make the entries into the general ledger.

The SEC staff performs "extensive and time consuming manual procedures" to put together quarterly subsidiary ledgers as a way of updating its accounting system, according to the GAO, which noted that the manual process risks creating added inaccuracies and inhibits timely reporting. In its report, the GAO recommended five actions to improve disgorgements and penalties: setting up an integrated accounting system; cross-checking judgments with the amounts in the case-tracking system; establishing controls for the accurate and timely record of disgorgements and penalties; tightening ties and data flow between the SEC’s Division of Enforcement and its Office of Financial Management; and developing written policies covering procedures, documentation systems, and responsible staff.

In its audit, the GAO also found that the SEC has neither formalized ways of showing "the procedures, systems, analysis of accounts, and personnel involved in developing key balances and preparing the financial statements and related disclosures, nor the related quality control and review procedures."

As a result, the SEC's opening balances for its fiscal year 2004 financial statements contained material misstatements. While the commission made corrections later, the GAO criticized it for delaying the reporting of its financials, consuming significant staff resources, causing audit inefficiencies, and creating higher costs for financial-statement preparation and audits.

To help improve the commission's controls over financial-statement preparation and reporting, the GAO recommended that the SEC take 13 actions. The first 11 include developing written policies and procedures that provide an adequate guide for year-end closing of the general ledger, setting up clearly defined staff responsibilities, considering a "formal closing" of all accounts at interim dates, requiring supervisory review for all entries posted to the general ledger and financial statements, using available checklists and implementation guides, and documenting all information included in the financial statements and footnotes. The last 2 of the GAO's 13 suggestions cover the leveraging of in-house resources for accounting advice and upgrading the SEC's capacity to improve its reporting system.

When asked by the GAO to comment on a draft of its report, the SEC reportedly acknowledged the material weaknesses in internal controls. The securities watchdog also told the GAO that the report's recommendations were consistent with the actions it has planned. SEC officials expect that the commission will complete its review of files and data and strengthening and documenting policies and procedures for disgorgements and penalties in fiscal year 2006. The commission also plans a multiyear project to replace the current case-tracking system.

The SEC stated that weaknesses related to its controls over the preparation of financial statements are being addressed by increasing its financial reporting staff, asking for advice from in-house experts, and reevaluating certain policies. The commission also plans to set up a formal senior-management committee to provide for continued regular review and advice by key officials.

Margaret Carpenter, CFO of the SEC, told CFO.com that she has read the report. "I don't think there was anything in there that surprised us," she said, explaining that SEC officials had already discussed the substance of the report with their counterparts at the GAO. "I'm sure we will have further discussions with what degree of implementation makes sense," she added.




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