SEC Beefing Up Internal Reporting in Response to GAO Audits

The Securities and Exchange Commission (SEC), the agency charged with overseeing the financial reporting of public companies, is “redoubling” its efforts to shore up major deficiencies in its own financial reporting procedures and internal controls that were uncovered in an audit by the Government Accountability Office.


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SEC Chairman Christopher Cox has further told the GAO that his agency will “fully resolve the material weaknesses” uncovered by an audit in fiscal year 2004 and largely unresolved by the time his agency was audited again in fiscal 2005, according to a letter from Jeanette M. Franzel, the GAO’s director financial management and assurance

Steps being taken by the SEC, according to Franzel’s letter, include: adding “resources and expertise” to the SEC’s financial management office, creating a set of written procedures governing financial reporting processes and related internal controls, and establishing a Financial Management Oversight Committee to provide an executive level review of the SEC’s financial statements and regularly review its accounting policies and internal controls. That committee is scheduled to start work in the second quarter.

Those actions are all part of a new set of recommendations the GAO came up with after its 2005 audit found that the SEC had not yet taken completed action on more than 20 of the 34 recommendations from the GAO’s 2004 audit.

Franzel’s letter, available on the GAO Web site,, lists all the SEC reporting weaknesses uncovered in its 2004 and 2005 audits. The highest level “material” weaknesses concern the SEC's controls over preparing financial statements and related disclosures; recording and reporting disgorgement and penalty activity; and information security. Other areas of concern that did not rise to the “material” level include the responsibilities of the contracting officer's technical representative, reviewing filing fee calculations, and compliance with prompt payment rules.

Franzel has acknowledged that the SEC is indeed responding to some of the GAO concerns, but notes that the agency’s responses “have not been sufficient” in the critical area of disgorgement and penalty data. Her letter notes that the SEC’s judgments and orders regarding disgorgements, civil monetary penalties, and interest against violators of federal securities laws “involved in excess of than $1.6 billion in collections during fiscal year 2005, and that the SEC was holding approximately $2 billion in a fiduciary capacity as of last Sept. 30.

Disgorgements and penalties could be among the areas that the soon-to-be created oversight committee will review.

Information security shortcomings found in the 2004 audit seemed to be particularly embarrassing. According to a report on, the GAO’s technology concerns include whether the SEC has been effectively controlling remote access to its servers, establishing controls over passwords, managing access to its systems and data, securely configuring network devices and servers, and monitoring mechanisms to detect and track security incidents.

In addition to the measures that the SEC is already acting on, the latest GAO recommendations to the agency include: determining cutoff dates for significant account balances that are both appropriate and practical to facilitate interim financial reporting and meeting year-end financial reporting deadlines; and preparing interim footnote disclosures to facilitate meeting year-end financial reporting deadlines.
~ JC

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