Examining Financial Management at the Securities and Exchange Commission
July 27, 2005
The Securities and Exchange Commission (SEC) is the Federal agency responsible for enforcing all the tough new corporate accountability standards on the private sector, in the wake of the Enron, Worldcom, and Arthur Andersen scandals. The SEC vision statement touts that the agency “aims to be the standard against which federal agencies are measured.” But did you know that the SEC didn’t even get a clean audit of its own books? The GAO, the auditing arm of Congress, reports that there are serious and material financial weaknesses at SEC that place the agency in an ironic position when it is swinging the hammer on the accounting practices of the private companies it regulates.
The SEC:
Can’t account for the revenues provided or expenditures paid by the taxpayers
Can’t track money owed to the Treasury or, more importantly, to harmed investors owed restitution
Can’t protect the financially sensitive, proprietary data provided by the private companies it regulates
Can’t stay on budget as it builds swank new buildings in 3 high-priced markets: in NYC, Washington, D.C. and Boston. Construction costs on new SEC facilities have tripled in cost over-runs. The underestimation of building costs heaped an added $40 million onto the SEC’s appropriation of taxpayer dollars.
• As of September 30, 2004, SEC had no formalized quality control or review procedures (e.g. there were no accounting policies and procedures, or they were still in draft and had not yet been developed for several major areas related financial statements).
• SEC lacks formal policies and procedures in several major areas related to financial management. An overhaul of the financial management system and development of formal procedures is necessary to eliminate material internal control weaknesses related to penalties and discorgements (e.g. errors where SEC staff entered information into the accounting system that conflicted with information in the files), and financial reporting (e.g. accounting staff could not provide supporting documentation of for certain account balances).
• SEC has no comprehensive agency information security program with effective controls to resolve existing information system control weaknesses and continuously manage information security risks (GAO says “SEC is at risk from malicious intruders entering inadequately protected systems”).
• Building boondoggles: the original Fiscal Year 2005 estimate for the total cost of three new SEC buildings was $22.2 million. The Revised Fiscal Year estimate totaled $40.5 billion; and the current total estimate is $69 million. The cost estimates for these three buildings has nearly tripled.
Impact on Taxpayers:
• Underestimation of building costs heaped an added $40 million onto the SEC’s appropriation of taxpayer dollars.
• Internal control weaknesses in the area of recording and reporting discorgements (restitution to harmed investors) and penalties (fines owed by securities traders, mutual funds, etc.) could mean a) loss of money for the government: penalty monies go to the Dept. of Treasury; and b) loss of money to harmed investors (discorgements).
These Findings Demand a Response:
• Full and independent GAO audit is needed of SEC. (Requested November 2005).
• Further examination of building cost over-runs and participation in costly leasing may suggest that appropriations language limiting participation in costly leasing schemes.
• Follow up hearing to check on progress in FY2006.
