GAO Faults SEC’s Accounting Procedures

By Michael Cohn

An audit by the Government Accountability Office of the Securities and Exchanges Commission’s Investor Protection Fund financial statements for fiscal years 2011 and 2012 found two areas of significant deficiency in the SEC’s internal controls.

The GAO said in a report released Friday that the “significant control deficiencies may adversely affect the accuracy and completeness of information used and reported by SEC’s management.” As a result, the GAO made nine new recommendations to address these significant internal control deficiencies.

In addition to the two significant deficiencies, the GAO’s financial audit for fiscal 2012 identified a number of other deficiencies in the SEC’s internal control over financial reporting. While these were not considered material weaknesses or significant deficiencies, the GAO cautioned that they nonetheless warrant the attention of SEC management. The deficiencies related to the SEC’s review and monitoring of disgorgement and penalty transactions, supervisory review and monitoring procedures over manual journal entries, the accounts payable accrual methodology, and information security.

In a follow-up on the status of internal control recommendations made in prior audits of the SEC, the GAO found that the SEC took action to fully address 25 of the GAO’s 47 prior recommendations, as of the conclusion of the GAO’s fiscal year 2012 audit of the SEC.

In response to the report, SEC chair Elisse Walter said she was pleased that the GAO found the SEC again had “no material weaknesses in its financial controls audit for 2012. However, she acknowledged that there were two “significant deficiency areas,” which the SEC plans to address, along with the other deficiencies.

“As your draft report noted, our internal control structure continues to warrant additional improvements, particularly in the two significant deficiency areas of budgetary resources and property and equipment transactions,” she wrote. “Continued improvement in these areas is a top priority of the SEC. While we have made significant strides in the SEC’s multi-year path towards a strong, sustainable internal control posture, the agency will continue to dedicate its energy towards remediating our remaining deficiencies.”

Those efforts include strengthening the SEC’s process for de-obligating funds from completed contracts and ensuring the SEC incorporates appropriate accounting adjustments for these amounts; improving controls over the review of property transactions and formalizing the process for conducting the physical inventory of plant and equipment; further enhancing the policies and procedures around accounting for disgorgement, post-judgment interest and penalty transactions; enhancing controls around the review and monitoring of manual journal entries; and augmenting control procedures over the SEC’s information security.