GAO-05-693R SEC Management Report 

United States Government Accountability Office

Washington, DC 20548 

August 12, 2005 

Margaret J. Carpenter 

Associate Executive Director 

Office of Financial Management 

U.S. Securities and Exchange Commission 

Subject: Management Report: Opportunities for Improvements in SEC’s Internal 

Controls and Accounting Procedures 

Dear Ms. Carpenter: 

In May 2005, we issued our report expressing an opinion on the Securities and 

Exchange Commission’s (SEC) fiscal year 2004 financial statements and an opinion 

on SEC’s internal control as of September 30, 2004.1 We also reported on the results 

of our tests of SEC’s compliance with selected provisions of laws and regulations 

during fiscal year 2004. Our report on SEC’s fiscal year 2004 financial statements 

identified reportable conditions in the internal controls over financial reporting that 

we considered to be material weaknesses.2 These weaknesses related to SEC’s 

controls over (1) recording and reporting disgorgements3 and penalties,4 (2) 

information security, and (3) preparing financial statements and related disclosures. 

We issued two separate reports providing recommendations to address those 

weaknesses.5 

The purpose of this report is to provide recommendations for those issues identified 

during our audit that, although not material in relation to the financial statements, we 

believe warrant management’s attention. We are making 16 recommendations in this 

 

1

GAO, Financial Audit: SEC’s Fiscal Year 2004 Financial Statements, GAO-05-244 (Washington, 

D.C.: May 26, 2005). 

2

 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. 

3

 A disgorgement is the repayment of illegally earned profits. 

4

 A penalty is a monetary sum that is to be paid by the registrant to SEC as a result of a security law 

violation. 

5

 GAO, Material Internal Control Issues Reported in the SEC’s Fiscal Year 2004 Financial Statement 

Audit Report, GAO-05-691R (Washington, D.C.: Aug. 27, 2005), and GAO, Information Security: 

Securities and Exchange Commission Needs to Address Weak Controls over Financial and Sensitive 

Data, GAO-05-262 (Washington, D.C.: Mar. 23, 2005). 
Page 2 GAO-05-693R SEC Management Report 

report for strengthening SEC’s accounting procedures and internal controls in the 

following 12 areas: 

• maintaining detailed subsidiary ledgers and records to support delivered and 

undelivered orders transactions; 

• segregation of duties and controls over cash receipts; 

• verifying that all fee-bearing filings recorded in the Electronic Data Gathering, 

Analysis, and Retrieval (EDGAR) system are recognized as revenue in the 

general ledger; 

• management review of the Fund Balance with Treasury (FBWT) reconciliation; 

• review process to ensure that apportionments are accurately entered into the 

general ledger; 

• evaluation of equipment or property leases to determine if they meet the 

capitalization criteria required by generally accepted accounting principles; 

• review of the final processed payroll data entered into the Federal Personnel 

and Payroll System (FPPS) by the National Business Center (NBC) for active 

employees; 

• documented policies and procedures governing the payroll process; 

• documentation and review of the effectiveness of corrective actions relating to 

audit recommendations addressing weaknesses reported under the Federal 

Managers’ Financial Integrity Act of 1982 (FMFIA); 

• charging expenditures to the proper Budget Object Class (BOC) codes;

• referral of eligible delinquent debt that was over 180 days due to Treasury, as 

required by the Debt Collection Improvement Act (DCIA); and 

• establishing and documenting property and equipment capitalization thresholds.

Our recommendations follow at the end of our discussion of each of these issues in 

the following sections. These recommendations are intended to bring SEC into 

conformance with the internal control standards that federal agencies are required to 

follow.6

 In its comments reprinted in enclosure I, SEC described actions completed, 

ongoing, and planned to address each of these issues. Further details on our scope 

and methodology are included in our report on the results of our audit of the 2004 

financial statements and are reproduced in enclosure II. We conducted our audit in 

accordance with U.S. generally accepted government auditing standards. 

 

6

GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1 (Washington, 

D.C.: November 1999).
Page 3 GAO-05-693R SEC Management Report 

Recording Undelivered and Delivered Orders

SEC was initially unable to provide auditable detail for the fiscal year 2004 opening 

balances of undelivered and delivered orders recorded in the general ledger. After 

extensive time and effort, SEC compiled schedules of transactions. However, those 

schedules did not reconcile to the related amounts recorded in the general ledger, 

and SEC staff could not readily explain the differences. Similar problems occurred 

with the ending balance for the amounts of delivered orders recorded in the general 

ledger as of September 30, 2004. Through much time and effort on the part of SEC 

and GAO staff, we were ultimately able to audit the amounts pertaining to SEC’s 

undelivered and delivered orders. However, GAO’s Standards for Internal Control 

in the Federal Government require that the documentation of transactions should be 

complete, accurate, and sufficient to facilitate the tracing of transactions and related 

information from authorization and initiation through processing and recording. In 

addition, documentation should be readily available for examination. Such 

documentation is necessary to enable management’s review of the related 

transactions. 

Recommendation

1. We recommend that SEC maintain subsidiary schedules and documentation 

supporting all delivered and undelivered orders transactions and related 

amounts recorded in the general ledger. The documentation should be at a 

detailed level sufficient to facilitate management review and the external audit 

process. 

Segregation of Duties and Controls over Cash Receipts 

SEC does not have proper segregation of duties or controls over cash receipts. 

Checks paid to SEC for disgorgements and other activities are opened either by an 

individual in the mail room, who does not log in the checks but forwards them to the 

Office of Financial Management (OFM), or by two accounting technicians in OFM 

who manually log in the checks and forward them and the log to the Supervisory 

Accounting Analyst. The Supervisory Accounting Analyst has incompatible duties 

regarding cash receipts by having custody of the checks, control over the original 

daily cash receipts log, and access to the general ledger. Furthermore, SEC does not 

reconcile the cash receipts log to the documentation supporting the deposit amount 

in the general ledger. According to GAO’s Standards for Internal Control in the 

Federal Government, key duties and responsibilities need to be divided or segregated 

between different people to reduce the risk of error or fraud. This should include 

separating the responsibilities for authorizing transactions, processing and recording 

transactions, reviewing the transactions, and handling any related assets so that no 

one individual controls all key aspects of a transaction or event. In addition, periodic 

reconciliations should be performed to ensure accountability over the assets. 

Because one individual performs incompatible duties over cash receipts, which could 

result in checks never being recorded into the general ledger, coupled with the lack 

of the receipts’ reconciliation with the deposit amounts, there is a risk of error or 

fraud concerning cash receipts. 
Page 4 GAO-05-693R SEC Management Report 

Recommendations

We recommend that SEC take the following two actions: 

2. Separate key responsibilities over the handling and recording of cash receipts so 

that no one individual handles all key aspects concerning the receipts. 

3. Periodically reconcile the cash receipts log to the documentation supporting the 

deposit amount in the general ledger. 

Recording Filing Fee Revenue 

SEC uses the Internet-based EDGAR system to collect, validate, index, and accept the 

submissions of forms filed by SEC-registered companies. EDGAR, along with the Fee 

Momentum module in EDGAR, recognizes revenue when filings are submitted and 

completed, and transfers this information to the general ledger through a nightly 

batch file. However, SEC does not perform a comparison or reconciliation between 

successfully completed filings in EDGAR and the amount recognized as revenue in 

the general ledger. During our testing of filing fee revenue, we identified a difference 

of approximately $154 million between the successful fee-bearing filings recorded in 

EDGAR of about $390 million and the revenue for filing fees recorded in the general 

ledger of about $236 million. This balance of $154 million had been recorded by SEC 

as transaction fee revenue in the general ledger. SEC corrected the difference after 

we brought the matter to its attention. Statement of Federal Financial Accounting 

Standards (SFFAS) No. 7, Accounting for Revenue and Other Financing Sources,

states that revenue should be recognized when earned, which, for filing fees, is when 

a company’s equity or debt offering has been successfully completed. 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 revenue amounts will be misstated. 

Recommendations

We recommend that SEC take the following two actions: 

4. Perform periodic reconciliations of successful fee-bearing filings in EDGAR and 

revenue recorded in the general ledger. 

5. Develop for this reconciliation process written policies and procedures that 

address the maintenance of documentation supporting the general ledger 

balances. 

Fund Balance with Treasury Reconciliation 

SEC performs monthly reconciliations of its FBWT as required. While management 

has stated that reviews of the FBWT reconciliations are performed by a management 

official, there is no evidence of such review. GAO’s Standards for Internal Control 

in the Federal Government requires agencies to establish controls to enforce 
Page 5 GAO-05-693R SEC Management Report 

adherence to requirements, such as FBWT reconciliations, and to create and maintain 

records providing evidence that these controls are executed. The lack of such 

evidence increases the risk that the reviews are not being performed, thereby 

increasing the risk of the untimely detection of errors in related account balances. 

Recommendation

6. We recommend that SEC management document its review of the monthly 

FBWT reconciliation to help ensure the timeliness of these reconciliations and 

the accuracy and validity of 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. 

Reviewing Apportionment Entries 

The Antideficiency Act prohibits agencies from obligating appropriated funds in 

excess of what the Office of Management and Budget (OMB) has apportioned. SEC 

budget analysts record apportionment amounts from Standard Form (SF)-132, 

Apportionment and Reapportionment Schedule, approved by OMB in the general 

ledger; however, there is no supervisory or management review of these entries. 

GAO’s Standards for Internal Control in the Federal Government requires agencies 

to implement internal control procedures to ensure the accurate and timely recording 

of transactions and events. Without a review process to ensure that apportionments 

are accurately entered into the general ledger, there is a risk that apportionments will 

not be accurately recorded and that obligations will be tracked against an inaccurate 

apportionment limit. 

Recommendation

7. We recommend that appropriate SEC management officials review recorded 

apportionment amounts to provide assurance over the accuracy of these 

amounts. The review should be evidenced in some manner, such as a signature 

and date. 

Accounting for Property and Equipment Leases 

During our audit, we found that SEC was not properly accounting for its equipment 

or property leases. SFFAS No. 6, Accounting for Property, Plant, and Equipment, 

requires management to determine if leases meet the criteria for recognition as 

capital leases. If a lease meets any one of the criteria, the cost of the property or 

equipment should be capitalized and an equal amount should be recognized as a 

liability for the capital lease at its inception. This standard also requires depreciation 

expense to be recognized to allocate the cost of the property or equipment over its 

estimated useful life. Financial Accounting Standards Board (FASB) Standard No. 13, 

Accounting for Leases, requires assets acquired under capital leases to be 

depreciated over the lease term, rather than the asset’s useful life, if the lease meets 

either the lease term or the present value of the minimum lease payments criteria. 

For fiscal year 2004, we found that SEC expensed the lease payments for one of its 

properties when the lease should have been capitalized and depreciated. We also 
Page 6 GAO-05-693R SEC Management Report 

found two contracts for leasing equipment that SEC recorded as purchases of 

equipment. Our evaluation determined that these equipment leases were properly 

capitalized, but the related capital lease liability was not recorded. In addition, 

depreciation expense was incorrectly calculated for these leases, since these leases 

did not meet the lease term or the present value of minimum lease payments criteria 

and the equipment was depreciated over the assets’ useful life rather than over the 

related lease terms. As a result of these errors, leases were not properly accounted 

for in the financial statements or related disclosures. 

Recommendations

We recommend that SEC take the following two actions: 

8. Review all existing leases for property and equipment to determine if they 

should be capitalized or expensed and make any necessary adjustments to the 

related general ledger balances. 

9. Develop policies and procedures to properly account for future property and 

equipment leases on an ongoing basis. 

Review Federal Personnel and Payroll System Data 

SEC payroll reports and transactions are created and managed under contract by the 

NBC at the Department of the Interior (DOI) through FPPS. On a biweekly basis, 

FPPS generates the Personnel Alphabetic Employee List, which shows all active 

employees for each pay period. The Personnel Alphabetic Employee List is used for 

budgeting purposes by SEC’s Planning and Budget Office in OFM. FPPS also 

generates the Organizational Employee Report, listing all active employees within 

each SEC division and office. However, SEC does not maintain an independent 

database of its payroll information or perform tests to verify the information in FPPS. 

The Organizational Employee Report is sent to all SEC divisions and offices, but 

there is no documentation or other indication that the divisions and offices review 

the Organizational Employee Report to determine if it accurately reflects the current 

active employees, new hires, and recent terminations. Neither SEC’s Office of 

Human Resources and Administrative Services nor OFM receives positive assurance 

from the divisions and offices that the employees listed on the Organizational 

Employee Report are currently active employees, thus offering no assurances that 

newly hired staff will be paid timely or that pay for departing staff will be stopped. 

According to OMB Circular A-127, Financial Management Systems, an agency 

should review and test all aspects of the time and attendance (T&A) systems’ 

processing procedures and controls with sufficient scope, depth, and frequency to 

reasonably ensure that key procedures and controls are effective in meeting legal and 

other requirements, and that data integrity is maintained. Without the review of finalprocessed payroll data, there is a risk that inaccurate or unauthorized transactions, 

such as those noted above, could occur, or that fictitious employees could be entered 

into FPPS, resulting in erroneous or fraudulent payments by SEC. Concerns over 

payroll data integrity are compounded in the service auditor’s report for FPPS, which 

found that application security controls over FPPS were not operating with sufficient 

effectiveness to reasonably ensure that access to FPPS is restricted to properly 
Page 7 GAO-05-693R SEC Management Report 

authorized NBC Payroll Operations personnel and that incompatible duties within 

Payroll Operations are properly segregated in the system.7 Since SEC does not 

evidence a review of the active employees listed on the Organizational Employee 

Report by the divisions and offices or perform other checks and reconciling 

procedures between FPPS data and SEC records, management does not have 

assurance regarding the accuracy of the active employee information in FPPS. 

Recommendation

10. We recommend that SEC periodically reconcile its active employees to FPPS. 

To do this, consideration should be given to maintaining an independent 

database of active employees and other payroll-related information, wherein 

active employee data could be readily compared with and reconciled to FPPSgenerated payroll records. This reconciliation should be documented. 

Payroll Processing Policies and Procedures 

During our audit, we noted that SEC had only one trained individual who performed 

the payroll file processing and reconciliation procedures each pay period. These 

unwritten procedures consist of uploading and reformatting information received 

from DOI into the general ledger, comparing data in the general ledger with the 

Payroll Operations Division Report generated by DOI for accuracy and completeness, 

researching any errors, verifying payroll expenses by SEC organization code, making 

necessary corrections to the data, recording the payroll disbursement in the general 

ledger, and reconciling the Treasury Statement of Transactions (SF-224) with the 

general ledger. Also during our audit, we did not find evidence of supervisory review 

of the payroll file processing and reconciliation procedures. Per OMB Circular A-127, 

Financial Management Systems, an agency should have clearly written and 

communicated policies and procedures setting forth the responsibilities of 

employees, timekeepers, supervisors, and others regarding recording, examining, 

approving, and reporting on T&A information. By having only one person trained in 

the payroll process and not having documented policies and procedures governing 

the process, there is a risk that the necessary reconciliation will not be performed 

correctly or timely in the absence of the one individual who is knowledgeable of the 

required procedure. Furthermore, the lack of supervisory review of the payroll 

process increases the risk that errors could occur and not be detected in a timely 

manner. 

Recommendations

We recommend that SEC take the following two actions: 

11. Develop written policies and procedures governing the payroll processing and 

reconciliation procedures, which would include requirements for documenting 

 

7

 KPMG, Federal Personnel and Payroll System General Mainframe Information Technology and 

Payroll Operations Controls: Third-Party Report on Controls Placed in Operation and Test of 

Operating Effectiveness (SAS 70) for the Period October 1, 2000–September 30, 2003 (Washington, 

D.C.: October 2003). 
Page 8 GAO-05-693R SEC Management Report 

supervisory review of the performance of the payroll procedures performed 

during each pay period. 

12. Train other individuals to perform this function. 

Closing Recommendations to Address FMFIA Weaknesses 

In fulfilling the reporting requirements of the Federal Managers’ Financial Integrity 

Act of 1982, SEC reports to the President of the United States on whether the 

agency’s management controls are adequate and effective and are achieving their 

intended objectives in accordance with the standards prescribed by the Comptroller 

General’s Standards for Internal Control in the Federal Government. SEC’s FMFIA 

report to the President is largely based on the knowledge of the operations and 

evaluations conducted by SEC staff and the certification of management controls by 

appropriate SEC officials. However, during our 2004 financial statement audit, we 

found that weaknesses relating to the accountability of property and internal controls 

over disgorgement funds, which were cited in the fiscal year 2002 FMFIA report, still 

existed even though SEC’s fiscal year 2003 FMFIA report indicated that the 

recommendations to address the related weaknesses were resolved. According to 

GAO’s Standards for Internal Control in the Federal Government, the resolution of 

audit recommendations is completed only after action has been taken that (1) 

corrects identified deficiencies, (2) produces improvements, or (3) demonstrates that 

the findings and recommendations do not warrant management’s action. In addition, 

the standards state that records, which provide evidence of the execution of such 

activities, and appropriate documentation should be maintained. SEC’s policies and 

procedures do not require documented support for the resolution of audit issues 

before they are closed in SEC’s tracking system. Without adequate documentation or 

review of the adequacy and the effectiveness of corrective actions, there is a risk that 

previous audit findings continue to exist as problems after SEC has considered audit 

findings to be closed. 

Recommendation

13. We recommend that SEC require documented support and review of SEC’s 

corrective actions to provide evidence that actions taken in response to audit 

recommendations fully correct identified deficiencies prior to closing out the 

audit issues in the tracking system. 

Charging Expenditures to BOC Codes 

SEC records obligations and prepares its annual budget on the basis of budget object 

class codes. Object classes are categories in a classification system that present 

obligations by the items or services purchased by the federal government. According 

to 31 U.S.C. 1104(b), the President’s budget is required to present obligations by 

object class for each account. During our testing of nonpayroll expenditures, we 

noted several incidences in which SEC did not properly or consistently record the 

expenditures to the appropriate BOC code and noted incidences for which we could 

not determine whether the correct BOC code was charged because of a lack of 

detailed support for the expenditures. For example, for one of the contracts we 

reviewed, we noted that detailed records were not maintained for the expenditures 
Page 9 GAO-05-693R SEC Management Report 

related to the contract. While it appeared appropriate for the obligation for this 

contract to be recorded in several BOC codes because of the broad scope of work 

being performed under the contract, SEC did not obtain sufficient detail on the 

expenditures to determine how they should be allocated among the BOC codes. 

Therefore, SEC charged the entire expenditure to one BOC code. On the other hand, 

for some contracts, SEC allocated the expenditures among the BOC codes but was 

not able to support the reason why the allocations were made. 

Without sufficient detailed supporting records, the actual amount of expenditures 

within each BOC code cannot be accurately determined, thus increasing the risk that 

management does not have reliable information for decision making. In addition, the 

lack of written policies and procedures regarding recording expenditures to the 

proper BOC codes increases the risk of inconsistently recorded expenditures. 

Recommendation

14. We recommend that SEC develop policies and procedures to help ensure that 

expenditures (1) are recorded in the proper BOC code on the basis of the nature 

of the expenditure and (2) are properly allocated across BOC codes as 

appropriate. 

Timely Referral of Delinquent Debt 

DCIA requires agencies to refer eligible debts that are delinquent over 180 days to 

Treasury for collection. Our test of SEC’s compliance with DCIA disclosed $285,626 

in eligible debt that was over 180 days old but had not been referred to Treasury as of 

September 30, 2004. While this matter was not material to SEC’s fiscal year 2004 

financial statements, timely referral of delinquent debts as DCIA requires would 

improve opportunities to collect such debt. 

Recommendation

15. We recommend that SEC refer eligible debt that is delinquent over 180 days to 

Treasury as required by DCIA. 

Property and Equipment Capitalization Threshold 

SEC does not have an analytical basis or other documented support for the selection 

of its capitalization thresholds for property and equipment. FASB requires that 

entities establish appropriate capitalization thresholds by considering the entities’ 

financial and operational conditions, that the thresholds be consistently applied, and 

that they be disclosed in the financial reports. The establishment of a capitalization 

threshold policy must be supported by a detailed analysis anchored by the two 

fundamental principles of matching and materiality. Inappropriate or excessive 

capitalization thresholds have a significant impact on financial reporting and related 

oversight issues, and may not comply with SFFAS No. 6 requirements to capitalize all 

items that meet certain characteristics. 
Page 10 GAO-05-693R SEC Management Report 

Recommendation

16. We recommend that SEC review its property and equipment capitalization 

thresholds and document the analysis used to select the capitalization 

thresholds. 

Agency Comments 

In written and oral comments provided to GAO on a draft of this report, SEC 

indicated that it is taking, or has planned, actions pertaining to the issues identified in 

this report. SEC’s written comments are reprinted in enclosure I of this report. 

- - - - - 

This report is intended for use by SEC management and the SEC Inspector General. 

We are sending copies of this report to the Chairmen and Ranking Members 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; the House Committee on Government Reform; 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 year 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 franzelj@gao.gov. 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 - 2 
Page 11 GAO-05-693R SEC Management Report 

Enclosure I 

Comments from the Securities and Exchange Commission
Page 12 GAO-05-693R SEC Management Report 

Enclosure I 
Page 13 GAO-05-693R SEC Management Report 

Enclosure I 
Page 14 GAO-05-693R SEC Management Report 

Enclosure I 
Page 15 GAO-05-693R SEC Management Report 

Enclosure I
Page 16 GAO-05-693R SEC Management Report 

Enclosure I 
Page 17 GAO-05-693R SEC Management Report 

Enclosure II 

Details on Audit Scope and Methodology

To fulfill our responsibilities as auditor of the financial statements of the Securities 

and Exchange Commission (SEC), we did the following: 

• examined, on a test basis, evidence supporting the amounts and disclosure in 

the financial statements; 

• assessed the accounting principles used and significant estimates made by 

management; 

• evaluated the overall presentation of the financial statements; 

• obtained an understanding of internal controls related to financial reporting and 

compliance with laws and regulations; 

• obtained an understanding of the recording, processing, and summarizing of 

performance measures as reported in Management’s Discussion and Analysis; 

• tested relevant internal controls over financial reporting and compliance, and 

evaluated the design and operating effectiveness of internal controls; 

• considered SEC’s process for evaluating and reporting on internal control and 

financial management systems under the Federal Managers’ Financial Integrity 

Act of 1982; and 

• 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 Antideficiency Act; laws governing the pay and 

allowance system for SEC employees; and the Prompt Payment Act. We 

performed our audit from February 2004 to February 2005 in accordance with 

U.S. generally accepted government auditing standards. 

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