GAO-06-459R Internal Control 

United States Government Accountability Office

Washington, DC 20548 

April 21, 2006 

The Honorable Christopher Cox 

Chairman 

U.S. Securities and Exchange Commission 

Subject: Internal Control: Improvements Needed in SEC’s Accounting and 

Financial Reporting Procedures

Dear Mr. Cox: 

On November 15, 2005, we issued our report1

 on the U.S. Securities and Exchange 

Commission’s (SEC) fiscal years 2005 and 2004 financial statements and on SEC’s 

internal control as of September 30, 2005. We also reported on the results of our tests 

of SEC’s compliance with selected provisions of laws and regulations during fiscal 

year 2005. 

The purpose of this report is to discuss issues identified during our fiscal year 2005 

audit concerning internal controls and accounting procedures that could be 

improved.2

 This report contains 14 recommendations that we are proposing SEC 

implement in order to improve its internal controls and accounting procedures. 

These recommendations are in addition to those we already provided to SEC as a 

result of our prior audit of SEC’s financial statements.3

Results in Brief

Our November 15, 2005, report concluded that SEC continues to face the same 

material weaknesses4

 in internal control that we reported as part of our audit of 

 

1

 GAO, Financial Audit: Securities and Exchange Commission’s Financial Statements for Fiscal 

Years 2005 and 2004, GAO-06-239 (Washington, D.C.: Nov. 15, 2005). 2

 The internal control issues concerning information security are discussed in a separate report: GAO, 

Information Security: Securities and Exchange Commission Needs to Continue to Improve Its 

Program, GAO-06-408 (Washington, D.C.: Mar. 31, 2006). 3

 Recommendations were addressed in our internal control reports issued as part of our fiscal year 

2004 SEC financial statement audit: GAO, Material Internal Control Issues Reported in SEC’s Fiscal 

Year 2004 Financial Statement Audit Report, GAO-05-691R (Washington, D.C.: July 27, 2005), 

Management Report: Opportunities for Improvements in SEC’s Internal Controls and Accounting 

Procedures, GAO-05-693R (Washington, D.C.: Aug. 12, 2005). 4

 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. 
Page 2 GAO-06-459R Internal Control

 

SEC’s fiscal year 2004 financial statements. These weaknesses related to SEC’s 

controls over (1) preparing financial statements and related disclosures, (2) recording 

and reporting disgorgement5

 and penalty6 activity, and (3) information security. SEC 

has made some progress in resolving these issues; however, these matters remain 

material weaknesses as of September 30, 2005, and therefore, increase the risk that 

misstatements material in relation to the financial statements would not be prevented 

or detected on a timely basis. Further details on the implementation status of the 

recommendations from our prior audit of SEC’s financial statements are provided in 

enclosure I.7

During our fiscal year 2005 audit, we also identified other internal control issues that 

although not considered to be material weaknesses or reportable conditions,8

 we 

believe warrant management’s consideration. These issues concern (1) 

responsibilities of the contracting officer’s technical representative, (2) reviewing 

filing fee calculations, and (3) compliance with the prompt payment act. 

Our recommendations follow the discussion of each of these issues in the following 

sections. In commenting on a draft of this report, the Chairman generally agreed with 

our recommendations, and indicated that SEC made progress in fiscal year 2005 in 

addressing its internal control weaknesses and has redoubled its efforts in fiscal year 

2006. The Chairman also identified specific actions and initiatives undertaken since 

the completion of our fiscal year 2005 audit. 

Scope and Methodology 

As part of our audit of SEC’s fiscal years 2005 and 2004 financial statements, we 

evaluated SEC’s internal controls and tested its compliance with selected provisions 

of laws and regulations. We designed our audit procedures to test relevant controls 

over financial reporting, including those designed to provide reasonable assurance 

that transactions are properly recorded, processed, and summarized to permit the 

preparation of the financial statements in conformity with U.S. generally accepted 

accounting principles, and assets are safeguarded against loss from unauthorized 

acquisition, use, or disposition. We requested comments on a draft of this report 

from the Chairman of SEC or his designee. SEC’s written comments are reprinted in 

enclosure II. We conducted our audit in accordance with U.S. generally accepted 

government auditing standards. Further details on our scope and methodology are 

included in our report on the results of our audits of SEC’s fiscal years 2005 and 2004 

financial statements9

 and are reproduced in enclosure III. 

5

 A disgorgement is the repayment of illegally gained profits (or avoided losses) for distribution to 

harmed investors whenever feasible. 

6

 A penalty is a monetary payment from a violator of securities law that SEC obtains pursuant to 

statutory authority. A penalty is fundamentally a punitive measure, although penalties occasionally 

can be used to compensate harmed investors. 

7

 GAO-05-691R and GAO-05-693R. 

8

 Reportable conditions are defined as significant deficiencies in the design or operation of internal 

control that could adversely affect the entity’s ability to record, process, summarize, and report 

financial data consistent with the assertions of management in financial statements. 9

 GAO-06-239. 
Page 3 GAO-06-459R Internal Control 

Financial Statement Preparation and Reporting 

Fiscal year 2005 was the second year that SEC prepared a complete set of financial 

statements to be audited. In response to the findings of our fiscal year 2004 audit, 

SEC has taken some steps to address control weaknesses over the preparation of 

financial statements and related disclosures. For example, in August 2005, SEC 

drafted policies and procedures for parts of its financial statements preparation 

process. SEC also has improved its ability to produce subsidiary ledgers that support 

financial statement amounts. 

For both fiscal years 2004 and 2005, SEC’s financial statement preparation and 

reporting processes were manually intensive, time consuming, and difficult to follow, 

and required numerous ad hoc procedures. For certain financial statement line items 

and disclosures, the detailed support for the balances and underlying transactions 

was not readily available and was difficult to retrieve. The issues underlying the 

material weaknesses, combined with SEC’s practice of determining certain key 

account balances only on a quarterly basis and preparing footnote disclosures only at 

year-end, necessitated intensive efforts by both SEC and GAO to meet the November 

15 financial reporting date. 

Key causes of material weakness in SEC’s financial statement preparation and 

reporting processes are that SEC did not have (1) finalized, written, comprehensive 

policies and procedures for several significant accounts and processes; (2) an 

adequate audit trail between the financial statements, the general ledger, and 

supporting subsidiary schedules; and (3) an integrated system for recording 

disgorgement and penalty transactions. Although SEC has started to prepare policies 

and procedures for some of its financial statement preparation processes, these 

policies and procedures are still in draft and are not sufficiently comprehensive to 

address accounting for significant activities, such as determining disgorgement and 

penalty accounts receivable, recording investment activity, and reconciling certain 

account balances such as the fiduciary liability. Of the policies and procedures that 

do exist, some are outdated and do not reflect SEC’s current practices. Among these 

are SEC’s policy for recording disbursements into the case-tracking system used for 

disgorgements and penalties. 

These issues were further exacerbated by the fact that during fiscal year 2005, SEC’s 

Office of Financial Management continued to operate with a staffing shortage both in 

terms of number and expertise. These issues, if not addressed, increase the risk and 

difficulty in meeting future financial reporting dates and making measurable progress 

in improving internal control over financial reporting. 

SEC does not have a documented process or template for compiling financial 

statement amounts to enable a crosswalk from the financial statements to the general 

ledger and supporting subsidiary schedules. For example, some numbers, including 

significant adjustments in the Statement of Custodial Activity, were recorded on a 

spreadsheet but could not be easily traced to the account balances that aggregate to 

the line items on the financial statement. In other instances, the available audit trails 
Page 4 GAO-06-459R Internal Control

included a series of numbers in a formula without an explanation or a clear 

explanation of the various general ledger accounts constituting the total. 

Furthermore, in cases where SEC’s financial statements deviate from Treasury’s 

standard form and content crosswalk because of adjustments and certain unique 

activity, SEC did not show a clear link or audit trail. 

SEC is in the process of establishing, but has not yet implemented, a formalized 

Financial Management Oversight Committee to provide advice and regularly review 

the agency’s financial operations and policies. The charter for the Financial 

Management Oversight Committee has been drafted. The committee now needs to 

become operational. This is a critical step that needs to be taken as SEC begins to 

take actions to address the weaknesses in financial reporting. 

SEC’s interim quarterly financial statements do not reflect the proper cutoff period 

for certain significant activity, such as disgorgement and penalty receivables. This is 

primarily attributable to the lack of an integrated system for recording disgorgement 

and penalty activity, which results in SEC having to perform extensive, timeconsuming, manual calculations to arrive at the related end-of-quarter receivable 

amounts. SEC’s current practice of preparing footnote disclosures only with its 

September 30 financial statements increases the amount of preparation, review, and 

audit work necessary at year-end, increasing the risk that SEC may not meet its 

financial reporting deadlines. 

If properly designed and implemented, a financial statement preparation process with 

documented comprehensive policies and procedures, a clear audit trail between the 

financial statement balances and the detailed support, an integrated core financial 

management system, and quality assurance reviews should reasonably assure SEC 

management that the balances presented in the financial statements and related 

disclosures are supported by SEC’s underlying accounting records and are fairly 

stated in conformity with U.S. generally accepted accounting standards for the 

federal government. The process should provide a discipline that facilitates SEC’s 

consistent preparation of financial statements without having to go through the 

intensive efforts that were needed in fiscal year 2005. 

Recommendations

We recommend that SEC take the following actions, in addition to our previous 

recommendations, to improve controls over financial statement preparation and 

reporting: 

1. Staff the Office of Financial Management with the collective knowledge, 

skills, and experience necessary to achieve effective implementation of 

internal control over the financial statement preparation and reporting 

process. 

2. Finalize formal, written policies and procedures governing financial 

reporting processes and related internal control and quality assurance, 

including the basic documentation, audit trails, and crosswalks needed to 
Page 5 GAO-06-459R Internal Control 

 

support financial statement amounts, to facilitate management review of 

financial information. 

3. Formalize and place into operation a senior management council or 

committee to oversee financial reporting activities; provide advice; and 

regularly review the agency’s financial information, operations, and 

policies. 

4. Determine cutoff dates for significant account balances that are both 

appropriate and practical to facilitate interim financial reporting and 

meeting year-end financial reporting deadlines. 

5. Prepare interim footnote disclosures to facilitate meeting year-end 

financial reporting deadlines. 

Disgorgements and Penalties 

As part of its enforcement responsibilities, SEC issues and administers judgments 

ordering, among other things, disgorgements, civil monetary penalties, and interest 

against violators of federal securities laws. These transactions involve material 

amounts of collections, which amounted to more than $1.6 billion in fiscal year 2005, 

and the recording and reporting of fiduciary and custodial liability balances on the 

financial statements.10 As a result of this significant collection activity, SEC was 

holding approximately $2 billion in a fiduciary capacity as of September 30, 2005, for 

potential distribution to harmed investors. 

SEC has taken several actions to address the material weakness that we reported in 

this area based on our fiscal year 2004 audit; however, these actions have not been 

sufficient to provide reliable disgorgement and penalty data. For example, SEC 

completed a comprehensive review of the disgorgement and penalty financial data in 

its case-tracking system, which includes data on over 12,000 parties in SEC 

enforcement actions. SEC’s review uncovered a significant amount of financial data 

inaccuracies. During our audit, we noted a significant number of cases for which 

inaccuracies had already been corrected; however, our audit continued to identify 

additional errors in disgorgement and penalty data. During fiscal year 2005, SEC’s 

Office of Financial Management and Division of Enforcement instituted weekly 

meetings to better coordinate and discuss disgorgement issues. In addition, the 

Office of Financial Management began comparing its financial information for 

disgorgement/penalty receivables to data on enforcement actions maintained by the 

10 Fiduciary liabilities arise when SEC collects disgorgements, penalties, and interest from securities 

law violators for the purpose of distributing the funds to injured investors. When SEC collects 

fiduciary receipts, they are held in Fund Balance With Treasury accounts or invested in Treasury 

securities, pending distribution to injured investors. Custodial liabilities arise in respect of accounts 

receivable for disgorgements, penalties, and interest assessed against securities law violators. SEC 

records a custodial liability in respect of the net amount of such receivables, after taking into account 

the estimated allowance for doubtful accounts. When SEC collects on the receivable, the collection is 

either deposited to the Treasury as a government receipt or becomes a fiduciary liability for future 

distribution to injured investors. 
Page 6 GAO-06-459R Internal Control

 

Division of Enforcement to provide some assurance as to the completeness of the 

subsidiary data. However, our audit continued to find instances in which the Office 

of Financial Management, the office responsible for entering and maintaining 

financial data on disgorgements and penalties in the case-tracking system and making 

the necessary entries into the general ledger, was not made aware of certain 

disgorgement activities by the Division of Enforcement in a timely manner. 

Although we were able to determine that SEC’s estimated collectible amount was not 

materially misstated, we continued to note significant errors and misstatements in 

the recorded gross accounts receivable balance of $1.365 billion and the related 

allowance for loss of $1.269 billion, as well as data inaccuracies in the case-tracking 

system. Specifically, we noted errors, inconsistent treatment, or both in recording 

judgment and interest amounts, terminated debts, waivers, and amounts paid by 

defendants. For example, we reviewed several cases for which waiver or termination 

of the debts had been approved several years prior but had not yet been recorded. In 

addition, for many of the terminations that we reviewed, there was not adequate 

documentation evidencing approval of the termination in the official case file at the 

time of our review. We also found cases that were incorrectly recorded in the casetracking system as being payable to SEC. Contributing to these errors is the lack of a 

clear formalized policy, communication, and coordination between SEC’s Office of 

Financial Management and its Division of Enforcement, both responsible for various 

portions of disgorgement and penalty activity.11 In addition, also contributing to 

those errors is the lack of follow-up procedures to ensure that the activity is being 

recorded in a timely fashion and in the proper reporting period. 

We also identified a new risk in this area associated with tracking fiduciary balances, 

including corresponding investments, by case. SEC is using spreadsheets as a 

subsidiary ledger for these amounts, and does not have a policy that includes formal 

procedures to provide assurance that cash collections and disbursements of 

disgorgements and penalties have been properly recorded to the appropriate cases in 

the subsidiary spreadsheets. In addition, during our testing of investments, we noted 

problems with the accuracy of fiduciary amounts recorded in the case-tracking 

system where the amounts recorded as collected in the case-tracking system did not 

correspond to the amounts collected and invested according to the investment 

balances from the Bureau of the Public Debt statements. We also noted cases where 

disbursements of fiduciary amounts had not been properly recorded in the casetracking system. A key cause of those issues is that SEC does not have formal, 

comprehensive policies concerning the initiation, recording, and monitoring of 

activity associated with investment accounts. In addition, SEC’s current practice of 

recording significant accounting activity, such as disgorgement and investment 

activity, only on a quarterly basis increases the risk of errors not being detected in a 

timely manner. 

11 This finding is similar to a finding in a recent GAO review of SEC penalties. See GAO, SEC and 

CFTC Penalties: Continued Progress Made in Collection Efforts, but Greater SEC Management 

Attention Is Needed, GAO-05-670 (Washington, D.C.: Aug. 31, 2005). 
Page 7 GAO-06-459R Internal Control 

It is critical that SEC develop policies, procedures, and key controls in the area of 

fiduciary accounting, so that it has adequate assurance that balances for 

disgorgements and penalties by case are accurate in preparation for distribution of 

funds to harmed investors. 

According to GAO’s Standards for Internal Control in the Federal Government, 

internal control needs to be clearly documented through management directives, 

administrative policies, or operating manuals, and the documentation should be 

readily available for examination. As we have again found during the fiscal year 2005 

financial statement audit, not having comprehensive policies and controls increases 

the risk that disgorgement and penalty transactions will not be completely, 

accurately, and consistently recorded and reported. 

Recommendations

We recommend that SEC, in addition to our previous recommendations, develop, 

document in writing, and implement comprehensive policies, procedures, and 

controls over disgorgement and penalty transactions that include the following: 

1. An accounting policy for disgorgements and penalties that will provide SEC 

management with reasonable assurance that the subsidiary ledger for 

disgorgement/penalty receivables is accurate and complete. 

2. The type of documentation and procedures needed to record the termination 

or waiver of a debt and the proper notification and communication for 

approved terminations and waivers, such that management has assurance that 

only valid and approved terminations are recorded. 

3. The recording of activity by case for fiduciary balances, including monthly 

reconciliations and management review, to ensure that balances by case are 

accurate. 

4. The initiation, recording, and monitoring of investments, including the 

monthly reconciliation of investment activity, to provide assurance that these 

fiduciary amounts are accurate and complete. 

Other Issues 

Although not considered to be reportable conditions, the following weaknesses 

warrant management’s consideration. 

Responsibilities of Contracting Officer’s Technical Representative

According to SEC Regulation SECR10-15, Contract Officer’s Technical 

Representative (COTR) and Inspection and Acceptance Official (IAO), a COTR’s 

responsibilities include the following: 
Page 8 GAO-06-459R Internal Control

• Reviewing vouchers for cost-reimbursement type work and recommending 

approval by the contracting officer if the contractor’s costs are consistent with 

the contractor’s proposal or negotiated amounts, and if progress is satisfactory 

and commensurate with the rate of expenditure. 

• Verifying receipt of goods and services and reviewing and approving invoices 

for fixed-price deliverables. 

• Processing all invoices and vouchers within 5 days of receipt by the COTR, 

and ensuring that payment is in accordance with the contract payment 

schedule. 

• Calculating the accurate amount owed to the contractor, and documenting the 

decision when authorizing payment of an amount different than the 

contractor’s requested amount. 

• Returning invoices to the Office of Financial Management with discrepancies 

noted, if any. 

• Submitting approved invoices to the Office of Financial Management within 

the time required to avoid prompt payment interest penalties. 

• Marking the final invoice as “final” to facilitate closing the obligation. 

• Forwarding closeout documentation to the contracting officer in a timely 

fashion following physical completion of the contract. 

• Completing the Contract Completion Statement, Form SEC 2414, required 

within 60 days of physical completion of the contract. 

Further, SEC Regulation SECR10-8, Management Oversight of Service Contracting, 

includes in the COTR’s responsibilities “reporting the amount of excess funds 

remaining at the end of a contractor’s performance... to the Branch, Procurement 

and Contracting. The contract will be modified to deobligate excess funds.” 

During our testing of nonpayroll expenditures, we found evidence that all the COTR 

responsibilities identified in SEC’s regulations are not being fully satisfied. In several 

cases, there was no evidence that the invoices had been thoroughly reviewed and 

whether the invoices were paid at rates, prices, or both exceeding those stipulated in 

the corresponding contract. With respect to the timeliness of invoice processing, we 

found a number of instances in which proper invoices were not returned to the Office 

of Financial Management as approved within 5 days as SEC Regulation SECR10-15 

provides. We also found that improper invoices were not always returned to vendors 

in a timely manner. This has implications for prompt payment penalties. Under the 

Prompt Payment Act and its implementing regulations, an agency’s payment due date 

for paying an invoice without incurring an interest penalty is generally 30 days after 

the agency’s receipt of a proper invoice (5 C.F.R. § 1315.4(f), (g)). Prompt Payment 

Act regulations provide that the agency shall return an improper invoice to the 

vendor with the reasons why the invoice is improper within 7 days of receipt (5 

C.F.R. § 1315.4(c)(2)). To the extent SEC takes longer than 7 days to return an 

improper invoice to a vendor, SEC’s 30-day period to pay a resubmitted proper 

invoice is reduced by the excess days (5 C.F.R. § 1315.4(g)(5)). Reducing the 30-day 

period increases the chance that interest penalties will be incurred. 
Page 9 GAO-06-459R Internal Control 

In addition, our review of accounts payable identified several unliquidated obligations 

recorded as accounts payable for which the corresponding purchasing 

documentation specified a period of performance ending in a prior fiscal year. For 

example, a contract we reviewed for expert witness services stipulated a period of 

performance from March 5, 2003, to March 4, 2004, and SEC has not received any 

invoices related to this obligation since December 9, 2003. SEC regulations state that 

all obligations should be deobligated in a timely manner, if physical completion of the 

contract has occurred. 

Recommendation

We recommend that SEC clarify guidance regarding policies and procedures 

(as described in SECR10-8 and SECR10-15) for the COTR’s responsibilities and 

take actions to help ensure existing policies and procedures are being 

followed consistently. 

Internal Review of Filing Fee Calculations

SEC collects fees from registrants for fee-bearing filings they submit to SEC, 

including securities registration, tender offers, mergers, and other filings. According 

to SEC policy, the Office of Filings and Information Services (OFIS) is responsible for 

recalculating each fee-bearing filing submitted to SEC to verify the required fee 

amount to be charged to the filer. OFIS recalculates the required fee based on data 

submitted by the filer along with the official filing. If an error is noted, SEC corrects 

the filing to reflect the correct required fee. For 10 of the 167 filing fee amounts we 

reviewed, we identified errors in the amounts charged to filers during fiscal year 2005 

that were not identified by OFIS during its review. In some cases the filer was 

charged a lesser amount than was required, while in other cases the filer was charged 

a greater amount than was required. In addition, we could not find documented 

evidence of the OFIS recalculation for 8 of the 45 fee-bearing filings we reviewed. 

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

transactions be clearly documented and that the documentation be accurate and 

readily available for examination. 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 

incorrect revenue amounts will be collected for filing fees. 

Recommendations

We recommend that SEC take action to help ensure that 

1. its policy on recalculating fee-bearing filing amounts is consistently 

followed, and 

2. the recalculation of the required filing fees is clearly documented. 
Page 10 GAO-06-459R Internal Control

Compliance with Prompt Payment Act

Under the Prompt Payment Act and its implementing regulations, an agency’s 

payment due date for paying an invoice without incurring an interest penalty is 

generally 30 days after the agency’s receipt of a proper invoice (5 C.F.R. § 1315.4(f), 

(g)).12 If the agency does not pay a proper invoice by the payment due date, the 

agency is to calculate a late interest penalty from the day after the payment due date 

until the payment is made (5 C.F.R. § 1315.10(a)). The applicable interest rate is 

established by the Secretary of the Treasury and is the rate in effect on the day after 

the payment due date (5 C.F.R. § 1315.2(d)). 

During our audit we reviewed 45 nonpayroll expenditures for compliance with the 

Prompt Payment Act. We identified seven instances in which SEC incorrectly 

calculated the interest penalty for late payments. SEC’s incorrect interest 

calculations were attributable to using the wrong date for SEC’s receipt of a proper 

invoice, which caused an incorrect determination of the payment due date after 

which interest was due. 

Recommendations

We recommend that SEC 

1. incorporate a review of the invoice receipt date as part of its daily review 

of Momentum (SEC’s general ledger) invoice entries to ensure the invoice 

receipt dates are accurately entered into Momentum, and 

2. take action to help ensure that the policy requiring the timely return of 

improper invoices to the vendor to allow for timely payment is followed. 

Agency Comments 

In commenting on a draft of this report, the Chairman indicated that SEC made 

progress in fiscal year 2005 in addressing its internal control weaknesses and stated 

that SEC has redoubled its efforts in fiscal year 2006. The Chairman also identified 

specific actions and initiatives undertaken since the completion of our fiscal year 

2005 audit that are not included in this report. The actions cited by the Chairman 

include: 

• adding resources and expertise to the Office of Financial Management; 

• nearing completion of a comprehensive set of written procedures governing 

the financial reporting processes and related internal controls; 

• beginning in the second quarter, implementation of SEC’s Financial 

Management Oversight Committee to provide executive-level review of SEC’s 

financial statements and regular oversight of the agency’s financial and 

accounting policies and internal control; and 

 

12 Different payment due dates may result from laws or contracts. Also, invoices are not required for 

all payments. 
Page 11 GAO-06-459R Internal Control 

• convening a working group to address weaknesses in controls over 

disgorgements and penalties. This group, which is comprised of 

representatives from the Division of Enforcement and the Offices of Financial 

Management, Information Technology, the Secretary, and the Executive 

Director, has undertaken several initiatives including clarifying and 

streamlining responsibilities and documenting and implementing a 

comprehensive set of procedures and controls, designing a new financial 

management system to replace the financial portion of the existing 

Enforcement database, eliminating inaccuracies in the existing database, and 

clarifying SEC’s policies with respect to debt terminations and write-offs. 

The Chairman also stated that SEC’s objective is to fully resolve the material 

weaknesses in the areas of financial statement preparation and disgorgements and 

penalties during fiscal year 2006. We will evaluate SEC’s actions and initiatives 

during our fiscal year 2006 audit. 

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

- - - - - 

This report contains recommendations to you. The head of a federal agency is 

required by 31 U.S.C. § 720 to submit a written statement on actions taken on our 

recommendations to the Senate Committee on Homeland Security and Governmental 

Affairs and to the House Committee on Government Reform not later than 60 days 

from the date of this report. A written statement also must be sent to the House and 

Senate Committees on Appropriations with agency’s first request for appropriations 

made more than 60 days after the date of this report. 

This report is intended for use by management of SEC. We are sending copies of this 

report to the Chairman and Ranking Minority Member 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; and the 

House Committee on Government Reform. We are also sending copies to the 

Secretary of the Treasury, the Director of the Office of Management and Budget, 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 years 2005 and 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 by e-mail at 
Page 12 GAO-06-459R Internal Control

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 – 3 
Page 13 GAO-06-459R Internal Control 

 

Enclosure I 

Status of GAO Recommendations from Our Audit of SEC’s 2004 Financial 

Statements

Table 1 provides the status of the Securities and Exchange Commission’s (SEC) 

efforts to implement our previous recommendations related to the material 

weaknesses and other opportunities for improvements in SEC’s internal control and 

accounting procedures identified during our audit of SEC’s 2004 financial 

statements.113The table lists (1) recommendations made, (2) the status of each 

recommendation and corrective action SEC has taken or planned as of January 2006, 

and (3) our analysis of whether the issues that gave rise to the recommendations 

have been effectively and fully addressed based on the work performed during our 

fiscal year 2005 financial audit. As of January 2006, we concluded that SEC had taken 

actions to close 13 of the 34 recommendations we made as a result of our prior SEC 

financial audit. Effectively implementing recommendations is critical for SEC to 

resolve its financial management challenges. 

1

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

Audit Report, GAO-05-691R (Washington, D.C.: July 27, 2005) and Management Report: 

Opportunities for Improvements in SEC’s Internal Controls and Accounting Procedures, GAO-05-

693R (Washington, D.C.: Aug. 12, 2005). 
Page 14 GAO-06-459R Internal Control

Table 1: GAO Recommendations and Status 

Count Recommendation Status of recommendation Source report Per SEC Per GAO 

1 Establish clearly 

defined roles and 

responsibilities for 

the staff involved in 

financial reporting 

and the preparation 

of interim and yearend financial 

statements. 

Material Internal 

Control Issues 

Reported in SEC’s 

Fiscal Year 2004 

Financial 

Statement Audit 

Report (GAO-05-

691R, July 27, 

2005) 

Closed. Completed 

policies identify units 

and individuals 

responsible for 

preparation of 

elements of the 

financial statements. 

Additional tactical 

plans assign work to 

individual staff 

members by name. 

Any further specificity 

in documenting 

assignments is limited 

by personnel policy 

concerns. 

Closed. The draft 

Financial Statements 

Preparation Guidance 

prepared by the Office 

of Financial 

Management (OFM) 

establishes roles and 

responsibilities for the 

staff involved in 

financial reporting and 

the preparation of 

financial statements. 

2 Collect common 

closing and 

adjusting entries in 

a formal listing, 

which is used 

in the general 

ledger closing 

process and in 

preparing financial 

statements. 

Material Internal 

Control Issues 

Reported in SEC’s 

Fiscal Year 2004 

Financial 

Statement Audit 

Report (GAO-05-

691R, July 27, 

2005) 

Closed. Listing is 

complete and policies 

describe how closing 

and adjusting entries 

are compiled and 

recorded. 

Closed. SEC’s journal 

voucher log master 

collects common 

closing and adjusting 

entries in a formal 

listing. 

3 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. 

Management 

Report: 

Opportunities for 

Improvements in 

SEC’s Internal 

Controls and 

Accounting 

Procedures (GAO05-693R, Aug. 12, 

2005) 

Closed. Subsidiary 

schedules for 

undelivered orders 

prior to budget fiscal 

year 2002 are not 

available at a detailed 

level; however, data 

are available for all 

subsequent years and 

are reconciled to the 

general ledger. 

Closed. During our 

2005 audit, we noted 

that SEC was able to 

reconcile the total 

delivered orders 

balance and the 

undelivered orders 

balance for budget 

fiscal years after 2002 

to subsidiary 

schedules. Although 

detailed support is not 

available for 

undelivered orders 

transactions for 

budget fiscal years 

prior to 2002, we were 

able to reconcile the 

summary-level support 

to the general ledger 

with only an 

immaterial difference. 
Page 15 GAO-06-459R Internal Control 

4 Separate key 

responsibilities 

over the handling 

and recording of 

cash receipts so 

that no one 

individual handles 

all key aspects 

concerning the 

receipts. 

Management 

Report: 

Opportunities for 

Improvements in 

SEC’s Internal 

Controls and 

Accounting 

Procedures (GAO05-693R, Aug. 12, 

2005) 

Closed. SEC has 

implemented 

procedures to ensure 

that two individuals 

are present to open 

mail, handle cash, and 

log in checks. 

Closed. During our 

2005 audit, we 

observed the dual 

control procedures 

over cash receipts that 

SEC has implemented. 

5 Perform periodic 

reconciliations of 

successful feebearing filings in 

EDGAR and 

revenue recorded 

in the general 

ledger. 

Management 

Report: 

Opportunities for 

Improvements in 

SEC’s Internal 

Controls and 

Accounting 

Procedures (GAO05-693R, Aug. 12, 

2005) 

Closed. SEC has 

implemented 

procedures to perform 

periodic 

reconciliations of the 

data in EDGAR and 

the general ledger. 

Closed. During our 

2005 audit, we 

reviewed the 

reconciliations 

prepared by SEC 

without exception. 

6 Develop for this 

reconciliation 

process written 

policies and 

procedures that 

address the 

maintenance of 

documentation 

supporting the 

general ledger 

balances. 

Management 

Report: 

Opportunities for 

Improvements in 

SEC’s Internal 

Controls and 

Accounting 

Procedures (GAO05-693R, Aug. 12, 

2005) 

Closed. 

Documentation and 

implementation of the 

policies and 

procedures have been 

completed. 

Closed. During our 

2005 audit, we 

reviewed the written 

policies and 

procedures prepared 

by SEC for the filing 

fee revenue 

reconciliation. Our 

testing indicated that 

these procedures have 

been implemented. 
Page 16 GAO-06-459R Internal Control

7 Document its 

review of the 

monthly 

Fund Balance With 

Treasury (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. 

Management 

Report: 

Opportunities for 

Improvements in 

SEC’s Internal 

Controls and 

Accounting 

Procedures (GAO05-693R, Aug. 12, 

2005) 

Closed. 

Documentation of the 

policies and 

procedures over this 

review has been 

completed. 

Closed. During our 

2005 audit, we noted 

documented review of 

the monthly FBWT 

reconciliation. 

8 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. 

Management 

Report: 

Opportunities for 

Improvements in 

SEC’s Internal 

Controls and 

Accounting 

Procedures (GAO05-693R, Aug. 12, 

2005) 

Closed. The Planning 

and Budget Office has 

been restructured, 

creating an additional 

level of checks and 

balances, and the 

newly created Budget 

Officer slot has been 

filled. The policy has 

been changed to 

include verification 

and approval by the 

Assistant Director, 

Planning and Budget, 

of the apportionment 

documents once they 

are entered into the 

general ledger by the 

Budget Officer. 

Closed. During our 

2005 audit, we noted 

documented evidence 

of appropriate SEC 

management review of 

recorded 

apportionment 

amounts. 
Page 17 GAO-06-459R Internal Control 

9 Develop written 

policies and 

procedures 

governing the 

payroll processing 

and reconciliation 

procedures, which 

would include 

requirements for 

documenting 

supervisory review 

of the performance 

of the payroll 

procedures 

performed during 

each pay period. 

Management 

Report: 

Opportunities for 

Improvements in 

SEC’s Internal 

Controls and 

Accounting 

Procedures (GAO05-693R, Aug. 12, 

2005) 

Closed. SEC has 

completed 

documentation of the 

payroll file processing 

and reconciliation 

process. 

Closed. During our 

2005 audit, we noted 

that SEC developed 

written policies and 

procedures for payroll 

processing and 

reconciliation. Our 

testing indicated that 

these procedures have 

been implemented. 

10 Train other 

individuals to 

perform payroll 

processing and 

reconciliation 

procedures. 

Management 

Report: 

Opportunities for 

Improvements in 

SEC’s Internal 

Controls and 

Accounting 

Procedures (GAO05-693R, Aug. 12, 

2005) 

Closed. A new staff 

person has been 

trained and performs 

the reconciliations 

with supervisory 

review. 

Closed. During our 

2005 audit, we noted 

that SEC has trained 

another individual to 

perform this function. 

11 Develop policies 

and procedures to 

help ensure that 

expenditures (1) 

are recorded in the 

proper Budget 

Object Class (BOC) 

code on the basis of 

the nature of the 

expenditure and (2) 

are properly 

allocated across 

BOC codes as 

appropriate. 

Management 

Report: 

Opportunities for 

Improvements in 

SEC’s Internal 

Controls and 

Accounting 

Procedures (GAO05-693R, Aug. 12, 

2005) 

Closed. Contracting 

Officer’s Technical 

Representative and 

OFM staff have been 

reminded of the 

requirement to assign 

invoice charges to the 

appropriate contract 

line/CLIN when 

approving and 

processing payments. 

Closed. SEC staff has 

been reminded of 

existing SEC 

regulations regarding 

assignment of invoice 

charges (SEC 

Regulation 10-15). 

During our 2005 audit, 

we noted no 

exceptions during our 

testing of BOC codes. 

12 Refer eligible debt 

that is delinquent 

over 180 days to 

Treasury as 

required by the 

Debt Collection 

Improvement Act 

(DCIA). 

Management 

Report: 

Opportunities for 

Improvements in 

SEC’s Internal 

Controls and 

Accounting 

Procedures (GAO05-693R, Aug. 12, 

2005) 

Closed. All eligible 

debt is being referred 

to Treasury as 

required by DCIA. 

Closed. During our 

2005 audit, we verified 

that SEC is properly 

referring eligible debt 

to Treasury as 

required by DCIA. 
Page 18 GAO-06-459R Internal Control

13 Review its property 

and equipment 

capitalization 

thresholds and 

document the 

analysis used to 

select the 

capitalization 

thresholds. 

Management 

Report: 

Opportunities for 

Improvements in 

SEC’s Internal 

Controls and 

Accounting 

Procedures (GAO05-693R, Aug. 12, 

2005) 

Closed. SEC’s 

Property 

Accountability Task 

Force performed and 

documented this 

analysis. 

Closed. During our 

2005 audit, we 

reviewed SEC’s 

analysis and 

concluded that the 

capitalization 

thresholds are 

reasonable. 

14 Review the 

disgorgement and 

penalty judgments 

and subsequent 

activities 

documented in 

each case file by 

defendant to 

determine whether 

the individual 

amounts recorded 

in the case-tracking 

system are accurate 

and reliable. 

Material Internal 

Control Issues 

Reported in SEC’s 

Fiscal Year 2004 

Financial 

Statement Audit 

Report (GAO-05-

691R, July 27, 

2005) 

Closed. SEC has 

completed a 

comprehensive review 

of case data. 

Open. SEC completed 

a comprehensive 

review of case data 

and appropriate 

adjustments have been 

recorded. However, 

our audit continued to 

find data inaccuracies 

in the case-tracking 

system. 

15 Implement a 

system that is 

integrated with the 

accounting system 

or that provides the 

necessary input to 

the accounting 

system to facilitate 

timely, accurate, 

and efficient 

recording and 

reporting of 

disgorgement and 

penalty activity. 

Material Internal 

Control Issues 

Reported in SEC’s 

Fiscal Year 2004 

Financial 

Statement Audit 

Report (GAO-05-

691R, July 27, 

2005) 

Open. SEC has begun 

a replacement of the 

financial components 

of the Case Action 

Tracking System. The 

replacement system 

will be integrated into 

the general ledger. 

SEC estimates 

completion in fiscal 

year 2006. 

Open. We will 

evaluate SEC’s 

corrective actions 

during our fiscal year 

2006 financial audit. 

16 Implement controls 

so that the ongoing 

activities involving 

disgorgements and 

penalties are 

properly, 

accurately, and 

timely recorded in 

the accounting 

system. 

Material Internal 

Control Issues 

Reported in SEC’s 

Fiscal Year 2004 

Financial 

Statement Audit 

Report (GAO-05-

691R, July 27, 

2005) 

Open. Staff from the 

Division of 

Enforcement and OFM 

meet weekly to 

discuss improvements 

in business processes, 

and staff have been 

added or reorganized 

to increase assurance 

of accurate and timely 

recordation in the 

accounting system. 

Open. We will 

evaluate SEC’s 

corrective actions 

during our fiscal year 

2006 financial audit. 
Page 19 GAO-06-459R Internal Control 

17 Strengthen 

coordination, 

communication, 

and data flow 

among staff of 

SEC’s Division of 

Enforcement and 

OFM who share 

responsibility for 

recording and 

maintaining 

disgorgement and 

penalty data. 

Material Internal 

Control Issues 

Reported in SEC’s 

Fiscal Year 2004 

Financial 

Statement Audit 

Report (GAO-05-

691R, July 27, 

2005) 

Open. Staff from the 

Chairman’s Office, 

Division of 

Enforcement, and the 

Offices of Financial 

Management, 

Information 

Technology and 

Security, and the 

Secretary meet weekly 

to discuss operating 

procedures and plan 

for development of the 

new system. The 

Division of 

Enforcement is in the 

process of scanning 

documents to provide 

joint electronic access 

to both itself and OFM 

in the interim. 

Open. We will 

evaluate SEC’s 

corrective actions 

during our fiscal year 

2006 financial audit. 

18 Develop and 

implement written 

policies covering 

the procedures, 

documentation, 

systems, and 

responsible 

personnel involved 

in recording and 

reporting 

disgorgement and 

penalty financial 

information. The 

written procedures 

should also address 

quality control and 

managerial review 

responsibilities and 

documentation of 

such a review. 

Material Internal 

Control Issues 

Reported in SEC’s 

Fiscal Year 2004 

Financial 

Statement Audit 

Report (GAO-05-

691R, July 27, 

2005) 

Open. Draft policies 

have been prepared 

but must be updated. 

The replacement 

financial system is 

likely to trigger 

improvements to 

business processes 

which will need to be 

documented. 

Open. We will 

evaluate SEC’s 

corrective actions 

during our fiscal year 

2006 financial audit. 

19 Develop written 

policies and 

procedures that 

provide sufficient 

guidance for the 

year-end closing of 

the general ledger 

as well as the 

preparation and 

analysis of 

quarterly and 

annual financial 

statements. 

Material Internal 

Control Issues 

Reported in SEC’s 

Fiscal Year 2004 

Financial 

Statement Audit 

Report (GAO-05-

691R, July 27, 

2005) 

Open. SEC has 

approved a plan to add 

a number of staff to 

OFM and has awarded 

two task orders for 

accounting support to 

free up more senior 

staff to complete the 

documentation of 

policies and 

procedures. Some 

policies have already 

been drafted. 

Open. We will 

evaluate SEC’s 

corrective actions 

during our fiscal year 

2006 financial audit. 
Page 20 GAO-06-459R Internal Control

20 Prepare a 

crosswalk between 

the financial 

statements and the 

source systems, 

general ledger 

accounts, and the 

various account 

queries and 

analyses that make 

up key balances in 

the financial 

statements. 

Material Internal 

Control Issues 

Reported in SEC’s 

Fiscal Year 2004 

Financial 

Statement Audit 

Report (GAO-05-

691R, July 27, 

2005) 

Open. The draft 

Financial Statements 

Preparation Guidance 

provides narrative on 

the crosswalk. 

Additional 

documentation will be 

completed in 2006. 

Open. The draft 

Financial Statements 

Preparation Guidance 

refers to the Treasury 

Form and Content 

Crosswalks; however, 

several of SEC’s 

financial statement 

line items deviate from 

the standard 

crosswalk because of 

adjustments and 

certain activity unique 

to SEC. 

21 Maintain subsidiary 

records or ledgers 

for all significant 

accounts and 

disclosures so that 

the amounts 

presented in the 

financial 

statements and 

footnotes can be 

supported by the 

collective 

transactions 

making up the 

balances. 

Material Internal 

Control Issues 

Reported in SEC’s 

Fiscal Year 2004 

Financial 

Statement Audit 

Report (GAO-05-

691R, July 27, 

2005) 

Open. Subsidiary 

ledgers are 

maintained; however, 

full documentation 

must still be 

completed. 

Open. We will 

evaluate SEC’s 

corrective actions 

during our fiscal year 

2006 financial audit. 

22 Perform monthly 

reconciliations of 

subsidiary records 

and summary 

account balances. 

Material Internal 

Control Issues 

Reported in SEC’s 

Fiscal Year 2004 

Financial 

Statement Audit 

Report (GAO-05-

691R, July 27, 

2005) 

Open. New staff have 

been hired, which will 

enable OFM to 

increase monthly 

reconciliations and the 

documentation of 

procedures for current 

and future 

reconciliations. 

Open. We will 

evaluate SEC’s 

corrective actions 

during our fiscal year 

2006 financial audit. 

23 Consider a ‘‘formal 

closing’’ of all 

accounts at an 

interim date(s), 

which will reduce 

the level of 

accounting activity 

and analysis 

required at yearend. The 

formal closing 

entails ensuring 

that all transactions 

are recorded in the 

proper 

period through 

month’s end. 

Material Internal 

Control Issues 

Reported in SEC’s 

Fiscal Year 2004 

Financial 

Statement Audit 

Report (GAO-05-

691R, July 27, 

2005) 

Open. SEC is 

considering workable 

alternatives to 

facilitate accelerating 

the audit process. 

Open. We will 

evaluate SEC’s 

corrective actions 

during our fiscal year 

2006 financial audit. 
Page 21 GAO-06-459R Internal Control 

24 Require 

supervisory review 

for all entries 

posted to the 

general ledger and 

financial 

statements, 

including closing 

entries. A 

supervisor should 

review revisions to 

previously 

approved entries 

and revised 

financial 

statements and 

footnotes. All 

entries and reviews 

should be 

documented. 

Material Internal 

Control Issues 

Reported in SEC’s 

Fiscal Year 2004 

Financial 

Statement Audit 

Report (GAO-05-

691R, July 27, 

2005) 

Open. OFM is 

implementing 

procedures to 

document reviews. 

These procedures will 

become standardized 

and fully implemented. 

Open. We will 

evaluate SEC’s 

corrective actions 

during our fiscal year 

2006 financial audit. 

25 Establish 

milestones for 

preparing and 

reviewing the 

financial 

statements by 

setting dates for 

critical phases, 

such as closing the 

general ledger; 

preparing financial 

statements, 

footnotes, and the 

performance and 

accountability 

report; and 

performing specific 

quality control 

review procedures. 

Material Internal 

Control Issues 

Reported in SEC’s 

Fiscal Year 2004 

Financial 

Statement Audit 

Report (GAO-05-

691R, July 27, 

2005) 

Open. OFM has a 

work plan with 

milestones and 

detailed tasks for the 

financial statement 

preparation each fiscal 

quarter. OFM needs to 

work with other SEC 

divisions and offices 

to prepare the same 

for the preparation of 

the performance and 

accountability report 

(PAR), review of the 

management 

representation letter, 

the Federal Managers’ 

Financial Integrity Act 

of 1982 process, and 

other financial 

reporting functions. 

Open. We will 

evaluate SEC’s 

corrective actions 

during our fiscal year 

2006 financial audit. 

26 Utilize established 

tools (i.e., 

checklists and 

implementation 

guides) available 

for assistance in 

compiling and 

reviewing financial 

statements. 

Material Internal 

Control Issues 

Reported in SEC’s 

Fiscal Year 2004 

Financial 

Statement Audit 

Report (GAO-05-

691R, July 27, 

2005) 

Open. SEC needs to 

determine how this 

recommendation can 

be implemented and 

documented. 

Open. We will 

evaluate SEC’s 

corrective actions 

during our fiscal year 

2006 financial audit. 
Page 22 GAO-06-459R Internal Control

27 Maintain 

documentation 

supporting all 

information 

included in the 

financial 

statements and 

footnotes. This 

documentation 

should be more 

self-explanatory 

than what has been 

retained in the past. 

The documentation 

should be at a level 

of detail to enable a 

third party, such as 

an auditor, to use 

the documentation 

for substantiating 

reported data 

without extensive 

explanation or recreation by the 

original preparer. 

Material Internal 

Control Issues 

Reported in SEC’s 

Fiscal Year 2004 

Financial 

Statement Audit 

Report (GAO-05-

691R, July 27, 

2005) 

Open. As workload 

permits, new staff will 

be assigned to tasks 

that may help to 

simplify 

documentation and 

maintain it in a more 

user-friendly format. 

Open. We will 

evaluate SEC’s 

corrective actions 

during our fiscal year 

2006 financial audit. 

28 Take advantage of 

in-house resources 

and expertise in 

establishing 

financial reporting 

policies, internal 

controls, and 

business practices, 

as well as in the 

review of financial 

statement and 

footnote 

presentation. 

Material Internal 

Control Issues 

Reported in SEC’s 

Fiscal Year 2004 

Financial 

Statement Audit 

Report (GAO-05-

691R, July 27, 

2005) 

Closed. SEC has 

publicly committed to 

the establishment of a 

senior financial 

management oversight 

committee or audit 

committee. The 2004 

and 2005 financial 

statements, footnotes, 

and PAR were 

extensively reviewed 

by management and 

staff in multiple 

divisions and offices 

within SEC. 

Open. The 2005 

financial statements, 

footnotes, and PAR 

were extensively 

reviewed by 

management and staff 

in multiple divisions 

and offices within 

SEC, including the 

Offices of the General 

Counsel, the Chief 

Accountant, and the 

Chairman. However, 

the Financial 

Management 

Oversight Committee 

still needs to become 

operational. 

29 Develop or acquire 

an integrated 

financial 

management 

system to provide 

timely and accurate 

recording of 

financial data for 

financial reporting 

and management 

decision making. 

Material Internal 

Control Issues 

Reported in SEC’s 

Fiscal Year 2004 

Financial 

Statement Audit 

Report (GAO-05-

691R, July 27, 

2005) 

Open. SEC has 

considered replacing 

the central accounting 

system. This will not 

be accomplished any 

earlier than 2008. 

Open. We will 

evaluate SEC’s 

corrective actions 

during our fiscal year 

2006 financial audit. 
Page 23 GAO-06-459R Internal Control 

30 Periodically 

reconcile the cash 

receipts log to the 

documentation 

supporting the 

deposit amount in 

the general ledger. 

Management 

Report: 

Opportunities for 

Improvements in 

SEC’s Internal 

Controls and 

Accounting 

Procedures (GAO05-693R, Aug. 12, 

2005)

Closed. During the 

first quarter of fiscal 

year 2006, SEC 

implemented 

procedures to 

reconcile the daily 

receipts ledger to the 

transaction journal on 

a monthly basis. 

Open. We will 

evaluate SEC’s 

corrective actions 

during our fiscal year 

2006 financial audit. 

31 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. 

Management 

Report: 

Opportunities for 

Improvements in 

SEC’s Internal 

Controls and 

Accounting 

Procedures (GAO05-693R, Aug. 12, 

2005) 

Open. Full 

documentation of the 

evaluations of new 

property leases has 

been completed; 

however, the 

documentation for 

equipment leases has 

not been completed. 

Open. SEC has 

reviewed property 

leases but not 

equipment leases. 

During our 2005 audit, 

we noted that SEC 

properly reviewed all 

new property leases 

and a sample of 

existing property 

leases, as was agreed 

to by SEC and GAO 

staff. Based on our 

review of the leases, it 

was not deemed 

necessary to review all 

existing property 

leases. We will 

evaluate SEC’s 

corrective actions 

relating to equipment 

leases during our 

fiscal year 2006 

financial audit. 

32 Develop policies 

and procedures to 

properly account 

for future property 

and equipment 

leases on an 

ongoing basis. 

Management 

Report: 

Opportunities for 

Improvements in 

SEC’s Internal 

Controls and 

Accounting 

Procedures (GAO05-693R, Aug. 12, 

2005) 

Open. Documentation 

of the policies and 

procedures needs to 

be completed. 

Open. We will 

evaluate SEC’s 

corrective actions 

during our fiscal year 

2006 financial audit to 

ensure leases are 

evaluated on a timely 

basis and are properly 

recorded. 
Page 24 GAO-06-459R Internal Control

33 Periodically 

reconcile its active 

employees to the 

Federal Personnel 

and Payroll System 

(FPPS). 

To do this, 

consideration 

should be given to 

maintaining an 

independent 

database of active 

employees and 

other payrollrelated information, 

wherein 

active employee 

data could be 

readily compared 

with and reconciled 

to FPPS-generated 

payroll records. 

This reconciliation 

should be 

documented. 

Management 

Report: 

Opportunities for 

Improvements in 

SEC’s Internal 

Controls and 

Accounting 

Procedures (GAO05-693R, Aug. 12, 

2005) 

Open. SEC has 

instituted a 

management process 

to verify the listing of 

active employees. 

Documentation of the 

reconciliation with 

FPPS is in process. 

Open. We will 

evaluate SEC’s 

corrective actions 

during our fiscal year 

2006 financial audit. 

34 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. 

Management 

Report: 

Opportunities for 

Improvements in 

SEC’s Internal 

Controls and 

Accounting 

Procedures (GAO05-693R, Aug. 12, 

2005) 

Open. The Executive 

Director’s office now 

requires additional 

support to document 

corrective actions. 

Formal policies and 

procedures remain to 

be issued. 

Open. We will 

evaluate SEC’s 

corrective actions 

during our fiscal year 

2006 financial audit to 

ensure proper 

documentation. 

Source: GAO. 
Page 25 GAO-06-459R Internal Control 

Enclosure II 

Comments from the Securities and Exchange Commission 
Page 26 GAO-06-459R Internal Control
Page 27 GAO-06-459R Internal Control 

 

Enclosure III 

Details on Audit Scope and Methodology1

1

 For further explanation of our audit scope and methodology, see the financial audit report (GAO-06-

239). 

To fulfill our responsibilities as auditor of the financial statements of 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 control. 

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

financial management systems under the Federal Managers’ Financial Integrity 

Act of 1982. 

• 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 Anti-Deficiency Act; laws governing the pay and 

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

 

We requested comments on a draft of this report from the Chairman of SEC or his 

designee. We received written comments from the Chairman of SEC. We conducted 

our audit in accordance with U.S. generally accepted government auditing standards. 

(194570) 
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