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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 report[Footnote 1] 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.[Footnote 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.[Footnote 3] 

Results in Brief: 

Our November 15, 2005, report concluded that SEC continues to face the 
same material weaknesses[Footnote 4] in internal control that we 
reported as part of our audit of 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 disgorgement[Footnote 5] and penalty[Footnote 6] 
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.[Footnote 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,[Footnote 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 
statements[Footnote 9] and are reproduced in enclosure III. 

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 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, time-consuming, 
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 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.[Footnote 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 
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 case-tracking 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.[Footnote 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 case-tracking 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. 

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: 

* 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. 

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. 

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)).[Footnote 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: 

* 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 [Hyperlink, 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 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,

Signed by: 

Jeanette M. Franzel: 
Director: 
Financial Management and Assurance: 

Enclosures - 3: 

[End of Section]

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.1[Footnote 13]The 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. 

Table 1: GAO Recommendations and Status: 

Count: 1;
Recommendation: Establish clearly defined roles and responsibilities 
for the staff involved in financial reporting and the preparation of 
interim and year-end financial statements;
Source report: Material Internal Control Issues Reported in SEC's 
Fiscal Year 2004;
Financial Statement Audit Report (GAO-05-691R, July 27, 2005);
Status of recommendation: Per SEC: 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;
Status of recommendation: Per GAO: 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. 

Count: 2;
Recommendation: Collect common closing and adjusting entries in a 
formal listing, which is used;
in the general ledger closing process and in preparing financial 
statements;
Source report: Material Internal Control Issues Reported in SEC's 
Fiscal Year 2004;
Financial Statement Audit Report (GAO-05-691R, July 27, 2005);
Status of recommendation: Per SEC: Closed. Listing is complete and 
policies describe how closing and adjusting entries are compiled and 
recorded;
Status of recommendation: Per GAO: Closed. SEC's journal voucher log 
master collects common closing and adjusting entries in a formal 
listing. 

Count: 3;
Recommendation: 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;
Source report: Management Report: Opportunities for Improvements in 
SEC's Internal;
Controls and Accounting Procedures (GAO-05-693R, Aug. 12, 2005);
Status of recommendation: Per SEC: 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;
Status of recommendation: Per GAO: 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. 

Count: 4;
Recommendation: Separate key responsibilities over the handling and 
recording of cash receipts so that no one individual handles all key 
aspects concerning the receipts;
Source report: Management Report: Opportunities for Improvements in 
SEC's Internal;
Controls and Accounting Procedures (GAO-05-693R, Aug. 12, 2005);
Status of recommendation: Per SEC: Closed. SEC has implemented 
procedures to ensure that two individuals are present to open mail, 
handle cash, and log in checks;
Status of recommendation: Per GAO: Closed. During our 2005 audit, we 
observed the dual control procedures over cash receipts that SEC has 
implemented. 

Count: 5;
Recommendation: Perform periodic reconciliations of successful fee-
bearing filings in EDGAR and revenue recorded in the general ledger;
Source report: Management Report: Opportunities for Improvements in 
SEC's Internal;
Controls and Accounting Procedures (GAO-05-693R, Aug. 12, 2005);
Status of recommendation: Per SEC: Closed. SEC has implemented 
procedures to perform periodic reconciliations of the data in EDGAR and 
the general ledger;
Status of recommendation: Per GAO: Closed. During our 2005 audit, we 
reviewed the reconciliations prepared by SEC without exception. 

Count: 6;
Recommendation: Develop for this reconciliation process written 
policies and procedures that address the maintenance of documentation 
supporting the general ledger balances;
Source report: Management Report: Opportunities for Improvements in 
SEC's Internal;
Controls and Accounting Procedures (GAO-05-693R, Aug. 12, 2005);
Status of recommendation: Per SEC: Closed. Documentation and 
implementation of the policies and procedures have been completed;
Status of recommendation: Per GAO: 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. 

Count: 7;
Recommendation: 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;
Source report: Management Report: Opportunities for Improvements in 
SEC's Internal;
Controls and Accounting Procedures (GAO-05-693R, Aug. 12, 2005);
Status of recommendation: Per SEC: Closed. Documentation of the 
policies and procedures over this review has been completed;
Status of recommendation: Per GAO: Closed. During our 2005 audit, we 
noted documented review of the monthly FBWT reconciliation. 

Count: 8;
Recommendation: 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;
Source report: Management Report: Opportunities for Improvements in 
SEC's Internal;
Controls and Accounting Procedures (GAO-05-693R, Aug. 12, 2005);
Status of recommendation: Per SEC: 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;
Status of recommendation: Per GAO: Closed. During our 2005 audit, we 
noted documented evidence of appropriate SEC management review of 
recorded apportionment amounts. 

Count: 9;
Recommendation: 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;
Source report: Management Report: Opportunities for Improvements in 
SEC's Internal;
Controls and Accounting Procedures (GAO-05-693R, Aug. 12, 2005);
Status of recommendation: Per SEC: Closed. SEC has completed 
documentation of the payroll file processing and reconciliation process;
Status of recommendation: Per GAO: 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. 

Count: 10;
Recommendation: Train other individuals to perform payroll processing 
and reconciliation procedures;
Source report: Management Report: Opportunities for Improvements in 
SEC's Internal;
Controls and Accounting Procedures (GAO-05-693R, Aug. 12, 2005);
Status of recommendation: Per SEC: Closed. A new staff person has been 
trained and performs the reconciliations with supervisory review;
Status of recommendation: Per GAO: Closed. During our 2005 audit, we 
noted that SEC has trained another individual to perform this function. 

Count: 11;
Recommendation: 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;
Source report: Management Report: Opportunities for Improvements in 
SEC's Internal;
Controls and Accounting Procedures (GAO-05-693R, Aug. 12, 2005);
Status of recommendation: Per SEC: 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;
Status of recommendation: Per GAO: 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. 

Count: 12;
Recommendation: Refer eligible debt that is delinquent over 180 days to;
Treasury as required by the Debt Collection Improvement Act (DCIA);
Source report: Management Report: Opportunities for Improvements in 
SEC's Internal;
Controls and Accounting Procedures (GAO-05-693R, Aug. 12, 2005);
Status of recommendation: Per SEC: Closed. All eligible debt is being 
referred to Treasury as required by DCIA;
Status of recommendation: Per GAO: Closed. During our 2005 audit, we 
verified that SEC is properly referring eligible debt to Treasury as 
required by DCIA. 

Count: 13;
Recommendation: Review its property and equipment capitalization 
thresholds and document the analysis used to select the capitalization 
thresholds;
Source report: Management Report: Opportunities for Improvements in 
SEC's Internal;
Controls and Accounting Procedures (GAO-05-693R, Aug. 12, 2005);
Status of recommendation: Per SEC: Closed. SEC's Property 
Accountability Task Force performed and documented this analysis;
Status of recommendation: Per GAO: Closed. During our 2005 audit, we 
reviewed SEC's analysis and concluded that the capitalization 
thresholds are reasonable. 

Count: 14;
Recommendation: 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;
Source report: Material Internal Control Issues Reported in SEC's 
Fiscal Year 2004;
Financial Statement Audit Report (GAO-05-691R, July 27, 2005);
Status of recommendation: Per SEC: Closed. SEC has completed a 
comprehensive review of case data;
Status of recommendation: Per GAO: 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. 

Count: 15;
Recommendation: 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;
Source report: Material Internal Control Issues Reported in SEC's 
Fiscal Year 2004;
Financial Statement Audit Report (GAO-05-691R, July 27, 2005);
Status of recommendation: Per SEC: 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;
Status of recommendation: Per GAO: Open. We will evaluate SEC's 
corrective actions during our fiscal year 2006 financial audit. 

Count: 16;
Recommendation: Implement controls so that the ongoing activities 
involving disgorgements and penalties are properly, accurately, and 
timely recorded in the accounting system;
Source report: Material Internal Control Issues Reported in SEC's 
Fiscal Year 2004;
Financial Statement Audit Report (GAO-05-691R, July 27, 2005);
Status of recommendation: Per SEC: 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;
Status of recommendation: Per GAO: Open. We will evaluate SEC's 
corrective actions during our fiscal year 2006 financial audit. 

Count: 17;
Recommendation: 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;
Source report: Material Internal Control Issues Reported in SEC's 
Fiscal Year 2004;
Financial Statement Audit Report (GAO-05-691R, July 27, 2005);
Status of recommendation: Per SEC: 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;
Status of recommendation: Per GAO: Open. We will evaluate SEC's 
corrective actions during our fiscal year 2006 financial audit. 

Count: 18;
Recommendation: 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;
Source report: Material Internal Control Issues Reported in SEC's 
Fiscal Year 2004;
Financial Statement Audit Report (GAO-05-691R, July 27, 2005);
Status of recommendation: Per SEC: 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;
Status of recommendation: Per GAO: Open. We will evaluate SEC's 
corrective actions during our fiscal year 2006 financial audit. 

Count: 19;
Recommendation: 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;
Source report: Material Internal Control Issues Reported in SEC's 
Fiscal Year 2004;
Financial Statement Audit Report (GAO-05-691R, July 27, 2005);
Status of recommendation: Per SEC: 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;
Status of recommendation: Per GAO: Open. We will evaluate SEC's 
corrective actions during our fiscal year 2006 financial audit. 

Count: 20;
Recommendation: 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;
Source report: Material Internal Control Issues Reported in SEC's 
Fiscal Year 2004;
Financial Statement Audit Report (GAO-05-691R, July 27, 2005);
Status of recommendation: Per SEC: Open. The draft Financial Statements 
Preparation Guidance provides narrative on the crosswalk. Additional 
documentation will be completed in 2006;
Status of recommendation: Per GAO: 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. 

Count: 21;
Recommendation: 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;
Source report: Material Internal Control Issues Reported in SEC's 
Fiscal Year 2004;
Financial Statement Audit Report (GAO-05-691R, July 27, 2005);
Status of recommendation: Per SEC: Open. Subsidiary ledgers are 
maintained;
however, full documentation must still be completed;
Status of recommendation: Per GAO: Open. We will evaluate SEC's 
corrective actions during our fiscal year 2006 financial audit. 

Count: 22;
Recommendation: Perform monthly reconciliations of subsidiary records 
and summary account balances;
Source report: Material Internal Control Issues Reported in SEC's 
Fiscal Year 2004;
Financial Statement Audit Report (GAO-05-691R, July 27, 2005);
Status of recommendation: Per SEC: Open. New staff have been hired, 
which will enable OFM to increase monthly reconciliations and the 
documentation of procedures for current and future reconciliations;
Status of recommendation: Per GAO: Open. We will evaluate SEC's 
corrective actions during our fiscal year 2006 financial audit. 

Count: 23;
Recommendation: Consider a "formal closing" of all accounts at an 
interim date(s), which will reduce the level of accounting activity and 
analysis required at year-end. The;
formal closing entails ensuring that all transactions are recorded in 
the proper;
period through month's end;
Source report: Material Internal Control Issues Reported in SEC's 
Fiscal Year 2004;
Financial Statement Audit Report (GAO-05-691R, July 27, 2005);
Status of recommendation: Per SEC: Open. SEC is considering workable 
alternatives to facilitate accelerating the audit process;
Status of recommendation: Per GAO: Open. We will evaluate SEC's 
corrective actions during our fiscal year 2006 financial audit. 

Count: 24;
Recommendation: 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;
Source report: Material Internal Control Issues Reported in SEC's 
Fiscal Year 2004;
Financial Statement Audit Report (GAO-05-691R, July 27, 2005);
Status of recommendation: Per SEC: Open. OFM is implementing procedures 
to document reviews. These procedures will become standardized and 
fully implemented;
Status of recommendation: Per GAO: Open. We will evaluate SEC's 
corrective actions during our fiscal year 2006 financial audit. 

Count: 25;
Recommendation: 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;
Source report: Material Internal Control Issues Reported in SEC's 
Fiscal Year 2004;
Financial Statement Audit Report (GAO-05- 691R, July 27, 2005);
Status of recommendation: Per SEC: 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;
Status of recommendation: Per GAO: Open. We will evaluate SEC's 
corrective actions during our fiscal year 2006 financial audit. 

Count: 26;
Recommendation: Utilize established tools (i.e., checklists and 
implementation guides) available for assistance in compiling and 
reviewing financial statements;
Source report: Material Internal Control Issues Reported in SEC's 
Fiscal Year 2004;
Financial Statement Audit Report (GAO-05-691R, July 27, 2005);
Status of recommendation: Per SEC: Open. SEC needs to determine how 
this recommendation can be implemented and documented;
Status of recommendation: Per GAO: Open. We will evaluate SEC's 
corrective actions during our fiscal year 2006 financial audit. 

Count: 27;
Recommendation: 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 re-
creation by the original preparer;
Source report: Material Internal Control Issues Reported in SEC's 
Fiscal Year 2004;
Financial Statement Audit Report (GAO-05-691R, July 27, 2005);
Status of recommendation: Per SEC: 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;
Status of recommendation: Per GAO: Open. We will evaluate SEC's 
corrective actions during our fiscal year 2006 financial audit. 

Count: 28;
Recommendation: 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;
Source report: Material Internal Control Issues Reported in SEC's 
Fiscal Year 2004;
Financial Statement Audit Report (GAO-05-691R, July 27, 2005);
Status of recommendation: Per SEC: 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;
Status of recommendation: Per GAO: 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. 

Count: 29;
Recommendation: Develop or acquire an integrated financial management 
system to provide timely and accurate recording of financial data for 
financial reporting and management decision making;
Source report: Material Internal Control Issues Reported in SEC's 
Fiscal Year 2004;
Financial Statement Audit Report (GAO-05-691R, July 27, 2005);
Status of recommendation: Per SEC: Open. SEC has considered replacing 
the central accounting system. This will not be accomplished any 
earlier than 2008;
Status of recommendation: Per GAO: Open. We will evaluate SEC's 
corrective actions during our fiscal year 2006 financial audit. 

Count: 30;
Recommendation: Periodically reconcile the cash receipts log to the 
documentation supporting the deposit amount in the general ledger;
Source report: Management Report: Opportunities for Improvements in 
SEC's Internal;
Controls and Accounting Procedures (GAO-05-693R, Aug. 12, 2005);
Status of recommendation: Per SEC: 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;
Status of recommendation: Per GAO: Open. We will evaluate SEC's 
corrective actions during our fiscal year 2006 financial audit. 

Count: 31;
Recommendation: 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;
Source report: Management Report: Opportunities for Improvements in 
SEC's Internal;
Controls and Accounting Procedures (GAO-05-693R, Aug. 12, 2005);
Status of recommendation: Per SEC: Open. Full documentation of the 
evaluations of new property leases has been completed;
however, the documentation for equipment leases has not been completed;
Status of recommendation: Per GAO: 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. 

Count: 32;
Recommendation: Develop policies and procedures to properly account for 
future property and equipment leases on an ongoing basis;
Source report: Management Report: Opportunities for Improvements in 
SEC's Internal;
Controls and Accounting Procedures (GAO-05-693R, Aug. 12, 2005);
Status of recommendation: Per SEC: Open. Documentation of the policies 
and procedures needs to be completed;
Status of recommendation: Per GAO: 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. 

Count: 33;
Recommendation: 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 payroll-related information, 
wherein active employee data could be readily compared with and 
reconciled to FPPS-generated payroll records. This reconciliation 
should be documented; 
Source report: Management Report: Opportunities for Improvements in 
SEC's Internal;
Controls and Accounting Procedures (GAO-05-693R, Aug. 12, 2005);
Status of recommendation: Per SEC: Open. SEC has instituted a 
management process to verify the listing of active employees. 
Documentation of the reconciliation with FPPS is in process;
Status of recommendation: Per GAO: Open. We will evaluate SEC's 
corrective actions during our fiscal year 2006 financial audit. 

Count: 34;
Recommendation: 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;
Source report: Management Report: Opportunities for Improvements in 
SEC's Internal;
Controls and Accounting Procedures (GAO-05-693R, Aug. 12, 2005);
Status of recommendation: Per SEC: Open. The Executive Director's 
office now requires additional support to document corrective actions. 
Formal policies and procedures remain to be issued;
Status of recommendation: Per GAO: Open. We will evaluate SEC's 
corrective actions during our fiscal year 2006 financial audit to 
ensure proper documentation. 

Source: GAO.

[End of table] 

Enclosure II: Comments from the Securities and Exchange Commission: 

United States San Francisco Securities And Exchange Commission: 

April 10, 2006: 

Ms. Jeanette M. Franzel: 
Director: 
Financial Management and Assurance Government Accountability Office: 
441 G Street, N.W. 
Washington, D.C. 20548: 

Dear Ms. Franzel: 

Thank you for the opportunity to review and comment on the draft report 
of the Government Accountability Office entitled Internal Control: 
Improvements Needed in SEC's Accounting and Financial Reporting 
Procedures. The report discusses issues identified during GAO's fiscal 
year 2005 audit of the financial statements of the Securities and 
Exchange Commission and reflects the state of the SEC's internal 
controls as of September 30, 2005. 1 would like to acknowledge and 
commend the efforts of you and the GAO staff in working with the SEC to 
meet our financial reporting deadlines and to improve the SEC's 
controls over financial reporting. 

GAO's audit report for fiscal year 2005 noted three material weaknesses 
in the SEC's internal controls over financial reporting. This report 
provides additional information and recommendations with respect to two 
of the control weaknesses that existed at the end of last year's audit: 
controls over preparing financial statements and related disclosures, 
and controls over recording and reporting disgorgement and penalty 
activity. The SEC's information security controls are addressed in a 
separate GAO report and in my letter of March 24, 2006 to Gregory 
Wilshusen. 

As you have noted, the SEC made progress in fiscal year 2005 in 
addressing its internal control weaknesses, and we have redoubled our 
efforts in fiscal year 2006. Specifically, since the end of last year's 
audit, we have taken steps to implement GAO's recommendations through 
several actions that are not reflected in your report. 

With respect to financial reporting, we have made substantial progress 
in addressing each of GAO's recommendations. We have added resources 
and expertise to the Office of Financial Management, and we are nearing 
completion of a comprehensive set of written procedures governing 
financial reporting processes and related internal controls. In 
addition, beginning with our second quarter financial statements, our: 

Financial Management Oversight Committee will provide executive-level 
review of the SEC's financial statements, and the Committee will also 
provide regular oversight with respect to the agency's financial and 
accounting policies and internal controls. We expect to have this 
weakness fully resolved well before the completion of GAO's fiscal 2006 
audit. 

The SEC has also made substantial progress in addressing its weakness 
in controls over recording and reporting of disgorgement and penalty 
activity. For the past several months, the agency has convened a 
regular working group comprised of representatives from the Division of 
Enforcement and the Offices of Financial Management, Information 
Technology, the Secretary, and the Executive Director, with the 
objective of fully resolving this material weakness during fiscal year 
2006. The group has undertaken the following principal initiatives: 

* clarifying and streamlining responsibilities across divisions and 
offices 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 to ensure data 
integrity in the new financial system going forward, and: 

* clarifying the SEC's policies with respect to debt terminations and 
write-offs and clearing out a backlog of old, uncollected debts. 

We believe these initiatives are responsive to GAO's recommendations 
and will substantially improve the SEC's controls over disgorgement and 
penalty activity. 

As Chairman, I remain committed to enhancing the SEC's financial and 
operational effectiveness, so that the agency can lead by example when 
it comes to compliance with internal control requirements. I appreciate 
your support of these efforts, and look forward to continuing our 
productive dialogue during the course of this year's audit. 

Thank you again for the opportunity to comment on this report. If you 
have any questions relating to our response, please contact me at 202- 
551-2100. 

Signed by:

Christopher Cox: 
Chairman:

Enclosure III: Details on Audit Scope and Methodology[Footnote 14]: 

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): 

FOOTNOTES 

[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. 

[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. 

[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. 

[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). 

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

[13] 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). 

[14] For further explanation of our audit scope and methodology, see 
the financial audit report (GAO-06-239).