Management Report:

Opportunities for Improvements in SEC's Internal Controls and Accounting Procedures

GAO-05-693R: Published: Aug 12, 2005. Publicly Released: Aug 12, 2005.

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In May 2005, we issued our report expressing an opinion on the Securities and Exchange Commission's (SEC) fiscal year 2004 financial statements and an opinion on SEC's internal control as of September 30, 2004. We also reported on the results of our tests of SEC's compliance with selected provisions of laws and regulations during fiscal year 2004. Our report on SEC's fiscal year 2004 financial statements identified reportable conditions in the internal controls over financial reporting that we considered to be material weaknesses. These weaknesses related to SEC's controls over (1) recording and reporting disgorgements and penalties, (2) information security, and (3) preparing financial statements and related disclosures. We issued two separate reports providing recommendations to address those weaknesses. The purpose of this report is to provide recommendations for those issues identified during our audit that, although not material in relation to the financial statements, we believe warrant management's attention.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: As part of GAO's FY 2004 SEC Financial Statement Audit, GAO found SEC did not perform reconciliations of subsidiary and summary account balances for certain financial statement line items, such as for the customer deposit liability relating to filing fees and the associated earned filing fee revenue, the accounts receivable related to exchange fees and the related amount of earned exchange fee revenue, and the budgetary accounts related to undelivered and delivered orders, thus requiring SEC staff to create supporting detail for balances after the fact in order to reconcile support to general ledger balances. We recommended the SEC perform monthly reconciliations of subsidiary records and summary account balances. As of September 2006, SEC prepared a matrix listing its significant reconciliations and frequency. The reconciliations improved SEC's accountability and support for several of its significant account balances. In addition, as of September 2005, SEC completed documentation and implementation of the written policies and procedures for the filing fee revenue reconciliation.

    Recommendation: SEC should 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.

    Agency Affected: United States Securities and Exchange Commission

  2. Status: Closed - Implemented

    Comments: As part of GAO's FY 2004 SEC Financial Statement Audit, we found that SEC's Supervisory Accounting Analyst had incompatible duties regarding cash receipts by having custody of the checks, control over the original daily cash receipts log, and access to the general ledger. Further, in FY 2005, we found that SEC did not reconcile its cash receipts log to the documentation supporting the deposit amount in the general ledger. Because one individual performed incompatible duties over cash receipts, there was a risk of error or fraud concerning cash receipts. Accordingly, we recommended that SEC separate key responsibilities over the handling and recording of cash receipts so that no one individual handles all key aspects concerning the receipts and periodically reconcile the cash receipts log to the documentation supporting the deposit amount in the general ledger. In response to our recommendation, as of January 2006, SEC has implemented procedures to implement proper segregation of duties and controls over cash receipts by requiring that two individuals are present to open mail, handle cash, and log in checks. SEC also implemented, as of January 2007, procedures to reconcile the daily receipts ledger to the transaction journal on a monthly basis. As a result, SEC has improved its controls over segregation of duties and has reduced the risk of error or fraud involving cash receipts.

    Recommendation: SEC should separate key responsibilities over the handling and recording of cash receipts so that no one individual handles all key aspects concerning the receipts.

    Agency Affected: United States Securities and Exchange Commission

  3. Status: Closed - Implemented

    Comments: As part of GAO's FY 2004 SEC Financial Statement Audit, we found that SEC's Supervisory Accounting Analyst had incompatible duties regarding cash receipts by having custody of the checks, control over the original daily cash receipts log, and access to the general ledger. Further, in FY 2005, we found that SEC did not reconcile its cash receipts log to the documentation supporting the deposit amount in the general ledger. Because one individual performed incompatible duties over cash receipts, there was a risk of error or fraud concerning cash receipts. Accordingly, we recommended that SEC separate key responsibilities over the handling and recording of cash receipts so that no one individual handles all key aspects concerning the receipts and periodically reconcile the cash receipts log to the documentation supporting the deposit amount in the general ledger. In response to our recommendation, as of January 2006, SEC has implemented procedures to implement proper segregation of duties and controls over cash receipts by requiring that two individuals are present to open mail, handle cash, and log in checks. SEC also implemented, as of January 2007, procedures to reconcile the daily receipts ledger to the transaction journal on a monthly basis. As a result, SEC has improved its controls over segregation of duties and has reduced the risk of error or fraud involving cash receipts.

    Recommendation: SEC should periodically reconcile the cash receipts log to the documentation supporting the deposit amount in the general ledger.

    Agency Affected: United States Securities and Exchange Commission

  4. Status: Closed - Implemented

    Comments: As part of GAO's FY 2004 SEC Financial Statement Audit, GAO found SEC did not perform reconciliations of subsidiary and summary account balances for certain financial statement line items, such as for the customer deposit liability relating to filing fees and the associated earned filing fee revenue, the accounts receivable related to exchange fees and the related amount of earned exchange fee revenue, and the budgetary accounts related to undelivered and delivered orders, thus requiring SEC staff to create supporting detail for balances after the fact in order to reconcile support to general ledger balances. We recommended the SEC perform monthly reconciliations of subsidiary records and summary account balances. As of September 2006, SEC prepared a matrix listing its significant reconciliations and frequency. The reconciliations improved SEC's accountability and support for several of its significant account balances. In addition, as of September 2005, SEC completed documentation and implementation of the written policies and procedures for the filing fee revenue reconciliation.

    Recommendation: SEC should perform periodic reconciliations of successful fee-bearing filings in the Electronic Data Gathering Analysis, and Retrieval System and revenue recorded in the general ledger.

    Agency Affected: United States Securities and Exchange Commission

  5. Status: Closed - Implemented

    Comments: As part of GAO's FY 2004 SEC Financial Statement Audit, GAO found SEC did not perform reconciliations of subsidiary and summary account balances for certain financial statement line items, such as for the customer deposit liability relating to filing fees and the associated earned filing fee revenue, the accounts receivable related to exchange fees and the related amount of earned exchange fee revenue, and the budgetary accounts related to undelivered and delivered orders, thus requiring SEC staff to create supporting detail for balances after the fact in order to reconcile support to general ledger balances. We recommended the SEC perform monthly reconciliations of subsidiary records and summary account balances. As of September 2006, SEC prepared a matrix listing its significant reconciliations and frequency. The reconciliations improved SEC's accountability and support for several of its significant account balances. In addition, as of September 2005, SEC completed documentation and implementation of the written policies and procedures for the filing fee revenue reconciliation.

    Recommendation: SEC should develop for this reconciliation process written policies and procedures that address the maintenance of documentation supporting the general ledger balances.

    Agency Affected: United States Securities and Exchange Commission

  6. Status: Closed - Implemented

    Comments: As part of GAO's FY 2004 Securities and Exchange Commission (SEC) Financial Statement Audit, we found SEC did not document its review of monthly required reconciliations of its Fund Balance With Treasury (FBWT). The lack of such documentation increases the risk that these reviews are not being performed and as a result increasing the risk of the untimely detection of any errors in related account balances. Accordingly, we recommended SEC document its review of the monthly FBWT reconciliation to provide evidence that the reviews are performed. In response to our recommendation, in September 2005, SEC developed and implemented policies and procedures addressing evidence needed to document reconciliation reviews. This action helped reduce the risk of undetected errors in SEC's financial statement balances.

    Recommendation: SEC management should document its review of the monthly Fund Balance with Treasury 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.

    Agency Affected: United States Securities and Exchange Commission

  7. Status: Closed - Implemented

    Comments: As part of GAO's FY 2004 SEC Financial Statement Audit, we did not find evidence of supervisory review of apportionment amounts recorded in the general ledger. The Antideficiency Act prohibits agencies from obligating appropriated funds in excess of what the Office of Management and Budget (OMB) has apportioned. Without a review process to ensure that apportionments are accurately entered in the general ledger, there is a risk that apportionments will not be accurately recorded and that obligations will be tracked against an inaccurate apportionment limit. Accordingly, we recommended that appropriate SEC management officials review recorded apportionment amounts to provide assurance over the accuracy of these amounts and that the review be evidenced in some manner, such as a signature and date. Acting on our recommendation, SEC's policy and procedures, as of September 2005, now include verification and approval by the Assistant Director of Planning and Budget, of the apportionment documents once they are entered into the general ledger by the Budget Officer. The new procedure has improved controls over compliance.

    Recommendation: Appropriate SEC management officials should 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.

    Agency Affected: United States Securities and Exchange Commission

  8. Status: Closed - Implemented

    Comments: This recommendation was superceded by subsequent GAO recommendations.

    Recommendation: SEC should 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.

    Agency Affected: United States Securities and Exchange Commission

  9. Status: Closed - Implemented

    Comments: In our fiscal year 2004 audit of the Securities and Exchange Commission's (SEC) financial statements, we identified that SEC was not properly accounting for its equipment or property leases. Specifically, we noted instances in which SEC inappropriately expensed lease payments which should have been capitalized, or in which the capital lease liability was not recorded for leased equipment. We found that these deficiencies occurred because SEC lacked written guidance for accounting for property and equipment leases. In our August 2005 report to SEC management concerning issues identified through our audit, we recommended that SEC develop policies and procedures to better ensure proper accounting for future property and equipment leases. In response to our recommendation and in concurrence with a new overall system implementation, SEC developed comprehensive written procedures in September 2008, including procedures for proper accounting treatment for the acquisition, use, and disposition of property and equipment. These new procedures clarified the accounting treatment for property and equipment leases. As a result, if effectively implemented, these new procedures should enable SEC to significantly improve its management and accountability for property and equipment leases.

    Recommendation: SEC should develop policies and procedures to properly account for future property and equipment leases on an ongoing basis.

    Agency Affected: United States Securities and Exchange Commission

  10. Status: Closed - Implemented

    Comments: SEC payroll reports and transactions are created and managed by the Department of Interior (DOI). DOI generates reports on a bi-weekly basis that shows all active employees for each pay period within each division and office. However, as part of GAO's FY 2004 SEC Financial Statement audit, we found SEC did not review the reports or perform any other procedures to determine if the reports accurately reflect SEC's current active employees, new hires, and recent terminations. Since SEC did not perform checks and reconciling procedures between DOI reporting and SEC records, management did not have assurance regarding the accuracy of the active employee information with DOI increasing the risk that previous SEC employees could get paid. Based on our recommendation, during FY 2006, SEC instituted a management process to verify DOI's active employee listings which should strengthen the integrity of SEC's payroll amounts. During our 2006 audit, we determined that this new control is in place and operating effectively.

    Recommendation: SEC should 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.

    Agency Affected: United States Securities and Exchange Commission

  11. Status: Closed - Implemented

    Comments: As part of GAO's FY 2004 SEC Financial Statement Audit, we noted that SEC had only one trained individual who performed the payroll file processing and reconciliation procedures each pay period. These procedures, which were not documented, consisted of uploading and reformatting information received from the Department of Interior (DOI) into the general ledger, comparing data in the general ledger to the Payroll Operations Division Report generated by DOI for accuracy and completeness, researching any errors, verifying payroll expenses by SEC organization code, making necessary corrections to the data, recording the payroll disbursement in the general ledger, and reconciling the Treasury Statement of Transactions (SF-224) with the general ledger. Further, we did not find evidence of supervisory review of the payroll file processing and reconciliation procedures. By having only one person trained on the payroll process and not having documented policies and procedures governing the process, there was a risk that the necessary reconciliation would not be performed correctly or timely in the absence of the one individual who was knowledgeable of the required procedure. The lack of supervisory review of the payroll process increased the risk that errors could occur and not be detected in a timely manner. Based on our recommendation in this area, SEC developed written policies and procedures during FY 2005 governing the payroll processing and reconciliation procedures, which included requirements for documenting supervisory review of the performance of the payroll procedures performed each period. SEC also trained other individuals to perform payroll processing and reconciliation procedures. These improvements in payroll processing controls which we verified as implemented in FY 2005, should increase the accuracy, integrity, and reliability of payroll amounts recorded in the financial statements.

    Recommendation: SEC should 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.

    Agency Affected: United States Securities and Exchange Commission

  12. Status: Closed - Implemented

    Comments: As part of GAO's FY 2004 SEC Financial Statement Audit, we noted that SEC had only one trained individual who performed the payroll file processing and reconciliation procedures each pay period. These procedures, which were not documented, consisted of uploading and reformatting information received from the Department of Interior (DOI) into the general ledger, comparing data in the general ledger to the Payroll Operations Division Report generated by DOI for accuracy and completeness, researching any errors, verifying payroll expenses by SEC organization code, making necessary corrections to the data, recording the payroll disbursement in the general ledger, and reconciling the Treasury Statement of Transactions (SF-224) with the general ledger. Further, we did not find evidence of supervisory review of the payroll file processing and reconciliation procedures. By having only one person trained on the payroll process and not having documented policies and procedures governing the process, there was a risk that the necessary reconciliation would not be performed correctly or timely in the absence of the one individual who was knowledgeable of the required procedure. The lack of supervisory review of the payroll process increased the risk that errors could occur and not be detected in a timely manner. Based on our recommendation in this area, SEC developed written policies and procedures during FY 2005 governing the payroll processing and reconciliation procedures, which included requirements for documenting supervisory review of the performance of the payroll procedures performed each period. SEC also trained other individuals to perform payroll processing and reconciliation procedures. These improvements in payroll processing controls which we verified as implemented in FY 2005, should increase the accuracy, integrity, and reliability of payroll amounts recorded in the financial statements.

    Recommendation: SEC should train other individuals to perform this function.

    Agency Affected: United States Securities and Exchange Commission

  13. Status: Closed - Implemented

    Comments: This recommendation was superseded by subsequent GAO recommendations.

    Recommendation: SEC should 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.

    Agency Affected: United States Securities and Exchange Commission

  14. Status: Closed - Implemented

    Comments: SEC records obligations and prepares its annual budget based on budget object class (BOC) codes. Object classes are categories in a classification system that presents obligations by the items or services purchased by the Federal Government. According to 31 U.S.C. 1104(b), the President's budget is required to present obligations by object class for each account. As part of GAO's FY 2004 SEC Financial Statement Audit, we noted several incidences in which SEC did not properly or consistently record the expenditures to the appropriate BOC code, and SEC did not have sufficient support for how certain expenditures were classified among BOC codes. Without sufficient detailed supporting records, the actual amount of expenditures within each BOC code cannot be accurately determined increasing the risk that management does not have reliable information for decision making. In addition, SEC did not have written policies and procedures regarding recording expenditures to the proper BOC codes, thereby increasing the risk of inconsistent recording of expenditures. Based on our recommendations to improve controls over expenditures, during FY 2005, SEC instructed its staff on the policies and procedures for assigning expenditures to the proper BOC codes and documented the policies and procedures. These improvements resulted in more consistent and accurate recording of expenditures in the FY 2005 financial statements.

    Recommendation: SEC should 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.

    Agency Affected: United States Securities and Exchange Commission

  15. Status: Closed - Implemented

    Comments: The Debt Collection Improvement Act (DCIA) requires agencies to refer eligible delinquent debt over 180 days to Treasury for collection. Our test of SEC's compliance with DCIA as part of GAO's FY 2004 SEC Financial Statement Audit disclosed $285,626 in eligible debt as of September 30, 2004, that was over 180 days old, but had not been referred to Treasury. While this matter was not material to SEC's fiscal year 2004 financial statements, timely referral of delinquent debts as DCIA requires would improve opportunities to collect such debt. Accordingly, we recommended that SEC refer eligible debt that is delinquent over 180 days to Treasury as required by DCIA. Based on our recommendation, as of September 30, 2005, SEC implemented policies and procedures to refer eligible delinquent debt over 180 days to Treasury as required by the DCIA. During our 2005 audit, we verified that SEC is properly referring eligible debt to Treasury as required by DCIA. Such timely referral of delinquent debts as DCIA requires will improve Treasury's opportunities to collect such debt.

    Recommendation: SEC should refer eligible debt that is delinquent over 180 days to Treasury as required by the Debt Collection Improvement Act.

    Agency Affected: United States Securities and Exchange Commission

  16. Status: Closed - Implemented

    Comments: As part of GAO's FY 2004 SEC Financial Statement Audit, we found that SEC did not have an analytical basis or other documented support for the selection of its capitalization thresholds for property and equipment. Inappropriate or excessive capitalization thresholds have a significant impact on financial reporting and related oversight issues, and may not comply with SFFAS No. 6 requirements to capitalize all items that meet certain characteristics. In response to our recommendation that SEC reviewed its property and equipment capitalization thresholds and documented the analysis used to select the capitalization thresholds during FY 2005. During our 2005 audit, we reviewed SEC's analysis and concluded that its capitalization thresholds were reasonable.

    Recommendation: SEC should review its property and equipment capitalization thresholds and document the analysis used to select the capitalization thresholds.

    Agency Affected: United States Securities and Exchange Commission

 

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