Internal Control:

Improvements Needed in SEC's Accounting and Operational Procedures

GAO-07-482R: Published: Apr 3, 2007. Publicly Released: Apr 3, 2007.

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On November 15, 2006, we issued our report on the U.S. Securities and Exchange Commission's (SEC) fiscal years 2006 and 2005 financial statements and on SEC's internal control as of September 30, 2006. We also reported on the results of our tests of SEC's compliance with selected provisions of laws and regulations during fiscal year 2006. The purpose of this report is to discuss issues identified during our fiscal year 2006 audit concerning internal controls and accounting/operational procedures that could be improved. This report contains six recommendations to SEC to improve these internal controls and procedures. These recommendations are in addition to those we already provided to SEC as a result of our prior audits of SEC's financial statements

Our November 15, 2006, report concluded that based on SEC's efforts to address concerns with controls over disgorgements and penalties and over information systems, and based on improvements that we found in these areas during the fiscal year 2006 audit, we no longer considered these two previously reported weaknesses to be material weaknesses. However, because many of these efforts represent compensating controls rather than permanent systemic solutions, we still considered these areas to be reportable conditions. We also concluded that SEC had taken sufficient action in the area of controls over the financial reporting process such that we no longer consider this issue to be a material weakness or reportable condition. In addition, we identified a new reportable condition concerning SEC's controls over recording property and equipment. We also identified other internal control issues that although not considered to be material weaknesses or reportable conditions, we believe warrant management's consideration. These issues concern (1) payroll system access, approval of time and attendance records, and process documentation and (2) comparison of furniture and equipment received and ordered.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: During our fiscal year 2006 audit, we identified an excessive number of staff in the Security and Exchange Commission's (SEC) Office of Human Resources (OHR) with the capability to initiate and approve both personnel actions and time cards. We also identified several cases in which administrative officers had approved time and attendance (T&A) for higher-level employees on a regular basis during fiscal year 2006. In addition, we determined that SEC lacks formal, comprehensive documentation of T&A and personnel action processes. As of the completion of our audit in November 2006, OHR had taken or planned corrective actions to address these issues. In our April 2007 report to SEC management concerning this weakness, we recommended that SEC evaluate the overall effectiveness of its actions taken in response to our findings regarding payroll and personnel action processing, when fully implemented, to determine whether any modifications, additional actions, or both are needed. In response to our recommendation, OHR implemented a personnel action workflow in 2009 to describe the required steps in its process. In addition, OHR assigned an OHR analyst to review the processing of personnel actions of staff with "superuser" rights. Further, OHR issued a directive in 2009 addressing T&A administration matters, including appropriate certification and approval of employees? T&A transactions. As a result, SEC strengthened the overall control environment for personnel action and payroll processing and reduced the risk of fraudulent approval of employee personnel actions.

    Recommendation: The SEC should evaluate the overall effectiveness of its actions taken in response to our findings regarding payroll and personnel action processing, when fully implemented, to determine whether any modifications, additional actions, or both are needed.

    Agency Affected: United States Securities and Exchange Commission

  2. Status: Closed - Implemented

    Comments: In our fiscal year 2006 audit of the Securities and Exchange Commission's (SEC) financial statements, we noted several errors and omissions in the amounts SEC capitalized for internal use software projects. Under SEC's business process, project managers within the Office of Information Technology (OIT) are responsible for providing capitalizable software cost data to the SEC's Office of Financial Management (OFM) for posting to the general ledger. Based on our review of these cost compilations, we concluded that (1) project managers lacked a consistent understanding of the accounting standards that should govern their cost submissions and (2) data submitted by project managers was not subject to detailed supervisory review within OIT before being forwarded to OFM thereby decreasing SEC's assurance over the accuracy and completeness of its reported balances for property and equipment. In our April 2007 report to SEC management concerning this weakness, we recommended that SEC implement procedures whereby OFM staff routinely review capitalized amounts for software projects against supporting documentation to provide additional assurance that the recorded amounts are accurate and complete. In response to our recommendation, SEC established procedures whereby the OFM property accountant routinely reviews the general ledger and OIT's cost compilation spreadsheets for capitalized software project costs to determine if project managers entered and processed these transactions in accordance with generally accepted accounting principles. As a result of these review procedures, SEC has improved its assurance that the capitalized amounts for internal use software are accurate and complete.

    Recommendation: The SEC, as part of its planned corrective measures to improve property and equipment controls, should implement procedures whereby OFM staff routinely review capitalized amounts for software projects against supporting documentation to provide additional assurance that the recorded amounts are accurate and complete.

    Agency Affected: United States Securities and Exchange Commission

  3. Status: Closed - Implemented

    Comments: In our fiscal year 2006 audit of the Securities and Exchange Commission's (SEC) financial statements, we noted several errors and omissions in the amounts SEC capitalized for internal use software projects. Under SEC's business process, project managers within the Office of Information Technology's (OIT) are responsible for providing capitalizable software cost data to the SECs Office of Financial Management (OFM) for posting to the general ledger. Based on our review of these cost compilations, we concluded that (1) project managers lacked a consistent understanding of the accounting standards that should govern their cost submissions and (2) data submitted by project managers was not subject to detailed supervisory review within OIT before being forwarded to OFM. In our April 2007 report to SEC management concerning this weakness, we recommended that SEC implement procedures to ensure that internal use software project managers have a consistent understanding of the requirements that should govern compilation of cost data submitted for capitalization, including consideration of joint OIT and Office of Financial Management (OFM) training to software project managers on the requirements of applicable generally accepted accounting principles. In response to our recommendation, SEC has implemented policies governing the assignment of employee labor costs to capitalizable projects and held a joint training session for project managers and OFM personnel to discuss the capitalization requirements for property, plant, and equipment in June 2009. As a result, software project managers have been provided with the resources necessary to adequately manage the cost provided for capitalization, thereby reducing the risk of capitalization errors in recording internal use software.

    Recommendation: The SEC, as part of its planned corrective measures to improve property and equipment controls, should implement procedures to ensure that internal use software project managers have a complete and consistent understanding of the requirements that should govern compilation of cost data submitted for capitalization, including consideration of joint Office of Information Technology and Office of Financial Management (OFM) training to software project managers on the requirements of applicable generally accepted accounting principles.

    Agency Affected: United States Securities and Exchange Commission

  4. Status: Closed - Implemented

    Comments: In our fiscal year 2006 audit of the Securities and Exchange Commission's (SEC) financial statements, we identified approximately $6.2 million of fiscal year 2006 furniture and equipment purchases that were not properly capitalized as of September 30, 2006. In addition to the unrecorded furniture and equipment, we also identified an unrecorded bulk purchase of furniture associated with office space in New York, NY. Specifically, based on our interim testing of furniture purchased in February 2006 for the new office space in New York, we determined that approximately $425,000 of furniture purchased in May 2003 for the previous space was moved to the new space but had not been capitalized. In our April 2007 report to SEC management concerning this weakness, we recommended that SEC implement procedures requiring periodic comparisons of related details in disbursement and property/equipment subsidiary records to identify any unrecorded purchases that satisfy established capitalization criteria. In response to our recommendation, SEC developed written procedures in fiscal year 2009 to identify expenditure transactions in appropriate general ledger accounts and to review those transactions for potential capitalization. As a result, internal control over the accurate and consistent recording of capitalized and non-capitalized furniture and equipment transactions is significantly improved, thereby reducing the risk that furniture and equipment transactions will be recorded incorrectly. In addition, SEC's procedures for identifying any unrecorded purchases that satisfy established capitalization criteria are significantly improved thereby providing an effective detective control and increasing the accuracy of SEC's property and equipment line item balances.

    Recommendation: The SEC, as part of its planned corrective measures to improve property and equipment controls, should implement procedures requiring periodic comparisons of related details in disbursement and property/equipment subsidiary records to identify any unrecorded purchases that satisfy established capitalization criteria.

    Agency Affected: United States Securities and Exchange Commission

  5. Status: Closed - Implemented

    Comments: In our fiscal year 2006 audit of the Securities and Exchange Commission's (SEC) financial statements, we identified numerous instances of inaccuracies in recorded acquisition costs and dates for furniture and equipment purchases, as well as unrecorded capitalization, unrecorded depreciation, and errors in amounts capitalized for internal use software projects. In our April 2007 report to SEC management concerning internal control weaknesses identified through our audit, we recommended that SEC include, in its updated property management policies, detailed procedures for recording proper acquisition costs and dates in its asset-tracking system, and take steps to ensure that these procedures are being consistently implemented. In response to our recommendation and in concurrence with a new overall system implementation, SEC developed a comprehensive set of written procedures during fiscal year 2008 detailing requirements for recording and accounting for property and equipment (a) process flows; (b) acquisition, use, and disposition of property and equipment, (including the acquisition costs and dates); and (c) capitalizing costs related to leasehold improvements, software for internal use, and the Momentum batch depreciation process. With full and effective implementation of these additional detailed procedures, SEC should significantly improve its management of and accountability for asset acquisitions.

    Recommendation: The SEC, as part of its planned corrective measures to improve property and equipment controls, should include, in its updated property management policies, detailed procedures for recording proper acquisition costs and dates in its asset-tracking system, and take steps to ensure that these procedures are being consistently implemented.

    Agency Affected: United States Securities and Exchange Commission

  6. Status: Closed - Implemented

    Comments: In our fiscal year 2006 audit of the Securities and Exchange Commission's (SEC) financial statements, we found that SEC did not always document a comparison of the quantity and type of item received against the corresponding purchase order(s) for furniture and equipment purchases. In our April 2007 report to SEC management concerning internal control weaknesses identified through our audit, we recommended that SEC include, in its updated property management policies, detailed procedures for documenting the comparison between the quantity and type of item received with the corresponding purchase order, and take actions to ensure that the comparisons are being consistently documented. In September 2008, in response to our recommendation and in concurrence with a new overall system implementation, SEC developed comprehensive written procedures to properly account for the acquisition, use, and disposition of property and equipment, including a procedure requiring documentation of the comparison between the quantity and type of item received with the corresponding purchase order. With the full and effective implementation of these procedures, SEC should significantly improve its internal control over its management of and accountability for asset acquisitions.

    Recommendation: The SEC should retain, in its updated property management policy, a procedure to document comparison of quantity and type of items received with the corresponding purchase order, and take actions to ensure that the comparisons are being consistently documented.

    Agency Affected: United States Securities and Exchange Commission

 

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