Tuesday, May 31, 2005

The SEC's Internal Control Weakness

Bruce Carton on the Securities Litigation Watch blog discusses (here) the recently released General Accountability Office's first annual audit of the SEC, including its comment on the Commission's internal controls shortcomings.  The post quotes from a San Jose Mercury-News story noting the rather delicious irony of the SEC's internal control problems in the new world of Sarbanes-Oxley Act Section 404, which imposes stringent internal control certification requirements on corporate CEOs and CFOs.  The GAO report (here) summarizes the Commission's internal control weakness in this way:

The material weaknesses we have identified and discuss in this report relate to SEC’s internal control over (1) recording and reporting of disgorgements and penalties, (2) information security, and (3) preparing financial statements and the related disclosures. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of SEC’s fiscal year 2004 financial statements, and our opinion on internal control does not affect our opinion dated February 11, 2005, on these financial statements. The details surrounding these weaknesses are being reported separately to SEC management, along with recommendations for corrective actions. Less significant matters involving SEC’s system of internal controls and its operations will also be reported to SEC separately.

It seems like internal controls are not the Commission's only problems these days.  As detailed in an AP story (here), the SEC is facing a $50 million budget shortfall over the next two years due to cost overruns related to moves to new offices in New York, Boston, and Washington DC.  This has led to budget cuts, including the oft-cited cutback on "nonessential travel."  In my experience working for the government, the lower you were, the less essential your travel was viewed.  Moreover, if you've ever traveled on the government, you know that every trip is essential -- no one goes out of their way to enjoy the bounteous per diem and joy of trying to find a hotel room at a government rate in a large city during a peak travel period.  Have you ever tried getting a hotel room in Boston during spring graduation season? (ph)

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