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SEC Official Testifies About Weaknesses in Agency's Internal Controls

Executive Director James McConnell responded to questions about the GAO's finding of material weaknesses in the SEC's internal controls in recent testimony before the Senate Subcommittee on Federal Financial Management. Mr. McConnell said the SEC believes it is critical to be forthright about the weaknesses and described plans to mitigate the problems as completely and quickly as possible. The SEC wants to be the gold standard of federal agencies, he said, and the believes the GAO's findings are a way to achieve that goal.

Subcommittee Chairman Tom Coburn said the GAO's audit results are "inexcusable" for the "financial watchdog" of corporate America and criticized the SEC's underestimate of tenant build-out costs for new facilities in Washington , New York and Boston . Rep. Frank Wolf, chairman of the House appropriations subcommittee with oversight of the SEC, has asked the GAO to review the actions that led to the inaccurate estimates. Mr. McConnell advised that several staff from these projects have been removed and the SEC is working to strengthen its budgetary formulation internal controls and oversight capabilities. He acknowledged that the budget shortfall, estimated at $48 million over the next three years, was a serious breakdown in operations.

Comptroller General David Walker noted that the GAO issued an unqualified, or clean opinion on the SEC's financial statements, while many other federal agencies failed to do so the first time out. When 24 major federal agencies began issuing audited financial statements in 1996, only six received unqualified opinions on their first audit and many still have not obtained unqualified opinions. The GAO issued an adverse opinion on the SEC's controls over the recording and reporting of disgorgements and penalties; its failure to have formalized processes or documentation on its procedures, systems analysis of accounts, and personnel in connection with the preparation of its financial statements and related disclosures, and weakness in internal controls over information security. Mr. Walker emphasized that the adverse opinion was as of the date of the opinion. The SEC has begun steps to address the matters identified by the GAO.

It is critically important that the SEC lead by example, Mr. Walker said, and the SEC has advised that it plans to do so. The changes will not be accomplished overnight, he added. Mr. McConnell testified that the material weaknesses identified by the GAO will be resolved in fiscal 2006. The SEC has developed a detailed inventory and timeline for correcting each of the weaknesses identified, he said, and contemplates a complete remediation by June 2006.

Mr. Walker also referred to the current period of transition while the SEC awaits a new chairman. The SEC chair has the authority to commit to the continuing progress, he said. Mr. Walker characterized the transition in leadership as the agency's biggest risk a the present time. The Senate Banking Committee yesterday voted to confirm Rep. Christopher Cox as chairman of the SEC and also confirmed nominees Roel Campos and Annette Nazareth. Their nominations will now be sent to the full Senate for confirmation.

The SEC is increasing its financial management staff, strengthening the documentation of its policies and procedures for statement preparation and continuing to look for ways to apply the best practices used by other financial agencies, according to Mr. McConnell. Sen. Coburn plans to submit additional questions to Mr. McConnell in writing, including a request for an explanation of $52.5 million in funds from the global research analyst settlement that went to the NASD Foundation. Sen. Coburn said this transfer raised legal questions and he expects solid explanations for the decision.