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Corporate Governance

: PomTalk

From the Pages of The Pomerantz Monitor: A Material Weakness in the SEC?s Own Financial-Reporting Controls

By Carolyn Moskowitz

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In the current issue of The Pomerantz Monitor, Leigh Handelman Smollar reports on continuing problems at the SEC. In its 2007 audit of the SEC, the Government Accountability Office (GAO) has identified a material weakness in the SEC's own financial-reporting controls, an embarrassment for the very agency charged with reviewing corporate books and policing fraud. The concern is one involving SEC computer integration problems, requiring manual processing. The SEC was criticized by the GAO in 2006 for the same manual processes, but narrowly avoided a material weakness by putting in place extra controls to compensate for them. The GAO said those controls were not effective in 2007.

SEC Chairman Christopher Cox made eliminating these weaknesses a high priority in fiscal 2006, but apparently, some of the problem is still lingering. The GAO added that the SEC's material weakness also included other control deficiencies related to the SEC's period-end closing process, accounting for transaction fee revenue and preparation of financial statement disclosures, although the GAO represented that the SEC's financial statements for fiscal 2007 and 2006 were fairly presented.

This is a major embarrassment for the SEC, considering that it is supposed to be policing the efforts of public companies to eliminate such flaws as these.

A couple of months after issuing this report, the GAO released another report criticizing the SEC, this time for frequently ignoring referrals of trading violations from this nation's stock and options exchanges. The GAO investigated the issue at the request of Iowa Senator Charles Grassley, who called the report "disturbing." Grassley said that the SEC's failure to set up technological systems to take advantage of the referrals generated by the exchanges was "like working with one hand tied behind your back."

Full post as published by PomTalk on February 25, 2008 (boomark / email).