Problems Found in SEC’s Own Financials

The Securities and Exchange Commission’s first-ever financial statements were approved by congressional auditors Thursday, although they noted some areas of weakness.

The Government Accountability Office said it found three “material weaknesses” in the SEC’s statements: in reporting fines and other payments from defendants, the security of the agency’s information technology and problems in the preparation of the financial statements themselves, the SEC said in a news release.

The agency previously disclosed problems with reporting fines and information technology security.

The SEC said it was “moving aggressively to address and resolve all three of the material weaknesses.” The agency said the problems with the preparation of its statements reflected that the fiscal 2004 financial report was the first produced under a new federal law.

The SEC was criticized this week by a Republican congressman after the agency said it must close a $48-million funding shortfall this year after misjudging security and construction costs at its new Washington headquarters and offices in New York and Boston.

The GAO audit covered the SEC’s financial reports and performance for fiscal 2004, which ended last Sept. 30.

“SEC did not maintain effective internal control over financial reporting,” including safeguarding of assets, the GAO report said. “Consequently, SEC’s internal control did not reduce to a relatively low level the risk that misstatements material to the financial statements may occur and not be detected on a timely basis.”

The audit, the first the GAO has done of the SEC’s books, was mandated by a 2002 federal law that required more than 200 federal agencies to submit audited financial statements to Congress and the White House. Previously, only the 24 biggest government agencies had been required to do so.

The law changed the way many agencies do their bookkeeping, requiring them to use more complex corporate-style accounting instead of government-style “budgetary accounting.”

The 2005 budget gap that the SEC disclosed this week was a blow to Chairman William H. Donaldson, who in March said he needed to run a “tight ship” after President George W. Bush gave the SEC $95 million less than it requested. The agency has a $913-million budget this fiscal year.

Rep. Frank R. Wolf (R-Va.), who heads the House subcommittee responsible for SEC appropriations, is seeking a GAO investigation into the shortfall.

“It is particularly unfortunate, to use a mild word, for the SEC, which is looking at other people’s books, to find out that they had this problem,” Wolf said in an interview.

The SEC blamed the gap on an “internal budgetary process control problem.”

On Wednesday, Peter Derby, a senior aide to Donaldson, said the agency wouldn’t seek additional money from Congress because of the budget shortfall. Instead, the SEC has told employees to limit travel, and will slow hiring and find other savings to prevent the shortfall from eating into enforcement and investor protection.

“We’re not cutting back enforcement. We’re not cutting back examinations,” Derby said. “We’re looking at every line item of the budget and trying to be very responsible.”