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SEC can't keep its own books in order, watchdog says

By Phillip Swarts

Thursday - 4/11/2013, 1:07pm  ET

Charged with trying to prevent the next Enron or Bernie Madoff scandal, the Securities and Exchange Commission hasn't kept close enough tabs on its own financial books.

In fact, a recent audit of its bookkeeping identified two "serious deficiencies," the accounting equivalent of a failing grade. Some areas of internal fiscal controls were so lacking, investigators said, that $42 million wasn't reported on SEC's ledgers, and $5 million worth of equipment was purchased but never used until a year later.

"These errors were not detected because SEC did not require routine, such as monthly reconciliation of its budget execution module and the related general ledger account balances," said a report by the Government Accountability Office, Congress' watchdog arm.

The SEC also has no definitive count of how much property it has, investigators said, since reviews of equipment are often incomplete.

Although no serious consequences have arisen yet, investigators noted that "until these deficiencies are corrected, SEC remains at risk of misstatements in its property and equipment reporting and possible theft or misuse of its assets."

The agency received no marks of "material weakness," the worst grade a GAO evaluation can give.  But it did get two ratings of "serious deficiencies," the next step down, for its poor reporting on some agency funds and equipment.

For an agency that monitors investment banks, markets and other financial institutions, being deficient in its own financial safeguards can seem hypocritical.  That's why the Securities and Exchange Commission wins this week's Golden Hammer, a weekly distinction awarded by the Washington Guardian to the worst examples of financial mismanagement.  

SEC officials acknowledged the problems and say they are making an effort to fix them.

"While we have made significant strides in the SEC's multi-year path towards a strong, sustainable internal control posture, the agency will continue to dedicate its energy towards remediating our remaining deficiencies," saidElisse Walter, who stepped down as SEC Chairwoman just this month.

Walter noted the agency is improving the process for deobligating funds, as well as adjusting the way it conducts physical inventories of its property and equipment.

Investigators found problems with the SEC's handling of "downward adjustment transactions," essentially returning money it received from Congress that it doesn't need.  The returned money can help officials get a better sense of the resources that are needed, and may affect the agency's funding the next fiscal year.

But the SEC has done a poor job of consistently tracking the "validity and accuracy" of such transactions, the GAO said, including having no paperwork to document some transactions.

It left money off the recordkeeping books, GAO said.  The agency's unobligated balance - funds that aren't earmarked for a specific project - was underreported by $42 million in June 2012.

Investigators said the SEC's recordkeeping was severely lacking, so much so that $5 million worth of equipment purchased in 2011 weren't used until a year later.

Bad recordkeeping makes it difficult for government officials to know exactly what they're dealing with, GAO investigators said, and the poor reporting can "affect the accuracy and completeness of information used and reported by SEC’s management."