United States Government Accountability Office GAO November 2008 Report to the Chairman, United States Securities and Exchange Commission_part4 docx

Management’s Discussion and Analysis
Page 30 GAO-09-173 SEC’s Financial Statements for Fiscal Years 2008 and 2007




2008 Performance and Accountability Report
22
Each offi ce head prepared an annual assurance state-
ment that identifi ed any control defi ciencies meriting the
attention of the Chairman. These statements were based
on information gathered from various sources, including,
among other things:
• Management’s personal knowledge gained from the
daily operation of the offi ce;
• Internal management reviews and self-assessments;
• GAO and Offi ce of Inspector General reports;
• Annual performance plans and reports;
• Audits of the agency’s fi nancial statements;
• Reports and other information from Congress or the
Offi ce of Management and Budget; and
• Additional reviews relating to the offi ce’s operations,
including those discussed in the Other Reviews
section below.
Each year, the agency’s FMOC evaluates the Section 2
and 4 submissions, recommendations from the Offi ce of the
Inspector General (OIG), and other supplemental sources of
information. Based on this review, the FMOC advises the
Chairman as to whether the SEC had any internal control or
system design defi ciencies serious enough to be reported as
a material weakness or non-conformance.

Other Reviews
Also during the year, the OIG and the Offi ce of Information
Technology (OIT) conducted a combined total of 21
additional reviews. The reviews covered 16 of the 33
assessable units (48 percent). Some components had
multiple reviews.
Further, OIT, in conjunction with system owners,
completed the certifi cation and accreditation of 21 major
systems in FY 2008. As a result, the SEC has now certi-
fi ed and accredited a total of 45 systems in accordance
with the appropriate guidance from OMB and National
Institute of Standards and Technology. OIT also com-
pleted contingency testing on the majority of the SEC’s
accredited systems in conjunction with several of its
disaster recovery exercises.
Finally, GAO audited the Commission’s financial
statements. GAO’s procedures included audits of the
FY 2008 financial statements, internal control over
financial reporting and compliance with selected
laws and regulations material to SEC’s financial state-
ments, and actions taken in response to prior GAO
audit recommendations.
Eliminating Material Weakness in Internal
Controls over Financial Reporting
Description of FY 2007 Material Weakness. GAO’s
audit of the SEC’s fi nancial statements for FY 2007
found a material weakness in internal controls over
fi nancial reporting, stemming from the combination of
four control defi ciencies. These four defi ciencies related
to the SEC’s period-end fi nancial reporting process,

disgorgements and penalties accounts receivable,
accounting for transaction fee revenue, and preparing
fi nancial statement disclosures.
The fi rst two defi ciencies, related to the period-end
fi nancial reporting process and the disgorgements and
penalties accounts receivable, were attributed to the same
underlying condition: lack of an integrated fi nancial
system forcing reliance on manual processes. With manual
processes, the risk of error is inherently greater. GAO
found that SEC processes for recording transaction fee
revenue and preparing fi nancial statement disclosures
were subject to error because the agency did not have
documented procedures.
Corrective Actions Taken. The SEC was successful in
eliminating in FY 2008 the material weakness in internal
controls over fi nancial reporting that was cited in the FY 2007
audit. Developing a fully integrated fi nancial management
system was the keystone of the SEC’s FY 2008 Corrective
Action Plan for remediation of the material weakness and
system non-conformance. The fi rst step toward full integra-
tion of the SEC’s fi nancial management systems was the
upgrade of the agency’s core fi nancial system, Momentum,
which was accomplished in FY 2008. The upgraded system
provides full integration of accounts payable; accounts
receivable, including disgorgements and penalties;
purchasing; and property, plant, and equipment (PP&E)
transactions with the general ledger. The system improve-
ments eliminated a signifi cant amount of manual data
handling of material fi nancial balances, resulting in enhanced
timeliness, accuracy, and reliability of fi nancial information,

and greater transparency in fi nancial processes.
To address the lack of documented procedures cited by
GAO as the cause for defi ciencies related to transaction
fee revenues and preparing fi nancial statement disclo-
sures, the SEC improved process documentation for
fi nancial reporting and period-end closes. The SEC’s fi rst
quarter 2008 fi nancial statements were the fi rst to be
prepared using the newly documented methodologies.
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