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United States Government Accountability Office:
GAO:
Report to the Chairman, United States Securities and Exchange
Commission:
November 2007:
Financial Audit:
Securities and Exchange Commission’s Financial Statements for Fiscal
Years 2007 and 2006:
GAO-08-167:
GAO Highlights:
Highlights of GAO-08-167, a report to the Chairman, United States
Securities and Exchange Commission.
Why GAO Did This Study:
Established in 1934 to enforce the securities laws and protect
investors, the Securities and Exchange Commission (SEC) plays an
important role in maintaining the integrity of the U.S. securities
markets.
Pursuant to the Accountability of Tax Dollars Act of 2002, SEC is
required to prepare and submit to Congress and the Office of Management
and Budget audited financial statements. GAO agreed, under its audit
authority, to perform the audit of SEC’s financial statements. GAO’s
audit was done to determine whether, in all material respects, (1)
SEC’s fiscal year 2007 financial statements were reliable and
(2) SEC’s management maintained effective internal control over
financial reporting and compliance with laws and regulations. GAO also
tested SEC’s compliance with certain laws and regulations.
What GAO Found:
In GAO’s opinion, SEC’s fiscal year 2007 and 2006 financial statements
were fairly presented in all material respects.
However, because of a material weakness in internal control over SEC’s
financial reporting process, in GAO’s opinion, SEC did not have effective
internal control over financial reporting as of September 30, 2007.
Recommendations for corrective action will be included in a separate report.
Although certain compliance controls should be improved, SEC did maintain
in all material respects effective internal control over compliance with
laws and regulations material in relation to the financial statements as of
September 30, 2007.
In addition, GAO did not find reportable instances of noncompliance with
the laws and regulations it tested.
In its 2006 report, GAO reported on weaknesses in the areas of SEC’s
(1) recording and reporting of disgorgements and penalties, (2)
information systems controls, and (3) property and equipment controls.
During fiscal year 2007, SEC improved its controls over the accuracy,
timeliness, and completeness of the disgorgement and penalty data and
used a much improved database for the initial recording and tracking of
these data.
However, the processing of these data for financial reporting purposes
is still done through a manual process that is prone to error.
GAO found that the internal controls that compensated for the manual
processing of the related accounts receivable balances in fiscal year
2006 were not effective in fiscal year 2007.
This issue is included in the material weakness in SEC’s financial reporting
process for fiscal year 2007. Other control deficiencies included in this
material weakness concern SEC’s period-end closing process, accounting
for transaction fee revenue, and preparation of financial statement
disclosures.
GAO also identified three significant deficiencies in internal control
during fiscal year 2007.
Although SEC has taken steps to strengthen its information security,
some of the weaknesses identified in GAO’s previous audit persisted and
GAO found new weaknesses during this year’s audit.
Therefore, GAO is reporting information security as a significant
deficiency as of September 30, 2007.
In addition, GAO continued to identify the same weaknesses in controls
over property and equipment and therefore considers this area a significant
deficiency as of September 30, 2007.
GAO also identified a new significant deficiency concerning SEC’s accounting
for budgetary transactions.
In commenting on a draft of this report, SEC’s Chairman emphasized
SEC’s commitment to enhance its controls in all operational areas and
to ensure reliability of financial reporting, soundness of operations,
and public confidence in SEC’s mission.
For a fuller understanding of GAO’s opinion on SEC’s financial
statements for fiscal years 2007 and 2006, readers should refer to the
complete audit report, available by clicking on [hyperlink,
http://www.GAO-08-167] which includes information on audit objectives,
scope and methodology. For more information, contact Jeanette Franzel,
202-512-9471, franzelj@gao.gov.
[End of section]
Contents:
Letter:
Opinion on Financial Statements:
Opinion on Internal Control:
Material Weakness:
Significant Deficiencies:
Compliance with Laws and Regulations:
Consistency of Other Information:
Objectives, Scope, and Methodology:
SEC Comments and Our Evaluation:
Appendix I: Management’s Discussion and Analysis:
Appendix II: Financial Statements:
Appendix III: Comments from the Securities and Exchange Commission:
Abbreviations:
FMFIA: Federal Managers’ Financial Integrity Act:
OMB: Office of Management and Budget:
SEC: United States Securities and Exchange Commission:
SRO: self-regulatory organizations:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
November 16, 2007:
The Honorable Christopher Cox:
Chairman:
U.S. Securities and Exchange Commission:
Dear Mr. Cox:
This report presents our opinion on whether the financial statements of
the Securities and Exchange Commission (SEC) for the fiscal years ended
September 30, 2007, and 2006 are presented fairly, in all material
respects, in conformity with U.S. generally accepted accounting
principles. This report also presents (1) our opinion on the
effectiveness of SEC’s internal control over financial reporting and
compliance as of September 30, 2007, and (2) the results of our
evaluation of SEC’s compliance with selected laws and regulations
during 2007.
The Accountability of Tax Dollars Act of 2002 requires that SEC prepare
and submit to Congress and the Office of Management and Budget (OMB)
audited financial statements. We decided, under our audit authority, to
audit SEC’s financial statements. We conducted this audit in accordance
with U.S. generally accepted government auditing standards and OMB
guidance.
We are sending copies of this report to the Chairman and Ranking
Minority Members of the Senate Committee on Banking, Housing, and Urban
Affairs; the Senate Committee on Homeland Security and Governmental
Affairs; the House Committee on Financial Services; and the House
Committee on Oversight and Government Reform. We are also sending
copies to the Secretary of the Treasury, the Director of the Office of
Management and Budget, and other interested parties. In addition, this
report will be available at no charge on our Web site at [hyperlink,
http://www.gao.gov].
This report was prepared under the direction of Jeanette M. Franzel,
Director, Financial Management and Assurance, who can be reached at
(202) 512-9471 or franzelj@gao.gov. If I can be of further assistance,
please call me at (202) 512-5500.
Sincerely yours,
Signed by:
David M. Walker:
Controller General of the United States:
[End of section]
To the Chairman of the United States Securities and Exchange Commission
In our audits of the United States Securities and Exchange Commission
(SEC) for fiscal years 2007 and 2006, we found:
* the financial statements as of and for the fiscal years ended
September 30, 2007, and 2006, including the accompanying notes, are
presented fairly, in all material respects, in conformity with U.S.
generally accepted accounting principles;
* SEC did not have effective internal control over financial reporting;
although certain compliance controls should be improved, SEC had
effective control over compliance with laws and regulations that could
have a direct and material effect on the financial statements as of
September 30, 2007; and;
* no reportable noncompliance with laws and regulations we tested.
The following sections discuss in more detail these conclusions as well
as our conclusions on Management’s Discussion and Analysis and other
supplementary information. They also present information on the
objectives, scope, and methodology of our audit and our discussion of
SEC management’s comments on a draft of this report.
Opinion on Financial Statements:
SEC’s financial statements, including the accompanying notes, present
fairly, in all material respects, in conformity with U.S. generally
accepted accounting principles, SEC’s assets, liabilities, net
position, net costs, changes in net position, budgetary resources, and
custodial activity as of, and for the fiscal years ended, September 30,
2007, and September 30, 2006. However, misstatements may nevertheless
occur in other financial information reported by SEC and may not be
prevented or detected because of the internal control deficiencies
described in this report.
As disclosed in footnote 1.C. to SEC’s financial statements, in fiscal
year 2007, SEC changed its method of accounting for user fees collected
in excess of current-year appropriations.
Opinion on Internal Control:
Because of the material weakness [Footnote 1] and significant
deficiencies [Footnote 2] in internal control discussed below, SEC did
not maintain effective internal control over financial reporting as of
September 30, 2007, and thus did not have reasonable assurance that
misstatements material in relation to the financial statements would be
prevented or detected on a timely basis. Although certain compliance
controls should be improved, SEC maintained, in all material respects,
effective internal control over compliance with laws and regulations as
of September 30, 2007, that provided reasonable assurance that
noncompliance with laws and regulations that could have a direct and
material effect on the financial statements would be prevented or
detected on a timely basis. Our opinion on internal control is based on
criteria established under 31 U.S.C. § 3512(c)(d), commonly referred to
as the Federal Managers’ Financial Integrity Act (FMFIA) and the Office
of Management and Budget (OMB) Circular No. A-123, Management
Accountability and Control.
During this year’s audit, we identified significant control
deficiencies in SEC’s financial reporting process, which taken
collectively, result in more than a remote likelihood that a material
misstatement of the financial statements will not be prevented or
detected. Therefore, we considered the combination of the following
control deficiencies to collectively constitute a material weakness in
SEC’s financial reporting process:
* period-end financial reporting process;
* disgorgements and penalties accounts receivable;
* accounting for transaction fee revenue, and;
* preparing financial statement disclosures.
In addition to the material weakness discussed above, we identified
three significant deficiencies in internal control, which although not
material weaknesses, represent significant deficiencies in the design
or operation of internal control. Although we are considering these
issues separately from the material weakness described above, they
nevertheless adversely affect SEC’s ability to meet financial reporting
and other internal control objectives. These deficiencies concern:
* information security controls;
* property and equipment, and;
* accounting for budgetary resources.
In our prior year audit, [Footnote 3] we reported on weaknesses we
identified in the areas of SEC’s (1) recording and reporting of
disgorgements and penalties, (2) information systems controls, and (3)
property and equipment controls. [Footnote 4] During fiscal year 2007,
SEC improved its controls over the accuracy, timeliness, and
completeness of the disgorgement and penalty data and used a much
improved database for the initial recording and tracking of these data.
However, the processing of these data for financial reporting purposes
is still done through a manual process that is prone to error. We found
that the internal controls that compensated for the manual processing
of the related accounts receivable balances in fiscal year 2006 were
not effective in fiscal year 2007. This issue is included in the
material weakness in SEC’s financial reporting process for fiscal year
2007.
SEC continues to make progress in resolving the information security
weaknesses. Previously identified weaknesses, though, still need to be
addressed, along with new weaknesses we found during this year’s audit.
Therefore, we consider information security to be a significant
deficiency as of September 30, 2007. In addition, we continued to
identify the same weaknesses in controls over property and equipment
during this year’s audit, and therefore, we considered this area to be
a significant deficiency as of September 30, 2007.
Although SEC had one material weakness and three significant control
deficiencies in internal control, SEC’s financial statements were
fairly stated in all material respects for fiscal years 2007 and 2006.
However, the weaknesses in internal control noted above may adversely
affect decisions by SEC management that is based, in whole or in part,
on information that is inaccurate because of this weakness. In
addition, unaudited financial information reported by SEC, including
performance information, may also contain misstatements resulting from
these weaknesses.
We will be reporting additional details concerning the material
weakness and the significant deficiencies separately to SEC management,
along with recommendations for corrective actions. We will also be
reporting less significant matters involving SEC’s system of internal
controls separately to SEC management.
Material Weakness:
Financial Reporting Process:
During this year’s audit, we found control deficiencies in SEC’s period-
end financial reporting process, in its calculation of accounts
receivable for disgorgements and penalties, in its accounting for
transaction fee revenue, and in preparing its financial statement
disclosures. We believe these control deficiencies, collectively,
constitute a material weakness.
Period-End Financial Reporting Process:
SEC’s financial management system does not conform to the systems
requirements of OMB Circular No. A-127, Financial Management Systems.
Specifically, Circular No. A-127 requires that financial management
systems be designed to provide for effective and efficient
interrelationships between software, hardware, personnel, procedures,
controls, and data contained within the systems. Circular No. A-127
further states that financial systems must have common data elements,
common transaction processing, consistent internal controls, and
efficient transaction entry, and that reports produced by the systems
shall provide financial data that can be traced directly to the general
ledger accounts.
SEC’s period-end financial reporting process for recording
transactions, maintaining account balances, and preparing financial
statements and disclosures are supported to varying degrees by a
collection of automated systems that are not integrated or compatible
with its general ledger system. These automated systems’ lack of
integration and compatibility require that extensive compensating
manual and labor-intensive accounting procedures, involving large
spreadsheets and numerous posting and routine correcting journal
entries, dominate SEC’s period-end financial reporting process. Some of
SEC’s subsidiary systems, such as that for property and equipment and
for disgorgements and penalties, do not share common data elements and
common transaction processing with the general ledger system.
Therefore, intermediary information processing steps, including
extensive use of spreadsheets, manipulation of data, and manual journal
entries, are needed to process the information in SEC’s general ledger.
This processing complicates review of the transactions and greatly
increases the risk that the transactions are not recorded completely,
properly, or consistently, ultimately affecting the reliability of the
data presented in the financial statements. Our identification this
year of errors in SEC’s calculation of disgorgement and penalty
accounts receivable, discussed below, illustrates this risk.
The risk to data reliability is further increased because basic
controls over electronic data, such as worksheet and password
protection, change history, and controls over data verification, such
as control totals and record counts, were not consistently used during
the data processing between the source systems and the general ledger.
In addition, currently, SEC’s general ledger has several unconventional
posting models and other limitations that prevent proper recording of
certain transactions. As a result, SEC’s year-end reporting process
requires extensive routine correcting journal entries to correct errors
created by incorrectly posted transactions in its general ledger. We
also noted that SEC’s documentation used to crosswalk individual
accounts to the financial statement line items contained an incorrect
routing to a line item on SEC’s Statement of Budgetary Resources for
SEC’s year-end financial statement preparation process, which caused a
material error in SEC’s draft financial statements. Also, SEC did not
have detailed written documentation of its methodologies and processes
for preparing financial statements and disclosures, increasing the risk
of inconsistent and improper reporting and the risk that disruptions
and error may arise when staff turnover occurs.
Disgorgements and Penalties Accounts Receivable:
As part of its enforcement responsibilities, SEC issues orders and
administers judgments ordering, among other things, disgorgements,
civil monetary penalties, and interest against violators of federal
securities laws. [Footnote 5] SEC recognizes a receivable when SEC is
designated in an order or a final judgment to collect the assessed
disgorgements, penalties, and interest. At September 30, 2007, the
gross amount of disgorgements and penalties accounts receivable was
$330 million, with a corresponding allowance of $266 million resulting
in a net receivable of $64 million.
In our reviews of the interim June 30, 2007, and year-end September 30,
2007, balances of accounts receivable for disgorgements and penalties,
we found errors in SEC’s spreadsheet formulas resulting in
overstatements of these receivable balances for both periods. These
errors consisted of incorrectly changed spreadsheet formulas that
affected the final calculated balances. SEC subsequently detected and
corrected the June 30 errors, but then made different spreadsheet
calculation errors in the year-end balances as of September 30, 2007,
which we detected as part of our audit. SEC made adjustments to correct
the errors, which were not material. However, SEC’s process for
calculating its accounts receivable for disgorgements and penalties
presents a high risk that significant errors could occur and not be
detected. The main cause of these errors is the breakdown this year in
the manual controls that were intended to compensate for the lack of an
integrated accounting system for disgorgements and penalties, as
discussed above. Specifically, although the journal entries posting the
amounts to the general ledger were reviewed, this review did not extend
to the preparation of the spreadsheet SEC used to document the accounts
receivable calculation at June 30 and September 30, 2007, and
therefore, was not sufficient to detect significant spreadsheet formula
errors.
Accounting for Transaction Fee Revenue:
As one of its sources of revenue, SEC collects securities transaction
fees paid by self-regulatory organizations (SRO) to SEC for stock
transactions. SRO transaction fees are payable to the SEC twice a year
–in March for the previous months September through December, and in
September for the previous months January through August. Since the
SROs are not required to report the actual volume of transactions until
10 business days after each month end, SEC estimates and records an
amount receivable for fees payable by the SROs to SEC for activity
during the month of September. At September 30, 2007, SEC estimated
this receivable amount at $100.6 million. Based on information SEC
received in mid-October concerning the actual volume of transactions,
the amount of claims receivable at September 30, 2007, should have been
$74.4 million.
In previous years, SEC made adjustments to reflect the
actual volume of transactions; however, SEC does not have written
procedures to help ensure that this adjustment is made as a routine
part of its year-end financial reporting process.
We proposed, and SEC
posted, the necessary audit adjustment to correct the amount of
transaction fee revenue for fiscal year 2007.
Statement on Auditing Standards No.1, Codification of Auditing
Standards and Procedures, which explains the accounting requirements
for subsequent events, requires that events or transactions that
existed at the date of the balance sheet and affect the estimates
inherent in the process of preparing financial statements should be
considered for adjustment to or disclosure in the financial statements
through the date that the financial statements are issued. In addition,
the concept of consistency in financial reporting provides that
accounting methods, including those for determining estimates, once
adopted, should be used consistently from period to period unless there
is good cause to change.
Preparing Financial Statement Disclosures:
In our review of SEC’s year-end draft financial statement disclosures,
we noted numerous errors including misstated amounts, improper break
out of line items, and amounts from fiscal year-end 2006 incorrectly
brought forward as beginning balances for fiscal year 2007. For
example, in its disclosure for Custodial Revenues and Liabilities, SEC
improperly excluded approximately $320 million in collections. In
another example, for its disclosure on Fund Balance with Treasury, SEC
misclassified approximately $90 million into incorrect line items.
Also, in its disclosure for Fiduciary Assets and Liabilities, SEC’s
beginning balances for Fund Balance with Treasury and for Liability for
Fiduciary Activity were each misstated by $8.9 million due to errors in
carrying forward ending balances from September 30, 2006. SEC revised
the financial statement disclosures to correct the errors that we
noted. We believe the cause of these and numerous other errors in the
disclosures is due mainly to the lack of a documented timeline and
process for completing the fiscal year 2007 financial statements and
disclosures, including review of the disclosures. In addition, the
cumbersome and complicated nature of SEC’s financial reporting process
discussed above did not allow SEC finance staff sufficient time to
carry out thorough and complete reviews of the disclosures in light of
the November 15 reporting deadline. [Footnote 6]
Significant Deficiencies:
We also identified three control deficiencies that adversely affect
SEC’s ability to meet its internal control objectives. These conditions
concern deficiencies in controls over (1) information security, (2)
property and equipment, and (3) accounting for budgetary resources,
which are summarized below.
Information Security:
SEC relies extensively on computerized information systems to process,
account for, and report on its financial activities and make payments.
To provide reasonable assurance that financial information and
financial assets are adequately safeguarded from inadvertent or
deliberate misuse, fraudulent use, improper disclosure, or destruction,
effective information security controls are essential. These controls
include security management, access controls, configuration management,
physical security, and contingency planning. Weaknesses in these
controls can impair the accuracy, completeness, and timeliness of
information used by management and increase the potential for
undetected material misstatements in the agency’s financial statements.
During fiscal year 2007, SEC made important progress in mitigating
certain control weaknesses that were previously reported as unresolved
at the time of our prior review. For example, SEC developed a
comprehensive program for monitoring access activities to its computer
network environment, tested and evaluated the effectiveness of controls
for the general ledger system, and documented authorizations for
software modifications. SEC also took corrective action to restrict
access to sensitive files on its servers, change default database
accounts that had known or weak passwords, and apply strong encryption
key management practices for managing secure connections.
Despite this progress, SEC has not consistently implemented certain key
information security controls to effectively safeguard the
confidentiality, integrity, and availability of its financial and
sensitive information and information systems. During this year’s
audit, we identified continuing and new information security weaknesses
that increase the risk that (1) computer resources (programs and data)
will not be adequately protected from unauthorized disclosure,
modification, and destruction; (2) access to facilities by unauthorized
individuals will not be adequately controlled; and (3) computer
resources will not be adequately protected and controlled to ensure the
continuity of data processing operations when unexpected interruptions
occur. For example, SEC had not yet mitigated weaknesses related to
malicious code attacks on SEC’s workstations, had not yet adequately
documented access privileges for a major application, and had not yet
implemented an effective intrusion detection system. New control
weaknesses in authorization, boundary protection, configuration
management, and audit and monitoring that we identified this year
include for example, the use of a single, shared user account for
posting journal vouchers in a financial application, inadequate
patching of enterprise databases, and inadequate auditing and
monitoring capabilities on its database servers. Lapses in physical
security enabled unauthorized network access from a publicly accessible
location within SEC Headquarters. In addition, SEC did not have
contingency plans for key desktops that support manual processes such
as the preparation of spreadsheets. These weaknesses existed, in part,
because SEC has not yet fully implemented its information security
program.
Collectively, these problems represent a significant deficiency in
SEC’s internal control over information systems and data. Specifically,
the continuing and newly identified weaknesses decreased assurances
regarding the reliability of the data processed by the systems and
increased the risk that unauthorized individuals could gain access to
critical hardware and software and intentionally or inadvertently
access, alter, or delete sensitive data or computer programs. Until SEC
consistently implements all key elements of its information security
program, the information that is processed, stored, and transmitted on
its systems will remain vulnerable, and management will not have
sufficient assurance that financial information and financial assets
are adequately safeguarded from inadvertent or deliberate misuse,
fraudulent use, improper disclosure, or destruction. We will be issuing
a separate report on issues we identified regarding information
security concerns at SEC.
Property and Equipment:
SEC’s property and equipment consists of general-purpose equipment used
by the agency; capital improvements made to buildings leased by SEC for
office space; and internal-use software development costs for projects
in development and production. SEC acquired approximately $27 million
dollars in property and equipment during fiscal year 2007.
Similar to our last year’s audit, during the course of testing fiscal
year 2007 additions, we noted numerous instances of inaccuracies in
recorded acquisition costs and dates for property and equipment
purchases, as well as unrecorded property and equipment purchases, and
errors in amounts capitalized and amortized for internal-use software
projects. In addition, errors were carried forward from the previous
year. These systemic errors did not materially affect the balances
reported for property and equipment or the corresponding
depreciation/amortization expense amounts in SEC’s financial statements
for fiscal year 2007; however, these conditions evidence a significant
deficiency in control over the recording of property and equipment that
affects the reliability of its recorded balances for property and
equipment. Specifically, SEC lacks a process that integrates controls
over capitalizing and recording property and equipment purchases. For
example, SEC does not have a formalized, documented process for
comparing quantity and type of item received against the corresponding
order for property purchases. In addition, SEC does not have sufficient
oversight of the recording of acquisition dates and values of the
capitalized property. Further, SEC’s lack of an integrated financial
management system for accounting for property and equipment, as
discussed above, requires compensating procedures, which were not
effective, to ensure that manual calculations, such as those for
depreciation and amortization, are accurate. Until it has a systemic
process that incorporates effective controls over receiving, recording,
capitalizing, and amortizing property and equipment purchases, SEC will
not have sufficient assurance over the accuracy and completeness of its
reported balances for property and equipment.
Accounting for Budgetary Resources:
For fiscal year 2007, SEC incurred $877 million in obligations, which
represents legal liabilities against funds available to SEC to pay for
goods and services ordered. At September 30, 2007, SEC reported that
the amount of budgetary resources obligated for undelivered orders was
$255 million, which reflects obligations for goods or services that had
not been delivered or received as of that date. In our testing of
undelivered order transactions for this year’s audit, we identified
several concerns over SEC’s accounting for obligations and undelivered
orders. Specifically, we found numerous instances in which SEC (1)
recorded obligations prior to having documentary evidence of a binding
agreement for the goods or services, (2) recorded invalid undelivered
order transactions due to an incorrect posting configuration in SEC’s
general ledger, and (3) made errors in recording new obligations and
deobligations due to the use of incorrect accounts and by posting
incorrect amounts in the general ledger.
The majority of exceptions related to these issues, amounting to
approximately $76 million, were corrected by SEC through adjusting
journal entries. While the remaining uncorrected amounts did not
materially affect the balances on the Statement of Budgetary Resources
at September 30, 2007, ineffective processes that caused these errors
constitute a significant deficiency in SEC’s internal control over
recording and reporting of obligations, and puts SEC at risk that the
amounts recorded in the general ledger and reported on SEC’s Statement
of Budgetary Resources are misstated. Specifically, SEC’s general
ledger is not configured to properly post related entries, thereby
resulting in the need to routinely correct entries. Extensive reviews
of the budgetary transactions, along with significant adjusting journal
entries, are needed to compensate for the system limitations. The
errors in recording new obligations and deobligations that we found in
our audit indicate a lack of effective review over those transactions.
Further, SEC does not have policies or internal controls to prevent
recording of obligations that are not valid. Recording obligations
prior to having documentary evidence of a binding agreement for the
goods and services is a violation of the recording statute, [Footnote
7] and may result in funds being reserved unnecessarily and therefore
made unavailable for other uses should the agreement not materialize.
In addition, early recording of obligations may result in charging
incorrect fiscal year funds for an agreement executed in a later fiscal
year.
Compliance with Laws and Regulations:
Our tests for compliance with selected provisions of laws and
regulations disclosed no instances of noncompliance that would be
reportable under U.S. generally accepted government auditing standards
or OMB audit guidance. However, the objective of our audit was not to
provide an opinion on overall compliance with laws and regulations.
Accordingly, we do not express such an opinion.
Consistency of Other Information:
SEC’s Management’s Discussion and Analysis and other accompanying
information contain a wide range of data, some of which are not
directly related to the financial statements. We do not express an
opinion on this information. However, we compared this information for
consistency with the financial statements and discussed the methods of
measurement and presentation with SEC officials. Based on this limited
work, we found no material inconsistencies with the financial
statements or nonconformance with OMB guidance. However, because of the
internal control weaknesses noted above, misstatements may occur in
related performance information.
Objectives, Scope, and Methodology:
SEC management is responsible for (1) preparing the financial
statements in conformity with U.S. generally accepted accounting
principles; (2) establishing, maintaining, and assessing internal
control to provide reasonable assurance that the broad control
objectives of FMFIA are met; and (3) complying with applicable laws and
regulations.
We are responsible for obtaining reasonable assurance about whether (1)
the financial statements are presented fairly, in all material
respects, in conformity with U.S. generally accepted accounting
principles; and (2) management maintained effective internal control,
the objectives of which are the following:
* Financial reporting: Transactions are properly recorded, processed,
and summarized to permit the timely and reliable preparation of
financial statements in conformity with U.S. generally accepted
accounting principles, and assets are safeguarded against loss from
unauthorized acquisition, use, or disposition.
* Compliance with applicable laws and regulations: Transactions are
executed in accordance with (1) laws governing the use of budgetary
authority, (2) other laws and regulations that could have a direct and
material effect on the financial statements, and (3) any other laws,
regulations, or governmentwide policies identified by OMB audit
guidance.
We are also responsible for (1) testing compliance with selected
provisions of laws and regulations that could have a direct and
material effect on the financial statements and for which OMB audit
guidance requires testing and (2) performing limited procedures with
respect to certain other information appearing in SEC’s Performance and
Accountability Report. In order to fulfill these responsibilities, we:
* examined, on a test basis, evidence supporting the amounts and
disclosures in the financial statements;
* assessed the accounting principles used and significant estimates
made by SEC management;
* evaluated the overall presentation of the financial statements;
* obtained an understanding of SEC and its operations, including its
internal control related to financial reporting (including safeguarding
of assets) and compliance with laws and regulations (including
execution of transactions in accordance with budget authority);
* obtained an understanding of the design of internal controls related
to the existence and completeness assertions relating to performance
measures as reported in Management’s Discussion and Analysis, and
determined whether the internal controls have been placed in operation;
* tested relevant internal controls over financial reporting and
compliance with applicable laws and regulations, and evaluated the
design and operating effectiveness of internal control;
* considered SEC’s process for evaluating and reporting on internal
control and financial management systems under the FMFIA; and
* tested compliance with selected provisions of the following laws and
their related regulations:
- the Securities Exchange Act of 1934, as amended;
- the Securities Act of 1933, as amended;
- the Antideficiency Act;
- laws governing the pay and allowance system for SEC employees;
- the Prompt Payment Act; and
- the Federal Employees’ Retirement System Act of 1986.
We did not evaluate all internal controls relevant to operating
objectives as broadly defined by the FMFIA, such as those controls
relevant to preparing statistical reports and ensuring efficient
operations. We limited our internal control testing to controls over
financial reporting and compliance. Because of inherent limitations in
internal control, misstatements due to error or fraud, losses, or
noncompliance may nevertheless occur and not be detected. We also
caution that projecting our evaluation to future periods is subject to
the risk that controls may become inadequate because of changes in
conditions or that the degree of compliance with controls may
deteriorate.
We did not test compliance with all laws and regulations applicable to
SEC. We limited our tests of compliance to those required by OMB audit
guidance and other laws and regulations that had a direct and material
effect on, or that we deemed applicable to, SEC’s financial statements
for the fiscal year ended September 30, 2007. We caution that
noncompliance may occur and not be detected by these tests and that
this testing may not be sufficient for other purposes.
We performed our work in accordance with U.S. generally accepted
government auditing standards and OMB audit guidance.
SEC’s management provided comments on a draft of this report. They are
discussed and evaluated below and are reprinted in appendix III.
SEC Comments and Our Evaluation:
In commenting on a draft of this report, SEC’s Chairman said he was
pleased to receive an unqualified opinion on SEC’s financial
statements.
The Chairman discussed SEC’s plans to remediate this
material weakness before the end of fiscal 2008, and to address each of
the findings and recommendations identified during the audit.
The
Chairman emphasized SEC’s commitment to enhance its controls in all
operational areas and to ensure reliability of financial reporting,
soundness of operations, and public confidence in SEC’s mission.
The complete text of SEC’s comments is reprinted in appendix III.
Signed by:
David M. Walker:
Comptroller General of the United States:
November 13, 2007:
[End of section]
Appendix I: Management’s Discussion and Analysis:
The Securities and Exchange Commission (SEC) administers the federal
laws governing the U.S. securities markets. As such, the SEC plays a
fundamental role in maintaining the integrity and vitality of America's
markets and protecting the interests of investors. The following
section provides high-lights of the agency's efforts during fiscal year
(FY) 2007. It contains information on the agency's mission and
strategic goals, notable achievements, performance results, financial
highlights, and management assurances.
The Securities and Exchange Commission aims to be the standard against
which federal agencies are measured. The SEC's vision is to strengthen
the integrity and soundness of U.S. securities markets for the benefit
of investors and other market participants, and to conduct its work in
a manner that is as sophisticated, flexible, and dynamic as the
securities markets it regulates.
The mission of the SEC is to protect investors; maintain fair, orderly,
and efficient markets; and facilitate capital formation.
* Integrity;
* Fairness;
* Teamwork;
* Accountability;
* Resourcefulness;
* Commitment to Excellence.
* Enforce compliance with federal securities laws:
The Commission seeks to detect problems in the securities markets,
prevent and deter violations of federal securities laws, and alert
investors to possible wrongdoing. When violations occur, the SEC aims
to take prompt action to halt the misconduct, sanction wrongdoers
effectively, and, where possible, return funds to harmed investors.
* Promote healthy capital markets through an effective and flexible
regulatory environment:
The savings and investments of every American are dependent upon
healthy capital markets. The Commission seeks to sustain an effective
and flexible regulatory environment that will facilitate innovation,
competition, and capital formation to ensure that our economy can
continue to grow and create jobs for our nation's future. Enhancing the
productivity of America is a key goal that the SEC works to achieve by
increasing investor confidence in the capital markets.
* Foster informed investment decision making:
An educated investing public ultimately provides the best defense
against fraud and costly mistakes. The Commission works to promote
informed investment decisions through two main approaches: reviewing
disclosures of companies and mutual funds to ensure that clear,
complete, and accurate information is available to investors; and
implementing a variety of investor education initiatives.
* Maximize the use of SEC resources:
The investing public and the securities markets are best served by an
efficient, well-managed, and proactive SEC. The Commission strives to
improve its organizational effectiveness by making sound investments in
human capital and new technologies, and by enhancing internal controls.
The SEC is an independent federal agency established pursuant to the
Securities Exchange Act of 1934. It is headed by a bipartisan five-
member Commission, comprised of the Chairman and four Commissioners,
who are appointed by the President and confirmed by the Senate (see
Appendix A: Commissioners). The Chairman serves as the chief executive
officer. The SEC is organized into four main divisions: Corporation
Finance, Enforcement, Investment Management, and Market Regulation. It
also has 18 functional offices. The Commission's headquarters are in
Washington, D.C., and it has 11 regional offices throughout the
country. In FY 2007, SEC received budget authority of $882 million. At
September 30, 2007, the SEC had utilized 3,470 Full-time Equivalents
(FTE), including 3,431 permanent and 39 temporary FTE.
Table 1.1: SEC Organization Chart:
Top Level:
* Chairman, Office of the Chairman;
* Commissioner;
* Commissioner;
* Commissioner;
* Commissioner.
Second Level:
* Corporation Finance;
* Administrative Law Judges;
* Enforcement;
* Risk Assessment;
* Investment Management;
* Economic Analysis;
* Market Regulation;
* Equal Employment Opportunity;
* Executive Director;
- Financial Management;
- Human Resources;
- Administrative Services;
* Information Technology;
* Investor Education and Advocacy;
* Inspector General;
* Compliance, Inspection and Examinations;
* International Affairs;
* General Counsel;
* Legislative and Intergovernmental Affairs;
* Chief Accountant;
* Secretary;
* Public Affairs.
Third Level (direct link to Enforcement and Compliance, Inspection and
Examinations:
* New York Regional Office;
* Boston Regional Office;
* Philadelphia Regional Office;
* Atlanta Regional Office;
* Miami Regional Office;
* Chicago Regional Office;
* Fort Worth Regional Office;
* Denver Regional Office;
* Salt Lake Regional Office;
* Los Angeles Regional Office;
* San Francisco Regional Office.
[End of table]
The following are highlights of the SEC's activities during fiscal year
2007:
Enforcing Compliance with Securities Law:
Increased Protection for Investors in Fledge Funds:
During the past year, the SEC created a hedge fund working group within
the Division of Enforcement. Working with other federal law enforcement
agencies and self-regulatory organizations, the group leads agency
efforts to combat hedge fund insider trading. In the most significant
insider trading case in 20 years, the SEC filed charges against 14
defendants in a scheme involving hedge funds that netted more than $15
million in illegal profits on thousands of trades, using information
stolen from UBS Securities LLC and Morgan Stanley.
Combating Senior Fraud:
In 2007 the SEC maintained its significant enforcement, examination,
and investor education initiatives designed to prevent and punish fraud
aimed at seniors. We partnered with other regulators and law
enforcement agencies in several significant enforcement actions and
examination sweeps, and we joined with the North American Securities
Administrators Association, the Financial Industry Regulatory
Authority, and consumer organizations including AARP to sponsor events
to educate senior investors across the U.S. Through this initiative,
the Commission is targeting fraudulent investment schemes and
aggressive sales tactics, including abusive "free lunch" sales
seminars, and working to arm older Americans with information they can
use to identify and avoid them. These efforts are targeted not only at
seniors but also their caregivers, as well as pre-retirement workers,
who are encouraged to plan for contingencies later in life.
Anti-Spam Initiative:
In March 2007, the SEC launched an initiative to combat spam-driven
stock market manipulations, which resulted in the trading suspension of
39 companies susceptible to spam stock promotions. This stepped-up SEC
effort to protect investors from potentially fraudulent e-mail
solicitations hyping small company stocks also brought several spam-
related enforcement actions. The agency's effort was credited for a
significant reduction in financial spam in a report by a major private-
sector Internet security firm, which stated that a 30 percent decrease
in stock market spam "was triggered by actions taken by the U.S.
Securities and Exchange Commission, which limited the profitability of
this type of spam." In addition, spam-related complaints to the SEC's
Online Complaint Center were cut in half.
Alerting Investors to Marketplace Impostors:
The SEC introduced a new Web site to alert investors worldwide about
unregistered entities engaged in solicitations of securities
transactions. Through the "Public Alert: Unregistered Soliciting
Entities" (PAUSE) program, the Commission publishes factual information
on our Web site about unregistered soliciting entities that have been
the subject of complaints forwarded by investors and others around the
globe, including foreign securities regulators. By immediately alerting
the public to information we receive in complaints, the SEC aims to
help retail investors discover the true nature of question-able
investment solicitations before they invest.
Internet Enforcement:
In 2007, the Commission and its Office of Internet Enforcement
concentrated significant efforts to combat the growing threats of
identity theft and account intrusions. One case resulted in the capture
of $3 million in a Latvian bank account—one of the largest asset
freezes in agency history. Another landmark case, brought in
conjunction with the Omaha U.S. Attorney's Office, marked the first
joint criminal and civil prosecution of an account intrusion.
Micro-Cap Fraud:
In 2007, in addition to bringing several important cases in the area,
the Commission announced the creation of a new group within the
Division of Enforcement to lead the SEC's efforts against micro-cap
fraud. The Commission created the unit in response to the growing
threat of fraud involving small issuers whose securities are not traded
on registered exchanges. The new group will primarily focus on market
manipulation and offering frauds, as well as other market violations.
It also will act as an expert within the SEC and a liaison with
domestic and foreign authorities regarding micro-cap fraud issues.
Improving Disclosure for Investors:
Interactive Data:
In 2007, the SEC created the Office of Interactive Disclosure to lead
the agency's global efforts to transform the nature of financial
reporting by public companies. Nearly 100 countries are involved in the
development of eXtensible Business Reporting Language, or XBRL. The use
of XBRL can make the information in financial reports completely
interactive, so that investors, analysts, journalists, and preparers of
financial statements can use the information in ways never before
possible. If public companies in many nations file financial reports
using interactive data, users of those statements would be able to make
immediate comparisons of a wide range of industry peers. The new Office
is working with key public and private sector stakeholders in the
United States and around the world to advance the use of interactive
data in financial reporting. It is also working with the SEC's Office
of Information Technology to transform the agency's financial reporting
database, EDGAR, into an interactive data platform.
Over the last few years, the SEC has encouraged public companies to
file their financial reports with the agency using interactive data as
part of a voluntary pilot program. During the year, the SEC's
interactive data initiative continued to grow, with the market
capitalization of companies participating in the program topping $2
trillion. In 2007, NYSE Euronext became the first stock exchange to
submit financial reporting information in the U.S. using interactive
data.
The Commission also adopted rules permitting mutual funds to submit
risk/return summary information from their prospectuses using
interactive data under the voluntary program. In the near future,
investors will find it far easier to access information about a
participating fund's investment objectives and strategies, risks,
costs, and historical performance via the agency's Web site.
During 2007, the Commission also announced the completion of all work
on developing interactive data tags for the entire system of U.S.
generally accepted accounting principles (GAAP).
Protecting Investors in Municipal Securities:
The Commission is redoubling its efforts to improve disclosure and
accounting practices in this sizable market affecting millions of
individual investors. The Commission entered an order sanctioning the
City of San Diego for committing securities fraud by failing to
disclose billions of dollars in pension and retiree health care
obligations in its sale of its municipal bonds. The agency delivered a
white paper to Congress outlining our recent enforcement actions and
highlighting areas of possible legislative reform, in light of the
growing size and importance of the municipal securities market and the
significant ways in which it has changed over time. The white paper
proposed, among other things, that offering documents and periodic
reports provided to investors contain information similar to what is
required for all other securities offerings, that information on
municipal securities be made available on a more timely basis, and that
municipal issuers be required to use generally accepted governmental
accounting standards.
Understandable Disclosure of Executive Compensation:
The Commission's new rules governing executive compensation disclosure
took effect in fiscal 2007. These rules have significantly improved the
quality and clarity of public company information about how, and how
much, top executives are paid. To gauge the effectiveness of the new
disclosures, the Commission conducted an across-the-board review of the
first year's experience under the new rules. The review determined that
investors are in fact receiving more comprehensive information on
executive compensation under the new rules than has been available in
the past—and that for the first time, investors can quickly see each
executive's total compensation from all sources, and compare these
figures from company to company.
Reducing Complexity in Financial Reporting:
The SEC created an advisory committee to examine the causes of, and
remedies for, excessive complexity in the U.S. financial reporting
system. The committee will provide recommendations about how to improve
the usefulness of financial information to investors, reduce
unnecessary complexity for U.S. companies, and better utilize advances
in technology to enhance all aspects of financial reporting.
Promoting an Effective and Flexible Regulatory Environment:
Rationalizing Implementation of the Sarbanes-Oxley Act:
The SEC voted to repeal the Public Company Accounting Oversight Board's
(PCAOB) audit standard under Section 404 of the Sarbanes-Oxley Act, and
to replace it with a new standard that is risk-based, materiality
focused, top-down, and scalable to company size and complexity. As a
result, investors will benefit from reduced compliance costs and more
focused audits of internal controls The Commission also voted to
approve new interpretive guidance to help public companies strengthen
their internal controls over financial reporting while reducing
unnecessary costs, particularly at smaller companies. In writing this
guidance, the Commission worked closely with the PCAOB to align the
interpretive guidance and the new audit standard. Together, the new
interpretive guidance and the new audit standard will help focus
discussions between managers and auditors on what matters most to
investors—the risk that material misstatements in the company's
financials will not be prevented or detected in a timely manner.
Improving Competition in Securities Brokerage:
The SEC and the Board of Governors of the Federal Reserve System
announced the adoption of final joint rules to define when banks have
to register as securities broker-dealers under the Gramm-Leach-Bliley
Act. The rules will foster greater competition in the financial
services industry to the benefit of investors.
Establishment of FINRA:
The Commission approved the creation of the Financial Industry
Regulatory Authority (FINRA), which is now responsible for regulatory
oversight of all securities firms that do business with the public. The
new entity replaces the National Association of Securities Dealers and
the New York Stock Exchange's member regulation operations. The
creation of FINRA will enable the establishment of a single set of
rules that can operate across markets, eliminating regulatory "seams"
that often made enforcement difficult.
Protecting Investors in Expanding Markets:
Global Affiliation of Exchanges:
The Commission approved the consolidation of the businesses of NYSE
Group, Inc., the publicly-traded company that owns the New York Stock
Exchange and NYSE Area, and Euronext N.V., a company organized under
the laws of the Netherlands and owner of five European exchanges. NYSE
Group and Euronext are now wholly-owned subsidiaries of a new publicly-
traded holding company, NYSE Euronext. The combination was conditioned
on a number of important regulatory improvements for the benefit of
investors.
International Regulatory Cooperation:
The Commission entered into an information-sharing arrangement with the
College of Euronext Regulators (comprised of the five European
authorities overseeing the Euronext markets). The agreement provides a
framework for coordination and consultation in connection with the
oversight of NYSE Euronext and its markets.
The SEC also increased efforts to formalize regulatory information-
sharing arrangements with other international counterparts. These allow
confidential sharing of issuer-specific information, with the ultimate
goal of encouraging high-quality and consistent application of
accounting standards. Additionally, the SEC finalized cooperative
arrangements related to the supervision and oversight of markets and
market participants, and handled over 800 requests related to
enforcement investigations and cases.
International Financial Reporting Standards:
The Commission announced a series of actions in connection with its
consideration of the effect of international financial reporting
standards on U.S. markets, including a proposal to accept financial
statements from foreign private issuers prepared in accordance with
International Financial Reporting Standards (IFRS) as published by the
International Accounting Standards Board (IASB) without requiring
reconciliation to GAAP.
The Commission also issued a concept release seeking comment on whether
U.S. issuers should have the option of preparing financial statements
in accordance with IFRS. Under the SEC's current rules, U.S. issuers
are required to prepare financial statements in accordance with GAAP.
Nearly 100 countries require or allow the use of IFRS.
Foreign Private Issuer Exchange Act Deregistration:
In March 2007, the Commission approved changes to rules for foreign
private issuer deregistration eliminating conditions that had been
considered a barrier to entry. The rules provide foreign private
issuers with greater flexibility in accessing and exiting U.S. capital
markets, encouraging participation in U.S. markets and providing
increased investor choice.
This fiscal year, the Commission worked diligently to meet or exceed
performance targets. Of the 24 performance measures the Commission is
reporting on in FY 2007, the SEC met or exceeded 21 of 28 planned
performance levels. The agency also is reporting four indicators which
provide further context for understanding the agency's activities. The
indicators are not included in the following table, because it is
inappropriate for the agency to conduct these activities with an eye
towards hitting predetermined targets.
A summary of the SEC's performance levels for FYs 2006 and 2007,
organized by goal, is presented in Table 1.2. A discussion of the
agency's program achievements and specific performance results is
located in Section 2: Performance Section.
Table 1.2, Performance Results Summary:
Key: Level Of Performance Attained:
Goal 1: Enforce Compliance With The Federal Securities Laws:
1. Distribution of cases across core enforcement areas:
FY06: Performance Level Met;
FY07: Performance Level Met.
2. Enforcement cases successfully resolved:
FY06: Performance Level Exceeded;
FY07: Performance Level Exceeded.
3. Percentage of first enforcement cases filed within two years:
FY06: Performance Level Not Met;
FY07: Performance Level Not Met.
4. Number of requests to and by foreign regulators for enforcement
assistance:
FY06: Performance Level Exceeded;
FY07: Performance Level Exceeded.
5. Investment advisers and investment companies examined;
a. Investment advisers:
FY06: Performance Level Not Met;
FY07: Performance Level Met.
b. Investment companies:
FY06: Performance Level Not Met;
FY07: Performance Level Not Met.
Goal 2: Promote Healthy Capital Markets Through An Effective And
Flexible Regulatory Environment:
1. Percentage of responses to exemptive, no-action letter, and
interpretive requests issued within six months;
FY06: Performance Level Exceeded;
FY07: Performance Level Exceeded.
2. Percentage of U.S. households owning mutual funds:
FY06: Performance Level Exceeded;
FY07: Performance Level Met.
3. Mutual fund share of total retirement assets;
FY06: Performance Level Exceeded;
FY07: Performance Level Exceeded.
4. Equity portfolio holdings of U.S. investment companies as a
percentage of total U.S. stock market capitalization;
FY06: Performance Level Exceeded;
FY07: Performance Level Exceeded.
5. Percentage of SRO rule filings closed in less than 60 days;
FY06: Performance Level Exceeded;
FY07: Performance Level Exceeded.
6. Global access to U.S. markets:
a. Number of new foreign private issuers registering;
FY06: Performance Level Exceeded;
FY07: Performance Level Exceeded.
b. Dollar amount of securities registered by foreign private issuers;
FY06: Performance Level Not Met;
FY07: Performance Level Not Met.
7. Milestones for international regulatory cooperation:
FY06: Performance Level Met;
FY07: Performance Level Met.
Goal 3: Foster Informed Investment Decision Making:
1. Number and percentage of investor complaints, questions, and
requests completed by the Office of Investor Education and Advocacy
(OIEA) within seven calendar days;
FY06: Performance Level Not Met;
FY07: Performance Level Met.
2. OIEA publications distributed by the General Services Administration
(GSA):
FY06: [Empty];
FY07: Performance Level Exceeded.
3. Annual number of on-line searches for EDGAR filings;
FY06: Performance Level Exceeded;
FY07: Performance Level Exceeded.
4. Percentage of reporting corporations and investment companies with
disclosures reviewed by the SEC:
a. Corporations:
FY06: Performance Level Not Met;
FY07: Performance Level Exceeded.
b. Investment companies;
FY06: Performance Level Exceeded;
FY07: Performance Level Exceeded.
5. Percentage of investment adviser and investment company
transactional reviews completed within timeliness goals;
FY06: Performance Level Exceeded;
FY07: Performance Level Exceeded.
6. Average time to issue initial comments on Securities Act filings;
FY06: Performance Level Met;
FY07: Performance Level Met.
7. Percentage of forms and submissions filed electronically and In a
structured format;
FY06: Performance Level Met;
FY07: [Empty].
Goal 4: Maximize The Use Of Sec Resources:
1. Percentage of IT projects that adhere to the agency's capital
planning investment control process;
FY06: Performance Level Not Met;
FY07: Performance Level Exceeded.
2. Milestones for major IT projects;
FY06: Performance Level Met;
FY07: Performance Level Met.
3. Receive an unqualified audit opinion on the SEC's audited financial
statements with no material weaknesses noted in internal controls over
financial reporting ICFR:
a. Audit opinion;
FY06: Performance Level Met;
FY07: Performance Level Met.
b. Material weaknesses;
FY06: Performance Level Met;
FY07: Performance Level Not Met.
4. Staff turnover rate:
FY06: Performance Level Not Met;
FY07: Performance Level Not Met.
5. Milestones achieved on major human capital initiatives:
FY06: Performance Level Met;
FY07: Performance Level Not Met.
[End of table]
The principal financial statements included in Section 3: Financial
Section have been prepared to report the financial position and results
of operations of the SEC, pursuant to the requirements of 31 U.S.C.
3515 (b). While the statements have been prepared from the books and
records of the SEC in accordance with GAAP for Federal entities and the
formats prescribed by the Office of Management and Budget (OMB), the
statements are in addition to the financial reports used to monitor and
control budgetary resources which are prepared from the same books and
records.
The statements should be read with the realization that they are for a
component of the U.S. Government, a sovereign entity.
The Improper Payments Information Act (IPIA) of 2002 requires federal
agencies to review all programs and activities, identify those that are
susceptible to significant erroneous payments, determine an annual
estimated amount of erroneous payments made in those programs, and
report the actions it is taking to reduce erroneous payments. In FY
2007, the SEC identified and reviewed two programs that had a potential
high risk for improper payments. For IPIA reporting purposes,
significant erroneous payments are defined as annual payments exceeding
both 2.5 percent of program payments and $10 million. SEC projections
are well below both thresholds. IPIA reporting details are provided in
Section 4: Other Accompanying Information.
Overview:
The SEC's financial statements were prepared in conformity with U.S.
GAAP and OMB Circular A-136, Financial Reporting Requirements. The
financial statements, footnotes, and auditor's opinion appear in
Section 3 of this Performance and Accountability Report. A summary of
the SEC's major financial activities in FY 2007 and FY 2006 is
presented below.
Balance Sheet and Net Position:
Presented below is a condensed Balance Sheet for comparison and
analysis.
Table 1.3: Condensed Balance Sheet, as of September 30, 2007 and
September 30, 2006, (in Thousands):
Fund Balance with Treasury:
FY 2007: $5,888,039;
FY 2006: $5,178,893;
$ Change: $709,146;
% Change: 14.
Investments:
FY 2007: 3,602,511;
FY 2006: 3,674,528;
$ Change: (72,017);
% Change: -2.
Accounts Receivable—Federal Agencies:
FY 2007: 155;
FY 2006: 154,506;
$ Change: (154,351);
% Change: -100.
Accounts Receivable—Public:
FY 2007: 138,693;
FY 2006: 177,491;
$ Change: (38,798);
% Change: -22.
Advances and Prepayments:
FY 2007: 2,100;
FY 2006: 974;
$ Change: 1,126;
% Change: 116.
Property, Plant and Equipment:
FY 2007: 98,280;
FY 2006: 103,631;
$ Change: (5,351);
% Change: -5.
Total Assets:
FY 2007: 9,729,778;
FY 2006: 9,290,023;
$ Change: 439,755;
% Change: 5.
Accounts Payable:
FY 2007: 49,249;
FY 2006: 62,135;
$ Change: (12,886);
% Change: -21.
Accrued Payroll, Benefits & Leave:
FY 2007: 62,360;
FY 2006: 59,615;
$ Change: 2,745;
% Change: 5.
Registrants' Deposit Accounts:
FY 2007: 61,689;
FY 2006: 57,464;
$ Change: 4,225;
% Change: 7.
Fiduciary Liability:
FY 2007: 3,615,760;
FY 2006: 3,834,662;
$ Change: (218,902);
% Change: -6.
Custodial Liability:
FY 2007: 63,614;
FY 2006: 71,545;
$ Change: (7,931);
% Change: -11.
Capital Lease Liability:
FY 2007: 16,865;
FY 2006: 27,641;
$ Change: (10,776);
% Change: -39.
Other Accrued Liabilities:
FY 2007: 6,473;
FY 2006: 14,839;
$ Change: (8,366);
% Change: -56.
Total Liabilities:
FY 2007: 3,876,010;
FY 2006: 4,127,901;
$ Change: (251,891);
% Change: -6.
Unexpended Appropriations:
FY 2007: [Empty];
FY 2006: 9,201;
$ Change: (9,201);
% Change: -100.
Cumulative Results of Operations:
FY 2007: 5,853,768;
FY 2006: 5,152,921;
$ Change: 700,847;
% Change: 14.
Total Net Position:
FY 2007: 5,853,768;
FY 2006: 5,162,122;
$ Change: 691,646;
% Change: 13.
Total Liabilities and Net Position:
FY 2007: $9,729,778;
FY 2006: $9,290,023;
$ Change: $439,755;
% Change: 5.
[End of table]
Assets:
Fund Balance with Treasury:
In FY 2007, Fund Balance with Treasury increased to 60.5 percent of
total assets from 55.7 percent of total assets in FY 2006. The increase
in funds held by the SEC is attributed to collections in excess of the
current year's appropriated funding. The revenues collected include
securities transaction fees, securities registration fees and other
fees as described below under "Net Cost of Operations."
Investments:
The SEC's Investments balance consists entirely of disgorgement and
penalties collected from securities law violators plus related interest
earned. These funds are held by the SEC pending future distribution to
harmed investors. The SEC invests these funds in overnight and short-
term market-based Treasury bills issued through the Treasury
Department's Bureau of Public Debt. Investments held by the SEC have
increased dramatically since FY 2005. This increase is the result of
provisions in the Sarbanes-Oxley Act of 2002 which allowed for the
distribution of penalties to harmed investors augmented by certain
unusually large disgorgement collections in FY 2006. The investment
balance is expected to decrease as fund distributions accelerate. In FY
2007, new collections transferred to investments of $314.5 million were
offset by distributions to harmed investors of $580.5 million.
Accounts Receivable:
At September 30, 2007 and 2006, the SEC's Accounts Receivable from the
public is $404.7 million and $353.6 million, respectively, offset by an
estimated allowance for doubtful accounts of $266.0 million and $176.1
million, respectively. The $38.8 million decrease in net Accounts
Receivables from the public is related to a decrease in receivables
established from enforcement-related actions and a decrease in
securities-related receivables as a result of the reduction in fee
rates in FY 2007.
The $154.3 million decrease in Federal Receivables is due to a
receivable at the end of 2006 relating to an order to transfer funds
from a Federal court late in September 2006.
Liabilities:
The SEC's liabilities consist of routine operating accounts payable,
accrued payroll and benefits, registrant deposit accounts, and
fiduciary and custodial liabilities associated with disgorgement and
penalties assessed against securities law violators.
Custodial Liability:
The Custodial Liability relates to disgorgement and penalty receivables
assessed against securities law violators. The SEC records a custodial
liability for the net amount of such receivables, after taking into
account the estimated allowance for doubtful accounts. Upon collection,
these amounts will either be transferred to the fiduciary accounts or
transferred to the General Fund of the Treasury. The net decrease is
due to a lower volume of high penalty financial fraud cases in FY 2007.
Fiduciary Liability:
The SEC's largest liability is the Fiduciary Liability. This liability
reflects amounts collected by the SEC in enforcement proceedings that
are held for future distribution to harmed investors. When collected,
these receipts are held as fiduciary assets in Fund Balance with
Treasury or Investments, pending distribution to investors, and this
equal and offsetting liability is reported on the Balance Sheet. The
net decrease of $218.9 million in Fiduciary Liability is due to efforts
by the SEC to accelerate the process of distributing funds to harmed
investors.
Net Position:
The increase in Net Position of $691.6 million in FY 2007 is the result
of collections of securities transaction, registration and other fees
in excess of program costs for current year operations.
Net Cost of Operations:
The Statement of Net Cost of Operations represents the gross cost
incurred by the SEC less exchange revenue earned
Table 1.4: Condensed Statement of Net Cost, For the years ended
September 30, 2007 and September 30, 2006 (In Thousands):
Enforce compliance with federal securities laws:
FY 2007: $529,454;
FY 2006: $579,076;
$ CHANGE: $(49,622);
% CHANGE: -9.
Promote healthy capital markets through an effective and flexible
regulatory environment:
FY 2007: 79,704;
FY 2006: 77,263;
$ CHANGE: 2,441;
% CHANGE: 3.
Foster informed investment decision making:
FY 2007: 135,917;
FY 2006: 135,856;
$ CHANGE: 61;
% CHANGE: 0.
Maximize the use of SEC resources:
FY 2007: 97,466;
FY 2006: 96,728;
$ CHANGE: 738;
% CHANGE: 1.
Total Gross Program Cost:
FY 2007: 842,541;
FY 2006: 888,923;
$ CHANGE: (46,382);
% CHANGE: -5.
Less: Earned Revenue Not Attributed to Programs:
FY 2007: 1,507,750;
FY 2006: 1,882,619;
$ CHANGE: (374,869);
% CHANGE: -20.
Net (Income) from Operations:
FY 2007: $(665,209);
FY 2006: $(993,696);
$ CHANGE: $328,487;
% CHANGE: -33.
[End of table]
For FY 2007 and 2006, the SEC's net income from operations totaled
$665.2 million and $993.7 million, respectively.
The SEC's Earned Revenue Not Attributed to Programs consists of
revenues from fees paid pursuant to the Securities Act of 1933 and the
Securities Exchange Act of 1934. These fees consist of securities
transaction fees paid by securities exchanges, and securities
registration, tender offer, merger, and other fees paid by issuers. The
fees are used to fund SEC programs and operations up to the limits
established through the annual appropriation process. The SEC reports
this revenue as "not attributed to programs" since the fees are
generated by the operations of the SEC as a whole, rather than the
efforts of one program or operating activity.
Exchange revenue decreased by $374.9 million due to a decrease in the
exchange fee rates in 2007. The rates changed as follows: (i) proxy
solicitations and statements in corporate control transactions fees
decreased to $30.70 per million from $107.00 per million; (ii)
securities transaction fees on the exchange and in the over-the-counter
markets decreased to $15.30 per million from $30.70 per million; and
(iii) the assessment or security futures transactions decreased to
$0.0042 for each round turn transaction from the rate of $0.009 for
each such transaction.
The 5 percent decrease in program costs reflects the fact that the SEC
and most other government agencies operated on a continuing resolution
appropriation in FY 2007. In addition, FY 2006 included certain non-
recurring costs related to the occupancy of new operating locations in
Washington D.C. and New York.
Budgetary Resources and Outlays:
The Statement of Budgetary Resources provides information on the
budgetary resources that were made available to the SEC during the
fiscal year and the status of those resources at the end of the fiscal
year. The SEC receives its funding from fee revenue earned, which must
be appropriated by Congress before it can be used by the Commission.
Table 1.5: Selected Budgetary Resources, for the years ended September
30 2007 and September 30, 2006 (In Thousands):
Budgetary Resources:
FY 2007: $966,607;
FY 2006: $5,775,491;
$ Change: $(4,808,884);
% Change: -83.
Collections:
FY 2007: 1,538,749;
FY 2006: 1,903,648;
$ Change: (364,899);
% Change: -19.
Non-Reimbursable Obligations:
FY 2007: 876,274;
FY 2006: 896,911;
$ Change: (20,637);
% Change: -2.
Net Outlays/(Collections):
FY 2007: 710,848;
FY 2006: 981,734;
$ Change: (270,886);
% Change: -28.
[End of table]
Budgetary Resources consist of the resources available to the SEC at
the beginning of the year, plus the appropriations, spending authority
from offsetting collections, and other budgetary resources received
during the year. Total resources decreased by $4.8 billion in FY 2007.
This decrease is primarily due to a change in accounting principle
related to prior year collections in excess of budgetary authority. As
a result of this change, the financial statement fine, Unobligated
Balance, Brought Forward, October 1, decreased to $186.7 million from
the reported $4,878 million FY 2006 ending balances of unobligated
funds. The prior year collections previously reported in this line
continue to be reported on the Balance Sheet in Fund Balance with
Treasury and Cumulative Results of Operations. However, these amounts
are no longer reported as budgetary resources of the SEC. See Note 1.0
Change in Accounting Principle in the Financial Section for additional
discussion of this accounting change. The reduction in collections of
$364.9 million is a direct result of the reduction in rates, as
referred to in the Net Cost of Operations.
Obligations and Outlays:
The decrease of $20.6 million in non-reimbursable obligations for FY
2007 reflects the fact that the SEC and most other government agencies
operated on a continuing resolution appropriation in FY 2007.
Net Outlays reflect disbursements net of offsetting collections and
distributed offsetting receipts. The decrease in Net Collections was
primarily due to the FY 2007 reduction in exchange fee rates as
mentioned above.
Custodial Activity:
The Statement of Custodial Activity reports the collections by the SEC
of disgorgement and penalty amounts from securities laws violators.
These collections constitute non-exchange revenue, as they arise from
the SEC's authority to demand payment from violators of the law.
Table 1.6: Condensed Statement of Custodial Activity, for the years
ended September 30. 2007 and September 30, 2006 (In Thousands):
Sources of Collections: Disgorgement & Penalties:
FY 2007: $496,386;
FY 2006: $1,804,043;
$ Change: $(1,307,657);
% Change: -72.
Sources of Collections: Other:
FY 2007: 138;
FY 2006: 90;
$ Change: 48;
% Change: 53.
Accrual Adjustment:
FY 2007: (7,931);
FY 2006: (23,967);
$ Change: 16,036;
% Change: 67.
Total Custodial Revenue:
FY 2007: 488,593;
FY 2006: 1,780,166;
$ Change: (1,291,573);
% Change: -73.
Disbursed to: Department of Treasury:
FY 2007: 176,761;
FY 2006: 122,030;
$ Change: 54,731;
% Change: 45.
Disbursed to: Other:
FY 2007: 319,763;
FY 2006: 1,682,103;
$ Change: (1,362,340);
% Change: -81.
Change in Liability Accounts:
FY 2007: (7,931);
FY 2006: (23,967);
$ Change: 16,036;
% Change: 67.
Total Disposition of Collections:
FY 2007: $488,593;
FY 2006: $1,780,166;
$ Change: $(1,291,573);
% Change: -73.
[End of table]
Collections:
The variance in collection activity is due to a reduction in fair funds
collections of $1,307.6 million for 2007, due to a lower volume of
financial fraud cases with large settlements, In FY 2006, the SEC won
fines and penalties in several large cases. These collections are
expected to be distributed to harmed investors in subsequent years.
Distributions:
FY 2007 distributions included $176.8 million transferred to the
General Fund of the Treasury, $580.5 million distributed to harmed
investors, with $260.7 million of that total transferred from the
Fiduciary Fund to cover distributions to the public. FY 2006
distributions included $122.0 million transferred to the General Fund
of the Treasury, $108.5 million distributed to investors, and $1,573.6
million held pending future distribution. The decrease in amounts
transferred to the fiduciary fund is directly related to the total
decrease in collections discussed above. The $54.7 million increase in
funds transferred to the General Fund of the Treasury is due to an
increased ability to collect on fines and penalties.
In FY 2007, the current year distributions exceeded the current year
collections due to a significant decrease in collections relative to
prior years. In addition to the decrease in collections, the SEC
undertook an initiative to distribute more funds to harmed investors
relative to prior years.
Federal Managers' Financial Integrity Act:
The Federal Managers' Financial Integrity Act (FMFIA) of 1982 is
implemented by the Office of Management and Budget (OMB) Circular No. A-
123, revised, Management's Responsibility for Internal Control.
Section 2 of the FMFIA requires federal agencies to report, on the
basis of annual assessments, any material weaknesses that have been
identified in connection with its internal and administrative controls
The reviews that took place during FY 2007 provide qualified assurance
that SEC systems and management controls comply with the requirements
of the FMFIA, with the exception of a material weakness in internal
control over financial reporting.
Section 4 of the FMFIA requires that agencies annually evaluate and
report on whether financial management systems conform to government-
wide requirements. The SEC evaluated its financial management systems
for the fiscal year ending September 30, 2007 in accordance with the
FMFIA and OMB Circular No. A-127, Financial Management Systems, as
applicable. This evaluation identified system non-conformances.
Internal controls were also evaluated by the SEC's independent
auditors, the Government Accountability Office (GAO).
Chairman's Assurance Statement:
The management of the SEC is responsible for establishing and
maintaining effective internal control and financial management systems
that meet the objectives of the FMFIA. Internal control is an integral
component of the Commission's management that provides reasonable
assurance that the following objectives are being achieved:
effectiveness and efficiency of operations, reliability of financial
reporting, and compliance with applicable laws and regulations. The
Commission is able to provide a qualified statement of assurance that
the internal controls and financial management systems meet the
objectives of FMFIA, with the exception of a material weakness and
system non-conformances as discussed below.
The Commission conducted its evaluation of internal control over the
effectiveness and efficiency of operations and compliance with
applicable laws and regulations in accordance with OMB Circular A-123.
A material weakness in internal controls over financial reporting and
system non-conformances surfaced in FY 2007 as a result of this
evaluation. Other than the exceptions noted, the internal controls were
operating effectively and no other material weaknesses were found in
the design or operation of the internal controls.
Signed by:
Christopher Cox:
Chairman:
November 15, 2007:
The SEC conducted its annual assessment of the effectiveness of
internal control in accordance with the requirement of OMB Circular No.
A-123, Management's Responsibility for Internal Control.
In accordance with guidance issued by the SEC's Office of the Executive
Director, 32 office heads con-ducted reviews of their financial,
administrative, and program management controls in FY 2007. The offices
range in size from 8 to 486 positions, with an average of 117 positions
at the end of FY 2007. This segmentation ensures comprehensive coverage
of all SEC offices.
Each office head prepared an annual assurance statement that identified
any control deficiencies that merit the attention of the Chairman.
Those statements were based on information gathered from various
sources, including, among other things:
* Management's personal knowledge gained from the daily operation of
the office;
* Management reviews and dashboard reports (which are monthly reports
used to track the progress on operational, budgetary, and staffing
objectives, and to adjust processes and resources as necessary);
* GAO and Office of Inspector General reports;
* Self-assessments;
* Annual performance plans and reports;
* Audits of the agency's financial statements;
* Reports and other information from Congress or the Office of
Management and Budget, and;
* Additional reviews relating to the office's operations, including
those discussed in the Other Reviews section below.
Each year, the agency's Financial Management Oversight Committee (FMOC)
evaluates the Section 2 and 4 submissions, recommendations from the
Office of the Inspector General, 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 deficiencies
serious enough to be reported as a material weakness or non-
conformance.
Other Reviews:
Also during the year, the Office of Inspector General and the Office of
Information Technology conducted a combined total of 21 alternative
reviews. The reviews covered 18 of the 32 assessable units (56
percent). Some components had multiple reviews.
Further, the Office of Information Technology certified and accredited
26 major applications; recertified the agency's accounting and general
support systems because of major upgrades; and completed 16 electronic
authentication risk assessments. E-authentication is a review process
at the transaction level designed to help agencies ensure that
authentication processes provide the appropriate level of assurance.
Finally, GAO audited the Commission's financial statements. GAO's
procedures included audits of the FY 2007 financial statements,
internal control over financial reporting and compliance with laws and
regulations, the SEC's compliance with selected provisions of law and
regulations applicable to the management of financial resources, and
actions taken in response to prior GAO audit recommendations.
Internal Controls Over Financial Reporting:
During FY 2007, increased rigor was applied to further compliance with
laws and regulations over the past years' standard. Overall, greater
discipline was instilled over the financial reporting process,
increasing transparency, reliability, and integrity. In FY 2008, Office
of Financial Management (OFM) will continue to improve compensating
controls. However, transitioning from manual interfaces to full
integration of core and feeder financial systems will be critical to
improving efficiency and effectiveness of controls over financial
reporting. The need is clear for integrating data with the core
accounting system in order to reduce the amount of manual calculations
and data entry. currently required. Efficiencies will be put into
practice to ensure sustainable processes.
Description:
In FY 2007, due to changes in key personnel including the Chief
Financial Officer and Chief of the Financial Statements and Policy
Branch, certain processes were subjected to internal review revealing
deficiencies in internal control and instances of non-conformance with
federal financial system requirements. The GAO identified a material
weakness in the SEC's internal controls over its financial reporting
process, with specific deficiencies cited concerning the period-end
financial reporting process, disgorgements and penalties accounts
receivable, accounting for transaction fee revenue, and preparing
financial statement disclosures.
Corrective Actions Taken:
Improved oversight processes were implemented to ensure compliance with
GAAP and OMB requirements relative to period-end financial reporting
process and preparation of footnote disclosures.
The SEC is dedicated to proactively identifying and correcting control
deficiencies such as those manifested in the use of manual journal
entries, and improper posting models and processes as cited by GAO in
the FY 2007 audit report. Financial information integrity improvements
are evidenced by significant advances in many areas. The SEC increased
the transparency of the financial reporting process. Process and
control documentation was improved or developed, as necessary, over the
past year. Position papers have been developed articulating SEC policy.
Standard Operating Procedures have been drafted for the preparation of
financial statements. Through the documentation and review process,
inadequate controls over several of the SEC's business processes were
identified. As a short-term solution, incremental improvements were
made to compensating controls. As a long-term solution, improvements to
financial management systems are planned. The improvements made this
year have set the stage for the upgrade of the SEC's financial systems,
created efficiencies, and begun the institution of sustainable
processes.
* Monthly financial reporting and review processes were instituted;
* Ongoing monitoring processes were established to ensure data
integrity;
* Quarterly certification processes were strengthened;
* An undelivered order review process was instituted;
* A process was put in place to accomplish bulk loading of manual
journal entries, eliminating duplicative data entry.
In the 4th quarter, OFM established a monthly cycle for General Ledger
close and preparation of financial reports. The monthly generation and
review of balances and reports, previously only performed quarterly,
are expected to result in more timely and useful information that will
facilitate the use of financial information in management decision
making.
In addition, the SEC implemented the use of standard analytical reports
to highlight key operational risk. These reports include, but are not
limited to, Abnormal Balances, Variance Analysis, Suspense Aging,
Reporting Consistency Checks, and the early implementation of U.S.
Treasury Tie-Point Project analytics. These analytic reviews of
financial data were conducted to ensure the quality of financial data,
and used to proactively detect and correct data anomalies. Through the
use of these standard reports, OFM was able to capture and remedy
several process deficiencies throughout the year.
Control over manual data entry has been improved. The Branch Chief,
Financial Statements and Policy, approves all entries manually posted
to the General Ledger and posting' models established by Branch staff.
In FY 2006, the SEC had a reportable condition related to its recording
and reporting of disgorgement and penalties ordered as a result of SEC
enforcement actions. During FY 2007, the SEC took a number of important
steps to ensure the integrity of enforcement-related disgorgement and
penalty data. The agency implemented a new financial management system
(Phoenix) as part of a multi-year effort to replace its existing case
tracking database. Phoenix provides enhanced management,
administrative, and monitoring controls that reasonably ensure that (a)
the initial recording of disgorgement and penalties ordered as a result
of enforcement actions is accurate and timely, (b) ongoing activities
such as payments, termination of collection activity, and amended
orders are documented and reported, and (c) disgorgement and penalty
data are consistently reviewed for reliability, timeliness and
completeness. In addition, the system provides for enhanced audit trail
capabilities, increased transparency of information which allows
management to monitor the activities within the system, the ability to
attach the documentation supporting all transactions within the system
itself, and increased management reporting functions. The SEC also
implemented new policies and procedures as well as mandatory computer-
based training modules for mid- and senior-level managers. Nonetheless,
integration of disgorgement and penalty receivable amounts from Phoenix
is through manual processes and significant analysis is performed
outside the system to determine the general ledger postings of
transactions, as addressed in the next section.
Based on an internal review of compliance with required form and
content, changes were made this year to the presentation of the
financial statements and footnote disclosures. Examples of the changes
made to more closely conform to OMB A-136 guidance include presentation
of costs on the Statement of Net Cost by strategic goal, and improved
footnote disclosures related to valuation of marketable securities,
segregation of entity/non-entity asset balances and differences between
the Statement of Budgetary Resources and the President's Budget. A
change in accounting principle this year eliminated material prior year
differences between the Statement of Budgetary Resources and the Budget
of the United States Government.
A more rigorous methodology to achieve compliance with the Improper
Payments Information Act (IPIA) of 2002 was deployed in FY 2007,
following the guidance prescribed by OMB for implementation. [Footnote
8] Methodology and results were both fully documented and made
available to the auditors.
The Prompt Payment Final Rule (formerly OMB Circular A-125, "Prompt
Payment") requires payment of commercial obligations within certain
time periods and interest penalties when payments are late. In fiscal
year 2007, the SEC improved the timeliness of vendor invoice payments
and corrected a system problem with the calculation of the interest for
returned vendor invoices. This resulted in a significant reduction of
late payments and interest paid. The number of late payments was
reduced by 38 percent and the dollar amount of interest paid was
reduced by 36 percent from the previous fiscal year.
Corrective Actions Planned:
Corrective actions will be taken in the short term to mitigate the
control deficiencies cited by GAO. Plans are under development to
implement short-term solutions to reduce intermediary information
processing steps, including extensive use of spreadsheets, manipulation
of data, and manual journal entries, in FY 2008. The process will be
reviewed and SEC will tighten compensating controls supporting the
calculation of receivable balances until automated integration is
achieved. SEC will continue to replace routine manual entries and
adjustments with approved posting models when feasible. For example,
pro-forma SGL compliant entries for operating under a continuing
resolution were recently implemented to replace manual journal entries
made in the first quarter of FY 2007.
Process and control documentation efforts are on-going. A project plan
has been developed to document each significant activity recorded in
the general ledger, including the closing process and the preparation
of the financial statements. The anticipated delivery date for the
initial draft procedural manual to the SEC is March 31, 2008, with the
final delivery and completion date being June 30, 2008. Nonetheless,
the risks cited are mitigated by managerial review of consistency
reports and other review processes put in place in the last quarter of
this fiscal year.
Financial Management System Non-conformance:
Although the SEC is not required to comply with the FFMIA, the agency
assesses its financial management systems annually for conformance with
the requirements of OMB Circular A-127 and other Federal financial
system requirements. The agency also makes continuous efforts to
strengthen and integrate its financial management systems.
Description:
SEC systems supporting Receivables, Property and Equipment, and
Investments balances do not conform to financial management system
requirements. Moreover, subsystems are integrated with the SEC's core
accounting system through manual processes in which summary level data
is posted to the core accounting system on a periodic basis. With
manual data entry, the inherent risk of error increases. Associated
with the system non-conformances are risks due to use of unconventional
posting models, inference of certain data attributes (rather than
maintaining at a transaction level consistent with the SGL) and the
inability to readily trace certain adjusting summary level entries to
source documents. To illustrate, a major limitation of Phoenix is its
inability to capture the related accounting impact of each financial
event.
Corrective Actions Taken:
In 2007, the SEC put a variety of controls in place to compensate for
this non-conformance as previously discussed.
The SEC has begun an upgrade of its core financial system. System
requirement development is underway for automated interfaces to the
core financial system related to Receivables, Investments, and Property
and Equipment.
Corrective Actions Planned:
System integration will eliminate the need for the bulk of the manual
journal entries currently being used, which will enhance the
timeliness, accuracy and reliability of the data while reducing the
need to maintain redundant schedules. The upgrade of the core financial
system will incorporate accurate configuration for the SEC's business
processes, development of pro-forma entries validated against the SGL,
replacement of the routine use of manual entries with pro-forma
entries, and integration of appropriate preventative edits for pro-
forma entries. The upgrade is expected to be completed in FY 2008.
Most accounts receivable data is captured in Phoenix, the SEC's system
for managing disgorgements and penalties resulting from the agency's
enforcement cases. The SEC is developing system requirements for an
automated interface for Phoenix to ensure that receivable transactions
posted to the core accounting system are compliant with the SGL at the
transaction level. In addition, the SEC is reviewing alternatives for
automating, upgrading or replacing subsidiary systems for Investments
and Property and Equipment, along with the associated interfaces. As a
short-term, stopgap measure, the SEC will utilize database solutions to
minimize manual intervention and increase compensating controls over
the financial reporting process.
Federal Information Security Management Act (FISMA):
FISMA requires federal agencies to conduct an annual self-assessment of
their IT security programs, to develop and implement remediation
efforts for identified security weaknesses and vulnerabilities, and to
report compliance to OMB. The SEC's Inspector General and Chief
Information Officer performed a joint review of the agency's compliance
with FISMA requirements, and submitted the report to OMB in late
September. The report showed that the agency has continued to make
progress in mitigating information security risk and complying with
FISMA requirements, and no significant deficiencies were identified. In
particular, the SEC has completed the implementation of its incident
response program, successfully reaccredited its "general support
system" (the agency's foundational IT infrastructure), and achieved
over 99 percent compliance with security and privacy awareness
training. The review also identified some additional opportunities for
improvement, in particular with respect to the documentation associated
with the certification and accreditation process; these findings will
be addressed in the coming year.
[End of section]
Appendix II: Financial Statements:
The following financial statements present the financial position, net
cost of operations, changes in net position, budgetary resources, and
custodial and fiduciary activities of the SEC's core business
activities as required by the Accountability of Tax Dollars Act of
2002.
These financial statements and accompanying notes are prepared in
conformity with U.S. generally accepted accounting principles (GAAP)
and presented in accordance with the form and content guidelines
established by OMB Circular A-136.
Kristine M. Chadwick:
Chief Financial Officer and Associate Executive Director, Finance:
{See PDF for image]
I am delighted to join Chairman Cox in presenting the Commission's FY
2007 Performance and Accountability Report (PAR). The PAR summarizes
the agency's annual accomplishments, in addition to providing financial
and performance information. I am pleased that the SEC sustained an
unqualified audit opinion on the financial statements this year. This
performance benchmark validates our efforts to ensure that the
financial statements of the agency, and of the funds for which we are
stewards, are fairly presented. This achievement is also a testament to
the hard work and dedication of SEC staff.
In 2006, the SEC received the Association of Government Accountants'
Certificate for Excellence in Accountability Reporting (CEAR) award for
our FY 2006 Performance and Accountability Report. The SEC also
received an industry-based award for its efforts in automating and
integrating the agency's budget and performance processes. Our activity-
based costing and performance-based budgeting system was used this year
to produce the agency's budget submissions and Statement of Net Cost,
and to provide greater detail on the agency's costs by strategic goal.
The SEC is committed to effective and efficient management of its
resources. During FY 2007, the SEC took a number of important steps to
ensure the integrity of enforcement-related disgorgements and penalties
data, held extensive training sessions on internal control issues with
process owners; and drafted documentation of key processes, risks and
controls.
The agency undertook a comprehensive review of the financial reporting
process, and overlaid identified deficiencies with compensating
controls. A material weakness in internal control, and system non-
conformances were identified. The SEC will develop and execute a
corrective action plan to remedy the control design deficiencies in FY
2008 and continue to evaluate and strengthen controls throughout the
year. We will also develop a plan to achieve greater integration of
budget, performance and financial management systems, addressing the
system non-conformances as well as facilitating better performance
management and decision making. I look forward to another productive
year in FY 2008 to continue the same high level of financial management
that resulted in our past successes.
Sincerely,
Signed by:
Kristine M. Chadwick
Chief Financial Officer and Associate Executive Director, Finance:
November 15, 2007:
[End of letter]
U.S. Securities And Exchange Commission:
Balance Sheet: As of September 30 2007 and 2006 (dollars in thousands):
Assets, Intragovernmental:
Fund Balance with Treasury (Notes 1.H, 2, 3 and 16):
FY 2007: $5,888,039;
FY 2006: $5,178,893.
Assets, Intragovernmental, Investments (Notes 1.1, 2, 4 and 16):
FY 2007: 3,602,511;
FY 2006: 3,674,528.
Assets, Intragovernmental, Accounts Receivable (Notes 1.J, 2, 5 and
16):
FY 2007: 155;
FY 2006: 154,506.
Assets, Intragovernmental, Advances and Prepayments (Note 1.K):
FY 2007: 1,198;
FY 2006: [Empty].
Assets, Total Intragovernmental:
FY 2007: 9,491,903;
FY 2006: 9,007,927.
Assets, Accounts Receivable, Net (Notes 1.J and 5):
FY 2007: 138,693;
FY 2006: 177,491.
Assets, Advances and Prepayments (Note 1.K):
FY 2007: 902;
FY 2006: 974.
Assets, Property and Equipment, Net (Notes 1.L and 6):
FY 2007: 98,280;
FY 2006: 103,631.
Total Assets:
FY 2007: $9,729,778;
FY 2006: $9,290,023.
Liabilities, Intragovernmental, Accounts Payable (Notes 1.M and 7):
FY 2007: $6,153;
FY 2006: $14,527.
Liabilities, Intragovernmental, Employee Benefits (Notes 1.N and 7):
FY 2007: 2,699;
FY 2006: 2,687.
Liabilities, Intragovernmental, Unfunded FECA and Unemployment
Liability (Notes 1.0 and 7):
FY 2007: 1,109;
FY 2006: 992.
Liabilities, Total Intragovernmental:
FY 2007: 9,961.
FY 2006: 18,206.
Liabilities, Accounts Payable (Notes 1.M and 7):
FY 2007: 43,096;
FY 2006: 47,608.
Liabilities, Accrued Payroll and Benefits (Notes 1.M and 7):
FY 2007: 18,176;
FY 2006: 18,149.
Liabilities, Accrued Leave (Notes 1.P and 7):
FY 2007: 35,296;
FY 2006: 32,974.
Liabilities, Registrant Deposits (Notes 1.Q, 2 and 7):
FY 2007: 61,689;
FY 2006: 57,464.
Liabilities, Actuarial FECA Liability (Notes 1.0, 7 and 8):
FY 2007: 5,080;
FY 2006: 4,813.
Liabilities, Fiduciary Liability (Notes 1.T, 2, 7 and 16):
FY 2007: 3,615,760;
FY 2006: 3,834.662.
Liabilities, Custodial Liability (Notes 1.S, 2, 7 and 15):
FY 2007: 63,614;
FY 2006: 71,545.
Liabilities, Other Accrued Liabilities (Notes 7 and 9):
FY 2007: 23,338;
FY 2006: 42,480.
Total Liabilities:
FY 2007: $3,876,010;
FY 2006: $4,121,901.
Commitments and Contingencies (Notes 7 and 11).
Net Position, Unexpended Appropriations—Other Funds:
FY 2007: [Empty];
FY 2006: 9,201.
Net Position, Cumulative Results of Operations—Other Funds:
FY 2007: 5,853,768;
FY 2006: 5,152,921.
Total Net Position:
FY 2007: $5,853,768.
FY 2006: $5,162,122.
Total Liabilities and Net Position:
FY 2007: $9,729,778;
FY 2006: $9,290,023.
The accompanying notes are an integral part of these financial
statements.
[End of balance sheet]
Statement of Net Cost, For the fiscal years ended September 30, 2007
and 2006 (Dollars In Thousands):
Costs By Strategic Goal And Objective (Notes 1.B and 12):
Enforce compliance with federal securities laws, Total Gross Cost:
FY 2007: $529,454;
FY 2006: $579,076.
Promote healthy capital markets through an effective and flexible
regulatory environment, Total Gross Cost:
FY 2007: 79,704;
FY 2006: 77,263.
Foster informed investment decision making, Total Gross Cost:
FY 2007: 135,917;
FY 2006: 135,856.
Maximize the use of SEC resources, Total Gross Cost:
FY 2007: 97,466;
FY 2006: 96,728.
Total Entity, Total Gross Program Cost:
FY 2007: 842,541;
FY 2006: 888,923.
Total Entity, Less: Earned Revenue Not Attributed to Programs (Note
13):
FY 2007: 1,507,750;
FY 2006: 1,882,619.
Net (Income) from Operations (Note 17):
FY 2007: $(665,209);
FY 2006: $(993,696).
The accompanying notes are an integral part of these financial
statements.
[End of statement of net cost]
Statement of Changes in Net Position, for the years ended September 30,
2007 and 2006 (Dollars In thousands):
Cumulative Results Of Operations, Beginning Balance:
FY 2007: $5,152,921;
FY 2006: $4,133,526.
Cumulative Results Of Operations, Budgetary Financing Sources,
Appropriations Used:
FY 2007: 9,201;
FY 2006: [Empty].
Cumulative Results Of Operations, Budgetary Financing Sources,
Appropriations Not Available:
FY 2007: [Empty];
FY 2006: (1,151).
Cumulative Results Of Operations, Other Financing Sources, Imputed
Financing (Note 10):
FY 2007: 26,437;
FY 2006: 26,850.
Cumulative Results Of Operations, Total Financing Sources:
FY 2007: 35,638;
FY 2006: 25,699.
Cumulative Results Of Operations, Net Income from Operations—Other
Funds:
FY 2007: 665,209;
FY 2006: 993,696.
Cumulative Results Of Operations, Net Change—Other Funds:
FY 2007: 700,847;
FY 2006: 1,019,395.
Cumulative Results Of Operations:
FY 2007: 5,853,766;
FY 2006: 5,152,921.
Unexpended Appropriations, Beginning Balance:
FY 2007: 9,201;
FY 2006: 9,791.
Unexpended Appropriations, Budgetary Financing Sources, Unexpended
Appropriations—Used:
FY 2007: (9,201);
FY 2006: [Empty].
Unexpended Appropriations, Budgetary Financing Sources, Appropriations
Not Available:
FY 2007: [Empty];
FY 2006: (590).
Total Unexpended Appropriations:
FY 2007: [Empty];
FY 2006: 9,201.
Unexpended Appropriations, Net Position, End of Period—Other
Funds:
FY 2007: $5,853,768;
FY 2006: $5,162,122.
The accompanying notes are an integral part of these financial
statements.
[End of Statement of Changes in Net Position]
Statement of Budgetary Resources, for the years ended September 30,
2007 and 2006 (Dollars In Thousands):
Budgetary Resources, Unobligated Balance, Brought Forward, October 1:
FY 2007: $4,878,061;
FY 2006: $3,840,573.
Budgetary Resources, Change in Accounting Principle (Note 1.C):
FY 2007: (4,691,392};
FY 2006: [Empty].
Budgetary Resources, Unobligated Balance, Brought Forward, October 1,
Revised (Note 1.C):
FY 2007: 186,669;
FY 2006: 3,840,573.
Budgetary Resources, Recoveries of Prior Year Unpaid Obligations:
FY 2007: 23,030;
FY 2006: 32,410.
Budgetary Resources, Budget Authority: Spending Authority from
Offsetting Collections Earned: Collected:
FY 2007: 1,538,749;
FY 2006: 1,903,648.
Budgetary Resources, Budget Authority: Spending Authority from
Offsetting Collections Earned: Change In Receivables from Federal
Sources:
FY 2007: (131);
FY 2006: (63).
Budgetary Resources, Budget Authority: Spending Authority from
Offsetting Collections: Change in Unfilled Customer Orders without
Advance Received:
FY 2007: (663);
FY 2006: 663.
Budgetary Resources, Budget Authority, Subtotal:
FY 2007: 1,537,955;
FY 2006: 1,904,248.
Budgetary Resources, Temporarily Not Available Pursuant to Public Law:
FY 2007: (781,047);
FY 2006: [Empty].
Budgetary Resources, Permanently Not Available:
FY 2007: [Empty];
FY 2006: (1,740).
Total Budgetary Resources:
FY 2007: $966,607;
FY 2006: $5,775,491.
Status Of Budgetary Resources, Obligations Incurred: Direct (Note 14):
FY 2007: $816,274;
FY 2006: $896,911.
Status Of Budgetary Resources, Obligations Incurred: Reimbursable (Note
14):
FY 2007: 321;
FY 2006: 519.
Status Of Budgetary Resources, Unobligated Balance Available: Realized
and Apportioned for Current Period:
FY 2007: 6,068;
FY 2006: 14,978.
Status Of Budgetary Resources, Unobligated Balance Not Available:
FY 2007: 83,944;
FY 2006: 4,863,083.
Total Status of Budgetary Resources:
FY 2007: $966,607;
FY 2006: $5,775,491.
Change In Obligated Balance: Obligated Balance, Net; Unpaid
Obligations, Brought Forward, October 1:
FY 2007: $230,102;
FY 2006: $235,702.
Change In Obligated Balance: Obligated Balance, Net; Less: Uncollected
Customer Payments from Federal Sources, Brought Forward, October 1:
FY 2007: (794);
FY 2006: (194).
Change In Obligated Balance: Obligated Balance, Net; Total Unpaid
Obligated Balance, Net:
FY 2007: 229,308;
FY 2006: 235,508.
Change In Obligated Balance: Obligations Incurred, Net:
FY 2007: 876,595;
FY 2006: 897,430.
Change In Obligated Balance: Less: Gross Outlays:
FY 2007: (829,006);
FY 2006: (870,620).
Change In Obligated Balance: Less: Recoveries of Prior Year Unpaid,
Obligations, Actual:
FY 2007: (23,030);
FY 2006: (32,410).
Change In Obligated Balance: Change in Uncollected Customer Payments
from Federal Sources:
FY 2007: 793;
FY 2006: (600).
Change In Obligated Balance: Obligated Balance, Net, End of Period,
Unpaid Obligations:
FY 2007: 254,660;
FY 2006: 230,102.
Change In Obligated Balance: Obligated Balance, Net, End of Period,
Less Uncollected Customer Payments from Federal Sources:
FY 2007: [Empty];
FY 2006: (794).
Change In Obligated Balance: Obligated Balance, Net, End of Period,
Total Unpaid Obligated Balance, Net, End of Period (Note 11):
FY 2007: $254,660;
FY 2006: $229,308.
Net Outlays, Gross Outlays:
FY 2007: $829,006;
FY 2006: $870,620.
Net Outlays, Offsetting Collections:
FY 2007: (1,538,749);
FY 2006: (1,903,648).
Net Outlays, Distributed Offsetting Receipts:
FY 2007: (1,105);
FY 2006: 51,294.
Net Outlays, Net Outlays/(Net Collections):
FY 2007: $(710,848);
FY 2006: $(981.134).
The accompanying notes are an integral part of these financial
statements.
[End of Statement of Budgetary Resources]
Statement of Custodial Activity, for the years ended September 30, 2007
and 2006 (Dollars In Thousands):
Revenue Activity, Sources of Cash Collections, Disgorgement and
Penalties:
FY 2007: $496,386;
FY 2006: $1,804,043.
Revenue Activity, Sources of Cash Collections, Other:
FY 2007: 138;
FY 2006: 90.
Revenue Activity, Net Collections:
FY 2007: 496,524;
FY 2006: 1,804,133.
Revenue Activity, Accrual Adjustments:
FY 2007: (7,931);
FY 2006: (23,967).
Total Custodial Revenue (Notes 1S, 15 and 16):
FY 2007: $488,593;
FY 2006: $1,780,166.
Disposition Of Collections, Amounts Transferred to Department of the
Treasury:
FY 2007: $176,761;
FY 2006: $122,030.
Disposition Of Collections, Amounts Transferred to Other:
FY 2007: 319,763;
FY 2006: 1,682,103.
Disposition Of Collections, Net Disbursements:
FY 2007: 496,524;
FY 2006: 1,804,133.
Disposition Of Collections, Change in Liability Accounts:
FY 2007: (7,931);
FY 2006: (23,967).
Total Disposition of Collections (Notes 1S, 15 and 16):
FY 2007: $488,593;
FY 2006: $1,780,166.
Net Custodial Activity:
FY 2007: [Empty];
FY 2006: [Empty].
The accompanying notes are an integral part of these financial
statements.
[End of Statement of Custodial Activity]
Note 1. Summary of Significant Accounting Policies:
A. Reporting Entity:
The United States Securities and Exchange Commission (SEC) is an
independent agency of the United States established pursuant to the
Securities Exchange Act of 1934. The SEC's mission is to protect
investors; maintain fair, orderly, and efficient securities markets;
and facilitate capital formation. The SEC works with the Congress,
other Executive Branch departments and agencies, self-regulatory
organizations (SROs) (e.g., stock exchanges and the Financial Industry
Regulatory Authority (FINRA)), the Public Company Accounting Oversight
Board (PCAOB), state securities regulators, and many other
organizations in support of the agency's mission.
These financial statements report on the SEC's four strategic goals as
performed by six major program areas: Compliance Inspections and
Examinations; Corporation Finance; Enforcement; Investment Management;
Market Regulation; and Other Offices. These programs promote the public
interest by, among other activities: promoting compliance through
inspections and examinations of regulated entities; facilitating
capital formation through full disclosure; enforcing the federal
securities laws; regulating investment companies and investment
advisors; overseeing the operations of the nation's securities markets
and participants; promoting technological innovation in the securities
markets; encouraging international regulatory and enforcement
cooperation; and educating and assisting investors.
B. Basis of Presentation and Accounting:
The accompanying financial statements present the financial position,
net cost of operations, changes in net position, budgetary resources,
and custodial and fiduciary activities of the SEC's core business
activities as required by the Accountability of Tax Dollars Act of
2002. They may differ from other financial reports submitted pursuant
to Office of Management and Budget (OMB) directives for the purpose of
monitoring and controlling the use of SEC budgetary resources. The
SEC's books and records serve as the source of the information
presented in the accompanying financial statements. Assets,
liabilities, revenues, and costs have been classified in these
financial statements according to the type of entity associated with
the transactions. Intragovernmental assets and liabilities are those
from or to other federal entities. Intragovemmental earned revenues are
collections or accruals of revenue from other federal entities, and
intragovemmental costs are payments or accruals to other federal
entities.
The financial statements and accompanying notes are prepared in
conformity with U.S. generally accepted accounting principles (GAAP)
and presented in accordance with the form and content guidelines
established by OMB in Circular A-136, Financial Reporting Requirements.
Certain information, including the Statement of Net Cost (SNC) and Note
4. Investments, is presented differently than the SEC's FY 2006
Performance and Accountability Report to conform with reporting
requirements in OMB A-136. The format used to present the SNC has
changed to better align costs by major program as prescribed by OMB A-
136. The new format presents strategic goals that align directly with
the major goal(s) and output(s) described in the SEC's strategic and
performance budgets required by Government Performance Results Act
(GPRA).
Effective for FY 2007, the Statement of Financing (SOF) is presented as
a note per OMB's authority under SFFAS No. 7, Accounting for Revenue
and Other Financing Sources and Concepts for Reconciling Budgetary and
Financial Accounting, and will no longer be considered a Basic
Statement. The Statement of Financing will now be displayed in Note 17
and referred to as 'Reconciliation of Not Cost of Operations
(proprietary) to Budget." The FY 2006 Statement of Financing is also
shown in this note.
Transactions are recorded on the accrual basis of accounting. Under the
accrual method, revenues are recognized when earned and expenses arc
recognized when a liability is incurred, without regard to receipt or
payment of cash.
C. Change in Accounting Principle:
The SEC changed its method of accounting for user fees collected in
excess of current-year appropriations. This change is reflected in
external reports resulting in a change in the Unobligated Balance,
Brought Forward in the Statement of Budgetary Resources (SBR).
Starting in FY 2007, the current year offsetting collections that are
not available for immediate obligation, but may be available for future
use, will be reflected as Temporarily Not Available Pursuant to Public
Law. An adjustment was made to the Unobligated Balance, Brought Forward
from October 1 to reflect the cumulative effect on the historical
offsetting collections. The offset to this adjustment is reflected in
the Unobligated Balance Not Available line item.
D. Use of Estimates:
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results will invariably differ from those
estimates.
E. Intra- and Inter-Agency Relationships:
The SEC does not have transactions among its own operating units, and
therefore, intra-entity eliminations are not necessary. The SEC has
certain oversight responsibilities with respect to the Financial
Accounting Standards Board (FASB); the Securities Investor Protection
Corporation (SIPC) (See Note 11. Commitments and Contingencies); and
the PCAOB; however, these entities are not subject to consolidation.
F. Fund Accounting Structure:
The SEC's financial activities are accounted for by Treasury Account
Fund symbol, summarized as follows:
* General Fund (X0100) includes the appropriated general funds used to
carry out the SEC's missions and functions and revenues collected by
the SEC in excess of appropriated funds for FY 2005 through 2007 (See
Note 3. Fund Balance with Treasury).
* Salaries and Expenses (0100) includes the appropriated general funds
used to carry out the SEC's missions and functions for FY 2002 through
2004.
* Deposit and Suspense Funds (X6563, F3875 and F3880) carry
disgorgement, penalties, and interest collected and held on behalf of
harmed investors, registrant monies held temporarily until earned by
the SEC, and collections awaiting disposition or reclassification.
* Miscellaneous Receipt Accounts (1099 and 3220) hold non-entity
receipts and accounts receivable from SEC custodial and fiduciary
activities that cannot be deposited into funds under SEC control. These
include amounts received pursuant to enforcement cases that are to be
sent to the Treasury.
The SEC does not have lending or borrowing authority, except as
discussed in Note 11. Commitments and Contingencies. The SEC has
custodial and fiduciary responsibilities, as described in Note 15.
Custodial Revenues and Liabilities and Note 16. Fiduciary Assets and
Liabilities.
G. Entity/Non-Entity Assets:
Assets that an agency is authorized to use in its operations are entity
assets. Assets that are held by the SEC on behalf of another federal
agency or a third party, and are not available for the agency's use,
are non-entity assets. The SEC's non-entity assets include the
following: (i) fiduciary assets, representing disgorgement, penalties,
and interest collected and held or invested by the SEC pending
distribution to harmed investors; (ii) custodial accounts receivable in
respect of disgorgement, penalties, and interest owed by securities law
violators; and (iii) registrant deposits, representing excess filing
fees remitted by registrants.
H. Fund Balance with Treasury:
Fund Balance with Treasury includes certain funds held on behalf of
third parties. These include registrant deposits, representing excess
filing fees remitted by registrants, and uninvested fiduciary assets,
representing disgorgement, penalties, and interest held by the SEC
pending distribution to harmed investors.
All SEC banking activity is conducted in accordance with directives
issued by the Treasury, Financial Management Service (FMS). All revenue
and receipts are deposited in commercial bank accounts maintained by
the FMS or wired directly to a Federal Reserve Bank. The Treasury
processes all disbursements made by the SEC. All monies maintained in
commercial bank accounts are transferred to the Federal Reserve Bank on
the next business day following the day of deposit.
I. Investments:
The SEC invests fiduciary assets in short-term Treasury securities,
whenever practicable. Once these funds are collected, they are
generally transferred to the SEC's deposit fund account and invested in
short-term market-based Treasury bills through a facility provided by
the Treasury, Bureau of the Public Debt (BPD), pending their
distribution to investors. Interest earned is added to the funds
available for distribution to investors.
J. Accounts Receivable and Allowance for Uncollectable Accounts:
Both entity and non-entity accounts receivable consist of amounts due
primarily from the public. Entity accounts receivable are amounts that
will be retained by the SEC upon collection. These generally include
claims arising from: (i) securities transaction fees paid by exchanges,
(ii) filing fees paid by registrants, (iii) goods or services that the
SEC has provided to another federal agency pursuant to an inter-agency
agreement, (iv) host reimbursement of SEC employee travel, (v) requests
pertaining to Freedom of Information Act (FOIA), and (vi) employee-
related debt. Entity accounts receivable represent a small portion of
the SEC's business activities because agency fee legislation generally
requires payment of filing fees at the time of filing, and SRO
transaction fees are payable to the SEC twice a year--in March for the
period September through December, and in September for the period
January through August. Accordingly, the year-end accounts receivable
accrual generally represents only fees payable by the SROs to the SEC
for activity during the month of September.
Non-entity accounts receivable are amounts that will not be retained by
the SEC upon collection. These mainly include disgorgement, penalties,
and interest assessments. These accounts receivable are recognized when
the SEC is designated in an order of the Commission or a court to
collect the assessed disgorgement, penalties, and interest. SEC
maintains a custodial responsibility over these non-entity accounts
receivable. When collected, these funds are either transferred to the
Treasury, or they are held for future distribution to harmed investors.
The SEC is also party to orders directing the court or a receiver to
collect the disgorgement, penalties, and interest assessed against
violators of federal securities laws. These orders are not recognized
as accounts receivable by the SEC because the debts are payable to
another party. However, these debts are subject to change based on
future orders issued by the presiding court that could result in the
SEC recognizing a receivable at a later date. The SEC's policy is to
record a receivable in those cases at the point in time when the debtor
is required, as a result of a court order or other legally binding
instrument, to remit funds to the SEC.
The allowance for uncollectible amounts and the related provision for
estimated losses for disgorgement and penalties and FOIA accounts
receivable is based on an analysis of the collectibility of individual
account balances for the largest debts and on historical collection
data to determine on a percentage basis the value of gross accounts
receivable that are likely to be collected by the SEC. This percentage
is applied to the remaining disgorgement and penalties and FOIA
accounts receivable to reflect the balances at their estimated net
realizable value. The allowance for uncollectible amounts and the
related provision for estimated losses for filing fees and other
accounts receivable is based on historical collection data to determine
on a percentage basis the value of gross accounts receivable that are
likely to be collected by the SEC; and no allowance for uncollectible
amounts and the related provision for estimated losses has been
established for Due for Reimbursable Agreements and Exchange Fees, as
these gross accounts receivable are deemed to represent their net
realizable value. In addition, the SEC does not recognize interest as
accounts receivable, unless a court or administrative order specifies
the amount of pre-judgment interest.
K. Advances and Prepayments:
The SEC may prepay amounts in anticipation of receiving future
benefits; the benefits include training and supplemental health
benefits for SEC employees. These payments are expensed when the goods
have been received or services have been performed. The SEC may also
advance funds to its personnel for travel costs, and these amounts are
expensed when the travel takes place.
L. Property and Equipment, Net:
The SEC's property and equipment consists of software and general
purpose equipment used by the agency: capital improvements made to
buildings leased by the SEC for office space; and internal-use software
development costs for projects in development. Property and equipment
purchases and additions are stated at cost. Property and equipment
acquisitions that do not meet the capitalization criteria, normal
repairs, and maintenance are charged to expense as received or incurred
by the SEC.
Property and equipment are depreciated over their estimated useful
lives using the straight-line method of depreciation. Property and
equipment are removed from the SEC's asset accounts in the period of
disposal, retirement, or removal from service. Any difference between
the book value of the property and equipment and amounts realized is
recognized as a gain or loss in the same period that the asset is
removed.
M. Liabilities:
The SEC records liabilities for amounts that are likely to be paid as
the result of events that have occurred as of September 30, 2007 and
2006. The SEC's liabilities consist of routine operating accounts
payable, accrued payroll and benefits, registrant deposit accounts, and
fiduciary and custodial liabilities associated with monetary sanctions
imposed on violators of securities laws.
Fiduciary and custodial liabilities represent the largest portion of
the SEC's liabilities. Custodial liabilities arise in respect of
accounts receivable for disgorgement, penalties, and interest assessed
against securities law violators. The SEC records a custodial liability
for the net amount of such receivables, after taking into account the
estimated allowance for doubtful accounts. When the SEC collects this
revenue, it is either transferred to the Treasury or it is held by the
SEC in a fiduciary capacity on behalf of harmed investors to whom the
SEC intends to return the funds. Fiduciary liabilities arise when the
SEC collects disgorgement, penalties, and interest from securities law
violators which will be returned to harmed investors. When collected,
fiduciary receipts are held in Fund Balance with Treasury or invested
in Treasury securities pending distribution to harmed investors, and an
equal and offsetting fiduciary liability for assets held by the SEC at
the Treasury is reported as a non-entity liability on the balance
sheet.
The SEC recognizes liabilities covered by three types of resources:
realized budgetary resources; unrealized budgetary resources that
become available without further Congressional action; and cash and
amounts held in Fund Balance with Treasury that do not require the use
of a budgetary resource. Realized budgetary resources include obligated
balances that fund existing liabilities and unobligated balances at
September 30, 2007 and 2006. Unrealized budgetary resources represent
fee collections in excess of amounts appropriated for current fiscal
year spending. These resources are used to cover liabilities when
appropriation language makes these unrealized budgetary resources
available in the fiscal year without further Congressional action.
N. Employee Retirement Systems and Benefits:
SEC employees participate in either the Civil Service Retirement System
(CSRS) or the Federal Employees Retirement System (FERS), depending on
when they were hired by the federal government. The FERS was
established by enactment of Public Law 99-335. Pursuant to this law,
the FERS and Social Security automatically cover most employees hired
after December 31, 1983. Employees who are rehired after a break in
service of more than one year and who had five years of federal
civilian service prior to 1987 are placed in the CSRS offset retirement
system or may elect to join the FERS.
The SEC's financial statements do not report CSRS or FERS assets or
accumulated plan benefits that may be applicable to its employees as
they are reported by the U.S. Office of Personnel Management (OPM).
While the SEC reports no liability for future payments to employees
under these programs, the federal government is liable for future
payments. to employees through the various agencies administering these
programs. The SEC does not fund post-retirement benefits such as the
Federal Employees Health Benefit Program (FEHB) and the Federal
Employees Group Life Insurance Program (FEGLI). The SEC is also not
required to fully fund the CSRS pension liabilities. Instead, the
financial statements of the SEC recognize an imputed financing source
and corresponding expense that represent the SEC's share of the cost to
the federal government of providing pension, post-retirement health,
and life insurance benefits to all eligible SEC employees. For the
fiscal year ended September 30, 2007, the SEC made contributions based
on OPM cost factors equivalent to approximately 6.74 percent and 10.87
percent of the employee's basic pay for those employees covered by CSRS
and FERS, respectively. For the fiscal year ended September 30, 2006,
the SEC made contributions based on OPM cost factors equivalent to
approximately 6.78 percent and 10.91 percent of the employee's basic
pay for those employees covered by CSRS and FERS, respectively. All
employees are eligible to contribute to a thrift savings plan. For
those employees participating in the FERS, a thrift savings plan is
automatically established, and the SEC makes a mandatory 1 percent
contribution to this plan. In addition, the SEC makes matching
contributions ranging from 1 to 4 percent for FERS-eligible employees
who contribute to their thrift savings plans. FERS participating
employees are also covered under the Federal Insurance Contributions
Act (FICA), for which the SEC contributes a matching amount to the
Social Security Administration. No matching contributions are made to
the thrift savings plans for employees participating in the CSRS.
O. Injury and Post-employment Compensation:
Claims brought by SEC employees for on-the-job injuries are addressed
under the Federal Employees' Compensation Act (FECA) administered by
the United States Department of Labor (DOL). The DOL bills each agency
annually as its claims are paid, but payment on these bills is deferred
for two years to allow for funding through the budget process.
Similarly, SEC employees who are terminated without cause may receive
unemployment compensation benefits under the unemployment insurance
program also administered by the DOL, which bills each agency quarterly
for paid claims.
P. Annual, Sick, and Other:
Annual leave and compensatory time are accrued as earned and the
accrual is reduced when leave is taken. Each fiscal quarter an
adjustment is made so that the balances in the accrued leave accounts
reflect current leave balances and pay rates. No portion of this
liability has been obligated. Funding will be obtained from future
financing sources to the extent current or prior year funding is not
available to pay for leave earned but not taken. Sick leave and other
types of non-vested leave are expensed as used.
Q. Revenue and Other Financing Sources:
The SEC's revenue and financing sources include exchange revenues,
which are generated from arm's length transactions, and non-exchange
revenues, which arise from the government's ability to demand payment.
The SEC's exchange revenues consist of mainly fees collected from SROs
and registrants. The SEC's non-exchange revenue consists of amounts
collected in enforcement proceedings from violators of securities laws.
The SEC's funding is through primarily the collection of securities
transaction fees from SROs, and securities registration, tender offer,
merger, and other fees from registrants. The SEC's fee rates are
established by law and are applied to volumes of activity reported by
SROs or to filings submitted by registrants. When received, these fees
are recorded as exchange revenue. The SEC is permitted by law to
include these amounts in its obligational authority or to offset its
expenditures and liabilities upon collection up to authorized limits.
All amounts remitted by registrants in excess of the fees for specific
filings are recorded as liabilities in deposit accounts until earned by
the SEC from registrant filings or returned to the registrant pursuant
to SEC policy, which calls for the return of registrant deposits when
an account is dormant for six months.
The SEC also recognizes revenue from enforcement proceedings that
result in the assessment of disgorgement, penalties, and interest
against violators of federal securities laws. This activity is
recognized as non-exchange revenue and presented on the Statement of
Custodial Activity. When the SEC collects this revenue, it is either
transferred to the Treasury or it is held by the SEC in a fiduciary
capacity on behalf of harmed investors to whom the SEC intends to
return the funds. An equal and offsetting liability for the fiduciary
assets held by the SEC is reported on the Balance Sheet. The SEC does
not record fiduciary assessments collected and held by another
government entity, such as a court registry, or a non-government
entity, such as a receiver.
R. Budgets and Budgetary Accounting:
The SEC is subject to certain restrictions on its use of statutory
fees. All fee revenues are deposited in a designated account at the
U.S. Department of the Treasury (Treasury). However, the SEC may use
funds from this account only as authorized by Congress, made available
by OMB apportionment, and upon issuance of a Treasury warrant. Revenue
collected in excess of appropriated amounts is restricted for use by
the SEC.
Fees other than the restricted excess fees can be used for SEC
operations subject to an annual Congressional limitation of $867.5
million and $888.7 million for the budget FYs 2007 and 2006,
respectively. Funds appropriated but not used in a given fiscal year
are maintained in a designated account for use in future periods, as
appropriated by the Congress.
Each fiscal year, the SEC receives its appropriation through Category A
apportionments, which are quarterly distributions of budgetary
resources made by OMB. The SEC also receives a small amount of Category
B funds for reimbursable activity which are exempt from quarterly
apportionment.
S. Custodial Activities:
The Statement of Custodial Activity presents the sources and
disposition of SEC custodial activity that consists of primarily
disgorgement, penalties, and interest assessed against violators of
securities laws. When collected, the funds are either returned to the
Treasury or held for future distribution to harmed investors as
discussed in Note 1. J. Accounts Receivable and Allowance for Uncoiled-
61e Accounts.
T. Fiduciary Activities:
Fiduciary activities represent the receipt, management, accounting, and
disposition by the SEC of cash or other assets in which harmed
investors will ultimately have an ownership interest, pursuant to an
approved distribution plan and disbursement order, that the SEC must
uphold. The SEC also recognizes an equal and offsetting liability for
these assets. See Note 1.M. Liabilities.
The SEC's fiduciary assets consist of disgorgement. penalties, and
interest assessed against securities laws violators where the
Commission, and administrative law judge, or, in some cases, a court
has determined that the SEC should return such funds to harmed
investors. The funds are held as fiduciary assets by the SEC pending
distribution to harmed investors pursuant to an approved distribution
plan. The SEC does not record fiduciary asset amounts collected and
held by another government entity, such as a court, or a non-
governmental entity, such as a receiver.
Note 2. Non-Entity Assets:
SEC non-entity assets consist entirely of public assets. At September
30, non-entity assets consisted of the following, (Dollars In
Thousands):
Public, Registrant Deposits (Fund Balance with Treasury):
FY 2007: $61,689;
FY 2006: $57,464.
Public, Fiduciary Assets (Fund Balance with Treasury, Investments, and
Accounts Receivable):
FY 2007: 3,615,760;
FY 2006: 3,834,662.
Public, Custodial Assets (Accounts Receivable):
FY 2007: 63,614.
FY 2006: 71,545.
Public, Securities Transaction Fee Refund (Fund Balance with Treasury):
FY 2007: [Empty];
FY 2006: 8,901.
Total Non-Entity Assets:
FY 2007: $3,741,063;
FY 2006: $3,972,572.
[End of Note 2. Non-Entity Assets]
Note 3. Fund Balance with Treasury:
Fund balances with Treasury, by type of fund, as of September 30, are
as follows, (Dollars In Thousands):
General Funds:
FY 2007: $5,817,111;
FY 2006: $5,107,369.
Fund Balance, Other Funds:
FY 2007: 70,928;
FY 2006: 71,524.
Total Fund Balance with Treasury:
FY 2007: $5,888,039;
FY 2006: $5,178,893.
Status of Fund Balance with Treasury, Unobligated Balance, Available:
FY 2007: 6,068;
FY 2006: 14,978.
Status of Fund Balance with Treasury, Unobligated Balance, Unavailable:
FY 2007: 83,944;
FY 2006: 4,863,083.
Status of Fund Balance with Treasury, Obligated Balance not yet
Disbursed:
FY 2007: 254,660;
FY 2006: 229,308.
Non-Budgetary Fund Balance with Treasury:
FY 2007: 5,543,367;
FY 2006: 71,524.
Total Fund Balance with Treasury:
FY 2007: $5,888,039;
FY 2006: $5,178,893.
[End of Note 3]
Starting in FY 2007 the SEC changed its method of accounting for the
user fees collected in excess of the current year appropriations. This
change in accounting principle resulted in a change in the Status of
Fund Balance with Treasury in the FY 2006 Unavailable amount to be
recorded as a Non-Budgetary Fund Balance with Treasury transaction in
the current year. Refer to Note 1.C. Change in Accounting Principle and
Note 1.R. Budgets and Budgetary Accounting.
Note 4. Investments:
At September 30, 2007, investments consist of the following, (Dollars
in Thousands):
Non-Marketable Market Based Securities:
Cost: $3,588,309;
Amortization Method: S/L;
Amortized (Premium) Discount: $14,202;
Investment Net: $3,602,511;
Market Value Disclosure: $3,605,239.
At September 30. 2006, investments consist of the following:
Non-Marketable Market Based Securities:
Cost: $3,652,749;
Amortization Method: S/L;
Amortized (Premium) Discount: $21,779;
Investment Net: $3,674,528;
Market Value Disclosure: $3,576.439.
The SEC invests these funds in Overnight and Short-Term Market-Based
Treasury Bills. Interest earned on investments of qualified settlement
funds is subject to income tax under Section 468B(b) of the Internal
Revenue Code.
Treasury Bills are securities traded in the primary and secondary U.S.
Treasury market. Originally, Treasury Bills are auctioned directly by
the U.S. government in the primary U.S. Treasury market and are
subsequently traded among investors in the secondary U.S. Treasury
market. In accordance with GAAP, SEC records the value of its
investments in U.S. Treasury Bills at cost and amortizes the discount
on a straight line basis through the maturity date of these securities.
The market value is determined by the secondary U.S. Treasury market
and represents the value an individual investor is willing to pay for
these securities, at a given point in time.
[End of Note 4]
Note 5. Accounts Receivable, Net:
At September 30, 2007, accounts receivable consisted of the following
(Dollars in Thousands):
Non-Entity Intragovernmental Assets, Interest on Investments:
Gross Receivables: $155;
Allowance: [Empty];
Net Receivables: $155.
Subtotal Intragovernmental Assets:
Gross Receivables: $155;
Allowance: [Empty];
Net Receivables: $155.
Entity Non-Intragovernmental Assets, Exchange Fees:
Gross Receivables: 74,422;
Allowance: [Empty];
Net Receivables: 74,422.
Entity Non-Intragovernmental Assets, Filing Fees:
Gross Receivables: 355;
Allowance: 11;
Net Receivables: 344.
Entity Non-Intragovernmental Assets, Other:
Gross Receivables: 318;
Allowance: 5;
Net Receivables: 313.
Non-Entity Assets, Disgorgement and Penalties:
Gross Receivables: 329,584;
Allowance: 265,974;
Net Receivables: 63,610.
Non-Entity Assets, FOIA:
Gross Receivables: 6;
Allowance: 2;
Net Receivables: 4.
Subtotal Non-Intragovernmental Assets:
Gross Receivables: 404,685;
Allowance: 265,992;
Net Receivables: 138,693.
Total:
Gross Receivables: $404,840;
Allowance: $265,992;
Net Receivables: $138,848.
At September 30, 2006, accounts receivable consisted of the following,
(Dollars In Thousands):
Entity Intragovernmental Assets, Due for Reimbursable Agreements:
Gross Receivables: $131;
Allowance: [Empty];
Net Receivables: $131.
Non-Entity Intragovernmental Assets, Disgorgement and Penalties:
Gross Receivables: 154,375;
Allowance: [Empty];
Net Receivables: 154,375.
Subtotal Intragovernmental Assets:
Gross Receivables: 154,375;
Allowance: [Empty];
Net Receivables: 154,375.
Entity Non-Intragovernmental Assets, Exchange Fees:
Gross Receivables: 105,416;
Allowance: [Empty];
Net Receivables: 105,416.
Entity Non-Intragovernmental Assets, Filing Fees:
Gross Receivables: 232;
Allowance: 5;
Net Receivables: 227.
Entity Non-Intragovernmental Assets, Other:
Gross Receivables: 305;
Allowance: 2;
Net Receivables: 303.
Non-Entity Assets, Fines and Penalties:
Gross Receivables: 247,631;
Allowance: 176,086;
Net Receivables: 71,545.
Subtotal Non-Intragovernmental Assets:
Gross Receivables: 353,584;
Allowance: 176,093;
Net Receivables: 177,491.
Total:
Gross Receivables: $508,090;
Allowance: $176,093;
Net Receivables: $331,997.
The SEC writes off debts that are two or more years old by removing the
amount of the debts from the gross accounts receivable and any related
allowance for doubtful accounts. Refer to Note i.J Accounts Receivable
and Allowance for Uncollectible Accounts for methods used to estimate
allowances.
[End of Note 5]
Note 6. Property and Equipment, Net:
At September 30, 2007, property and equipment consisted of the
following (dollars in thousands):
Class Of Property: Furniture;
Depreciation Amortization Method: S/L;
Capitalization Threshold For Individual Purchases: $15;
Capitalization Threshold For Bulk Purchases:
$50;
Service Life (Years): 5;
Acquisition Value: $9,975;
Accumulated Depreciation Amortization: $4,227;
Book Value: $5,748.
Class Of Property: Equipment;
Depreciation Amortization Method: S/L;
Capitalization Threshold For Individual Purchases: $15;
Capitalization Threshold For Bulk Purchases: $500;
Service Life (Years): 3;
Acquisition Value: 48,509;
Accumulated Depreciation Amortization: 37,866;
Book Value: 10,643.
Class Of Property: Software;
Depreciation Amortization Method: S/L;
Capitalization Threshold For Individual Purchases: 300;
Capitalization Threshold For Bulk Purchases: 300;
Service Life (Years): 3-5;
Acquisition Value: 68,119;
Accumulated Depreciation Amortization: 47,117;
Book Value: 21,002.
Class Of Property: Leasehold Improvements;
Depreciation Amortization Method: S/L;
Capitalization Threshold For Individual Purchases: 300;
Capitalization Threshold For Bulk Purchases: N/A;
Service Life (Years): 10;
Acquisition Value: 74,167;
Accumulated Depreciation Amortization: 133,280;
Book Value: 60,887.
Class Of Property: Total;
Depreciation Amortization Method: [Empty];
Capitalization Threshold For Individual Purchases: [Empty];
Capitalization Threshold For Bulk Purchases: [Empty];
Service Life (Years): [Empty];
Acquisition Value: $200,770;
Accumulated Depreciation Amortization: $102,490;
Book Value: $98,280.
At September 30, 2006, property and equipment consisted of the
following (dollars in thousands):
Class Of Property: Furniture;
Depreciation Amortization Method: S/L;
Capitalization Threshold For Individual Purchases: $15;
Capitalization Threshold For Bulk Purchases:
$50;
Service Life (Years): 5;
Acquisition Value: $8,569;
Accumulated Depreciation Amortization: $2,165;
Book Value: $6,404.
Class Of Property: Equipment;
Depreciation Amortization Method: S/L;
Capitalization Threshold For Individual Purchases: $15;
Capitalization Threshold For Bulk Purchases: $500;
Service Life (Years): 3;
Acquisition Value: 37,155;
Accumulated Depreciation Amortization: 25,778;
Book Value: 11,367.
Class Of Property: Software;
Depreciation Amortization Method: S/L;
Capitalization Threshold For Individual Purchases: 300;
Capitalization Threshold For Bulk Purchases: 300;
Service Life (Years): 3-5;
Acquisition Value: 58,828;
Accumulated Depreciation Amortization: 36,032;
Book Value: 22,796.
Class Of Property: Leasehold Improvements;
Depreciation Amortization Method: S/L;
Capitalization Threshold For Individual Purchases: 300;
Capitalization Threshold For Bulk Purchases: N/A;
Service Life (Years): 10;
Acquisition Value: 69,104;
Accumulated Depreciation Amortization: 6,040;
Book Value: 63,064.
Class Of Property: Total;
Depreciation Amortization Method: [Empty];
Capitalization Threshold For Individual Purchases: [Empty];
Capitalization Threshold For Bulk Purchases: [Empty];
Service Life (Years): [Empty];
Acquisition Value: $173,656;
Accumulated Depreciation Amortization: $70,025;
Book Value: $103,631.
[End of Note 6]
Note 7. Liabilities Not Covered by Budgetary Resources:
At September 30, liabilities consisted of the following, (Dollars In
Thousands):
Liabilities Not Covered by Budgetary Resources, Intragovernmental,
Unfunded FECA and Unemployment Liability:
FY 2007: $1,109;
FY 2006: $992.
Total Intragoverntnental Liabilities:
FY 2007: 1,109;
FY 2006: 992.
Other Accrued Liabilities—Recognition of Lease Liability:
FY 2007: 16,865;
FY 2006: 27,641.
Accrued Leave:
FY 2007: 35,296;
FY 2006: 32,974.
Actuarial FECA Liability:
FY 2007: 5,080;
FY 2006: 4,813.
Total Liabilities Not Covered by Budgetary Resources:
FY 2007: 58,350;
FY 2006: 66,420.
Liabilities Not Requiring Budgetary Resources, Registrant Deposits:
FY 2007: 61,689;
FY 2006: 57,464;
Liabilities Not Requiring Budgetary Resources, Custodial Liability:
FY 2007: 63,614;
FY 2006: 71,545.
Liabilities Not Requiring Budgetary Resources, Fiduciary Liability:
FY 2007: 3,615,760;
FY 2006: 3,834,662.
Total Liabilities Not Requiring Budgetary Resources:
FY 2007: 3,741,063;
FY 2006: 3,963,671.
Liabilities Covered by Budgetary Resources, Intragovernmental, Accounts
Payable:
FY 2007: 6,153;
FY 2006: 14,527.
Liabilities Covered by Budgetary Resources, Intragovernmental, Employee
Benefits:
FY 2007: 2,699;
FY 2006: 2,687.
Total Intragovernmental Liabilities:
FY 2007: 8,852;
FY 2006: 17,214.
Accounts Payable:
FY 2007: 43,096;
FY 2006: 47,608.
Accrued Payroll and Benefits:
FY 2007: 18,176;
FY 2006: 18,149.
Other:
FY 2007: 6,473;
FY 2006: 14,839.
Total Liabilities Covered by Budgetary Resources:
FY 2007: 76,597;
FY 2006: 97,810.
Total Liabilities:
FY 2007: $3,876,010;
FY 2006: $4,127,901.
SEC's liabilities include amounts that will never require the use of a
budgetary resource. These liabilities consist of registrant deposit
accounts; accounts receivable for disgorgement, penalties, and interest
assessed against securities laws violators; and invested and uninvested
fiduciary assets held by the SEC on behalf of harmed investors.
[End of Note 7]
Note 8. Actuarial FECA Liability:
The FECA provides income and medical cost protection to covered federal
civilian employees harmed on the job and for those who have contracted
a work-related occupational disease, and dependents of employees whose
death is attributable to a job-related injury or occupational disease.
Claims incurred for benefits under the FECA for the SEC's employees are
administered by the DOL and, ultimately, are paid by the SEC.
The SEC's estimate is based on the DOLs model for estimating the FECA
actuarial liability for federal agencies not specified in the DOLs FECA
model. The model considers the average amount of benefit payments
incurred by the SEC for the past three fiscal years, multiplied by the
medical and compensation liability to benefits paid (LBP) ratio for the
whole FECA program, estimated at approximately 11 times the annual
payments. To capture variability, the model estimates the liability
using three sets of LBP ratios, summarized as follows:
For FY 2007, the LBP ratios were as follows:
LBP Category: Highest;
Medical: 9.50%;
Compensation: 12.20%.
LBP Category: Overall Average;
Medical: 8.00%;
Compensation: 11.80%.
LBP Category: Lowest;
Medical: 7.20%;
Compensation: 11.50%.
For FY 2006, the LBP ratios were as follows:
LBP Category: Highest;
Medical: 9.70%;
Compensation: 12.80%.
LBP Category: Overall Average;
Medical: 8.00%;
Compensation: 11.90%.
LBP Category: Lowest;
Medical: 7.10%;
Compensation: 11.40%.
For FY 2007 and 2006, the SEC used the overall average LBP ratios to
calculate the $5.1 million and $4.8 million FECA actuarial liabilities
for those years, respectively.
[End of Note 8]
Note 9. Leases:
The SEC has the authority to negotiate long-term leases for office
space. At September 30, 2007, the SEC leased office space at 18
locations under operating lease agreements that expire between 2008 and
2021. The SEC paid $85,497 thousand and $80,958 thousand for rent for
FY 2007 and 2006, respectively. Under existing commitments, the minimum
lease payments through FY 2012 and thereafter are as follows:
Fiscal Year (Dollars In Thousands): 2008;
Minimum Lease Payments: $80,848.
Fiscal Year (Dollars In Thousands): 2009;
Minimum Lease Payments: 78,566.
Fiscal Year (Dollars In Thousands): 2010;
Minimum Lease Payments: 76,692.
Fiscal Year (Dollars In Thousands): 2011;
Minimum Lease Payments: 76,595.
Fiscal Year (Dollars In Thousands): 2012;
Minimum Lease Payments: 67,723.
Fiscal Year (Dollars In Thousands): 2013 and thereafter;
Minimum Lease Payments: 403,683.
Total Future Minimum Lease Payments: $784,107.
The total future minimum lease payments summarized above include a
liability the SEC has recognized for office space leased in Washington,
D.C. and New York. During FY 2006, the SEC moved into new office space
and vacated old office space in Washington, D.C. While the SEC is
marketing the old office space for potential tenants, the SEC is
responsible for the remaining $1,909 thousand of lease payments that
end in FY 2008.
Fiscal Year (Dollars In Thousands): 2008;
Required Lease Payments, New York: $2,722;
Required Lease Payments, Washington, DC: $1,909
Required Lease Payments, Total: $4,631.
Fiscal Year (Dollars In Thousands): 2009;
Required Lease Payments, New York: 2,722;
Required Lease Payments, Washington, DC: [Empty];
Required Lease Payments, Total: 2,722.
Fiscal Year (Dollars In Thousands): 2010;
Required Lease Payments, New York: 2,722;
Required Lease Payments, Washington, DC: [Empty];
Required Lease Payments, Total: 2,722.
Fiscal Year (Dollars In Thousands): 2011;
Required Lease Payments, New York: 2,469;
Required Lease Payments, Washington, DC: [Empty];
Required Lease Payments, Total: 2,469.
Fiscal Year (Dollars In Thousands): 2012;
Required Lease Payments, New York: 1,192;
Required Lease Payments, Washington, DC: [Empty];
Required Lease Payments, Total: 1,192.
Total Future Estimated Lease Payments:
Required Lease Payments, New York: $11,827;
Required Lease Payments, Washington, DC: $1,909;
Required Lease Payments, Total: $13,736.
During FY 2005, the SEC also entered into a lease agreement for new
office space in New York. With respect to its prior New York office
space, the SEC and U.S. General Services Administration (GSA) entered
into separate agreements with the lessor. The GSA has agreed to rent
the office space from the lessor for the next five years of the SEC's
lease. At that time, the GSA has the option to renew the agreement for
the remaining 15 months of the SEC's lease. As part of the SEC's
agreement with the lessor, the SEC was responsible for the estimated
$18 million difference between its annual lease liability and the
annual lease liability negotiated by the GSA with the lessor. As of FY
2007, the SEC is responsible for the remaining $11,827 thousand of
lease payments that end in FY 2012.
In FY 2006, the SEC recorded an additional six months of rent expense
totaling approximately $4.4 million and recorded a reduction to the
liability for six months totaling $0.3 million. In FY 2007, the SEC
recorded a reduction to the liability totaling $10.7 million. For FY
2007 and 2006, the SEC recognized an unfunded liability of $16.9
million and $27.6 million, respectively to cover the three lease
obligations (See Note 7 Liabilities Not Covered by Budgetary
Resources).
[End of Note 9]
Note 10. Imputed Financing:
The SEC recognizes an imputed financing source and corresponding
expense to represent its share of the cost to the federal government of
providing pension and post-retirement health and life insurance
benefits (Pension/Other Retirements Benefits (ORB)) to all eligible SEC
employees. For September 30, 2007 and 2006, the components of the
imputed financing sources and corresponding expenses were as follows:
Pension/ORB Category (Dollars In Thousands): CSRS;
FY 2007: $6,113;
FY 2006: $6,956.
Pension/ORB Category (Dollars In Thousands): FERS;
FY 2007: 1,386;
FY 2006: 1,269.
Pension/ORB Category (Dollars In Thousands): FEHB;
FY 2007: 18,838;
FY 2006: 18,525.
Pension/ORB Category (Dollars In Thousands): FEGLI;
FY 2007: 89;
FY 2006: 93.
Pension/ORB Category (Dollars In Thousands): Other;
FY 2007: 11;
FY 2006: 7.
Total Pension/ORB (Dollars In Thousands):
FY 2007: $26,437;
FY 2006: $26,850.
[End of Note 10]
Note 11. Commitments and Contingencies:
A. Commitments:
The Securities Investor Protection Act of 1970 (SIPA), as amended
created the SIPC to provide certain financial protections to customers
of insolvent registered securities brokers, dealers, firms, and members
of national securities exchanges for up to $500,000 per customer. The
SIPA authorizes the SIPC to create a fund to maintain all moneys
received and disbursed by the SIPC. The SIPA also gives the SIPC the
authority to borrow funds from the SEC in an amount not to exceed in
the aggregate $t billion in the event that the SIPC fund is or may
appear insufficient for purposes of the SIPA. If necessary, these funds
would be made avail-able to the SEC through the purchase by the
Treasury of notes or other obligating instruments issued by the SEC.
Such notes or other obligating instruments would bear interest at a
rate determined by the Secretary of the Treasury. As of September 30,
2007, the SEC had not loaned any funds to the SIPC, and there are no
outstanding notes or other obligating instruments issued by the SEC.
In addition to future lease commitments discussed in Note 9. Leases,
the SEC is obligated for the purchase of goods and services that have
been ordered, but not yet received. For FY 2007, net obligations for
all of SEC's activities were $254,660 thousand and of this amount
$80,731 thousand were delivered and unpaid. For FY 2006, net
obligations for all of SEC's activities were $229,308 thousand and of
this amount $89,507 thou-sand were delivered and unpaid.
B. Contingencies:
Contingent liabilities are recognized when a past event or exchange
transaction has occurred, a future outflow or other sacrifice of
resources is probable, and the future outflow or sacrifice of resources
is measurable.
The SEC is party to various routine administrative proceedings, legal
actions, and claims brought by or against it, including threatened or
pending litigation involving labor relations claims, some of which may
ultimately result in settlements or decisions against the federal
government. As of September 30, 2007, SEC management does not owe for
claims.
[End of Note 11]
Note 12. Intragovernmental Costs and Exchange Revenue:
All costs incurred during FY 2007 and 2006 were assigned to specific
goals, but exchange revenue is not directly assignable to a specific
goal, and is presented in total. Total intragovernmental and public
costs at September 30, are summarized below.
Program Goals, (Dollars In Thousands): Enforce compliance with federal
securities laws, Intragovernmental costs;
FY 2007: $82,118;
FY 2006: $95,152.
Program Goals, (Dollars In Thousands): Enforce compliance with federal
securities laws, Public costs;
FY 2007: 447,336;
FY 2006: 483,924.
Program Goals, (Dollars In Thousands): Subtotal-Enforce compliance with
federal securities laws;
FY 2007: 529,454;
FY 2006: 579,076.
Program Goals, (Dollars In Thousands): Promote healthy capital markets
through an effective and flexible regulatory environment,
Intragovernmental costs:
FY 2007: 12,362;
FY 2006: 12,695.
Program Goals, (Dollars In Thousands): Promote healthy capital markets
through an effective and flexible regulatory environment, Public
costs;
FY 2007: 67,342;
FY 2006: 64,568.
Program Goals, (Dollars In Thousands): Subtotal-Promote healthy capital
markets through an effective and flexible regulatory environment:
FY 2007: 79,704;
FY 2006: 77,263.
Program Goals, (Dollars In Thousands): Foster informed investment
decision making, Intragovernmental costs;
FY 2007: 21,081;
FY 2006: 22,323.
Program Goals, (Dollars In Thousands): Foster informed investment
decision making, Public costs;
FY 2007: 114,836;
FY 2006: 113,533.
Program Goals, (Dollars In Thousands): Subtotal -Foster informed
investment decision making;
FY 2007: 135,917;
FY 2006: 135,856.
Program Goals, (Dollars In Thousands): Maximize the use of SEC
resources, Intragovernmental costs;
FY 2007: 15,117;
FY 2006: 15,894.
Program Goals, (Dollars In Thousands): Maximize the use of SEC
resources, Public costs;
FY 2007: 82,349;
FY 2006: 80,834.
Program Goals, (Dollars In Thousands): Subtotal-- Maximize the use of
SEC resources;
FY 2007: 97,466;
FY 2006: 96,728.
Program Goals, (Dollars In Thousands): Total Entity, Intragovernmental
Costs:
FY 2007: 130,678;
FY 2006: 146,064.
Program Goals, (Dollars In Thousands): Total Entity, Public Costs;
FY 2007: 711,863;
FY 2006: 742,859.
Total Costs:
FY 2007: $842,541;
FY 2006: $888,923.
Less Exchange Revenues:
FY 2007: 1,507,750;
FY 2006: 1,882,619.
Net (Income) from Operations:
FY 2007: $(665,209);
FY 2006: $(993,696).
[End of Note 12]
Note 13. Exchange Revenues:
For FY 2007 and 2006, exchange revenues consisted of the following,
(Dollars in Thousands):
Securities Transactions Fees:
FY 2007: $1,249,019;
FY 2006: $1,382,805.
Securities Registration, Tender Offer, and Merger Fees:
FY 2007: 258,490;
FY 2006: 499,236.
Other:
FY 2007: 241;
FY 2006: 578.
Total Exchange Revenues:
FY 2007: $1,507,750;
FY 2006: $1,882,619.
[End of Note 13]
Note 14. Status of Budgetary Resources:
A. Apportionment Categories of Obligations Incurred:
The distinction between Category A and B funds is that Category A funds
are subject to quarterly apportionment by the OMB, while Category B
funds are available for use by the agency without being subject to
quarterly apportionment. For FY 2007 and 2006, obligations incurred as
reported on the Statement of Budgetary Resources consisted of the
following:
Obligations Incurred, (Dollars In Thousands): Direct Obligations,
Category A;
FY 2007: $876,274;
FY 2006: $896,911.
Obligations Incurred, (Dollars In Thousands): Total Direct Obligations;
FY 2007: $876,274;
FY 2006: $896,911.
Obligations Incurred, (Dollars In Thousands): Reimbursable Obligations,
Category B;
FY 2007: 321;
FY 2006: 519.
Obligations Incurred, (Dollars In Thousands): Total Reimbursable
Obligations;
FY 2007: 321;
FY 2006: 519.
Obligations Incurred, (Dollars In Thousands): Total Obligations
Incurred;
FY 2007: $876,595;
FY 2006: $897,430.
In addition, the amounts of budgetary resources obligated for
undelivered orders include $173,929 thousand and $140,595 thousand as
of September 30, 2007 and 2006, respectively.
B. Explanation of Differences between the Statement of Budgetary
Resources and the Budget of the United States Government:
A comparison between the Statements of Budgetary Resources and the
actual FY 2007 data in the President's Budget cannot be performed as
the FY 2009 President's Budget is not yet available; the comparison
will be presented in next year's financial statements. A comparison
between the FY 2006 Statement of Budgetary Resources and the FY 2006
data in the President's Budget is as follows (Dollars in millions):
SBR:
Total Budgetary Resources/Status Of Budgetary Resources:
$5,775;
Total New Obligations: $897;
Temporarily Not Available Pursuant To Public Law: [Empty];
Unobligated Balance—End Of Year: $4,878;
Obligations Incurred: $897;
Net Outlays: $(982).
Reconciling Items:
Total Budgetary Resources/Status Of Budgetary Resources:
4,861;
Total New Obligations: 19;
Temporarily Not Available Pursuant To Public Law: 1,041;
Unobligated Balance—End Of Year: 4,842;
Obligations Incurred: 19;
Net Outlays: 51.
Budget of the U.S. Government:
Total Budgetary Resources/Status Of Budgetary Resources: $914;
Total New Obligations: $878;
Temporarily Not Available Pursuant To Public Law: $(1,041)
Unobligated Balance—End Of Year: $36;
Obligations Incurred: $878;
Net Outlays: $(1,033).
In the past, the SEC recorded excess collections as unapportioned
authority. This amount is presented on the SBR as Unobligated Balance,
Brought Forward, October 1 and as Unobligated Balance Not Available.
This SBR presentation differs from the treatment of these balances on
the Program and Financing (P&F) Statement included in the Budget of the
United States, in that this amount is presented in a memorandum account
on the P&F rather than as a component of agency resources.
Under a change in accounting methodology made in the third quarter, SEC
will reflect the current years' excess offsetting collections as
Temporarily Not Available Pursuant to Public Law. Accordingly, the SBA,
Unobligated Balance, Brought Forward, October 1 will appear net of
excess collections resolving the reconciling items. To effect this
change, an adjustment in the amount of $4,691 million was made
decreasing both Unobligated Balance, Brought Forward, October 7 and
Unobligated Balance Not Available.
The SBR reports all obligations incurred while the President's Budget
excludes expired accounts that are no longer available for new
obligations. The net outlays do not agree, due to the fact that the P&F
does not include Distributed Offsetting Receipts.
[End of Note 14]
Note 15. Custodial Revenues and Liabilities:
For FY 2007, the source of custodial revenues consisted of the
following, (Dollars In Thousands):
Cash Collections:
Disgorgement And Penalties: $496,386;
Other: $138;
Total: $496,524.
Less: Refunds:
Disgorgement And Penalties: [Empty];
Other: [Empty];
Total: [Empty].
Net Cash Collections:
Disgorgement And Penalties: 496,386;
Other: 138;
Total: 496,524.
Increase/(Decrease) in Amounts to be Collected:
Disgorgement And Penalties: (7,935);
Other: 4;
Total: (7,931).
Total Non-Exchange Revenues:
Disgorgement And Penalties: $488,451;
Other: $142;
Total: $488,593.
For FY 2007, the source of custodial liabilities consisted of the
following:
Gross Custodial Accounts Receivable:
Disgorgement And Penalties: $329,584;
FOIA: $6;
Total: $329,590.
Less: Allowance for Doubtful Accounts:
Disgorgement And Penalties: (265,974);
FOIA: (2);
Total: (265,976).
Net Custodial Liability:
Disgorgement And Penalties: $63,610;
FOIA: $4;
Total: $63,614.
For FY 2006, the source of custodial revenues consisted of the
following:
Cash Collections:
Disgorgement And Penalties: $1,804,043;
Other: $90;
Total: $$1,804,133.
Less: Refunds:
Disgorgement And Penalties: [Empty];
Other: [Empty];
Total: [Empty].
Net Cash Collections:
Disgorgement And Penalties: $1,804,043;
Other: $90;
Total: $$1,804,133.
Increase/(Decrease) in Amounts to be Collected:
Disgorgement And Penalties: (23,967);
Other: [Empty];
Total: (23,967).
Total Non-Exchange Revenues:
Disgorgement And Penalties: $1,780,076;
Other: $90;
Total: $1,780,166.
For FY 2007, the source of custodial liabilities consisted of the
following:
Gross Custodial Accounts Receivable:
Disgorgement And Penalties: $247,631;
FOIA: [Empty];
Total: $247,631.
Less: Allowance for Doubtful Accounts:
Disgorgement And Penalties: (176,086);
FOIA: [Empty];
Total: (176,086).
Net Custodial Liability:
Disgorgement And Penalties: $71,545;
FOIA: [Empty];
Total: $71,545.
[End of Note 15]
Note 16. Fiduciary Assets and Liabilities:
At September 30, 2007 and 2006, the assets held by the SEC in a
fiduciary capacity and its offsetting liability consisted of the
following:
Fiduciary Activities (Dollars in thousands): Assets, Fund Balance with
Treasury;
FY 2007: $13,094;
FY 2006: $5,759.
Fiduciary Activities (Dollars in thousands): Assets, Investments;
FY 2007: 3,602,511;
FY 2006: 3,674,528.
Fiduciary Activities (Dollars in thousands): Assets, Accounts
Receivable;
FY 2007: 155;
FY 2006: 154,375.
Fiduciary Activities (Dollars in thousands): Total Assets;
FY 2007: $3,615,760;
FY 2006: $3,834,662.
Fiduciary Activities (Dollars in thousands): Liabilities, Liability for
Fiduciary Activity;
FY 2007: $3,615,760;
FY 2006: $3,834,662.
Fiduciary Activities (Dollars in thousands): Total Liabilities;
FY 2007: $3,615,760;
FY 2006: $3,834,662.
At September 30, 2007 and 2006, the source and disposition of the SEC's
fiduciary activities consisted of the following:
Fiduciary Activities (Dollars in thousands): Fund Balance with
Treasury, Beginning Balance;
FY 2007: $5,759;
FY 2006: $207,529.
Fiduciary Activities (Dollars in thousands): Fund Balance with
Treasury, Disgorgement and Penalties;
FY 2007: 321,866;
FY 2006: 1,639,914.
Fiduciary Activities (Dollars in thousands): Fund Balance with
Treasury, Transfer to Investments;
FY 2007: (314,531);
FY 2006: (1,841,684).
Fiduciary Activities (Dollars in thousands): Total Fund Balance with
Treasury;
FY 2007: 13,094;
FY 2006: 5,759.
Fiduciary Activities (Dollars in thousands): Investments, Beginning
Balance:
FY 2007: 3,674,528;
FY 2006: 1,768,024.
Fiduciary Activities (Dollars in thousands): Investments, Net
Investments Activity, Disgorgement and Penalties;
FY 2007: (72,017);
FY 2006: 1,906,504.
Fiduciary Activities (Dollars in thousands): Total Investments;
FY 2007: 3,602,511;
FY 2006: 3,674,528.
Fiduciary Activities (Dollars in thousands): Accounts Receivable,
Beginning Balance;
FY 2007: 154,375;
FY 2006: [Empty].
Fiduciary Activities (Dollars in thousands): Accounts Receivable, Net
Activity--Accounts Receivable;
FY 2007: (154,220);
FY 2006: 154,375.
Fiduciary Activities (Dollars in thousands): Total Accounts Receivable;
FY 2007: 155;
FY 2006: 154,375.
Fiduciary Activities (Dollars in thousands): Total Assets;
FY 2007: $3,615,760;
FY 2006: $3,834,662.
Fiduciary Activities (Dollars in thousands): Liability for Fiduciary
Activity, Beginning Balance;
FY 2007: $3,834,662;
FY 2006: $1,975,553.
Fiduciary Activities (Dollars in thousands): Liability for Fiduciary
Activity, Disgorgement and Penalties;
FY 2007: (218,902);
FY 2006: 1,859,109.
Fiduciary Activities (Dollars in thousands): Total Liabilities;
FY 2007: $3,615,760;
FY 2006: $3,834,662.
[End of Note 16]
Note 17. Reconciliation of Net Cost of Operations (Proprietary) to
Budget (formerly the Statement of Financing)(Dollars In Thousands):
Resources Used To Finance Activities:
Budgetary Resources Obligated, Obligations Incurred (Note 14);
FY 2007: $876,595;
FY 2006: $897,430.
Resources Used To Finance Activities:
Budgetary Resources Obligated, Less: Spending Authority from Offsetting
Collections and Recoveries;
FY 2007: (1,560.985);
FY 2006: (1,936,658).
Resources Used To Finance Activities:
Net Obligations;
FY 2007: (684,390);
FY 2006: (1,039.228).
Resources Used To Finance Activities:
Other Resources: Imputed Financing from Cost Absorbed by Others (Note
10);
FY 2007: 26,437;
FY 2006: 26,850.
Total Resources Used to Finance Activities:
FY 2007: (657,953);
FY 2006: (1,012,378).
Resources Used To Finance Items Not Part Of The Net Cost Of Operations:
Change in Budgetary Resources Obligated for Goods, Services and
Benefits Ordered But Not Yet Provided:
FY 2007: (35,123);
FY 2006: 21,831.
Resources Used To Finance Items Not Part Of The Net Cost Of Operations:
Resources That Finance the Acquisition of Assets Capitalized on the
Balance Sheet;
FY 2007: (31,793);
FY 2006: (57,658).
Resources Used To Finance Items Not Part Of The Net Cost Of Operations:
Net Decrease in Revenue Receivables Not Generating Resources until
Collected;
FY 2007: 30,855;
FY 2006: 20,941.
Resources Used To Finance Items Not Part Of The Net Cost Of Operations:
Total Resources Used to Finance Items Not Part of the Net Cost of
Operations;
FY 2007: (36,061);
FY 2006: (14,886).
Resources Used To Finance Items Not Part Of The Net Cost Of Operations:
Total Resources Used to Finance the Net Cost of Operations;
FY 2007: (694,014);
FY 2006: (1,027,264).
Components Of Net Cost Of Operations That Will Not Require Or Generate
Resources In The Current Period: Components Requiring or Generating
Resources in Future Periods: Costs That Will Be Funded by Resources in
Future Periods;
FY 2007: 2,322;
FY 2006: 950.
Components Of Net Cost Of Operations That Will Not Require Or Generate
Resources In The Current Period: Components Requiring or Generating
Resources in Future Periods: Change in Lease Liability;
FY 2007: (10,776);
FY 2006: 5,994.
Components Of Net Cost Of Operations That Will Not Require Or Generate
Resources In The Current Period: Components Requiring or Generating
Resources in Future Periods: Change in Unfunded Liability;
FY 2007: 385;
FY 2006: (715).
Components Of Net Cost Of Operations That Will Not Require Or Generate
Resources In The Current Period: Total Components of Net Cost of
Operations That Will Require or Generate Resources in Future Periods;
FY 2007: (8,069);
FY 2006: 6,229.
Components Not Requiring or Generating Resources: Depreciation and
Amortization;
FY 2007: 35,912;
FY 2006: 26,265.
Components Not Requiring or Generating Resources: Revaluation of Assets
or Liabilities;
FY 2007: 950;
FY 2006: 1,071.
Components Not Requiring or Generating Resources: Other Costs That Will
Not Require Resources;
FY 2007: 12;
FY 2006: 3.
Total Components of Net Cost of Operations That Will Not Require or
Generate Resources in Future Periods:
FY 2007: 36,874;
FY 2006: 27,339.
Total Components of Net Cost of Operations That Will Not Require or
Generate Resources in the Current Period:
FY 2007: 28,805;
FY 2006: 33,568.
Net (Income) from Operations:
FY 2007: $(665,209);
FY 2006: $(993,696).
[End of Note 17]
[End of section]
Appendix III: Comments from the Securities and Exchange Commission:
United States:
Securities And Exchange Commission:
Christopher Cox:
Chairman:
Headquarters:
100 F Street, NE:
Washington, DC 20549:
Regional Offices:
Atlanta, Boston, Chicago, Denver, Fort Worth, Los Angeles, Miami, New
York, Philadelphia, Salt Lake City, San Francisco:
November 14, 2007:
The Honorable David M. Walker:
Comptroller General of the United States:
Government Accountability Office:
441 G Street, NW:
Washington, D.C. 20548:
Dear Mr. Walker:
Thank you for the opportunity to respond to the Government
Accountability Office's (GAO) draft report entitled Financial Audit:
Securities and Exchange Commission's Financial Statements for Fiscal
Years 2007 and 2006. I would like to personally acknowledge and commend
you and the GAO staff for your efforts and dedication in working with
the SEC again this year to meet the reporting deadline for our audited
financial statements.
I am pleased that once again the audit found that the statements and
notes are presented fairly, in all material respects, and in conformity
with U.S. generally accepted accounting principles, and that it found
no instances of reportable noncompliance with laws and regulations
tested. I also appreciate the progress that you have helped the SEC
make during the past year in strengthening our internal controls over
financial reporting. As you know, in 2008 the agency will introduce
several new technology upgrades designed to support the preparation of
reliable audited financial statements. The phase-in of these new
software systems is designed to eliminate the material weakness in the
SEC's internal controls cited in the draft report, stemming in
substantial part from the lack of integration and compatibility in the
agency's legacy automated systems. The SEC intends to remediate this
material weakness before the end of fiscal 2008, and to address each of
the findings and recommendations identified during the audit. We will
continue to work with you and your staff to enhance the SEC's controls
in all operational areas, and ensure reliability of financial
reporting, soundness of operations, and public confidence in the
agency's mission.
If you have any questions relating to our response, please contact
Kristine Chadwick, Chief Financial Officer, at (202) 551-7840.
Signed by:
Christopher Cox:
Chairman:
CHAIRMANOFFICE@SEC.GOV:
[hyperlink, http://WWW.SEC.GOV]:
[End of section]
Footnotes:
[1] A material weakness is a significant deficiency or combination of
significant deficiencies that results in more than a remote likelihood
that a material misstatement of the financial statements will not be
prevented or detected.
[2] A significant deficiency is a control deficiency, or combination of
deficiencies, that adversely affects the entity’s ability to initiate,
authorize, record, process, or report financial data reliably in
accordance with generally accepted accounting principles such that
there is more than a remote likelihood that a misstatement of the
entity’s financial statements that is more than inconsequential will
not be prevented or detected.
[3] GAO, Financial Audit: Securities and Exchange Commission’s
Financial Statements for Fiscal Year 2006 and 2005, GAO 07 134
(Washington, D.C.: Nov. 15, 2006).
[4] In our previous report, we considered those weaknesses to be
reportable conditions. Reportable conditions involved matters coming to
the auditor’s attention that, in the auditor’s judgment, should be
communicated because they represent significant deficiencies in the
design or operation of internal control, and could adversely affect an
agency’s ability to meet key control objectives. In May 2006, the
American Institute of Certified Public Accountants issued Statement on
Auditing Standards (SAS) 112, and subsequently made conforming changes
to the Statements on Standards for Attestation Engagements (AT 501).
The new standards eliminated the term reportable condition and
introduced new definitions for the terms “significant deficiency” and
“material weakness.” Under these new standards, the auditor is required
to communicate control deficiencies that are considered to be
significant deficiencies or material weaknesses in internal controls.
[5] A disgorgement is the repayment of illegally gained profits (or
avoided losses) for distribution to harmed investors whenever feasible.
A penalty is a monetary payment from a violator of securities law that
SEC obtains pursuant to statutory authority. A penalty is fundamentally
a punitive measure, although penalties occasionally can be used to
compensate harmed investors.
[6] OMB directs executive branch agencies to issue their audited
financial statements by November 15 for the preceding fiscal year
ending on September 30. OMB Circular No. A-136, Financial Reporting
Requirements, § I.5 (rev. June 27, 2007).
[7] 31 U.S.C. § 1501(a)(1).
[8] Appendix C, Part l to OMB Circular A-123, Management's
Responsibility for Internal Controls, issued through OMB Memorandum M-
06-23 dated August 10, 2006.
[End of section]
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