SEC Fails at Overseeing Self

The General Accountability Office (GOA) has concluded today that the Securities and Exchange Criminals....Ahem.....Commission (SEC), the agency that is responsible for all the financial oversight of all U.S. corporations under the umbrella of corporate America, fails at overseeing its own "internal controls." According to CFO.com, the GAO has reported that all the "data related to accounts receivable balances is processed manually at the SEC in a manner that is prone to error and could result in inaccurate financial reporting by the agency." (Emphasis added.)

Here's what the rest of the piece says:

The news is a blow to the SEC, which was criticized by the GAO in 2006 for the same manual processes, but narrowly avoided a material weakness by putting in place extra controls to compensate for them. The GAO said those controls were not effective in 2007.

The GAO added that the SEC's material weakness also included other control deficiencies related to the SEC's period-end closing process, accounting for transaction fee revenue and preparation of financial statement disclosures.

The news is also a moral blow the agency, which is responsible for implementing and enforcing the provisions of the Sarbanes-Oxley Act for publicly-listed companies. Section 404 of the act requires that companies maintain internal controls over financial reporting, and requires its CEO and CFO to attest to their effectiveness.

It is also intriguing to note that the article also states the following two paragraphs:

In response, SEC chairman Christopher Cox said that in 2008 the commission will introduce new software systems designed to eliminate the material weakness in the SEC's internal controls. "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," said Cox in a letter to Comptroller General David Walker.

In its latest report, the GAO assured that the SEC's financial statements for fiscal 2007 and 2006 were fairly presented. It also noted that the SEC maintained effective internal control over compliance with laws and regulations material to its financial statements as of September 30, 2007. And the GAO did not find reportable instances of noncompliance with the laws and regulations it tested.

The fact that the SEC can't effectively and efficiently oversee its internal operations is scathing. This is a federal agency whose sole responsibility is to keep a close watch on the financial health of major Fortune 1000 and Fortune 500 companies and many other private companies and to enforce provisions of the diabolical and disastrous Sarbanes-Oxley 404 law, requiring private management to report on their firms' internal controls with regards to financial reporting. If the federal government's own SEC cannot hold itself financially accountable to its own internal operations, then how can we trust it to hold private firms accountable for their own financial malaise when it is incapable of doing the same thing?

As LewRockwell.com blogger Karen DeCoster recently pointed it out on her blog:

The SEC avoided a big fat "E" last year via its remediation of internal control problems, but this year the SEC's material weaknesses included control deficiencies related to its accounts receivable balances, "period-end closing process, accounting for transaction fee revenue, and preparation of financial statement disclosures.

The political jury is in: we must abolish the Securities and Exchange Commission and allow the free market to regulate the financial reporting of companies. Let's allow free enterprise to solve this problem, which has, in all fairness, plagued corporate America for many years. Goverment cannot solve the problem; only the free market can.