FAIL: SEC fails audits seven years in a row

The U.S. Securities and Exchange Commission (SEC) was established in 1934 following the crash of the stock market. Its primary responsibility is the enforcement of federal securities laws and regulating the securities industry, the nation’s stock and options exchanges, and other electronic securities markets. While it may have done a decent job in the past, its recent performance (since about 2000) has been less than stellar, to put it mildly. It has been asleep at the switch for some of the biggest scandals and financial failures of the century and it has failed its own audits seven years running (story here from the NYT).

If a company’s financial reporting were so bad that its auditor had pointed out significant weaknesses in its accounting for seven years running, the Securities and Exchange Commission would most likely be all over it.

But what if the company were the S.E.C. itself?

Since the commission began producing audited statements in 2004, the Government Accountability Office has faulted its reporting almost every year. Last November, the G.A.O. said that the commission’s books were in such disarray that it had failed at some of the agency’s most fundamental tasks: accurately tracking income from fines, filing fees and the return of ill-gotten profits.

“A reasonable possibility exists that a material misstatement of S.E.C.’s financial statements would not be prevented, or detected and corrected on a timely basis,” the auditor concluded.

Since 2000 its budget has tripled and its staff has ballooned to almost 4000 employees.

…the S.E.C. is far from starved for money. Its $1.1 billion budget in 2010 was 15 percent higher than the $960 million it received the year before — and nearly triple its $377 million budget in 2000.

Representative Spencer T. Bachus, the Alabama Republican who is chairman of the House Financial Services Committee, said last week that the tripling of the S.E.C.’s budget occurred in a period that included some of the agency’s biggest failures — the Ponzi schemes of Bernard L. Madoff and R. Allen Stanford and the collapse of Bear Stearns and Lehman Brothers.


With the Dodd/Frank boot-to-the-face avalanche of new financial regulation coming into play, the SEC is about to become even more powerful – and costly.

Dodd-Frank did authorize a doubling of the commission’s budget, to $2.25 billion, over the next five years — without providing the money for it. It also authorized the commission to spend as much as $100 million beyond its operating budget for new technology systems.

Anticipating new employees, the S.E.C. has been busily leasing more office space — an effort that has drawn the attention of the agency’s inspector general. Last week, he began investigating the S.E.C.’s decision last July to lease more than a million square feet of prime office space in Washington, one of the largest federal leases in a decade.

Within a few months of that decision, its prospects for bigger budgets fading, the S.E.C. began negotiations to return some of the leased space. The latest inquiry is the second investigation of the S.E.C.’s leasing practices in a year. Last September, H. David Kotz, the inspector general, reported that a lack of adequate policies led the agency to make lease payments that could have been avoided, including more than $15 million for space in Manhattan that no S.E.C. employees have occupied in the last five years.

Typical. Government. FAIL. With no end in sight…


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