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To all struggling businesses forced by their auditors to disclose “material weakness” in their financial reporting, the Securities and Exchange Commission may have a message: “We feel your pain.”
“Material weakness” is an accounting world term that essentially means a company can’t verify its sales, expenses or similar vitals. It’s the sort of dark disclosure that often sends investors bolting for the exits. The giant insurer American International Group Inc., for example, reported material weakness in its accounting shortly before collapsing into the government’s arms last year.
It turns out that material weakness runs rampant at the SEC, too. The Government Accountability Office (GAO) said in a report recently that it found six “significant deficiencies” at the SEC that collectively amount to the dreaded material weakness at the agency. Successfully addressing these issues is critical to maintaining the SEC’s credibility given its important role in the financial reporting process of publicly traded companies.
Some of the bigger problems that government auditors cited:
A “significant deficiency in internal control over information systems.” In other words, it’s too easy for unauthorized parties to manipulate SEC computer data. The GAO has warned of this problem since 2004.
Failure to implement such elementary safeguards as “appropriate password settings” in the SEC’s computer systems, where companies file their annual reports and other key financial data.
Trouble with something as basic as keeping track of payroll. The SEC failed to “provide evidence that it monitored controls … to ensure payroll transactions were recorded accurately and timely.”
In a response to the GAO, SEC Chairman Mary Shapiro declared: “We are committed to making the resolution of these deficiencies a priority of the very highest order.”
Last week’s report comes on the heels of a blistering report in May, in which the GAO found that SEC lawyers didn’t have the time needed to catch fraudsters because they dedicated two or three hours a day to such tasks as making photocopies at a local corner store.
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