While April 1st is the traditional time for office pranks...

It's no joke when the Government Accountability Office (GAO) sends the chairman of the Securities and Exchange Commission, Christopher Cox, a letter with the subject line: "Internal Control: Improvements Needed in SEC’s Accounting and Financial Reporting Process."

Why should we care?

First, because it highlights material weaknesses in the agency's systems and procedures, internal controls and computerized and manual systems; and

Second, because it represents the type of accounting that hides waste, fraud and mismanagement of the taxpayer's money.

Third, and most importantly, because this is the state of affairs in almost every government agency throughout this land.

Hidden in plain sight and coded in bureaucratize...

Agencies which rely on complex and arcane accounting rules to actually hide unpleasant information from the public in plain sight. Especially when one is presented with data for a fiscal year's budget that spans multiple years and that fraud, waste and evidence of corruption is reported as "deviations from our projected outcomes."

When watchdog agencies encounter slip-shod procedures, faulty accounting or, even worse, outright fraud and theft, the answer is always "blamed on the system." It isn't so much that a particular person or group of people robbed the taxpayer blind as it is a "failure to institute systemic controls to prevent unauthorized deviations from funding guidelines."

Defective by design...

Either the politicians do not want the American people to know the truth or they want to insulate themselves from an unpleasant situation in a cloak of plausible deniability.

Sometimes the failure is deliberate, conditioned on political considerations rather than providing a clear, concise accounting to the American public. However, the only acceptable rationale for anomalous behavior is "national security." Which many believe is being abused beyond belief and hidden by those elected politicians who serve on oversight boards or watchdog committees. Some of whom are personally corrupt or so stupid as to overlook the obvious.

The solution...

In my not so humble opinion, the answer lies only partly with automated systems. The responsibility lies mostly with the individuals who head the agencies and those who perform the day-to-day work.

So, the solution is apparently to upgrade both the people and the systems with great preference being given to selecting and promoting more people who are honest and actually do possess a modicum of common sense.

If we must have some form of affirmative action programs for the terminally lame: the people who are dumb and lack common-sense, let's just form a nonsensical bureau in which the people pass intricate and exquisitely-crafted memos back-and-forth on tightly-scheduled deadlines. All backed by the meticulous researching of previous memos. Nothing in this department would ever be funded or implemented.

Here in a single place, we could isolate the great mass of government foolishness and political correctness.

Perhaps the name of the new agency could be something along the lines of:

Bureau Logistics Oversight Workgroup - Justice Oversight Bureau.

A redundant name which is fully descriptive of its function.

Real world example...

Presented for your consideration are the "open" items remaining from the SEC's 2004 and 2005 audit with a some of the recommendations from the 2006 audit. Remember, these are a smattering of the remaining "open" issues and are not fully reflective of the numerous "closed issues" which have been resolved or adequately explained away. In any event it provides a closer look at our government.

Table 1: Recommendations from 2004 Audit Reported as Open at Conclusion of 2006 Audit

Disgorgements and penalties

1. Implement a system that is integrated with the accounting system or that provides the necessary input to the accounting system to facilitate timely, accurate, and efficient recording and reporting of disgorgement and penalty activity.

2. Implement controls so that the ongoing activities involving disgorgements and penalties are properly, accurately, and timely recorded in the accounting system. 

3. Develop and implement written policies covering the procedures, documentation, systems, and responsible personnel involved in recording and reporting disgorgement and penalty financial information. The written procedures should also address quality control and managerial review responsibilities and documentation of such a review.

Financial statement preparation and reporting

5. Develop or acquire an integrated financial management system to provide timely and accurate recording of financial data for financial reporting and management decision making.

Property and equipment leases

6. Review all existing leases for property and equipment to determine if they should be capitalized or expensed and make any necessary adjustments to the related general ledger balances.

7. Develop policies and procedures to properly account for future property and equipment leases on an ongoing basis.

Closing recommendation to address Federal Managers’ Financial Integrity Act weaknesses

8. Require documented support and review of SEC’s corrective actions to provide evidence that actions taken in response to audit recommendations fully correct identified deficiencies prior to closing out the audit issues in the tracking system.

Table 2: Recommendations from 2005 Audit Reported as Open at Conclusion of 2006 Audit

Disgorgements and penalties

2. An accounting policy for disgorgements and penalties that will provide SEC management with reasonable assurance that the subsidiary ledger for disgorgement/penalty receivables is accurate and complete.

3. The type of documentation and procedures needed to record the termination or waiver of a debt and the proper notification and communication for approved terminations and waivers, such that management has assurance that only valid and approved terminations are recorded.

4. The recording of activity by case for fiduciary balances, including monthly reconciliations and management review, to ensure that balances by case are accurate.

5. The initiation, recording, and monitoring of investments, including the monthly reconciliation of investment activity, to provide assurance that these fiduciary amounts are accurate and complete.

Responsibilities of contracting officer’s technical representative (COTR)
6. Clarify guidance regarding policies and procedures (as described in SECR 10-8 and SECR 10-15) for the COTR’s responsibilities and take actions to help ensure existing policies and procedures are being followed consistently.

Internal review of filing fee calculations

7. Take action to help ensure that its policy on recalculating fee-bearing filing amounts is consistently followed. 

8. Take action to help ensure that the recalculation of the required filing fees is clearly documented.

Compliance with Prompt Payment Act

9. Take action to help ensure that the policy requiring the timely return of improper invoices to the vendor to allow for timely payment is followed.

Table 3: Recommendations from 2006 Audit

Property and equipment

1. Include, in its updated property management policies, detailed procedures for recording proper acquisition costs and dates in its asset-tracking system, and take steps to ensure that these procedures are being consistently implemented.

2. Implement procedures requiring periodic comparisons of related details in disbursement and property/equipment subsidiary records to identify any unrecorded purchases that satisfy established capitalization criteria.

3. Implement procedures to ensure that internal use software project managers have a complete and consistent understanding of the requirements that should govern compilation of cost data submitted for capitalization, including consideration of joint Office of Information Technology and Office of Financial Management (OFM) training to software project managers on the requirements of applicable generally accepted accounting principles.

4. Implement procedures whereby OFM staff routinely review capitalized amounts for software projects against supporting documentation to provide additional assurance that the recorded amounts are accurate and complete.

Payroll system access, approval of time and attendance records, and process documentation

5. Evaluate the overall effectiveness of its actions taken in response to our findings regarding payroll and personnel action processing, when fully implemented, to determine whether any modifications, additional actions, or both are needed.

Comparison of furniture and equipment received and ordered

6. Retain, in its updated property management policy, a procedure to document comparison of quantity and type of item received with the corresponding purchase order, and take actions to ensure that the comparisons are being consistently documented.

Bureau-speak for we know and we are working to fix the problem...

Here is an excerpt from Chairman Cox's reply to a draft copy of the report...

"Developing a fully integrated financial management system is the keystone of the SEC's Corrective Action Plan to remediate the deficiencies identified by the GAO."

"Fully integrated financial management systems and compliance with the U.S. Standard General Ledger (SGL) at the transaction level are fundamental requirements for federal financial management systems. The SEC's lack of automated system integration is the underlying cause of the system non-conformance reported. Currently, data is manually entered at a summary level; however, compliance with SGL is required at the transaction, or detail, level."

"The deficiencies in internal control over financial reporting are attributable to ineffective compensating controls over the manual processes and spreadsheets supporting financial statement balances that, in the desired state, will be replaced by fully automated integration."

"We have developed remediation strategies to address the deficiencies found relative to system integration, non-compliance with SGL at the transaction level, and compensating controls."

"The strategies are presented in the Corrective Action Plan in terms of both long-term and short-term solutions. The short-term strategies represent
improvements that are expected to be achieved this fiscal year. We are confident that these additional compensating controls will be successful in mitigating the risk associated
with manual processes. The long-term solution will achieve greater efficiency, effectiveness and risk mitigation by minimizing reliance on detective controls."

What can YOU do?

Have a great April Fools Day celebrating the great foolishness which is sometimes referred to as "government."

Elect honest and competent leaders.

Do not vote for any candidate or current politician who is willing to subvert the safety, security, sovereignty and economic strength of the United States or limit an individual's right of self-defense for their personal philosophy, power, prestige or profits.

-- steve

Quote of the Day: "While the price of freedom and security is high, it is never too high!" --George W. Bush
(probably as a justification of ever-increasing costs)

A reminder from OneCitizenSpeaking.com: a large improvement can result from a small change…

The object in life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane. -- Marcus Aurelius

Reference Links:

For those wishing to read the GAO's full audit report and the SEC's response, it can be found by clicking on the following link.

Internal Control: Improvements Needed in SEC's Accounting and Financial Reporting Process| Government Accountability Office (GAO)