Semiannual Report to Congress: October 1, 1997 to March 31, 1998
March 31, 1998
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Securities and Exchange Commission
Office of Inspector General
Semiannual Report to Congress - April 1998
Executive Summary
During this reporting period (October 1, 1997 to March 31, 1998) the Office of Inspector General (Office) issued eight audit reports. The audits reviewed: Commission administrative proceedings; the compliance inspections and examinations program; comment letters on full disclosure filings; the payroll system; database administration; and financial and administrative controls in the Northeast Regional Office and the San Francisco and Ft. Worth District Offices.
Eighteen investigations were closed during the period. Eight cases were referred to the Commission; four were also referred to the Department of Justice (which declined prosecution). The subjects of two investigations resigned from the Commission, one employee accepted demotion to a lower graded position, and forty-five employees either received or are in the process of receiving written reprimands. Three management reports on controls were issued as a result of investigations.
The Commission is making substantial efforts to ensure that its information systems are year 2000 compliant. The conversion process will entail significant risks and expenditures. We are monitoring the conversion and making recommendations, as appropriate.
Information resources management (IRM) continues to experience significant problems, which will complicate year 2000 efforts. Specifically, systems development contracting, IRM planning, and ADP security remain problem areas. The Office of Information Technology is currently reorganizing and plans to increase the use of out-sourcing to improve its performance. The Commission has established a senior level information technology committee to monitor information technology investments.
Another previously reported significant problem involves controls over the collection of fees. Although statutory changes have eliminated many of the fees most at risk and the Commission has made many improvements in controls over the collection of filings fees, the overall control structure remains inadequate. This condition will remain until a new fee system, which is currently in procurement, is implemented.
Audit Program
The Office issued eight audit reports during the reporting period. A total of ninety recommendations were made in these reports, which are further described below. Management generally concurred with the recommendations.
Administrative Proceedings
Audit 253, November 7, 1997
Commission administrative proceedings are of three types: appeals to the Commission of Self-Regulatory Organization (SRO) decisions taking disciplinary action(s) against an SRO member, proceedings held before an Administrative Law Judge (ALJ), and appeals of ALJ initial decisions to the Commission. A recent Commission Task Force concluded that the fundamental structure of the administrative proceeding (AP) process was sound. It further concluded that the AP process successfully protected the essential interests of respondents, investors, and the public, and afforded respondents a fair hearing and thorough, deliberate, and balanced post hearing decision making. The Task Force made numerous recommendations to improve the timeliness and fairness of the process.
Our objective was to evaluate the timeliness and management of the Commission's administrative proceeding (AP) process, including determining whether the recommendations that were adopted have had their desired effect. In addition, we sought to identify other improvements not directly related to the Task Force's findings.
During the audit, we interviewed members of the Commission, Commission staff, and SRO officials; surveyed a limited number of attorneys and respondents who recently participated in Commission APs; attended oral arguments before the Commission and a prehearing conference; analyzed numerical data on APs; gathered information on APs at other federal agencies; and reviewed available documentation, among other procedures.
We made several recommendations to further improve the timeliness and management of the AP process, while maintaining its fairness. The major recommendations included preparing confidential status reports, providing additional information in reports to the Commission, establishing a hiring panel for filling ALJ positions, trial use of settlement judges, and revising the criteria for oral argument in ALJ appeals.
Compliance Inspections and Examinations
Audit 254, March 18, 1998
The Commission's examination function was consolidated in May 1995 to create the Office of Compliance Inspections and Examinations (OCIE), which was designed to streamline and improve the examination process. OCIE's mandate is to protect investors through fostering compliance with the securities laws, detecting violative conduct, and ensuring that the Commission is informed of developments in the regulated community.
The three primary examination types are Broker/Dealers (B/D), Investment Advisers/Investment Companies (IA/IC) and Self-Regulatory Organizations (SRO). OCIE exercises program supervision over the examination function conducted by the eleven regional and district offices. Besides actually performing examinations, OCIE staff determine examination policy and procedure.
The scope of the audit included conducting 16 structured workshops with 207 staff and management from OCIE and six regional and district offices (approximately 35% of all personnel in the program). The primary objective of the audit was to determine the extent to which the examination function was achieving the primary and supporting objectives identified by management. The review also sought to identify actions which would increase the likelihood that the objectives would be achieved.
Workshop participants believed that, taken as a whole, the examination function was generally achieving its primary objective to conduct effective examinations and inspections of regulated entities to protect investors. They indicated that most supporting objectives were generally being implemented, although some obstacles exist which are impairing full implementation. Participants felt that OCIE should introduce additional training topics, while expanding the coverage of others. OCIE recently demonstrated its commitment to examiner training by arranging for a contractor to provide a periodic and comprehensive training program for examiners.
Staff retention was identified as a significant obstacle to achieving the examination function's objectives. We identified several improvements for consideration, while recognizing the legal and political constraints faced by the Commission.
Information systems support was also a concern raised by management and participants. The examination function is in need of additional computer support to maintain and improve its examinations. The participants in the workshops also expressed a desire for better communication of goals, objectives and examination information between OCIE headquarters and the field offices, improved examination targeting and follow-up efforts, and enhanced accountability for managers and staff.
Review of Filings - Comment Letters
Audit 259, February 4, 1998
The Division of Corporation Finance reviews filings submitted by issuers concerning securities offered in the public markets. After the review is completed, comments are sent to the issuer. The comments may consist of requests for supplemental information, amendments to filings, or improvements in future filings. The Division works with the issuer to resolve the comments.
We sought to evaluate how well the Division achieves its objectives regarding the timeliness and effectiveness of comment letters to the issuers. Also, the review sought to provide management with staff views on the importance of the comment letter process objectives and to recommend actions to increase the likelihood that the objectives would be achieved.
We obtained and analyzed information concerning successes, obstacles, recommendations, and effectiveness ratings related to the primary objective and six supporting objectives identified by the Division for the comment letter process. To obtain this information, we conducted six internal audit workshops involving approximately seventeen percent of Division review staff. Separately, we also reviewed feedback from issuers on the process and analyzed information on comment letters and filing processing to determine conformance to Division procedures and timeliness goals.
The participants in the workshops agreed that, taken as a whole, the Division's comment letter process was achieving its primary objective to improve disclosure to investors. Combined management and staff scores indicated that communication of comments was the most important supporting objective and the supporting objective most successfully implemented. All supporting objectives, except for program performance measures, were viewed as generally being achieved, although some obstacles impaired full implementation.
The participants expressed a desire for better communication of Division filing review policies from management to staff; more consistent treatment of filing issues; clearer definitions of accountant, examiner, and reviewer responsibilities; and re-evaluation of the filing examination report format. The Office of Inspector General generally endorsed these recommendations and made additional recommendations in its report. These recommendations included updating review guidance as appropriate, designing and implementing formal training for reviewers, and improving the use of outcome-based program performance measures.
Payroll System
Audit 263, March 30, 1998
The Commission's payroll system, known as the Pay, Time and Leave system, receives information from several sources. The Office of Administrative and Personnel Management, through its Personnel Resource System, provides information on new employees' salaries and withholdings and changes to current employees' salaries and withholdings (e.g., as a result of promotions or open seasons in the Thrift Savings Plan and the Health Benefits Plan). Employees submit changes to their tax withholdings directly to the Office of the Comptroller, while time and attendance data are submitted by timekeepers through the Enhanced Time and Attendance system. Information on garnishments of employee salaries is provided by the Office of the General Counsel.
The Office of the Comptroller has overall responsibility for the accuracy and timeliness of payroll data and payments. A Pay and Leave Section within that office has day-to-day responsibility for the payroll. Automated payroll processing and related hardware and software are the responsibility of the Office of Information Technology.
Our objective was to determine if the payroll system was efficient and effective and in compliance with General Accounting Office guidance and Commission policies and procedures. During the review, we interviewed payroll staff in the Office of the Comptroller, Office of Administrative and Personnel Management, and the Central and Pacific Regional Offices. We reviewed selected payroll documentation and performed limited tests of management controls.
We found that generally most management controls were effective and operations were conducted efficiently. Our recommendations to the Comptroller's Office included: ensure that separating employees are removed from the payroll system; consider eliminating a manual spreadsheet which duplicates automated payroll data; ensure that all employees have state taxes withheld when required; make one employee responsible for garnishments; ensure that payroll technicians review the Health Code Enrollment Listing to help identify health benefit deductions for new employees; remind supervisors to review the final payroll report before the payroll is processed; and remind all employees of the cut-off date for processing payroll changes.
In addition, we recommended that the Office of Information Technology modify the Health Code Enrollment Listing so that it identifies changes from the prior report. The Office of Administrative and Personnel Management should ensure that separating employees are entered into the Personnel Resource System and General Manager employees are converted to the General Schedule pay plan when appropriate.
Database Administration
Audit 269, January 5, 1998
The OIG issued a task order to Tichenor & Associates (Tichenor), an independent CPA firm, to perform agreed upon procedures on the information systems controls in the database environment of the Office of Information Technology (OIT). The objectives of the procedures were to determine the efficiency and effectiveness of controls related to the administration of the OIT database environment, which uses ADABAS (for mainframe applications) and Sybase database management software (for EDGAR and client-server applications). Also, Tichenor was to assess the operational efficiency of the database environment.
Tichenor found that OIT management has implemented some improvements in database administration (e.g., it has established the role of database administrator as a result of a recent organizational restructuring). OIT is aware of the need to make further improvements. The audit's recommendations included: issuing better written policies and procedures; stronger separation of duties; clearer organization ownership and responsibility for the EDGAR database environment; improved procedures for management of data and to control database changes; and improvements to the year 2000 plan as it relates to database environments.
Northeast Regional Office
Audit 270, January 13, 1998
The Northeast Regional Office (NERO) is located in New York City. Assisted by the Boston and Philadelphia District Offices, it administers Commission programs, subject to Commission oversight, in the states of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont, Virginia, and West Virginia, and the District of Columbia. In carrying out its responsibilities, the NERO exercises a broad range of financial and administrative functions, including maintaining time and attendance records; procuring supplies and services; arranging for staff travel; maintaining an inventory of property; and recording budgeted and actual expenditures of the office.
We conducted a limited audit of the financial and administrative controls of the NERO. The audit procedures were limited to analyzing representations made by NERO staff, reviewing supporting documentation, and conducting some tests of transactions. The purpose of the limited audit was to provide the Commission with negative assurance that the internal controls were adequate, being implemented economically and efficiently, and in compliance with Commission policies and procedures.
During our limited audit, no material weaknesses in the NERO's financial and administrative controls came to our attention. Some minor control weaknesses were verbally provided to NERO management with recommendations to resolve them. Management agreed to implement the recommendations.
San Francisco District Office
Audit 278, March 30, 1998
The San Francisco District Office (SFDO) assists the Pacific Regional Office in administering Commission programs in the states of Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington, and the territory of Guam. In carrying out its responsibilities, SFDO exercises a broad range of financial and administrative functions, including maintaining time and attendance records; procuring supplies and services; arranging for staff travel; maintaining an inventory of property; and recording budgeted and actual expenditures of the office.
We conducted a limited audit of the financial and administrative controls of the San Francisco District Office. The audit procedures were limited to interviewing SFDO staff, reviewing supporting documentation, and conducting limited tests of transactions. The purpose of the limited audit was to provide the Commission with negative assurance that the internal controls were adequate, implemented economically and efficiently, and in compliance with Commission policies and procedures.
During the limited audit described above, we identified two material weaknesses in the SFDO's financial and administrative controls: storage of back-up tapes and ordering of transcripts. We recommended that back-up tapes be secured and stored off-site and transcripts be ordered through purchase orders or the government credit card. Except for these two weaknesses, our limited testing indicated that the SFDO's controls were adequate, implemented economically and efficiently, and in compliance with Commission policies and procedures.
We also verbally discussed a number of non-material findings and informal recommendations with SFDO management. SFDO generally concurred with our findings and agreed to implement the recommendations.
The SFDO recently suggested increasing the local travel area eligible for imprest fund reimbursement. Its suggestion could be expanded to other field offices as appropriate, which could reduce Commission and Treasury administrative expense to process travel vouchers and issue Treasury checks for small amounts. We recommended that the Comptroller's Office consider redefining local travel in terms of mileage.
Ft. Worth District Office
Audit 279, March 30, 1998
The Ft. Worth District Office (FWDO) assists the Central Regional Office in administering Commission programs. In carrying out its responsibilities, the FWDO exercises a broad range of financial and administrative functions, including maintaining time and attendance records; procuring supplies and services; arranging for staff travel; maintaining an inventory of property; and recording budgeted and actual expenditures of the office.
We conducted a limited audit of the financial and administrative controls of the FWDO. The audit procedures were limited to interviewing FWDO staff, reviewing supporting documentation, and conducting limited tests of transactions. The purpose of the limited audit was to provide the Commission with negative assurance that the internal controls were adequate, being implemented economically and efficiently, and in compliance with Commission policies and procedures.
During our limited audit, no material weaknesses in the FWDO's financial and administrative controls came to our attention. Some minor control weaknesses and respective recommendations were verbally provided to FWDO management. Management generally agreed to implement the corrective actions implemented.
Investigative Program
Eighteen investigations were closed during the period. Eight cases were referred to the Commission; four were also referred to the Department of Justice (which declined prosecution). The subjects of two investigations resigned from the Commission, while another employee agreed to a demotion to a lower graded position. Forty-five employees received or are in the process of receiving written reprimands. They have also been barred from participating in the public transportation subsidy program. In addition, the Office issued three public investigative reports on management issues with recommendations for corrective actions.
At the close of the period, two investigations were pending. The pending investigations included allegations of misuse of position and conflict of interest. The most significant cases are described below.
Misuse of Public Transportation Subsidy
An investigation developed evidence that 45 Commission employees had violated the requirements of the Commission's public transportation subsidy program. The majority of these employees had collected the subsidy even though, contrary to their certifications, they did not use public transportation as their primary method of commuting to and from work. We also found that some employees had transferred the subsidy to someone else and that some employees had used the subsidy for personal travel. Written reprimands and warnings have been issued or are in process for the 45 employees. The employees have also been barred from future participation in the public transportation subsidy program.
Forgery/Theft
An investigation developed evidence that an employee's signature was forged on two certification logs for the public transportation subsidy program. Participants in the program sign the log when they receive subsidies. The employee, who had voluntarily left the program, claimed not to have signed the logs or to have received subsidies for the relevant period. Expert handwriting analysis and other evidence were referred to management. After being notified of our investigation, the subject resigned before administrative action could be taken.
Falsification of Payroll Records
We found evidence that an employee falsified payroll records to make it appear that a relative of the employee worked at the Commission. After management proposed the employee's removal, the employee agreed to alternative discipline, which included a change of position and demotion to a lower grade.
Unauthorized Disclosure of Non-Public Information
Evidence revealed that an employee had obtained non-public documents from a Commission attorney under false pretenses. The employee then knowingly provided these non-public documents to a friend at a law firm. The law firm subsequently returned the documents and did not retain any copies. Administrative action is pending.
Impersonation/Misuse of Social Security Number
We found evidence that an employee fraudulently used another Commission employee's Social Security number to open a telephone account in that employee's name. The subject did not pay the bills on the account and subsequently filed for bankruptcy. After being notified of our investigation, the subject resigned before administrative action could be taken.
Conflict of Interest/False Statements
An investigation disclosed evidence that a professional employee had engaged in conduct which gave the appearance that the employee was giving preferential treatment to a private individual and using the employee's official position to induce a third party to provide a financial benefit to that private individual. Evidence also showed that the employee may have lied to his supervisor about the extent of his contacts with the private individual. Administrative action is pending.
Investigative Reports on Management Issues
Three investigative reports on management issues were issued during the period. These reports are public and do not contain allegations, evidence, or names of subjects, but rather focus exclusively on corrective actions needed to strengthen controls. More traditional referral reports to management, Justice, etc. were also issued.
Contracting Procedures
An investigation identified several needed improvements in the Space Renovation Program's (SRP) management controls. We recommended enhanced legal consultation with the Office of the General Counsel; adequate documentation when SRP selects contractors and subcontractors; and enhanced monitoring documentation.
Selection Procedures
During an investigation into allegations of prohibited personnel actions, we identified a need to improve personnel selection procedures in the Division of Corporation Finance. We recommended that the division consider explicitly stating in vacancy announcements when knowledge of a specific industry is desirable. Also, the Office of Administrative and Personnel Management should consider whether supervisors on selection panels should be recused from rating applicants whom they supervise.
Public Transportation Subsidy Program Controls
We conducted an investigation into allegations of misuse in the Public Transportation Subsidy Program (see above). The investigation identified a need for improved management controls over the program. We recommended that the Office of Personnel and Administrative Management: check that the number of employees riding the metro shuttle is comparable to the number receiving the metro subsidy; issue additional guidance on the required extent of public transit use; remind the shuttle contractor that shuttle logs need to be complete and on the correct form; and inform program participants who should be notified if they exit the program.
Significant Problems
Year 2000
During the reporting period, the OIG began audits on the Commission's efforts to make its systems year 2000 compliant. The scope of the audits includes EDGAR and Commission internal systems.
Year 2000 conversion will cost significant resources and pose material risks for the Commission. The Commission is making substantial efforts to address the problem. However, these efforts are complicated by the on-going reorganization and operational problems in the Office of Information Technology (described below). We intend to monitor the entire conversion process and will share our findings and recommendations with OIT as they are developed.
Significant Problems Identified Previously
Information Resources Management
Audit and investigative work in a prior reporting period identified significant weaknesses in the Commission's implementation of information technology. These weaknesses related to contracting for systems development, information resources planning, and ADP security.
We reported previously that the Office of Information Technology (OIT) has taken numerous positive steps to address these and other problems. In addition, the Commission has implemented a senior level information technology committee to oversee information technology investments. Nevertheless, significant weaknesses remain.
Based on a study by a contractor, OIT will outsource much of the more routine operational IT activities with government oversight. As a result of this outsourcing, OIT staff will then turn their attention to core agency activities such as technical architecture, strategic planning, project management, security, and customer support.
Collection of Filing Fees
Our audit of the collection of filing fees confirmed the Commission's previous assessment that the management controls were not in material conformance with accounting standards. Although statutory changes have eliminated many of the fees most at risk and Commission management has made significant progress in correcting the most serious weaknesses, some corrective actions must await the implementation of a new computerized collection system. Until these corrective actions are implemented, the overall control structure will continue to fail to provide adequate assurance that accountability over filing fees is adequate.
Access to Information
The Office of Inspector General has received access to all information required to carry out its activities. No reports to the Chairman, concerning refusal of such information, were made during the period.
Other Matters
Executive Council on Integrity and Efficiency
The Office actively participates in the activities of the Executive Council on Integrity and Efficiency (ECIE). The Inspector General attends ECIE meetings, is an active member of its Financial Institutions Regulatory Committee, and serves as the ECIE representative to, and member of, the Integrity Committee of the President's Council on Integrity and Efficiency (PCIE).
The Counsel and Associate Counsel to the Inspector General are active members of the PCIE Council of Counsels. The Council considers legal issues relevant to the Inspector General community.
Computer Software Copyrights
In the previous semiannual report, we noted that the standard contract provisions for software under the Federal Acquisition Regulation (FAR) do not appear to adequately protect the government's interest. The government does not routinely obtain the copyright for custom computer software developed by contractors at government expense. We expressed our concerns to the Chairman of the Civilian Agency Acquisition Council (which issues the Federal Acquisition Regulation), as well as to the Commission's contracting personnel.
In response to our concerns, the Council decided to modify the instructions for the "special works" clause in the FAR to make it clear that the clause can be used to protect the government's interest in computer software.
Questioned Costs
Dollar Value
(in thousands)
Unsupported Questioned
Number Costs Costs
|
A |
For which no management decision has been made by the commencement of the reporting period |
0 |
0 |
0 |
|
|
B |
Which were issued during the reporting period |
0 |
0 |
0 |
|
|
Subtotals (A+B) |
0 |
0 |
0 |
||
|
C |
For which a management decision was made during the reporting period |
0 |
0 |
0 |
|
|
(i) |
Dollar value of disallowed costs |
0 |
0 |
0 |
|
|
(ii) |
Dollar value of costs not disallowed |
0 |
0 |
0 |
|
|
D |
For which no management decision has been made by the end of the period |
0 |
0 |
0 |
|
|
Reports for which no management decision was made within six months of issuance |
0 |
0 |
0 |
Recommendations That Funds Be Put To Better Use
Dollar Value
Number (in thousands)
|
A |
For which no management decision has been made by the commencement of the reporting period |
0 |
0 |
|
|
B |
Which were issued during the reporting period |
0 |
0 |
|
|
Subtotals (A+B) |
0 |
0 |
||
|
C |
For which a management decision was made during the period |
0 |
0 |
|
|
(i) |
Dollar value of recommendations that were agreed to by management |
0 |
0 |
|
|
- |
Based on proposed management action |
0 |
0 |
|
|
- |
Based on proposed legislative action |
0 |
0 |
|
|
(ii) |
Dollar value of recommendations that were not agreed to by management |
0 |
0 |
|
|
D |
For which no management decision has been made by the end of the reporting period |
0 |
0 |
|
|
Reports for which no management decision was made within six months of issuance |
0 |
0 |
Reports with No Management Decisions
Management decisions have been made on all audit reports issued before the commencement of this reporting period (October 1, 1997).
Revised Management Decisions
No management decisions were revised during the period.
Agreement with Significant Management Decisions
The Office of Inspector General agrees with all significant management decisions regarding audit recommendations, including "Funds put to Better Use" and "Questioned Costs."
April 30, 1998
The Honorable Arthur Levitt, Jr.
Chairman
Securities and Exchange Commission
Washington, D.C. 20549
Dear Chairman Levitt,
The attached Semiannual Report to Congress summarizes the activities of the Office of Inspector General for the six months ending March 31, 1998. It contains descriptions and accounts of the audit reports we issued during the period and summarizes the activities of our investigative and other review functions.
In accordance with the Inspector General Act of 1978, as amended, this report should be forwarded to Congress, with your comments and a separate management response by May 30, 1998.
Your continued support and cooperation, as well as that of the Commission and its staff, are greatly appreciated.
Sincerely,
Walter Stachnik
Inspector General
Attachment