One way to better track the agency’s effectiveness, says Turner, would be to require fuller disclosure in its annual reports to Congress of the number and types of cases opened, as well as details about their outcomes. “People manage what they are measured on, and no doubt the SEC and Justice would become more accountable if they each provided these disclosures,” he says. Even better, Turner adds, would be to create a benchmark for restatements that would gauge whether more companies are getting their financials right the first time. “The idea is not to catch all fraudsters, but to create a system so you’ll have less fraud in the first place,” he says.
The ultimate irony, of course, is that for all of the financial controls and measures the SEC enforces, it has few of its own. A July GAO report, in fact, notes that “creating a system of internal controls within the budget process could prove particularly challenging for the SEC.” The agency currently has no CFO or accountants experienced in external GAAP-basis financial reporting. It is probably three to five years away from producing auditable financial statements, according to Turner. That’s one of the reasons that Congress has not given it full control over the money it collects through fees, which has outstripped its budget for nearly 20 years. In 2001, for example, it collected $2.1 billion but was allocated only $423 million to spend. While the GAO report did not purport to make recommendations on whether the SEC should have more control over its collections, it was hardly enthusiastic about the prospect.
The upshot? “We continue to believe that it would be useful for [the] SEC to determine its staffing and resource needs to fulfill its mission regardless of its funding status,” wrote GAO director Richard Hillman.
To be sure, changes are in store. Chairman Pitt, who has argued that the agency deserves cabinet-level status, replied to the GAO that he is not only planning to “develop a more forward-looking, strategic budget process,” but also intends to “implement aggressive risk management and strategic planning that will affect all the agency’s programs to help ensure that the SEC anticipates and plans for major market changes.” How successful he’ll be–and what that strategy will mean for corporate issuers–is still an open question.
Alix Nyberg is a staff writer at CFO.
The SEC’s To-Do List
Studies Due Within 180 Days of Passage of the Sarbanes-Oxley Act:
1. A study of the civil penalties and disgorgements still owed the SEC from the past five years of enforcement actions, and the likelihood of getting them back to investors, as well as a study of methods to improve the collection rates.
2. A study of the number of accountants, investment bankers, brokers, attorneys, and other professionals who were convicted between January 1, 1998, and December 21, 2001, of violating federal laws, and the status of the fines and disgorgements collected or due from them.
3. A review and analysis of all SEC enforcement actions involving violations of reporting requirements during the past five years, in order to identify the areas most susceptible to fraud and manipulation.
4. A study of the “role and function of credit-rating agencies in the operation of the securities market.”
Studies Due by July 30, 2003:
1. The extent to which principles-based accounting exists in the United States, the costs and benefits of switching to such a system, and the costs and benefits involved in switching U.S. financial reporting to such a system.
2. The extent to which off-balance-sheet transactions are used, and how well “generally accepted accounting rules” reflect the economics of such transactions to investors, with a six-month interim report due.