The Securities and Exchange Commission received a clean audit opinion on its 2009 and 2010 financial statements but more criticism for its internal control over financial reporting from the Government Accountability Office.

In its latest report on the SEC's financial statements, the GAO said the SEC did not maintain effective internal control as of its September 30, 2010, fiscal year end as a result of material weaknesses in its financial reporting and accounting processes. In fact, the GAO notes, the SEC has struggled with its internal controls since it began preparing financial statements in 2004 under the Accountability of Tax Dollars Act of 2002.

In its report, the GAO noted the SEC has made some progress, most notably in its controls over its fund balance with the U.S. Treasury and its risk-assessment processes. The GAO no longer finds significant deficiencies in those areas.

The SEC continues, however, to have deficiencies in information security, financial reporting processes, budgetary resources, and registrant deposits, the GAO said. It also noticed some new trouble spots emerging in 2010 in information systems, disgorgements and penalties, and required supplementary information. Even worse, the GAO says, the deficiencies led to errors and misstatements in the SEC’s financial reporting during the fiscal year, although the SEC was able to clean those up in time to issue clean financial statements.

“These material weaknesses are likely to continue to exist until the SEC’s accounting system is either significantly enhanced or replaced, key accounting activity in other systems is fully integrated with the accounting system at the transaction level, information security controls are significantly strengthened, and appropriate resources are dedicated to maintaining effective internal controls,” the GAO wrote in its report.

SEC Chairman Mary Schapiro acknowledged the weaknesses in internal control in a letter to GAO director James Dalkin attached to the GAO report. She said the key to the SEC’s strategy for shoring up controls is a new initiative to replace the agency’s core financial system by migrating to a federal government “shared service provider,” which should be complete in fiscal 2012.

Schapiro said she will rely on several recently hired officers and senior financial managers to lead the transition and remediate the material weaknesses. Her letter to Dalkin provided no further details on the shared service provider, except that the SEC had completed a letter of intent with the U.S. Department of Transportation to get the process under way. The GAO said the SEC expects its measures to better protect financial data and enhance financial reporting process through further automation.

The GAO also said it tested SEC’s compliance with various provisions of significant laws and regulations and found no instances of non-compliance.

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