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SEC gets a taste of its own medicine

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Like a professor flunking part of his own test, the agency that grades corporate America on its accounting announced Thursday that it had three major flaws of its own in its internal systems for preventing financial fraud or mistakes.

The Securities and Exchange Commission got a passing grade for financial accuracy in its first-ever audited financial statements. But the Government Accountability Office found the SEC lacking in how it tracks fines and penalties collected from corporations and others, how it ensures that unauthorized people can't tamper with its computer systems, and how it prepares its financial reports.

The finding was part of the SEC's first annual Performance and Accountability report, required by a 2002 law that aimed to make government agencies account for how they spend taxpayer dollars.

That the SEC had to disclose three ``weaknesses'' will probably be a bittersweet irony for the hundreds of valley companies that file their financial reports for SEC approval. Many of them have been loudly decrying the cost and burden of new requirements to document and test such controls, while getting only minimal relief from the SEC.

``This will probably give people in public companies a lot of emotional satisfaction, seeing the SEC hoisted on its own petard,'' said Bill Sherman, a corporate lawyer with Morrison & Foerster in Palo Alto.

Asked by reporters on a conference call if it was embarrassed to have failed standards it enforces every day, the SEC reacted like many of the dozens of companies that have reported material weaknesses -- by focusing on the positive.

``We feel the process was a healthy process,'' said Peter Derby, the SEC's managing executive for operations, noting that the SEC was fixing the problems.

Other executives say they'd laugh at the irony if they weren't still crying over the multimillion-dollar cost and thousands of hours required to document and test their controls -- made mandatory in the 2002 corporate crackdown law known as Sarbanes-Oxley. ``It's amusing,'' said Bryan Stolle, chief executive of Agile Software.

``But the damage and the pain is so high, it's a shame.''

David Dunlap, chief financial officer at Socket Communications in Newark, said he's not surprised the SEC's first audit wouldn't be perfect. But he said it's ``satisfying'' that the SEC is now following its own rules.

``What's good for the goose is good for the gander.''

By Deborah Lohse
Mercury News.

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