CFO Studio Magazine with Robert Falzon, CFO, Prudential

and facilitate capital formation — and a rapidly evolving financial world of split- second trades and complex investment vehicles to oversee, the SEC needed strong internal controls so its probity would be unquestionable and distractions from its mission minimal. The CFO’s office constructs those controls and monitors their effectiveness. The effort Johnson, 43, puts into this area is similar to the pains a private sector CFO takes to manage risk and ensure the company’s continued impact and integrity. However, Johnson cannot ever lose sight of the fact that the SEC operates for the good of the public and it is entirely the public’s money that is being risked. So while every company and federal agency needs to follow relevant laws and regulations, “It’s perfectly appropriate for the public to expect that we would have strong internal controls, given our role,” says Johnson. In 2010, the SEC was performing less than spectacularly in this regard. The Government Accounting Office (GAO), which conducts annual audits of the SEC’s financial statements, had found six “significant deficiencies that collectively represent a material weakness” in its 2008- 2009 audit. Small wonder that on taking office, Johnson focused on the need to beef up internal controls. Material Weaknesses A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. — Public Company Accounting Over- sight Board “We’re not looking to hide things, not looking to hope they’ll go away, but really trying to deal with things forthrightly,” says Johnson in an interview with CFO Studio magazine from his office in Washington, D.C. In 2011, there were no material weaknesses discovered. Johnson remembers his elation. “We were working hard to try to remediate [two material weaknesses from the year before],” he says. One of those GAO-cited faults regarded the agency’s financial reporting and accounting processes, reflecting the need for tightened controls in areas such as fees collected and enforcement penalties. The other material weakness related to the design and operation of the SEC’s information security and other system controls. “I remember the day when we heard from our auditors that we had no material weaknesses. That was more than we dared hope for in 2011, and to have reached it was a big milestone,” says Johnson. However, four “significant deficiencies” were detailed in that FY2011 report — including information security, which the SEC tackled with stronger staffing and a series of key investments. Johnson and his team focused on continually improving controls. The SEC has been investing in its financial systems, and sometimes adjusting a policy or procedure, or introducing a less onerous series of steps to reach the same objective. A branch inside the SEC’s Office of Financial Management was created and tasked with assessing whether the internal controls operate as designed, and whether they operate effectively. The work has paid off: In FY2015, the GAO found no significant issues at all. That said, Johnson notes that a couple of big fixes are still needed. Money is in the FY2017 budget request for technology to digitize the process when the agency collects Q2 2017 WWW.CFOSTUDIO.COM 11 “It’s perfectly appropriate for the public to expect that we would have strong internal controls, given our role.” — Ken Johnson, CFO, SEC Money in the Budget When Ken Johnson, CFO of the SEC, prepares a budget, he must present it to 535 people, not counting the internal SEC leadership and the person who ultimately signs off on the document, the president of the United States. (The 535 are the senators and members of the House of Representatives.) The initial presentation, the authorization request, includes a description in broad-brush terms of the main projects the SEC will be focusing on in the coming two years, and the budgetary support for these initiatives. Next, a revised request is made to the Office of Management and Budget. Johnson’s office then puts together a Congressional Justification, or CJ, running about 140 pages. This includes strategic goals, performance data against those goals in prior years, and estimates of the agency’s progress toward achievement of those goals in upcoming fiscal years. Finally, the SEC chair is invited by the House and Senate subcommittees that oversee the SEC’s budget to testify about the agency’s needs. Congress makes its decisions and the president signs the budget allocation. The SEC is then required to adjust its fees on securities transactions to generate the actual amount it needs to cover that budget. Thus, the SEC, in the language of government, is deficit neutral. “The appropriation and those fee collections offset each other,” says Johnson. “So Congress can decide the best level of funding for the SEC, without facing trade-offs with other agencies or with any deficit-reduction goals.”