Looking For Trouble

Under new IT leadership, the SEC upgrades technology to become a better watchdog and head off scandals that could shake market confidence



The CIO at the U.S. Securities and Exchange Commission is putting the finishing touches on a sweeping plan to transform the paper-burdened and IT-challenged agency into an adept high-tech consumer and revamp business processes to keep tabs on the more than 18 million pages of financial documents it receives each year from more than 12,000 companies.

One can only imagine how much more productive this will make us, CIO Booth says of the new tools. Photo by David Deal

"One can only imagine how much more productive this will make us," CIO Booth says of the new tools.

Photo by David Deal
In the job for just seven months, Corey Booth has a key role in SEC Chairman William Donaldson's top priority: becoming more proactive in protecting investors and maintaining fair and efficient markets by overseeing SEC-registered companies' financial practices. The agency's five-year strategic plan, approved in July and posted on its Web site earlier this month, admits that for too long the commission has been reacting to market problems rather than anticipating them.

"Our chairman has made a very big deal about the fact that we need to look around the corner more effectively," says Booth, a boyish-faced 34-year-old who made the leap to the government sector from McKinsey & Co., where he was an associate principal in the consulting firm's Chicago office, working with large financial-services companies on IT issues. Booth, who reports to Donaldson, stepped into a role that had been vacant for about a year and a half, since the departure of Michael Bartell, who's now CIO at the Federal Deposit Insurance Corp. Booth says he was looking for a chance to put into practice the ideas he'd formulated with clients as a consultant. "Corey is a great problem solver, which is one of the reasons he was successful at McKinsey and which is why I think he'll be successful in this new role," says Celia Huber, a principal in McKinsey's Pittsburgh office, who has known Booth about five years.

He'll need that skill. Booth has taken the IT reins at an agency that has suffered embarrassing failures over the past couple of years, notably the accounting scandal that led to the collapse of energy-trading company Enron. The U.S. Senate charged the agency with failing to review Enron's financial reports. It's those kinds of meltdowns, and the consequent loss of investor confidence, that Booth and everyone at the SEC are aiming to avoid.

Booth's IT objectives range from improving security to implementing mobile technologies in order to enable a virtual workforce. But the three top items on his list--electronic-information discovery, workflow and content management, and new data-tagging formats--all relate to the agency's ability to use state-of-the-art analytical tools to catch accounting and securities irregularities before they become major problems and to better manage their investigations.

"We were asked by Congress to be more effective," says Booth, who has an MBA from Stanford Business School. The Sarbanes-Oxley Act requires the SEC to review the filings of a third of companies registered with it each year. Congress boosted the SEC's budget about 40% in fiscal 2003 to $716.4 million from $514 million in fiscal 2002 so the agency could hire more accountants, examiners, and other staff. But, Booth says, "It's very clear that staffing will only go so far. The rest has to come from business and technology improvements."

In fiscal 2004, $120 million of the agency's $811.5 million budget is going toward IT operations (excluding salaries and related expenses), almost three times as much as was spent on IT in 2001. "There's really no other way for the SEC to improve other than with technology," says Bill Cline, managing partner for global capital markets at consulting firm Accenture. "The only alternative is to add lots of people, and I think that's a losing proposition."

By the end of September, the agency expects to complete converting most of the stacks of paper documents related to investigations under way to an electronic format using document-imaging and optical character-recognition software. Most companies under investigation submit paper documents to the SEC, so every time an investigation begins, trucks full of these files pull up to the massive concrete and glass SEC building in downtown Washington to unload the stuff.



The SEC also must review data in a number of different electronic formats, including E-mails, which Booth says often contain "all the smoking guns." Without a cohesive, advanced system for accessing and searching documents related to an investigation, attorneys and examiners can spend months poring over evidence to find examples and make certain connections.

The goal is to enable investigators to search across documents and use automated tools to analyze their content. Tied to that is the planned deployment of content-management and workflow software. Booth is reviewing vendors and plans to begin implementing a system later this year or early next. "All the tools that we're deploying will allow the attorney to find similar concepts using different vocabulary, recognize patterns in the way E-mails are exchanged, and other, more-advanced kind of analysis," he says. "One can only imagine how much more productive this will make us."

Workflow tools will help the agency manage the complex process of initiating an investigation, which involves staff attorneys, general counsel, and SEC commissioners. The same is true for approving a new regulation: One team writes the plan, various managers revise it, counsel and commissioners review it, comments from the public are included, and so on. "There are dozens of potential places for the document to get revised or bottlenecked," Booth says. "We need to build the ability to collaborate and track [the thousands of documents] that are moving through the commission at a given time."

Another key component of Booth's plan to improve the regulatory process revolves around the adoption of standards such as the Extensible Business Reporting Language, or XBRL, an XML-based markup language for tagging data in financial statements, and the Financial Information Exchange Markup Language, another XML format for highlighting transactional data such as stock purchases. The SEC is considering letting companies use XBRL in filings for the upcoming year-end reporting season. The SEC already has three forms that use XML tags for data about individuals associated with SEC registrants.

Each year, the SEC processes and disseminates to the public more than 600,000 documents that are filed through its Edgar online-reporting system. Using standards should make it easier to analyze filings for potentially questionable activities and prioritize projects in the process. "We ought to be able to be substantially more effective, do investigations more quickly so we can act or get out of people's hair more quickly," Booth says.

As a uniform way to electronically distribute business reports, XBRL will make it easier to compare the financial performance of one company against others and know that the data are comparable, according to a report last year by R. Timothy McNamar, at the time a visiting fellow for corporate governance at the Cato Institute and a former deputy secretary of the treasury under Ronald Reagan. "If Enron had filed in XBRL, its reported revenues, cash flows from operations, and profits would have been compared against industry standards," McNamar wrote. "Its growth rate and the growth rate of its purported cash flows from operations would have been so far above the industry norms that it would have been flagged for an SEC staff review."

Without applying standard tags across companies, industries, and geographies, "there'd be absolutely no way the SEC could meet the requirement of reviewing [the] number of filings" Sarbanes-Oxley demands, says John Batt, VP of marketing and strategic planning at financial printer Bowne & Co., a member of XBRL International, an industry group promoting the use of the standard. Bowne and several other companies last year conducted an XBRL pilot to tag second-quarter earnings releases. The tags, embedded in newswire releases, contained much of the financial data filed with the SEC. The pilot showed how XBRL can make it easier to conduct financial comparisons across industries, Batt says. While it's premature to identify specific advantages for companies that must file with the SEC, he adds, more-advanced XBRL tools could make it easier for companies to repurpose information that's contained in management reports, internal documents, tax filings, and SEC financial filings. "The SEC initiative will help to give XBRL the shot in the arm to encourage companies to continue to develop the tools," he says.

Booth has a chance to provide a booster shot to the SEC's business-technology efforts. In the past, he says, the agency has viewed IT as "providing decent baseline service but not excellent baseline service." That will change, promises Booth, who's putting in 65-hour weeks, splitting his time between the Alexandria, Va., office where the IT staff works and the Washington headquarters. He already has approval to add 30 full-time IT staffers to supplement 100 in-house and 300 contract employees as he pushes to turn the agency into an IT-savvy organization. "It's all about opportunity," Booth says. "At the end of the day, I'm certainly not discouraged about anything."

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