Recently the SEC’s Inspector General reported on recommendations to the Commission’s Enforcement Division to improve enforcement in direct response to the Bernie Madoff scandal. The report focuses on what went wrong that allowed the Madoff scandal to happen and what can be done to make sure it does not happen again.

The answers in the report to the question of “What went wrong?” can be separated into two categories: failures that resulted from the enforcement staff not having the proper tools and failures that resulted from the enforcement staff not using the proper tools it had.

How one designates a failure depends in large part on whether one wants to blame the actual investigators for shirking their duties or the policymakers for having ineffective systems for catching fraud. To some extent, the Inspector General blames both. For example, the IG recommends both (i) a better tip and complaint handling system with a record of how a complaint is vetted and who is accountable and (ii) increased resources and time for evaluating complaints.

Of all the findings, the most troubling is that 99 respondents (13.2%) to the IG’s questionnaire said they have been involved in a situation where they felt there was a lack of impartiality in the performance of official duties, such as preferential treatment toward former SEC employees or improper external influences. If true, this problem may require a culture change that cannot necessarily be fixed with increased resources or better control mechanisms.