WASHINGTON -- Credit-rating agencies with questionable financial conditions and resources were still approved for federal designation by the U.S. Securities and Exchange Commission, the agency's internal watchdog revealed Friday.

In his latest report, SEC Inspector General H. David Kotz said the agency's trading and markets division recommended that some credit-rating firms receive approvals as nationally recognized firms even though they didn't meet all the requirements.

In one instance, Kotz said the division identified serious concerns with a firm's application, including "adequacy of the credit-rating agency's managerial resources, suspicions regarding the accuracy of the financial information provided in its application and concerns about the authenticity of a number of certifications," Kotz wrote in an executive summary of his findings.

The staff decided to approve the application anyway, saying the concerns would be addressed by SEC examiners. But examiners didn't even initiate an inspection until 10 months after the application was approved, and to this day the examination is still not done. The report didn't identify the name of the firm in question, although there are only a total of 10 nationally recognized credit-rating agencies.

Credit-ratings agencies such as Standard & Poor's Corp., Moody's Corp. (MCO) and Fitch Ratings have been blamed by some critics for exacerbating the financial crisis after giving overly positive ratings to certain kinds of debt, including some backed by subprime mortgages.

Some say the business model at the big three firms is riddled with conflicts of interest because issuers pay them for ratings. SEC Chairman Mary Schapiro has said the compensation models are a potential concern for her, and she held a roundtable earlier this year to explore ways to enhance credit-rating regulation. The three major firms have all maintained that conflicts of interest can be managed and vigorously opposed any changes to their business model.

In his report, Kotz identified several cases in which the trading and markets division signed off on flawed applications.

Some of those flaws included a lack of required information about the process for rating structured products, concerns about financial conditions and issues surrounding firms' procedures for handling material non-public information.

Kotz said he believes the inspections and examinations division at the SEC should be conducting exams of credit-rating firms as part of the application process.

"If examinations had been conducted as part of the review process for the applications discussed above, it is likely that some of the significant issues trading and markets identified with the applications could have been resolved," the report says.

The SEC only officially started overseeing credit-rating agencies in 2006 with the passage of new legislation that carved out a process the SEC must follow to designate firms as being "nationally recognized." The act served to promote more competition, reduce potential conflicts of interest and promote more disclosure, but it prohibited the SEC from regulating the substance of ratings. Since then, the SEC has passed several rules governing credit-rating firms and has other proposed rules still pending.

Earlier this year, SEC Chairman Mary Schapiro announced she had created a special new team of examiners to focus on credit-rating firms. She also said she was exploring ways to reduce ratings shopping, in which debt issuers are able to shop around from firm to firm for the best rating.

Kotz said the SEC can beef up its oversight of credit-rating firms by requiring that applicants submit audited financial statements and implementing new rules to restrict consulting and advisory services that firms perform for issuers and underwriters, among other things.

Schapiro, in a memo responding to the report's findings, said the agency is already considering many of the suggestions for improvement.

"I expect the commission to consider a full range of additional rules, finalizing some previous proposals and proposing new ones, within the next few weeks," she wrote.