.i

COMMODITY FUTURES TRADING COMMISSION

SEMIANNUAL REPORT

OF THE

OFFICE OF THE

INSPECTOR GENERAL

FOR THE PERIOD ENDING SEPTEMBER 30, 2007
Office of the

Inspector General

TO:

FROM:

SUBJECT:

u.s. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5110

Facsimile: (202) 418-5522

www.cftc.gov

October 30, 2007

Walter Lukken

Acting Chairman

A. Roy Lavik .ac. /~ Inspector General

Semiannual Report ofthe Office ofthe Inspector General

Attached is the Semiannual Report ofthe Office ofthe Inspector General for the period

from April 1,2007 through September 30,2007. This report is submitted to you in accordance

with the requirements of Section 5 ofthe Inspector General Act of 1978, as amended.

I appreciate your support ofthis office.

Attachment
OFFICE OF THE INSPECTOR GENERAL

COMMODITY FUTURES TRADING COMMISSION

SEMIANNUAL REPORT

FOR THE PERIOD FROM

April 1, 2007 THROUGH September 30, 2007

TABLE OF CONTENTS

SUMMARY OF OIG ACTIVITIES [including a description of any significant problems, abuses,

and deficiencies and a description of OIG recommendations for corrective action

(Mandated by Section Sea) (1) and (2) ofthe Act)] 1

AlJDITS 1

INVESTIGATIONS 2

LEGISLATIVE AND REGULATORY REVIEWS 2

OTHER REVIEWS 3

OIG RESPONSIBILITIES 3

OIG RESOURCES , 4

. CFTC PROGRAMS AND OPERATIONS .4

COMPLETED WORK .: 4

AlJDITS [including a list of each audit report issued and a summary of each particularly

significant report (Mandated by Section 5(a)(6) and (7) ofthe Act)]. .4

INVESTIGATIONS 6

LEGISLATIVE AND REGULATORY REVIEWS 6

OTHER REVIEWS 7

AlJDIT REPORTS OVER SIX MONTHS OLD 8

CORRECTIVE ACTION NOT COMPLETED [including an identification of each

significant recommendation described in previous semiannual reports on which

corrective action has not been completed (Mandated by Section 5(a)(3) ofthe Act)] ........8

CORRECTIVE ACTION COMPLETED 8
MANAGEMENT DECISION NOT MADE [including a summary of each audit

report issued before the commencement ofthe reporting period for which no management

decision has been made by the end ofthe reporting period (including

the date and title of each such report), an explanation ofthe reasons such a

management decision has not been made, and statement concerning the desired timetable

for achieving a management decision on each such report (Mandated by Section 5(a)(IO)

ofthe Act)] 8, 11

SUMMARY OF MATTERS REFERRED TO PROSECUTIVE AUTHORITIES and

the prosecutions and convictions which have resulted (Mandated by

Section 5(a)(4) ofthe Act) 8

SUMMARY OF EACH REPORT MADE TO THE AGENCY HEAD

under Section 6(b)(2) concerning information or assistance unreasonably

refused or not provided (Mandated by Section 5(a)(5) ofthe Act) 8

REVISED MANAGEMENT DECISIONS [including description and explanation of

the reasons for any significant revised management decision made during the

reporting period (Mandated by Section 5(a)(lI) ofthe Act)]. 8

INSPECTOR GENERAL DISAGREEMENT [including information concerning any

significant management decision with which the Inspector General is in

disagreement (Mandated by Section 5(a)(12) ofthe Act)] 9

CURRENT AUDITS 9

GAO LIAISON 12

STRATEGIC PLAN 12

CONTACTING THE OFFICE OF THE INSPECTOR GENERAL. 17

TABLE 1 -- REPORTS ISSUED WITH QUESTIONED COSTS

(Mandated by Section 5(a)(8) ofthe Act) 18

TABLE 2 -- REPORTS ISSUED WITH RECOMMENDATIONS THAT FUNDS BE PUT

TO BETTER USE (Mandated by Section 5(a)(9) ofthe Act) 19

11
INDEX OF IG ACT REPORTING

REQUIREMENTS

Section 4(a)(2) Review oflegislation and regulations 6

Section 5(a)(1) Significant problems, abuses, and deficiencies 1

Section 5(a)(2) Recommendations with respect to significant problems 1

Section 5(a)(3) Significant recommendations that have not been completed 8

Section 5(a)(4) Matters referred to prosecutorial authorities 8

Section 5(a)(5) Summary ofinstances where information was refused 8

Section 5(a)(6) Completed audit reports '" , .4

Section 5(a)(7) Significant audit reports .4

Section 5(a)(8) Statistical Table-Questioned Costs 18

Section 5(a)(9) Statistical Table-Funds Recommended for Better Use 19

Section 5(a)(1 0) Audit reports lacking management decision 8, 11

Section 5(a)(II) Significant revised management decisions 8

Section 5(a)(12) Significant management decisions where the IG disagrees 9

Section 5(a)(13) Information described under the Federal Financial Management. ..

...... Improvement Act of 1996 , 5

Section 6(b)(2) Summary ofreports to Chairman where assistance was refused 8

11I
SUMMARY OF OIG ACTIVITIES

AUDITS

The primary objectives ofthe Office ofthe Inspector General (OIG) ofthe Commodity

Futures Trading Commission (Commission, CFTC) are to help promote long-term efficiency and

effectiveness in the administration and operation ofthe Commission and to protect against fraud,

waste, and abuse. This reporting period's OIG audit activities, which are listed below, reflect

these objectives. During this reporting period, the OIG audits uncovered no significant problems

requiring recommendations.

Completed Audits

Audit ofCompliance with the Federal Managers' Financial Integrity Act, FMFIA. In

support ofOMB Circular A-123 (Revised), the Inspector General evaluates, provides

technical assistance, and advises the agency head as to whether the agency's review and

evaluation process was conducted in accordance with the circular's requirements. (For

additional details, see page 5.)

Evaluation ofthe CFTC Information Security Management Act, FISMA. The Federal

Information Security Management Act requires the Inspector General or his designee to

perform annual independent evaluations ofthe information security program and

practices ofthe agency. (For additional details, see page 5.)

Current Audits

The following are the audits being conducted during the current reporting period and

continuing into the next reporting period. (For additional details, see the section on current

audits beginning on page 9.)

Audit ofCFTC Financial Statements for Fiscal Year 2007. In FY 2002, Congress passed

the Accountability ofTax Dollars Act. The Act requires the CFTC, along with numerous

other Federal entities, to have its financial statements audited annually. To this end, the

OIG has engaged a contractor to provide the audit effort required to enable the contractor

to render an opinion on the agency's financial statements for Fiscal Year 2007 in

accordance with generally accepted auditing standards, Government Auditing Standards,

and OMB Bulletin 01-02. (For additional details, see page 9.)

Updating ofthe Review ofthe Need for a Los Angeles Office. The Review ofthe Need

for a Los Angeles Office was completed approximately one year ago. Because of

budgetary constraints, the Chairman was not in a position to act on the recommendations

in the report. Now that the budgetary situation may be easing, opportunity for a decision

could be forthcoming. To facilitate this decision, the Office ofthe Inspector General has

continued to update the infonnation it gathered for the initial report. (For additional

details, see page 11.)
Review of Agency Use ofContractors. Over the past five fiscal years, the agency has'

increased its reliance on contractors to replace some CFTC employees and to extend the

capabilities of others. The objectives ofthis review are to determine whether the agency

has effectively employed contractors to complement its staff, and to present the Chairman

with a complete picture ofthe Commission's use of contractors. During this reporting

period, the OIG completed its review of current contracts and contracting information,

and began conducting interviews with relevant individuals. (For additional details, see

page 11.)

INVESTIGATIONS

The Inspector General Act of 1978, as amended, provides that the Inspector General may

receive and investigate complaints or information from the Commission's employees concerning

.the possible existence of an activity constituting a violation oflaw, rules or regulations, or

mismanagement, abuse of authority, or gross waste offunds, or a substantial and specific danger

to the public health and safety.

No investigations were pending as ofthe beginning ofthe reporting period, and the OIG

opened no investigations during the period. (See the section on investigations beginning on

page 6.)

LEGISLATIVE AND REGULATORY REVIEWS

The OIG reviews proposed and final CFTC regulations, legislation, and selected

exchange rules using the following basic criteria: whether the agency: (1) has identified

specifically the problem(s) to be addressed by the proposal; (2) has defined through case study or

data analysis a clear link between the proposed solution and the identified problem(s); (3) has

specified clearly the means to effectively and efficiently enforce the proposal; (4) has assessed

the likely efficiency and effectiveness of alternative solutions; (5) can reasonably document that

the proposal will yield positive net benefits over the long term; and (6) has met the requirements

ofthe Regulatory Flexibility Act and the Paperwork Reduction Act.

The Regulatory Flexibility Act requires the agency to evaluate the impact ofits

regulations on small entities. The Paperwork Reduction Act requires the agency to manage

effectively and efficiently its information collections so that they are the least burdensome

necessary to achieve the stipulated objectives.

Legislative Activities

the Inspector General continues to be involved in legislative activities pertaining to both

the CFTC and the IG community. The IG serves on the legislation committee for the Executive

Council on Integrity and Efficiency, which discusses and provides guidance on pending

legislation affecting the IG community. During this reporting period Congressional staffs were

contacted about various CFTC and IG related issues.

2
OTHER REVIEWS

Review ofthe CFTC Exchange Data Base System, EDBS The Exchange Data Base

System, a system developed in the mid-1980s, processes and maintains information

concerning trading activity on designated contract markets. We reviewed EDBS in

conformance with standards promulgated by the National Institute of Standards and

Technology. Our field work was completed in September 2007 (For additional details,

see page 7).

Peer Review During this period, the National Endowment for the Humanities Office of

the Inspector General completed a review ofthe system of quality control for the audit

function within the OIG. The peer review was completed in September 2007 (For

additional details, see page 7).

OIG RESPONSIBILITIES

The Office ofthe Inspector General in the Commodity Futures Trading Commission was

created in accordance with the Inspector General Act of 1978 (P.L. 95-452), as amended by the

Inspector General Act Amendments of 1988 (P.L. 100-504). The OIG was established to create

an independent unit to:

• Promote economy, efficiency, and effectiveness in the administration ofCFTC

programs and operations and detect and prevent fraud, waste, and abuse in such

programs and operations;

• Conduct and supervise audits and, where necessary, investigations relating to the

administration ofCFTC programs and operations;

• Review existing and proposed legislation, regulations, and exchange rules and make

recommendations concerning their impact on the economy and efficiency ofCFTC

programs and operations or the prevention and detection offraud and abuse; and

• Keep the Chairman and Congress fully informed about any problems or deficiencies

in the administration ofCFTC programs and operations and provide

recommendations for correction ofthese problems or deficiencies.

Given that the CFTC does not have extensive contracts or grant making authority, the

OIG's efforts have been focused on the review ofinternal CFTC operations and the monitoring

oflegislative and regulatory proposals.

3
OIG RESOURCES

The OIG consists ofthe Inspector General, two professional staffmembers, and a

secretary. In April 2007, one professional staffmember retired. A new professional staff

member was hired, and began work on June 11,2007. The present Inspector General assumed

his position on October 7, 1990.

The OIG, on December 4, 1989, signed a Memorandum ofUnderstanding with the Office

ofthe General Counsel (OGC). This Memorandum details the procedures that are used to

provide the OIG with OGC legal services. Because the new professional staffmember who

began in June 2007 is an attorney, the OIG will not be utilizing the 1989 Memorandum for the

time being.

CFTC PROGRAMS AND OPERATIONS

Congress created the Commodity Futures Trading Commission in 1974 as an

independent agency with the mandate to regulate commodity futures and options markets in the

United States. The Commission's mandate was renewed and/or expanded in 1978, 1982, 1986,

1992, and 1995. In December 2000, the Commission was reauthorized by Congress and the

President through Fiscal Year 2005 with the passage ofthe Commodity Futures Modernization

Act of2000 (CFMA).

The CFMA transformed the Commission from a front-line regulatory agency to an

oversight regulator. Although the Commission's approach to regulation has changed, the

CFTC's mission has not. The CFTC continues to be responsible for fostering the economic

utility offutures markets by encouraging their competitiveness and efficiency, ensuring their

integrity, and protecting market participants against manipulation, abusive trade practices, and

fraud. Through effective oversight regulation, the CFTC enables the commodity futures markets

better to serve their vital function in the nation's economy -- providing a mechanism for price

discovery and a means of offsetting price risks.

COMPLETED WORK

AUDITS

The OIG is required to conduct, supervise and coordinate audits ofCFTC programs and

operations and to ensure that the audits are conducted in accordance with generally accepted

government auditing standards. The OIG is also required to recommend changes to existing and

4
proposed CFTC programs and operations to promote economy, efficiency, and effectiveness and

to prevent and detect fraud and abuse.

The purpose ofthese audits is to ensure that:

• Funds have been expended in a manner consistent with related laws, regulations, and

policies;

• Resources have been managed effectively and efficiently;

• Stipulated program objectives have been achieved; and

• Resources have been safeguarded.

1. Audit ofCompliance with the Federal Managers' Financial Integrity Act, FMFIA

Objective.

In support ofOMB Circular A-123 (Revised), the Inspector General evaluates, provides

technical assistance, and advises the agency head as to whether the agency's review and

evaluation process was conducted in accordance with the circular's requirements.

Status.

The OIG reviewed all ofthe draft internal control reviews produced by agency staff and

provided comments to the originating divisions. The OIG offered its services to the CFTC

Intemal Control Committee as advisor and consultant on conducting and reporting on

vulnerability assessments and internal control reviews. The OIG reported the results ofits

review ofthe final submissions to the Chairman in its annual assurance letters to the Chairman.

2. Evaluation ofthe CFTC Information Security Management Act, FISMA

Objective.

The Federal Information Security Management Act requires the Inspector General or his

designee to perform annual independent evaluations ofthe information security program and

practices ofthe agency.

Status.

To provide a comprehensive review ofthe Commission's security program, Office of

Information Technology Services (OITS) and OIG worked jointly in gathering and interpreting

information relating to the CFTC information security program. Using the infonnation supplied

by OITS staff, a contractor, and the program managers, the Inspector General reviewed and

analyzed the information and responded in tabular form to the questions raised by the OMB

Guidance. Results ofthis effort were transmitted to the CFTC's ChiefInfonnation Officer (CIO)

5
on September 6,2007, for combination with the CIO's assessment and inclusion in the

Chairman's report to OMB.

INVESTIGATIONS

The Inspector General Act of 1978, as amended, provides that the Inspector General may

receive and investigate complaints or information from the Commission's employees concerning

the possible existence of an activity constituting a violation oflaw, rules or regulations, or

mismanagement, abuse of authority, or gross waste offunds, or a substantial and specific danger

to the public health and safety.

No investigations were pending as ofthe beginning ofthe reporting period, and the OIG

opened no investigations during the period.

LEGISLATIVE AND REGULATORY REVIEWS

As specified in Section 4(a)(2) ofthe Inspector General Act of 1978, the OIG reviews the

impact of existing and proposed legislation and regulations on CFTC programs and operations

and makes recommendations regarding more effective or efficient alternatives or protections

against fraud and abuse. The OIG also reviews selected exchange rule proposals and changes.

The OIG notified the responsible Divisions as to any concerns with draft and final

documents relating to legislation, rules or investigations. Formal comments were not filed with

the Commission.

Rule Reviews Initiated In Previous Reporting Periods

There were no rule reviews initiated in previous reporting periods which were continued

into this reporting period.

Rule Reviews Initiated This Reporting Period

The OIG has reviewed the numerous rules required by the CFMA. The CFMA altered

the relationship ofthe Commission to the futures industry in many regards and the rules sought

to reflect this change.

Legislative Activities

The Inspector General continues to be involved in legislative activities. The IG serves on

the legislation committee for the Executive Council on Integrity and Efficiency, which

comments on proposed amendments to the IG Act, and other legislation affecting the IG

community. In addition, contact has been made with Congressional staff concerning various

agency and IG issues.

6
OTHER REVIEWS

1. Review ofthe CFTC Exchange Data Base System, EDBS.

The Exchange Data Base System, a system developed in the mid-l 980s, processes and maintains

infonnation concerning trading activity on designated contract markets. EDBS daily receives

trade data from various exchanges, and is used by both the Division ofMarket Oversight and the

Division ofEnforcement for trading analysis and surveillance. It is also used by other divisions

to respond to Commission and Congressional requests.

We reviewed EDBS in confonnance with standards promulgated by the National Institute of

Standards and Technology. Specifically, we examined controls relating to: boundary protection

(i.e., assuring that the infonnation system monitors and controls communications at the external

boundary ofthe system and at key internal boundaries within the system); security assessments;

system security plan updates; contingency plans; and periodic maintenance. Our field work was

completed in September 2007.

2. Peer Review.

During this reporting period, the National Endowment for the Humanities Office ofInspector

General (NEH OIG) reviewed the OIG's system of quality control for its auditfunction. The

NEH OIG concluded that

...the system of quality control for the audit function ofCFTC OIG in effect for

the year ended September 30, 2006, has been designed to meet the requirements

ofthe quality control standards established by the Comptroller General ofthe

United States for a Federal Goverrnnent audit organization and was substantially

complied with during the year ended to provide the OIG with reasonable

assurance of confonning with applicable auditing standards, policies, and

procedures.

The NEH OIG made four suggestions for improvement that "did not impact on our opinion."

First, NEH OIG suggested that training documentation be centrally maintained within CFTC

OIG and that all audit stafftake care to attain 80 hours of continuing professional education (on a

bi-yearly basis). All CFTC OIG staff did not complete this requirement due in part to budgetary

constraints, and retirement. Second, the NEH OIG recommended that the CFTC OIG should

document the applicability of and work perfonned relating to internal controls, relevant to each

audit. Third, the NEH OIG recommended that CFTC OIG amend its internal policy on audit

workpapers to identify that independent referencing is completed during supervisory review of

audit workpapers. Fourth and finally, the NEH-OIG recommended enhancements to the process

by which CFTC OIG utilizes OGC attorneys.

CFTC OIG implemented the first three recommendations immediately. The hiring oflegal

counsel in June 2007 essentially mooted the fourth recommendation.

7
AUDIT REPORTS OVER SIX MONTHS OLD

CORRECTIVE ACTION NOT COMPLETED

There were no instances of audit reports over six months old where corrective action had

not been completed.

CORRECTIVE ACTION COMPLETED

There were no instances ofreports issued before the commencement ofthe reporting

period for which corrective action had been completed by the end ofthe reporting period.

MANAGEMENT DECISION NOT MADE

There is one instance of a report issued before the commencement ofthe reporting period

for which a management decision had not been made by the end ofthe reporting period. The

Chairman is continuing to examine the issue.

SUMMARY OF MATTERS REFERRED TO

PROSECUTIVE AUTHORITIES

No matters were referred to prosecutive authorities during the reporting period.

SUMMARY OF EACH REPORT MADE TO

THE AGENCY HEAD

No reports were made to the agency head under section 6(b)(2) concerning information

or assistance unreasonably refused or not provided (mandated under section 5(a)(5) ofthe Act).

REVISED MANAGEMENT DECISIONS

No management decisions were revised during the reporting period.

8
INSPECTOR GENERAL DISAGREEMENT

The Inspector General does not disagree with any management decisions on OIG

recommendations.

L- C_U_RRE __N_T_A_U_D_I_TS I

The audit agenda and priorities for the OIG are determined based on the following

factors:

• Statutory and regulatory requirements;

• Adequacy ofinternal control systems as indicated by vulnerability assessments and

internal control reviews recommended by OMB Circular A-123;

• Changes in the program conditions or particular vulnerability ofthe organization,

program, activity, or function to problems or deficiencies;

• Current and potential dollar magnitude and likely benefits ofa review on the

efficiency or effectiveness ofCFTC programs and operations;

• Management priorities and improvements that may be possible;

• Results of audits ofCFTC programs and operations by other Federal agencies; and

• Availability of audit resources and the potential opportunity costs to the agency.

The audit agenda and summary of progress for each audit, which has not yet been

completed, is summarized below. New agenda items periodically will be added, as appropriate,

along with a description ofthe audit objective for each.

1. Audit of CFTC Financial Statements for Fiscal Year 2007.

Objectives.

In FY 2002, Congress passed the Accountability ofTax Dollars Act. The Act requires

the CFTC, along with numerous other Federal entities, to have its financial statements audited

annually. To this end, the OIG has engaged a contractor to provide the audit effort required to

enable the contractor to render an opinion on the agency's financial statements for Fiscal Year

2007 in accordance with generally accepted auditing standards, Government Auditing Standards,

and OMB Bulletin 01-02.

9
The specific objectives ofthis audit are to detennine whether:

(1) The financial statements present fairly the financial position ofthe Commodity

Futures Trading Commission in accordance with generally accepted accounting

principles (GAAP) as promulgated by the Federal Accounting Standards Advisory Board

(FASAB). The six financial statements, along with all corresponding notes to be audited

include: (a) Balance Sheet; (b) Statement ofNet Cost; (c) Statement ofChanges in Net

Position; (d) Statement ofBudgetary Resources; (e) Statement of Financing; and (f)

Statement ofCustodial Activity.

(2) Management's assertions about the effectiveness ofits internal controls for achieving

internal control objectives described in AU Section 319 and the Federal Managers

Financial Integrity Act (FMFIA) are fairly stated in all material respects. The contractor

shall make this detennination in part by obtaining an understanding ofthe internal control

policies and procedures and assessing the level of control risk relevant to all significant

cycles, classes oftransactions, and account balances. For those significant control

policies and procedures that have been properly designed and placed in operation, the

contractor shall perfonn sufficient tests to provide reasonable assurance as to whether the

controls are effective and working as designed.

The independent public accountant (IPA) will limit its internal control testing to those

controls necessary to achieve the objectives described in OMB Bulletin 01-02. Further,

the IPA is not required to test all internal controls relevant to operating objectives as

broadly defined by the Federal Manager's Financial Integrity Act of 1982, such as those

controls relevant to achieving efficient operations.

With respect to internal controls related to perfonnance measures reported in the

accountability report, the IPA will obtain an understanding ofthe design ofsignificant

internal controls relating to the existence and completeness assertions, as required by

OMB Bulletin 01-02. The procedures are not required to provide assurance on internal

controls over reported perfonnance measures.

(3) The agency has complied with selected provisions oflaws and regulations identified

by OMB Bulletin 01-02 or the Inspector General, noncompliance with which could have

a direct and material effect on the detennination of financial statement amounts. The IPA

will limit its tests of compliance to these provisions and need not test compliance with all

laws and regulations applicable to the CFTC.

(4) The infonnation in the "Overview ofthe Reporting Entity" is consistent in content

and presentation with the infonnation in the principal statements and the related notes

consistent with Statements on Auditing Standards (SAS) No.8, Other Information in

Documents Containing Audited Financial Statements.

10
Status.

An independent public accounting finn was first selected on January 15, 2004 to

complete the CFTC Financial Statement Audits for up to five successive years. On March 19,

2007, the Fiscal Year 2007 audit began with a meeting with senior agency managers. Further

meetings and reviews have taken place throughout this reporting period, while work on the audit

is ongoing. The final audit report is to be delivered to the Office ofthe Inspector General on

November 9,2007.

2. Updating of the Review of the Need for a Los Angeles Office.

Objective.

The Review ofthe Need for a Los Angeles Office was completed over one year ago.

Because of budgetary constraints, the Chairman was not in a position to act on the

recommendations in the report. With the arrival of new Commissioners and anticipated

appointment of a new chairman, and now that the budgetary situation may be easing, opportunity

for a decision could be forthcoming. To facilitate this decision, the Office ofthe Inspector

General decided to update the information it gathered for the initial report.

Status.

To update the information in the report, the Office ofthe Inspector General collected and

analyzed staffing and workload data for the Division ofEnforcement for eight months in 2006

and 2007.

The Office ofthe Inspector General also interviewed current and former CFTC Western

Regional Office (WRO) staffmembers to determine ifthe opinions expressed on the availability

of CFTC-related work during their tenures in the WRO and their opinions ofthe current

availability of CFTC-related work in the area formerly serviced by WRO had changed. We

found no change in status to indicate a reduced need for a revived WRO in Los Angeles.

3. Review of Agency Use of Contractors.

Objective.

Over the past five fiscal years the agency has increased its reliance on contractors to

replace some CFTC employees and to extend the capabilities of others. The objectives ofthis

review are to determine whether the agency has effectively employed contractors to complement

its staff and to present the Chairman with a complete picture ofthe Commission's use of

contractors.

The Office of Financial Management has supplied the OIG with extensive data on

contracts employed by CFTC during FY 2002, 2005, 2006, and 2007. The Office of the

11
Inspector General reviewed and analyzed this data to detennine whether the agency has received

the services for which it contracted, and has selected two contracts for detailed review. In

addition, the Office ofthe Inspector General has conducted numerous interviews during this

reporting period to obtain background infonnation on the contracts and staffopinions on the

effectiveness ofthe contract process, as well as contractor perfonnance. Interviews will be

ongoing during the remainder ofthis year, and we anticipate issuance of our final report during

the next reporting period.

GAO LIAISON

The DIG is charged with providing policy direction for, and conducting, supervising, and

coordinating audits and investigations relating to CFTC programs and operations. In addition,

the GIG is required to recommend policies for, and conduct, supervise, and coordinate with other

Federal agencies, state and local governmental agencies, and nongovernmental entities, audits,

investigations, and evaluations regarding the economy, efficiency, and effectiveness ofCFTC

programs and operations.

GAO also conducts audits ofCFTC activities, and DIG plans its audits so as not to

duplicate GAO's efforts. Moreover, DIG in its audit activities identifies the goals of each audit

and the methods ofreaching the goals so as to minimize the requirements placed on CFTC

resources. During this reporting period the CFTC-OIG collaborated with GAO on several

reviews of agency activities.

STRATEGIC PLAN FOR THE

OFFICE OF THE INSPECTOR GENERAL

INTRODUCTION

The Office ofthe Inspector General in the Commodity Futures Trading Commission was

created in accordance with the Inspector General Act of 1978 (P.L. 95-452), as amended by the

Inspector General Act Amendments of 1988 (P.L. 100-504). The DIG was established to create

an independent unit to:

• Promote economy, efficiency, and effectiveness in the administration of CFTC

programs and operations and detect and prevent fraud, waste, and abuse in such

programs and operations;

• Conduct and supervise audits and investigations relating to the administration of

CFTC programs and operations;

12
• Review existing and proposed legislation, regulations, and exchange rules and make

recommendations concerning their impact on the economy and efficiency ofCFTC

programs and operations or the prevention and detection offraud and abuse; and

• Keep the Chairman and Congress fully informed about any problems or deficiencies

in the administration ofCFTC programs and operations and provide

recommendations for correction ofthese problems or deficiencies.

Accordingly, the OIG has established three programs to carry out its responsibilities:

audit, investigation, and legislative and regulatory review. A summary ofthose programs

follows.

AUDIT

The primary objectives ofthe OIG are to promote long-term efficiency and effectiveness

in the administration and operation ofthe Commission and to protect against fraud and abuse.

The key to effectively and efficiently managing the CFTC is information. Top level

managers and decision makers require a steady stream of organized data on the effects oftheir

policy decisions and resource allocations on the operations ofthe Commission. Once having

made the decision to change resource levels or policy, managers must receive accurate and

timely reports ofthe operational effects oftheir decision so they can determine ifthe change is in

the direction and ofthe magnitude predicted. In the absence ofsuch information, top level

managers cannot adequately perform their jobs.

A number of obstacles to acquiring and transmitting the desired infonnation to decision

makers may exist in some programs. Principal among them is the Commission's apparent

difficulty in many instances in tracking the progress of a particular action across organizational

lines within the Commission.

A simple example is the Reparations Program prior to the installation of an OIG

recommended unified, Commission-wide tracking system. Complaints are received and

processed and hearings are held in the Office ofProceedings; appeals ofinitial decisions in

reparations cases are transmitted to the Office ofthe General Counsel where proposed

Commission opinions are drafted; and appeals are decided by the Commission with the

paperwork being handled by the Office ofthe Secretariat. Each office involved in the process

had a separate tracking system without ties to the tracking systems in the offices preceding them

or following them in the process. Each office treated the case as ifit were brand new to the

Commission when they received it. As a result, there was no provision for tracking information

across organizational lines. Ifthe Chairman wanted to know how much time was spent on the

average reparations case of a particular description at each stage in the process, that information

was unavailable without an extensive expenditure ofmanual labor.

A related problem is the difficulty the Commission has in associating resources devoted

to an activity with the results ofthat activity. The Commission does a good job oftracking

13
resources expended. It can determine how much stafftime and material at what cost was spent

in a particular activity. Some Commission organizations can even associate costs with particular

projects. What a program manager may have great difficulty doing, however, is telling a

decision maker that, for a specific level or increase in resources, the program manager will

deliver a specific level ofincreased output. Without this information from all programs

competing for limited resources, decision makers cannot make reasoned resource allocation

judgments. Decision makers are forced to rely on intuition and anecdotal evidence.

To increase the efficiency and the effectiveness ofthe management ofCFTC programs

and operations, the OIG has, and will continue, in addition to conducting mandatory audits,

concentrate its audit resources on the identification ofinformation voids and the lack of

continuity in the flow ofinformation across organizational lines from the beginning of a process

until its conclusion. The DIG will recommend the implementation of any system improvements

where the benefits ofimplementing the change exceed the costs.

In addition to our efforts to bring technology to bear on the information requirements of

the Commission, the OIG has begun to focus on the CFTC's use of contractors. As budgetary

issues have reduced the CFTC's ability to acquire new full time employees (FTEs), it has

become more expedient in some situations to hire contractors to perform work formerly

performed by agency staff. This trend toward using contractors, rather than FTEs, appears

especially prevalent in the area ofinformation technology (i.e., telecommunications and

network-related services). The Office ofthe Inspector General believes that ongoing,

independent review will be useful to assure that the use of contractors is cost-effective, that the

use of contractors does not compromise information privacy and security, and that the use of

contractors improves agency performance. As the Commission continues to update and expand

its IT systems, the OIG will devote resources to monitoring agency performance in this area to

insure these concerns are examined and addressed as appropriate.

INVESTIGATIONS

The Inspector General Act of 1978, as amended, provides that the Inspector General may

receive and investigate complaints or information from the Commission's employees concerning

the possible existence of an activity constituting a violation oflaw, rules or regulations, or

mismanagement, gross waste of funds, abuse of authority or a substantial and specific danger to

the public health and safety.

The OIG has to date conducted only a reactive investigative program chiefly relying on

unsolicited employee complaints as the source ofinvestigative leads. This reactive program has

resulted in only a handful ofinvestigations per year. This strategy was followed because the

OIG believed that an independent regulatory agency such as the CFTC, without grant money or

substantial contracts to award, was not likely to generate a substantial investigative workload.

To insure that employee complaints could easily reach the OIG, a 24-hour hotline was

established in February 1993 to receive complaints. The hotline's existence is publicized on the

back cover ofthis semiannual report.

14
Because ofthe reactive nature ofthe OIG's investigative program, no investigative

agenda has been established.

LEGISLATIVE AND REGULATORY REVIEW

Because ofthe importance ofthis activity in an economic regulatory agency, the OIG

reviews proposed and final CFTC regulations, legislation, and selected exchange rules using six

basic criteria: Whether the agency: (1) has identified specifically the problem(s) to be addressed

by the proposal; (2) has defined through case study or data analysis a clear link between the

proposed solution and the identified problem(s); (3) has specified clearly the means to

effectively and efficiently enforce the proposal; (4) has assessed the likely efficiency and

effectiveness of alternative solutions; (5) can reasonably document that the proposal will yield

positive net benefits over the long term; and (6) has met the requirements ofthe Regulatory

Flexibility Act and the Paperwork Reduction Act.

The Regulatory Flexibility Act requires the agency to evaluate the impact ofits

regulations on small entities. The Paperwork Reduction Act requires the agency to manage

effectively and efficiently its information collections so that they are the least burdensome

necessary to achieve the stipulated objectives.

Because the OIG does not initiate legislation or, generally, regulations, the OIG

legislative and regulatory review program is reactive to the legislative and regulatory proposals

developed by others. Accordingly, no independent legislative and regulatory review agenda has

been established.

AUDIT AGENDA

ANNUAL AUDITS

The following audits are performed on an annual basis.

Audit of Compliance with the Federal Managers' Financial Integrity Act, FMFIA.

In support of OMB Circular A-123 (Revised), the Inspector General will evaluate,

provide technical assistance, and advise the agency head as to whether the agency's review and

evaluation process was conducted in accordance with the circular's requirements.

Evaluation of the CFTC Information Security Management Act, FISMA.

The Federal Information Security Management Act requires the Inspector General or his

designee to perform annual independent evaluations ofthe information security program and

practices ofthe agency.

15
Audit of CFTC Financial Statements.

In FY 2002, Congress passed the Accountability ofTax Dollars Act. The Act requires

the CFTC, along with numerous other Federal entities, to have its financial statements audited

annually. To this end, the OIG has engaged a contractor to provide the audit effort required to

enable the contractor to render an opinion on the agency's financial statements for each fiscal

year in accordance with generally accepted auditing standards, Government Auditing Standards,

and OMB Bulletin 01-02.

OTHER AUDITS

The OIG intends to focus the balance ofits audit resources on insuring that the Chairman,

the Commissioners, and program managers have timely, useful information on the progress of

the CFTC's programs in meeting their goals and objectives. For example, emphasis will be

placed on determining whether all managerial levels engaged in a process can track the progress

oftheir various programs. The tracking systems required in many, though not all, programs will

cross formal organizational lines.

These audits will entail a cataloging and description of all ofthe manual and automated

systems used by a program to gather information on its use ofresources, the results ofthe

devotion ofthose resources (including definitions ofmeasurements of accomplishment), and the

reporting ofresults and associated costs to the upper level managers in the Division and to the

Chairman and the Commissioners. The cataloging ofthese decision support systems will be

followed by an assessment ofwhether all concerned officials are timely receiving the

information they require to efficiently allocate resources to those uses which best accomplish the

priorities ofthe Commission. If any elements are lacking in the information systems, they will

be identified and improvements will be recommended ifthey can be implemented in a

cost/beneficial manner.

Ifrecommendations are successfully implemented, the proposed systems should allow

the Chairman, the Commissioners, and concerned program managers to track the progress of a

particular program across organizational lines and to quickly determine the effects, if any, of

changes in policy, procedure, or staffing.

The first step in accomplishing this goal will be to concentrate on documenting, and

recommending the improvement and/or development oftracking systems in every program

element throughout the Commission.

In addition to our focus on facilitating the development of an efficient flow of

information throughout the agency, the OIG intends to continue to monitor the agency's use of

contractors, with emphasis on contracts for IT services, to assure that the use of contractors is

cost effective, that the contracts are managed effectively to improve agency performance.

Finally, the OIG will devote resources to the review ofthe management and operation of

the agency and compliance with Congressional mandates.

16
RESOURCES REQUIRED

The OIG estimates that approximately one staff year of effort will be devoted over each

ofthe next five years to the development of an efficient flow ofinformation throughout the

agency. One staff year will be devoted over each ofthe next five years to the review ofthe

agency's use of contractors. One-halfstaff year of effort will be devoted over each ofthe next

five years to the compliance audits described above. The "Annual Audits" are expected to

consume approximately one-halfstaff year per year.

CONTACTING THE OFFICE OF THE

INSPECTOR GENERAL

The OIG is located at 1155 21st Street, N.W., Washington, D.C. 20581. The telephone

number is (202)418-5110. The facsimile number is (202)418-5522. The hotline number is

(202)418-5510. Regular business hours are between 8:30 AM and 5:00 PM, Monday through

Friday, except Federal holidays.

17
Table 1

Reports Issued with Questioned Costs

(April!, 2007 - September 30, 2007)

Number

Dollar Value

Thousands

Questioned Unsupported

A. For which no management decision has

been made by the commencement ofthe

reporting period

B. Which were issued during the reporting

period

Subtotals (A + B)

c. For which a management decision was

made during the reporting period

o

o

o

o

o

o

o

o

o

o

o

o

(1)

( ii )

dollar value of

disallowed costs

dollar value of costs not

disallowed

o

o

o

o

o

o

D. For which no management decision

has been made by the end ofthe

reporting period

18

o o o
Table 2

Reports Issued with Recommendations

That Funds be Put to Better Use

(Aprill, 2007 - September 30,2007)

A. For which no management decision has

been made by the commencement ofthe

reporting period

B. Which were issued during the reporting

period

Subtotals (A + B)

c. For which a management decision was

made during the reporting period

( i ) dollar value of

recommendations that

were agreed to by management

Number

o

o

o

o

o

Dollar Value

Thousands

o

·0

o

o

o

( ii ) dollar value of

recommendations that

were not agreed to by

management o o

D. For which no management decision

has been made by the end ofthe

reporting period

19

o o
The InspectorGeneral

needsyourhelp to

assure the integrity of

CFTC's programs.

Report FRAUD, WASTE

or ABUSE to the

INSPECTOR GENERAL

HOTLINE

(202)418-5510

Office of the Inspector General

Commodity Futures Trading Commission

1155 21 ST Street, N.W.

Washington, D.C. 20581