COMMODITY FUTURES TRADING COMMISSION

SEMIANNUAL REPORT

OF THE

OFFICE OF THE

INSPECTOR GENERAL

FOR THE PERIOD ENDING MARCH 31, 2008
Office of the

Inspector General

TO:

FROM:

SUBJECT:

U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

115521 st Street, NW, Washington, DC 20581

Telephone: (202) 418-5110

Facsimile: (202) 418-5522

www.cftc.gov

May 30,2008

Walter L. Lukken

Acting Chainnan

A. Roy Lavik Q tZ

Inspector General

Semiannual Report ofthe Office ofthe Inspector General

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

. from October 1, 2007 through March 31,2008. This report is submitted to you in accordance

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

I appreciate your continuing support ofthis office.

Attachment
OFFICE OF THE INSPECTOR GENERAL

COMMODITY FUTURES TRADING COMMISSION

SEMIANNUAL REPORT

FOR THE PERIOD FROM

October 1, 2007 THROUGH March 31, 2008

TABLE OF CONTENTS

SUMMARY OF OIG ACTIVITIES [including a description ofsignificant problems, abuses,

and deficiencies and a description of OIG recommendations for corrective action

(Mandated by Section 5(a)(1) and (2) ofthe Act)] 1

AUDITS and REVIEWS 1

INVESTIGATIONS 3

LEGISLATIVE AND REGULATORY REVIEWS 3

OIG RESPONSIBILITIES ; 3

OIG RESOURCES 4

CFTC PROGRAMS AND OPERATIONS 4

COMPLETED WORK 5

AUDITS and REVIEWS [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)] 5

INVESTIGATIONS 8

LEGISLATIVE AND REGULATORY REVIEWS 8

AUDIT REPORTS OVER SIX MONTHS OLD 9

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)] ........9

CORRECTIVE ACTION COMPLETED 9

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 (Mandatedby Section 5(a)(lO)

ofthe Act)] 9
SUMMARY OF MATTERS REFERRED TO PROSECUTIVE AUTHORITIES and

the prosecutions and convictions which have resulted (Mandated by

Section 5(a)(4) ofthe Act) 9

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) 9

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)(11) ofthe Act)] 10

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)] 10

CURRENT AUDITS 10

GAO LIAISON 12

STRATEGIC PLAN 13

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 oflegislationand regulations 8

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 9

Section 5(a)(4) Matters referred to prosecutorial authorities 9

Section 5(a)(5) Summary ofinstances where infonnation was refused 9

Section 5(a)(6) Completed audit reports.: 5

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

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

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

Section 5(a)(10) Audit reports lacking management decision 7, 9

Section 5(a)(1l) Significant revised management decisions 10

Section 5(a)(12) Significant management decisions where the IG disagrees 10

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

..................In1provement Act of 1996 5

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SUMMARY OF OIG ACTIVITIES

AUDITS and REVIEWS

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

Futures Trading Commission (Cormnission, Agency, 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. The OIG pursues these objectives through the

completion of audits, reviews, and other projects. This reporting period's OIG audit and review

activities, which are listed below, reflect these objectives. During this reporting period, the OIG

audits resulted in recommendations, and a review reiterated one earlier recommendation.

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 10.)

Audit ofCFTC Financial Statements for Fiscal Year 2008. 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 2008 in

accordance with generally accepted auditing standards, Government Auditing Standards,

and OMB Bulletin 01-02. (For additional details, see page 10.)

Current Reviews

Review ofAgency Use ofContractors. Over the past five fiscal years the Agency has

increased its reliance on contractors to extend the capabilities ofsome CFTC employees

and to replace others. The objectives ofthis review are to determine whether theAgency

has effectively employed contractors to complement andreplace its staff and to present

the Chairman with a complete picture ofthe Commission's use of contractors. (For

additional details, see page 12.)

Completed Audits

The following audits have been completed during this reporting period. (For additional

details, see the section on completed audits and reviews beginning on page 5.)

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 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

1
accordance with generally accepted auditing standards, Government Auditing Standards,

and OMB Bulletin 01-02. (For additional details, see page 5.)

Completed Reviews

The following reviews have been completed during this reporting period. (Fot additional

details, see the section oncbmpleted audits and reviews beginning on page 5.)

Review ofAgency Compliance with GPRA. The Government Performance and Results

Act of 1993 (GPRA) requires federal agencies to develop strategic plans, prepare annual

plans setting performance goals, and report annually on actual performance compared to

goals. The first report was prepared in March 2000. The objective ofthis review is to

determine how effectively the Commission is complying with GPRA's terms. This

includes an examination ofthe performance measures devised by the Commission and

the systems used for gathering the data to report on those performance measures.

The OIG reviewed the Commission's FY 2007 Annual Performance Plan before it was

submitted to Congress. The Reports Consolidation Act of 2000 authorizes the CFTC to

provide financial and performance information in a more meaningful and useful format

for Congress, the President, and the public, through publication ofthe Performance and

Accountability Report (PAR). Reports required under GPRA are also included in the

PAR, and the Office ofthe Inspector General also reviewed the Commission's FY 2007

, PAR report prior to submission to OMB and Congress. Based upon those reviews, the

Office ofthe Inspector General submitted suggestions regarding the PAR, and

determined that the Commission has complied with GPRA's terms. (For additional

details, see page 6.)

Report ofCFTC's Management Challenges; The Reports Consolidation Act requires the

Inspector General to summarize the most serious management and performance

challenges facing the CFTC and to assess the Agency's progress in addressing those

challenges, all for inclusion in the PAR. During this reporting period, the OIG examined

the work ofthe CFTC over the past year, as well as market developments and significant

events impacting the futures industry, in order to determine the Agency's most serious

management and performance challenges. The OIG identified two potential management

challenges: The Modernization ofElectronic Market Surveillance and Expansion of

CFTC Oversight into New Markets (For additional details, see page 7.)

Update ofthe Review ofthe Need for a Los Angeles Office. The OIG report titled

"Review ofthe Need for a Los Angeles Office" was completed in 2006. Because of

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

in the report. In December, Congress increased the CFTC's budget for FY 2008. Also in

December, the OIG received an inquiry from Congress regarding unresolved

reCOmmendations. In light ofthe budget situation and the Congressional inquiry, the

OIG updated the 2006 report and expanded the scope ofits original review. (For

additional details, see page 7.)

2
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 and others

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

regulations, or mismanagement, abuse of authority~ or gross waste of funds, or a supstantial 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. During this period the OIG did review investigative

leads submitted by individuals and organizations. (See the section on investigations beginning

on page 8.)

LEGISLATIVE AND REGULATORY REVIEWS

The OIG reviews proposed,and final CFTC regulation.s, 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, serving on the

legislative committee ofthe Inspector Generals. Congressional staffs were briefed about the

various IG issues, and the Inspector General responded to Congressional inquiries. (See the

section on legislative and regulatory reviews beginning on page 8.)

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:

3
• 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, 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 Chainnan 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 oflegislative and regulatory proposals and the

monitoring ofinternal CFTC operations.

OIG RESOURCES

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

secretary. During the preceding reporting period one professional staffmember retired and a

new professional staffmember 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 professional staffmember who began in

June 2007 is an attorney, the OIG is not utilizing the 1989 Memorandum.

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 of 2000 (CFMA). The Commission is currently working with the Administration and the

Congress on issues related to the reauthorization ofthe Commission.

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

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

4
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.and REVIEWS

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

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.

The following audit reports and reviews have been issued during the reporting period.

1. Audit of CFTC Financial Statements for Fiscal Year 2007

Objective.

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 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.

5
Status.

An unqualified independent auditor's report was issued on November 15,2007. The

independent auditor's report found that the CFTC's financial statements as of September 30,

2007 are presented fairly, in all material respects, in conformitywith U.S. generally accepted

accounting principles. However, with respect to internal control over financial reporting, one

significartt deficiency wasidentified: Improvement is needed over recording accruals. However,

the independent auditor did not consider the significant deficiency above to be a material

weakness. Management concurred with this finding and agreed with the recommendations.

The IG Act and the Federal Financial Management Improvement Act of 1996 (FFMIA)

require the Inspectors General of certain agencies to report "instances and reasons" when the

Agency has not met intermediate target dates established in a remediation plan to bring the

agency's financial management system into substantial compliance with the Act. CFTC is not

subject to the requirements ofthe FFMIA; however, it voluntarily seeks to comply with its

requirements. During this reporting period, there were no events giving rise to a duty to report

under FFMIA.

2. Review of Agency Compliance with GPRA

Objective.

The GPRA requires federal agencies to develop strategic plans, prepare annual plans

setting performance goals, and report annually on actual performance compared to goals. The

Reports Consolidation Act of 2000 authorized agencies to provide financial and performance

information in a more meaningful and useful format for Congress, the President, and the public,

through publication ofthe PAR. Beginning in FY 2004, in response to an OMB directive, the

Agency began submitting an annual PAR. The PAR includes reports required under the GPRA.

The objective ofthis review is to determine how effectively the Commission is

complying with GPRA's terms. This includes an examination ofthe performance measures

devised by the Commission and the systems used for gathering the data to report on those

performance measures.

Status.

The OIG has been involved with the review ofAgency compliance with the GPRA from

its inception. In response to Congressional interest, OIG consulted with and advised the

Commission's operating divisions concerning GPRA requirements. The Office ofthe Inspector

General reviewed the Commission's FY 2001 through FY 2007 Annual Performance Plans

required under GPRA before each was submitted to Congress. The OIG will continue to review

the Annual Performance Plan that is included in the annual budget estimate which is submitted to

the Office ofManagement and Budget.

6
Prior to the adoption ofthe Reports Consolidation Act, from FY 1999 through FY 2003

Congress required the Agency to submit a report on the Agency's performance results by

strategic goal. The OIG selectively reviewed these reports after they were submitted to

Congress.

In FY 2004 the Agency began issuing a yearly PAR, and the OIG has reviewed the

Commission's PAR reports each year prior to submission to Congress, and submitted

suggestions. Based upon those reviews, the OIGhas determined that the Commission has

complied with GPRA's terms.

3. Report of CFTC's Management Challenges

Objective.

In addition to authorizing the agencies to provide financial and performance information

in a more meaningful and useful format for Congress, the Reports Consolidation Act of 2000

also required the Inspector General to summarize the most serious management and

performance challenges facing the CFTC and to assess the Agency's progress in addressing

those challenges for inclusion in the PAR.

Status.

The OIG prepared the required summary ofthe Agency's most serious management and

performance challenges in accordance with the Reports Consolidation Act of 2000 for inclusion

in the FY 2007 PAR. The OIG concluded that the Agency had adequately addressed the most

serious management and performance challenges identified by the Inspector General in FY 2006.

Using information gathered during review ofthe draft FY 2007 PAR, as well as market

developments and significant events impacting the futures industry over the past fiscal year, the

Inspector General prepared its annual Assessment ofthe most serious management challenges

facing the CFTC. In November 2007 the OIG submitted the report to the Agency for inclusion

in the PAR, and the Agency transmitted the PAR to OMB and Congress. The OIG identified

two potential management challenges: The Modernization ofElectronic Market Surveillance and

Expansion ofCFTC Oversight into New Markets

For FY 2008, the OIG will review the CFTC's FY 2008 PAR and prepare its annual

assessment ofthe most serious management challenges facing the CFTC.

4. Update of the Review of the Need for a Los Angeles Office.

Objective.

Our report titled "Review ofthe Need for a Los Angeles Office" was completed in 2006.

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

recommendations in the report. In December, Congress increased the CFTC's budget for FY

2008. Also in December, the OIG received an inquiry from Congress regarding unresolved

recommendations. In light ofthe budget situation and the Congressional inquiry, the OIG

7
updated the 2006 report and expanded the scope ofits original review. Our objective was to

obtain inforITlation regarding registration and compliance trends inthe Western States, as well as

information regarding opportunities for cooperative enforcement in the Los Angeles Area and

the views offormer CFTC employees.

Status.

The Office ofInspector General issued this report on March 12, 2008. The report

reiterated the reconunendation in the 2006 Report to reopen the Los Angeles Office, and was

bolstered by information obtained through expanded inquiry.

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 no

investigations were opened during the period, although several leads were received and none

warranted formal investigation at this time.

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 makesrecommendations regarding more effective or efficient alternatives or protections

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

The OIG has 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 In.itiated This Reporting Period

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

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

to reflect this change.

8
Legislative Activities

The mspector General continues to be involved in legislative activities and contact has

been made with congressional staff on various IG issues. In addition, the Inspector General has

responded to Congressional inquiries.

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.

9
REVISED MANAGEMENT DECISIONS

No management decisions were revised during the reporting period.

INSPECTOR GENERAL DISAGREEMENT

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

recommendations.

CURRENT AUDITS

The audit agenda and priorities for the DIG are detennined based on the following

factors:

• Statutory and regulatory requirements;

• Adequacy ofinternal control systems as indicated by vulnerability assessments and

internal control reviews recommended by DMB 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 of a 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 - including reviews and progreSs summaries for each audit and review,

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.

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1. Audit of CFTC Financial Statements for Fiscal Year 2008

Objectives.

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

the CFTC, along with nUlllerous 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

en.able the contractor to ren.der an opinion on the Agency's finanCial statements for Fiscal Year

2008 in accordance with generally accepted auditing standards, Government Auditing Standards,

alidOMB Bulletin 01-02.

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) wi11limit 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 FMFIA, such as those controls relevant to achieving efficient

operations.

With respect to internal controls related to performance 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 performance 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 determination offinancial statement amounts. The IPA

11
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 information in the "Overview ofthe Reporting Entity" is consistent in content

and presentation with the information 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.

Status.

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

complete the Fiscal Year 2004 CFTC Financial Statement Audit. Their audit report was

delivered on November 18,2004. The same firm under an option year ofthe contract rendered

an opinion on November 14, 2005 on the Agency's financial statements for Fiscal Year 2005, on

November 15,2006 performed the same tasks on the Fiscal Year 2006 financial statements, and

on November 15, 2007 issued its independent audit report for Fiscal Year 2007.

On March 10, 2008, the Fiscal Year 2008 audit began with a meeting with senior Agency

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

November 9, 2008.

2. Review of Agency Use of Contractors.

Objective.

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

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

review areto determine whether the Agency has effectively employed contractors to complement

its staff and replac'e others and to present the Chairman with a complete picture ofthe

Commission's use of contractors.

Status.

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

contracts employed by CFTC during FY 2002 to 2007. The OIG has reviewed and analyzed this

data and attempted to determine whether the Agency has effectively employed contractors to

complement and replace its staff. The OIG has sought to develop a complete picture ofthe

Commission's use of contractors. During this reporting period, the OIG completed interviews,

obtained further data on Agency contract employees, and began the process offormulating

conclusions and recommendations and drafting the report.

GAO LIAISON

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

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

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

12
Federal agencies, state and local governmental agencies, and nongovernmental entities, audits,

investigations, and evaluations regarding the economy, efficieilcy, and effectiveness of CFTC

programs and operations. GAO also conducts audits ofCFTC activities, and OIG plans its audits

so as not to duplicate GAO's efforts.

STRATEGIC PLAN

FOR THE

OFFICE OF THE INSPECTOR GENERAL

INTRODUCTION

The CFTC DIG 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 investigations relating to the administration of

CFTC programs and operations;

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

recommendations concerningtheir impact on the economy and efficiency ofCFTC

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

• Keep the Chainnan 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 DIG has established three programs to carry out its responsibilities:

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

follows.

AUDIT and REVIEW

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.

During the next reporting period, in addition to the mandatory audits, OIG will complete

its review ofthe Agency's use of contractors. This review is motivated by and should respond to

concerns expressed by some Agency employees regarding the growth of contractor employee use

by the Agency, including concerns that Agency employees could perform the same tasks at less

13
cost. Our review will address these concerns and provide the Commission with an overview of

the evolution ofthe use of contractors by the Agency.

In addition, the OIG will work on the development of new audits that are timely and

useful to Agency administrative operations. Looking to the longer term, 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 information 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 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

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 would like to, 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 OIG 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 been following the Commission's development ofmeasures and

systems ofmeasurement in response to the GPRA. As the Commission implements GPRA, the

OIG will devote resources to monitoring Agency performance to insure that the data is

accurately gathered and that the measures reported are the best available for demonstrating

program performance.

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

14
the possible existence of an activity constituting a violation oflaw, rules or regulations, or

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

the public health and safety.

The GIG 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

GIG 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 GIG, 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..

Because ofthe reactive nature ofthe GIG's investigative program, no investigative

agenda has been established.

LEGISLATIVE AND REGULATORY REVIEW

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

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 solutjon 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 GIG 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.

15
AUDIT AGENDA

ANNUAL AUDITS

The following audits are perfonned on·an annual basis.

Audit of Compliance with the Federal Managers' Financial Integrity Act

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 Program and Practices, FISMA

The Federal Information Security Management Act (FISMA) requires the Inspector

General or his designee to perform annual independent evaluations ofthe information security

program and practices ofthe Agency.

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 the design and

implementation of audits that are timely and useful to Agency administrative operations.

Looking to the longer term, the OIG intends to develop and implement audits designed to ensure

that the Chairman, the Commissioners, and program managers have timely, useful information

on the progress ofthe 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), andthe

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

16
priorities ofthe Commission. If any elements are lacking in the information systems, they will

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

costlbeneficial 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 will devote resources to the review ofthe

management and operation ofthe Agency and compliance with Congressional mandates.

RESOURCES REQUIRED

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

ofthe next five years to performance and compliance audits and reviews ofthe Agency's

operations. 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 Three Lafayette Centre 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

(October 1, 2007 - March 31, 2008)

Number

Dollar Value

Thousands

Questioned Unsupported

A. For which no management decision has

beertmade 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

·0

o

o

o

o

o

o

o

o

o

o

o

(I)

(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

(October 1, 2007- March 31, 2008)

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

o

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