COMMODITY FUTURES TRADING COMMISSION

SEMIANNUAL REPORT

OF THE

OFFICE OF THE

INSPECTOR GENERAL

FORTHEPERIOD ENDING SEPTEMBER30, 2004
Office of the

Inspector General

TO:

FROM:

SUBJECT:

u.s. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centr~

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5110

Facsimile: (202) 418-5522

www.cftc.gov

October 29, 2004

Sharon Brown-Hruska

Acting Chairman

A. Roy Lavik 0.((

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, 2004 through September 30, 2004. This report is submitted to you in accordance

with the requirements ofSection 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, 2004 THROUGH September 30, 2004

TABLE OF CONTENTS

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

and deficiencies and a description ofOIG recommendations for corrective action

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

AUDITS 1

IN'VESTIGATIONS 2

LEGISLATIVE AND REGULATORY REVIEWS 2

OIG RESPONSffiILITIES 3

OIG RESOURCES 4

CFTC PROGRAMS AND OPERATIONS 4

COMPLETED WORK. 4

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

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

IN'VESTIGATIONS 7

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 (Mandated by Section 5(a)(10)

ofthe Act)] 9

SUMMARY OF MATTERS REFERRED TO PROSECUTNE AUTHORITIES and

the prosecutions and convictions which have resulted (Mandated by

Section 5(a)(4) ofthe Act) 10

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) 10

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)(II) 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

ClJRRENT AUDITS 10

GAO LIAISON 14

STRATEGIC PLAN 15

CONTACTING THE OFFICE OF THE INSPECTOR GENERAL 20

TABLE 1 -- REPORTS ISSUED WITH QUESTIONED COSTS

(Mandated by Section 5(a)(8) ofthe Act) 21

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

TO BETTER USE (Mandated by Section 5(a)(9) ofthe Act) 22

11
INDEX OF IG ACT REPORTING

REQUIREMENTS

Section 5(a)(I) 1

Section 5(a)(2) 1

Section 5(a)(3) 9

Section 5(a)(4) 10

Section 5(a)(5) 10

Section 5(a)(6) 4

Section 5(a)(7) 4

Section 5(a)(8) 21

Section 5(a)(9) 22

Section 5(a)(10) 9

Section 5(a)(11) 10

Section 5(a)(12) 10

111
SUMMARY OF OIG ACTIVITIES

AUDITS

The primary objectives ofthe Office ofthe Inspector General (DIG) 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 DIG audit activities, which are listed below, reflect

these objectives.

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.)

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 will

include an examination ofthe performance measures devised by the Commission and the

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

additional details, see page 11.)

Audit ofCFTC Financial Statements. In FY 2002, Congress passed the Accountability of

Tax Dollars Act. The Act requires the CFTC, along with numerous other Federal

entities, to have its financial statements audited annually. To this end, the objective of

this audit is to acquire a contractor who will provide the audit effort required to enable

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

2004 in accordance with generally accepted auditing standards, Government Auditing

Standards, and OMB Bulletin 01-02. (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 beginning on page 4.)

Follow-up Audit ofCivil Monetary Penalty Collections. The Debt Collection Act of

1982 and the Debt Collection Improvement Act of 1996 (DCIA) direct Federal agencies

to collect debts owed to the United States. The DIG completed an audit ofthe Civil

1
Monetary Penalties Collection Process in April 2001 which examined the outstanding

debts owed to the Commission, reviewed the procedures for collecting outstanding debts,

and assessed compliance with the DClA. Improvements in the implementation ofthe

debt collection process were recommended. The objectives ofthis audit are to determine

ifthe suggested changes were implemented and ifthey have had the desired effect. (For

additional details, see page 5.)

Audit ofEmergency Contact Telephone Numbers. The Commission maintains

emergency telephone contact numbers for all key CFTC employees and for key

employees at regulated exchanges. The list ofthese emergency contact numbers should

be currently maintained and in the possession ofall key employees for use in the event of

an emergency. This audit reviewed the currency ofthe list of emergency contact

numbers and the possession ofthese numbers by all key employees. (For additional

details, see page 5.)

Audit ofCompliance with the Federal Managers' Financial Integrity Act. In support of

OMB 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 6.)

Evaluation ofthe CFTC Infonnation 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 infonnation security

program and practices ofthe agency. (For additional details, see page 6.)

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 ofauthority, 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. The OIG

opened two investigations during the reporting period and completed two investigations. (See the

section on investigations beginning on page 7.)

LEGISLATIVE AND REGULATORY REVIEWS

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

exchange rules using the following basic criteria: whether the ~gency: (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

2
the likely efficiency and effectiveness of alternative solutions; (5) can reasonably document that

the proposal will yield positive net benefits over the long tenn; 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 infonnation collections so that they are the least burdensome

necessary to achieve the stipulated objectives.

Legislative Activities

The Inspector General continues to be heavily involved in legislative activities.

Congressional staffwere briefed about the various IG issues.

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 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

GIG's efforts have been focused on the review oflegislative and regulatory proposals and the

monitoring ofinternal CFTC operations.

3
OIG RESOURCES

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

secretary. All positions have been filled since January 2,2000. 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. An OGC staffmember has been assigned to provide

such services to the OIG on an as-needed basis.

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 (FY) 2005 with the passage ofthe Commodity Futures

Modernization Act of2000 (CFMA).

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

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 ofoffsetting price risks.

COMPLETED WORK

AUDITS

The OIG is required to conduct, supervise and coordinate audits ofCFfC 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.

4
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 have been issued during the reporting period.

1. Follow-up Audit ofCivil Monetary Penalty Collections

Objective.

The Debt Collection Act of 1982 and the Debt Collection Improvement Act of 1996

(DClA) direct Federal agencies to collect debts owed to the United States. The OIG completed

an audit ofthe Civil Monetary Penalties Collection Process in April 2001 which examined the

outstanding debts owed to the Commission, reviewed the procedures for collecting outstanding

debts, and assessed compliance with the DClA. Improvements in the implementation ofthe debt

collection process were recommended. The objectives ofthis audit are to determine ifthe

suggested changes were implemented and ifthey have had the desired effect.

Status.

A final audit report was issued on September 23, 2004. The audit disclosed that there

were twenty-one cases totaling $12,796,047 with uncollected civil monetary penalties that were

180 days or older. Twelve ofthe cases totaling $6,265,000 were timely sent to the Financial

Management Service at Treasury for collection. Two ofthe cases totaling $1,039,174 were

timely sent to the Department ofJustice for authorization to terminate collection activities; and

seven cases amounting to $5,491,873 were incorrectly identified in the Division of

Enforcement's records. As a result ofthis audit, the OIG recommends that the Director, Division

ofEnforcement direct the DOE employee in charge ofcollections to continuously update DOE's

automated and manual records systems to reflect the current status of all cases and to comply

strictly with the deadlines imposed by the Debt Collection and Improvement Act of 1996.

2. Audit ofEmergency Contact Telephone Numbers.

Objective.

The Commission maintains emergency telephone contact numbers for all key CFTC

employees and for key employees at regulated exchanges. The list ofthese emergency contact

numbers should be currentLy maintained and in the possession of all key employees for use in the

5
event ofan emergency. This audit reviewed the currency ofthe list ofemergency contact

numbers and the possession ofthese numbers by all key employees.

Status.

This audit found that the agency does not have a current, comprehensive listing of

emergency contact numbers for key CFTC employees and for key employees at regulated

exchanges. The agency is preparing a new document, which will include this infonnation as

well as additional infonnation for key employees to use in the event of a market disruption.

Senior managers in the affected divisions have committed to producing a new comprehensive

document prior to the end ofthe third quarter of2004. Once this document is available, the OIG

will conduct random tests to ascertain the accuracy ofthis infonnation.

3. Audit ofCompliance with the Federal Managers' Financial Integrity Act

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.

For the third year, the Commission has been working on a new approach to satisfying the

requirement ofCircular A-123 (Revised). The OIG reviewed draft and final internal control

materials produced by the Commission and provided comments. The OIG reported the results of

its review ofthe submissions to the Chairman in its annual assurance letters. The OIG offered its

services to the Commission as advisor and consultant on conducting and reporting on internal

control reviews.

4. Evaluation ofthe CYrC Information Security Program and Practices, FISMA

Objectives.

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, OIRM and

DIG jointly engaged a contractor. Using the information supplied by the contractor and the

program managers, the Inspector General responded to the areas raised by the OMB Guidance.

The evaluation covered the following systems: the General Support System, Trade Practice

Investigations System, Payroll and Personnel Systems, ISS Market Surveillance System, 1FR

Company Financial Reporting System and the Financial Management System. The Financial

6
Management System consists ofthree components entitled Financial Management System,

Travel Manager System, and Electronic Certification System.

In addition to the independent evaluation, the Inspector General produced a summary

characterizing the results ofthe independent evaluation ofthe agency's infonnation security

program and practices. Results ofthis effort were transmitted to the CFTC's ChiefInfonnation

Officer (CIO) on September 15,2004 for combination with the CIO's assessment and inclusion

in the Chainnan's report to O:MB.

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 ofauthority, 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. The OIG

opened two investigations during the reporting period and completed the two investigations

during the reporting period.

In August 2004, the OIG received information from an employee that impending action

by agency staff as directed by the employee's supervisor would directly endanger the lives of

undercover agents involved in a sensitive investigation. The OIG interviewed relevant parties

and concluded that the danger asserted did not exist. As a result, this investigation was closed.

In April 2004, the OIG learned that a convicted felon was hired as a Grade 14 supervisor

at the CFTC without awareness ofhis prior criminal record. The OIG's concern was that,

although this relevant information regarding his criminal convictions was readily available and in

plain sight in the employee's Official Personnel Folder stored with other files safeguarded in the

Office ofHuman Resources (OHR), no one in ORR noticed the information. This oversight was

compounded by OHR's policy ofnot notifying the selecting official ofthe availability ofthe

Official Personnel Folder. This was particularly unfortunate since the individual had been

"outed" by a senior Senator. These facts led us to question the system currently in place for

hiring, processing critical information on new employees, and distributing adequate information

to the selecting officials so that they can make a decision that will benefit the agency. The

nonnotification ofthe availability ofthe Official Personnel Folder was particularly egregious.

As a result ofthis investigation, the OIG concluded that the present system in OHR was

faulty and must be repaired. Specifically, selecting officials must be given unconditional and

timely access to the Official Personnel Folder ofnew employees so that they can evaluate its

content to determine iftheir hiring decision was based on complete and accurate information.

To achieve this purpose, the Office ofthe Inspector General recommended that the Director,

Office ofHuman Resources personally review the Official Personnel Folder of each recently

hired employee who is grade CT- 14 and above to determine ifthe Official Personnel Folder

7
contains pertinent derogatory information or ifthe contents ofthe Official Personnel Folder are

inconsistent with the claims in the employee's application documents; inform the selecting

official ofthe results ofthat review; establish a procedure for notifying the selecting official

when the Official Personnel Folder relating to a recently hired employee is received by CFTC,

informing the selecting official ofhis right to review the Official Personnel Folder, and asking if

the selecting official would like to review the Official Personnel Folder; and, upon receipt of a

request from the selecting official to review the Official Personnel Folder, deliver the original

Official Personnel Folder to the selecting official's office for review by that official and return to

the Office ofHuman Resources within three business days.

We found that the pattern ofsecrecy maintained by the Director, OHR which kept

important information not only from the selecting official but also from her own Security Officer

is the base cause ofthe hiring difficulties. The Office ofthe Inspector General recommended

that the Chairman take disciplinary action against the Director for her culpability in creating and

maintaining an atmosphere ofexcessive secrecy which kept information from officials who

needed it to perform their functions.

The then Chainnan decided not to take disciplinary action against the Director. He did,

however, direct that OHR notify the hiring official ofthe availability ofthe Official Personnel

Folder for viewing. He did not, though, require that the Official Personnel Folder be made

available at the hiring offical's office, but, rather required the viewing be done at OHR.

The Executive Director has established a pilot project to determine the incidence of

misrepresentations of facts on the resumes of new hires. The Executive Director has

asked Human Resources staff to review Official Personnel Folders for all supervisors and all

CT-14 and above employees hired over the next six months to identify any discrepancies

between the information on the prospective employee's application and the information in the

Official Personnel Folder. The pilot project will also keep track ofhow many hiring officials

take advantage of an offer to come to the Office ofHuman Resources Management and review

the new employee's Official Personnel Folder under the supervision ofOHR.

While the OIG disagrees that the actions taken are sufficient to resolve the problems

identified, we will evaluate the results ofthe pilot project at its conclusion and make further

recommendations at that 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 makes recommendations regarding more effective or efficient alternatives or

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

changes.

8
The GIG has notified the responsible Divisions as to any concerns with draft and final

documents relating to legislation, rules or investigations. Fonnal 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 GIG 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 and contact has

been made with congressional staffon various IG issues.

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 were no instances ofreports issued before the commencement ofthe reporting

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

9
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.

REVISED MANAGEMENT DECISIONS

No management decisions were revised during the reporting period.

INSPECTOR GENERAL DISAGREEMENT

The Inspector General has a disagreement with the management decisions on OIG

recommendations contained in the investigation ofthe hiring process detailed on page 7.

CURRENT AUDITS

The audit agenda and priorities for the GIG 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 of a review on the

efficiency or effectiveness ofCFTC programs and operations;

10
• Management priorities and improvements that may be possible;

• Results ofaudits 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 ofprogress 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. Review ofAgency Compliance with GPRA

Objective.

The Government Performance and Results Act of 1993 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 will include an examination ofthe performance measures devised by the

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

measures.

Status.

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

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

General reviewed the Commission's FY 2001, FY 2002, FY 2003 and FY 2004 Annual

Performance Plan before each was submitted to Congress. Subsequently, the OIG selectively

reviewed the FY 1999, FY 2000, FY 2001, FY 2002 and FY 2003 Annual Performance Reports

after they were submitted to Congress. The OIG concluded that the agency had made

improvements in defining its goals and identifying measures for reaching its stated goals.

The CFMA, which was enacted in fiscal year 2001, fundamentally changed the

regulatory structure for the commodity futures markets. The Commission adopted new rules and

procedures consistent with the regulatory refonns presented in that Act. This wholesale change

in approach challenged each operating division to redefine its service goals under GRPA. The

agency implemented a reorganization that allows the Commission to more effectively respond to

the new Act.

The OIG participated in a number of discussions on how to best reflect the agency's new

regulatory paradigm in structuring future goals and measures under GPRA. In conjunction with

other federal agencies' Inspectors General, the OIG is participating in the development ofbest

practices for measuring compliance~with the requirements ofGPRA. The OIG is reviewing the

goals and objectives prepared by senior managers for adherence to the requirements ofGPRA.

11
After this review, the GIG will verify and validate a subset ofthe data submitted in the GPRA

report.

2. Audit ofeYre Financial Statements

. 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 objective ofthis audit is to acquire a contractor who will provide the

audit effort required to enable the contractor to render an opinion on the agency's financial

statements for fiscal year 2004 in accordance with generally accepted auditing standards,

Government Auditing Standards, and OMB Bulletin 01-02.

The specific objectives ofthis audit are to determine 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 ofFinancing; and (t)

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 determination 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 perform 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 IFA 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 performance measures reported in the

accountability report, the IFA 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.

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(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 detennmation offinancial statement amounts. The IFA

will limit its tests ofcompliance 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, OtherInformation in

Documents Containing Audited Financial Statements.

Status.

A Request for Quote was issued on July 14, 2003. By the closing date ofAugust 14,

2003, four finns had submitted proposals. An independent public accounting finn was selected

on January 15,2004. Work began on this audit with an opening meeting.on February 18,2004.

Initial interviews ofCFTC employees were conducted, and an audit plan was delivered to the

Office ofthe Inspector General. The plan was reviewed, modified, and implemented.

Preliminary findings have been presented to the OIG and are subject to revisions until the final

report is delivered on November 12,2004.

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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

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 OIG plans its audits so as not to

duplicate GAO's efforts. Moreover, OIG in its audits activities identifies the goals ofeach audit

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

resources.

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STRATEGIC PLAN

FOR THE

OFFICE OF THE INSPECTOR GENERAL

INTRODUCTION

The Office ofthe Inspector General (OIG) in the Commodity Futures Trading

Commission (CFTC) 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 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 infonnation. 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 detennine ifthe change is in

the direction and ofthe magnitude predicted. In the absence ofsuch inf6fll1ation, top level

managers cannot adequately perform theirjobs.

15
A number ofobstacles 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 simple example is the Reparations Program prior to the installation ofan 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

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

judgements. 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 will, in addition to conducting mandatory audits, concentrate its audit

resources on the identification ofinformation voids and the lack of continuity in the flow of

information 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 of

implementing the change exceed the costs.

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

the Commission, the GIG has been following the Commission's development ofmeasures and

systems ofmeasurement in response to the Government Performance and Results Act (GPRA).

As the Commission implements GPRA, the OIG will devote significant 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

16
the possible existence ofan activity constituting a violation oflaw, rules or regulations, or

mismanagement, gross waste offunds, abuse ofauthority 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 in the

agency-wide telephone book and in this semiannual report.

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.

17
AUDIT AGENDA

ANNUAL AUDITS

The following audit is performed on an annual basis.

Audit ofCompliance with the Federal Managers' Financial Integrity Act

In support ofOMB 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.

OTHER AUDITS

The GIG 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. Ifany elements are lacking in the information systems, they will

be identified and improvements will be recommended 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 GIG will devote resources to the audit of compliance

with the terms of agency contracts (such as leases ofspace in New York, Chicago, and

Washington, D.C.), the collection offunds (such as compliance with the terms ofthe Debt

Collection hnprovement Act of 1996 and the resultant Memorandum ofUnderstanding with

18
Treasury), and agency compliance with Congressional mandates (such as the Government

Performance and Results Act and the Government Information Security Reform Act).

RESOURCES REQUIRED

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

ofthe next five years to the development ofan efficient flow ofinformation throughout the

agency. Nine-tenths of a staffyear 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-tenth staff year per year.

19
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.

20
Table 1

Reports Issued with Questioned Costs

(April I, 2004 - September 30, 2004)

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

(I)

(ii)

dollar value of

disallowed costs

dollar value ofcosts not

disallowed

o

o

o

o

o

o

D. For which no management decision

has been made by the end ofthe

reporting period

21

o o o
Table 2

Reports Issued with Recommendations

That Funds be Put to Better Use

(Aprill, 2004 - September 30, 2004)

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

22

o o
The InspectorGeneral

needs yourhelpto

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 21ST Street, N.W.

Washington, D.C. 20581