COMMODITY FUTURES TRADING COMMISSION

SEMIANNUAL REPORT

OF THE

OFFICE OF THE

INSPECTOR GENERAL

FOR THE PERIOD ENDING MARCH 31, 2005
Office of the

Inspector General

TO:

FROM:

SUBJECT:

u.s. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW. Washington. DC 20581

Telephone: (202) 418-5110

Facsimile: (202) 418-5522

www.cftc.gov

April 22, 2005

Sharon Brown-Hruska

Acting Chainnan

A. Roy Lavik Q rz W

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, 2004 through March 31, 2005. This report is submitted to you in accordance

with the requirements ofSection 5 ofthe Inspector 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, 2004 THROUGH March 31, 2005

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

A"UDITS 1

IN'VESTIGATIONS 2

LEGISLATIVE AND REGULATORY REVIEWS 3

OIG RESPONSffiILITIES 3

OIG RESOURCES 4

CFTC PROGRAMS AND OPERATIONS 4

COMPLETED WORK 5

A"UDITS [including a list ofeach audit report issued and a summary ofeach particularly

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

INVESTIGATIONS 6

LEGISLATIVE AND REGULATORY REVIEWS 7

AUDIT REPORTS OVER SIX MONTHS OLD 8

CORRECTIVE ACTION NOT COMPLETED [including an identification of each

significant recommendation described in previous semiannual reports on which

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

CORRECTIVE ACTION COMPLETED 8

1
MANAGEMENT DECISION NOT MADE [including a summary ofeach 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 ofeach 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)] 8

SUMMARY OF MATTERS REFERRED TO PROSECUTIVE AUTHORITIES and

the prosecutions and convictions which have resulted (Mandated by

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

SUMMARY OF EACH REPORT MADE TO THE AGENCY HEAD

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

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

REVISED MANAGEMENT DECISIONS [including description and explanation of

the reasons for any significant revised management decision made during the

reporting period (Mandated by Section 5(a)(11) ofthe Act)] 8

INSPECTOR GENERAL DISAGREEMENT [including information concerning any

significant management decision with which the Inspector General is in

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

CURRENT AUDITS 9

GAO LIAISON 13

STRATEGIC PLAN 14

CONTACTING THE OFFICE OF THE INSPECTOR GENERAL 19

TABLE 1 -- REPORTS ISSUED WITH QUESTIONED COSTS

(Mandated by Section 5(a)(8) ofthe Act) 20

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

TO BETTER USE (Mandated by Section 5(a)(9) ofthe Act) 21

ii
INDEX OF IG ACT REPORTING

REQUIREMENTS

Section 5(a)(1) 1

Section 5(a)(2) 1

Section 5(a)(3) 8

Section 5(a)(4) 8

Section 5(a)(5) 8

Section 5(a)(6) 5

Section 5(a)(7) 5

Section 5(a)(8) 20

Section 5(a)(9) 21

Section 5(a)(10) 8

Section 5(a)(11) 8

Section 5(a)(12) 9

111
SUMMARY OF OIG ACTIVITIES

AUDITS

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

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

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

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

these objectives.

Current Audits

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

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

audits beginning on page 9.)

Audit ofCFTC Financial Statements for Fiscal Year 2005. 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 2005 in accordance with generally accepted auditing standards, Government

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

Peer Review ofExternal Office ofthe Inspector General. Each office ofthe Inspector

General is subject to a periodic external review. The objectives ofthis peer review are to

determine whether the Office ofInspector General's internal quality control system is

adequate, in place, and operating in compliance with auditing standards promulgated by

the Comptroller General ofthe United States; and whether established policies,

procedures and applicable auditing standards are being followed in practice. (For

additional details, see page 11.)

Evaluation OfThe CFTC Proceedings Program. In response to observations that the

workload ofthe Office ofProceedings has changed markedly over the past few years and

that the resources ofthe office may be misallocated, the Office ofthe Inspector General

undertook an evaluation ofthe Office ofProceedings. The evaluation is designed to cover

the workload and staffing ofthe Office ofProceedings from FY 1999 to date. (For

additional details, see page 11.)

Review ofAgency Compliance with GPRA. The Government Performance and Results

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

1
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 12.)

Completed Audits

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

details, see the section on completed audits begffiffing on page 5.)

Audit ofCFTC Financial Statements for Fiscal Year 2004. 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. An unqualified audit opinion was issued

on November 18,2004. (For additional details, see page 5.)

Audit ofCompliance With 5 U.S.C. §2302(c). In 1994, Congress responded to reports

ofwidespread ignorance in the federal workforce concerning employees' right to be free

from prohibited personnel practices, especially retaliation for whistle blowing, by

enacting 5 U.S.C. §2302(c). That provision charges "[t]he head ofeach agency" with

responsibility for "ensuring (in consultation with the Office ofSpecial Counsel) that

agency employees are informed ofthe rights and remedies available to them" under the

prohibited personnel practice and whistleblower retaliation protection provisions ofTitle

5. The Office ofthe Inspector General was charged with ensuring compliance with this

Act.

This audit sought to ascertain whether the agency had applied for and received

certification from Office ofSpecial Counselor had independently adopted the five

notification elements ofOffice ofSpecial Counsel's certification program. Although the

audit found that the agency had not received Office ofSpecial Counsel certification of

compliance with the notification requirements ofTitle 5 the agency has recently sought to

notify employees ofthe protections accorded to them under the No-FEAR Act and, more

specifically, the Whistleblower Protection Act, which was the focus ofthis audit. (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

2
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 one investigation during the reporting period and completed one investigation. (See the

section on investigations beginning on page 6.)

LEGISLATIVE AND REGULATORY REVIEWS

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

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

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

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

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

the likely efficiency and effectiveness ofalternative 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. 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;

3
• 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 infonned 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. All positions have been filled since January 2, 2000. The present Inspector General

assumed his position on October 7, 1990.

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

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

provide the DIG 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 transformed the Commission from a front-line regulatory agency to an

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

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

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

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

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

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

discovery and a means ofoffsetting price risks.

4
COMPLETED WORK

AUDITS

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

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

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

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 have been issued during the reporting period.

1. 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.

Status.

The 2004 Audit ofCFTC Financial Statements was completed and an audit report was

issued on November 18, 2004 in accordance with a written extension from the Office of

Management and Budget. The opinion section ofthat report states, "the accompanying balance

sheet is presented fairly, in all material aspects, in confonnity with accounting principles

generally accepted in the United States ofAmerica." However the report identified three

reportable conditions that are considered to be material weaknesses. They are: Improvement

5
Needed in Recording Accruals and Preparing Financial Statements; Improvement Needed in

Financial Accounting Process over Journal Entries; and, Financial Management Systems Need

Improvement. Three reportable conditions were also identified. They are: Improvement

Needed in Fixed Asset System; Improvement Needed in Recording Interest on Civil Monetary

Penalties; and, Improvement Needed in Evaluating Undelivered Orders. The OIG and

Management in February 2005 agreed to a remediation plan for addressing all items mentioned

in the audit report.

2. Audit ofCompliance with 5 U.S.C. §2302(c)

Objective.

In 1994, Congress responded to reports ofwidespread ignorance in the federal workforce

concerning employees' right to be free from prohibited personnel practices, especially retaliation

for whistle blowing, by enacting 5 U.S.C. §2302(c). That provision charges "[t]he head ofeach

agency" with responsibility for "ensuring (in consultation with the Office ofSpecial Counsel)

that agency employees are informed ofthe rights and remedies available to them" under the

prohibited personnel practice and whistleblower retaliation protection provisions ofTitle 5.

This audit focused on the employee notification provision ofthe Whistleblower

Protection Act. To achieve this notification requirement, this audit sought to ascertain whether

the agency had applied for and received certification from the Office ofSpecial Counselor had

independently adopted the five employee notification elements ofthe Office ofSpecial

Counsel's certification program.

Status.

A final audit report was issued in March 2005. The audit found that the agency had not

received Office ofSpecial Counsel certification of compliance with the notification requirements

ofTitle 5. However, the agency has recently sought to notify employees (via the agency's

intranet) ofthe protections accorded to them under the No-FEAR Act and more specifically the

Whistleblower Protection Act, which was the focus ofthis audit.

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. The OIG

opened one investigation during the reporting period and completed the one investigation during

the reporting period.

6
In March 2005, the OIG received infonnation ofseveral unauthorized purchase attempts

made on a CFTC issued purchase card. The purchase card was issued to an agency employee for

micro purchases ofessential agency goods and services. However, several attempted purchases

were made for goods and services not customarily used in behalfofthe agency. The

investigation demonstrated that the card was not out ofthe employee's control and that the

attempted purchases were unauthorized. The purchase card was canceled and the agency did not

incur any expense due to the unauthorized attempts to purchases goods and services.

LEGISLATIVE AND REGULATORY REVIEWS

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

the impact ofexisting and proposed legislation and regulations on CFTC programs and

operations and makes recommendations regarding more effective or efficient alternatives or

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

changes.

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

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

to reflect this change.

Legislative Activities

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

been made with congressional staffon various IG issues.

7
AUDIT REPORTS OVER SIX MONTHS OLD

CORRECTIVE ACTION NOT COMPLETED

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

not been completed.

CORRECTIVE ACTION COMPLETED

There were no instances ofreports issued before the commencement ofthe reporting

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

MANAGEMENT DECISION NOT MADE

There 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.

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 infonnation

or assistance unreasonably refused or not provided.

REVISED MANAGEMENT DECISIONS

No management decisions were revised during the reporting period.

8
INSPECTOR GENERAL DISAGREEMENT

The Inspector General has an ongoing disagreement with the management decisions

made by a previous Chainnan on OIG recommendations contained in the investigation ofthe

hiring process detailed in the semiannual report for the period ending September 30, 2004.

CURRENT AUDITS

The audit agenda and priorities for the OIG 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 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;

• Management priorities and improvements that may be possible;

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

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

The audit agenda and summary 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. Audit ofCFfC Financial Statements for Fiscal Year 2005

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

9
statements for fiscal year 2005 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 ofBudgetaryResources; (e) Statement ofFinancing; 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 ofcontrol 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 IPA is not required to test all internal controls relevant to operating objectives as

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

controls relevant to achieving efficient operations.

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

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

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

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

controls over reported perfonnance measures.

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

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

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

will limit its tests ofcompliance 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.

10
Status.

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

2004 CFTC Financial Statement Audit. Their audit report was delivered on November 18, 2004.

The same finn under an option year ofthe contract began this audit with an opening meeting on

March 11,2005. 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. The final report is to be delivered on November 15,2005.

2. Peer Review ofExternal Office ofthe Inspector General

Objective.

Each office ofthe Inspector General is subject to a periodic external review. The

objectives ofthis peer review are to determine whether the Office ofInspector General's internal

quality control system is adequate, in place, and operating in compliance with auditing standards

promulgated by the Comptroller General ofthe United States; and whether established policies,

procedures and applicable auditing standards are being followed in practice.

Status.

The data gathering phase has commenced. An interview ofthe external Office of

Inspector General was conducted in March 2005. The report is expected to be finalized before

the end ofthe calendar year.

3. Evaluation ofthe CYrC Proceedings Program

Objective.

The first objective ofthis evaluation is to determine ifthe current number ofdecision

making officials (Administrative Law Judges and Judgment Officers) and their staffs can be

supported by the current level ofwork available. The second objective ofthis evaluation is to

determine whether the current number ofstaffin the Proceedings Clerk's Office and the

Complaints Section ofthe Office ofProceedings can be supported by the current level ofwork

available.

Status.

The data gathering phase has commenced. After compiling and analyzing historical

workload data, the team will initiate interviews with all staffin the Office ofProceedings.

Following the interviews, the team will evaluate the collected information and prepare and

circulate a report.

11
4. 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. The OIG also reviewed the FY 2005

Annual Performance Plan that was included with the FY 2005 budget estimate which were

combined into the FY 2005 Budget & Performance Estimate submitted to the Office of

Management and Budget in FY 2004.

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. However, in

FY 2004 the DIG reviewed the agency produced Peformance and Accountability Report prior to

it being submitted to the Office ofManagement and Budget. The FY2004 PAR contained three

sections which are: the first audited (by OIG/KPMG) Financial Statements ofthe agency; the

FY 2004 Annual Performance Report as well as a Management Discussion and Analysis of

operations section. The DIG 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 reforms 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 ofdiscussions 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 DIG is participating in the development ofbest

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

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

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

report.

12
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.

During this reporting period the OIG has met on several occasions with and coordinated

its audit activities with stafffrom the GAO.

13
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 information. Top level

managers and decision makers require a steady stream oforganized 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 theirjobs.

14
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 of an OIG

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

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

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

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

paperwork being handled by the Office ofthe Secre~ariat. 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 OIG 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

15
the possible existence of an 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 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 CFfC, 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 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 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.

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

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.

16
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 OIG intends to focus the balance ofits audit resources on insuring that the Chairman,

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

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

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

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

cross formal organizational lines.

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

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

devotion ofthose resources (including definitions ofmeasurements ofaccomplishment), 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

cost/beneficial manner.

Ifrecommendations are successfully implemented, the proposed systems should allow

the Chairman, the Commissioners, and concerned program managers to track the progress ofa

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 ofan efficient flow of

information throughout the agency, the OIG will devote resources to the audit ofcompliance

with the terms ofagency 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 Improvement Act of 1996 and the resultant Memorandum ofUnderstanding with

17
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 GIG estimates that approximately one staff year ofeffort will be devoted over each

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

agency. Nine-tenths ofa 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.

18
CONTACTING THE OFFICE OF THE

INSPECTOR GENERAL

The DIG 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.

19
Table 1

Reports Issued with Questioned Costs

(October 1,2004 - March 31,2005)

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

20

o o o
Table 2

Reports Issued with Recommendations

That Funds be Put to Better Use

(October 1, 2004 - March 31,2005)

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

21

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 21ST Street, N.W.

Washington, D.C. 20581