KPMG LLP

2001 M Street, NW

Washington, DC 20036

Independent Auditors' Report

Chairman of the U.S. Commodity Futures Trading Commission and

Office of the Inspector General, U.S. Commodity Futures Trading Commission:

We have audited the accompanying balance sheet of the U.S. Commodity Futures Trading Commission

(CFTC) as of September 30, 2004. Further, we were engaged to audit the related accompanying statements

of net cost, changes in net position, budgetary resources, financing, and custodial activity for the year then

ended. In connection with our engagement, we also considered CFTC's internal control over financial

reporting and tested CFTC's compliance with certain provisions of applicable laws, regulations, and

contracts Olat could have a direct and material effect on these financial statements.

Summary

As stated in the Opinion section, we concluded Olat the accompanying balance sheet is presented fairly, in

all material respects, in conformity with accounting principles generally accepted in the United States of

America. The scope of our work was not sufficient to enable us to express an opinion on the accompanying

statements of net cost, changes in net position, budgetary res,',wr~es, financing, and custodial activity for

the year ended September 30, 2004, because the financial statenlents bf CFTC have not been audited prior

to fiscal year 2004, and as a result, we have no aSSUtanee9 as'Io the asset, liability, and obligation balances

at the beginning ofthe year, which enter into the determination of net position as of the beginning of fiscal

year 2004, and the net cost, status of budgetary resources, t!Ie reconciliation of net cost to budgetary

obligations, and custodial activity for the year ended September 30, 2004.

Our consideration of internal control over financial reporting resulted in the following conditions being

identified as reportable conditions:

• Recording Accruals and Preparing Financial Statements;

• Financial Accounting Process over Journal Entries;

• Financial Management Systems Need Improvement;

• Fixed Asset System;

• Recording Interest Receivable on Civil Monetary Penalties; and

• Evaluating Undelivered Orders,

We consider the first three reportable conditions, above, to be material weaknesses.

""~'Cl.lP r.Pf~·:ur.... l~s.l·..(jo:llW 'I'CI.,"l~.···~:, _,' '1.'".' \4U'!.l'.' t-k-,'~'"'''''' (j :':'....\~ .. ,~.'·I.I....·
KPMG LLP

2001 M Street. NW

Washington, DC 20036

Independent Auditors' Report

Chainnan of the U.S. Commodity Futures Trading Commission and

Office of the ~lspector General, U.S. Commodity I'utures Trading Commission:

We have audited the accompanying balance sheet of the U.S. Commodity Futures Trading Commission

(CFTC) as of September 30, 2004. Further, we were engaged to audit the related accompanying statements

of net cost, changes in net position, budgetary resources, financing, and custodial activity for the year then

ended. In connection with our engagement, we also considered CITC's internal contTol over financial

reporting and tested CFTC's compliance with ccrtain provisions of applicable laws, regulations, and

contracts that could have a direct and material effect on these financial statements.

Summary

As stated in the Opinion section, we concluded that the accompanying balance sheet is presented fairly, in

all material respects, in conformity with accounting principles generally accepted in the United States of

America. The scope of our work was not sufficient to enable us to express an opinion on the accompanying

statements of net cost, changes in net position, budgetary resources, financing, and custodial activity for

the year ended September 30, 2004, because the financial statements of CFTC have not been audited prior

to fiscal year 2004, and as a result, we have no assurances as to the asset, liability, and obligation balances

at the beginning of the year, which enter into the determination of net position as of the beginning of fiscal

year 2004, and the net cost, status of budgetary resources, the reconciliation of net cost to budgetary

obligations, and custodial activity for the year ended September 30, 2004.

Our consideration of internal control over financial reporting resulted in the following conditions being

identified as reportable conditions:

,)J1ditions, above, to be material weaknesses.

• RecordilliLAccruals and_ lrcparing Financial Statements;

ess over Journal Entries;

aO££'9£00l JO N019NIHSVM 1if'tems Need Improvement;

MN 15 lSll 55ll

J1.:1J ;;; ble on Civil MonetaIy Penalties; and

9IV m d

SIldVa NOl ers.

AJ'lOa5ll l lS0d~JAJ:300Jd

1"'1"1"1"'11'11"'11""11"11""'11"'111'1"1

1 lOl

I\PMG llP. a us limited liability partner:;hlp. IS the U S

mamber firm of KPMG Imematlonal, a SWISS cooperative,
The results of our tests of compliance with certain provisions of laws, regulations, and contracts disclosed

the following instances of noncompliance or other matters that are required to be reported under the

Government Auditing Standards, issued by the Comptroller General of the United States, and Office of

Management and Budget (OMB) Bulletin No. 01-02, Audit Requirements for Federal Financial

Statements:

• Federal Information Security Management Act;

• Debt Collection Improvement Act of1996; and

• Federal Financial Management Improvement Act of1996.

The following sections discuss our opinion on CFfC's balance sheet, the reasons why we are unable to

express an opinion on the other financial statements, our consideration of CFfC's internal control over

financial reporting, our tests ofCFfC's compliance with certain provisions of applicable laws, regulations,

and contracts, and management's and our responsibilities.

Opinion on the Balance Sheet

We have audited the accompanying balance sheet ofthe U.s. Commodity Futures Trading Commission as

of September 30, 2004. Further, we were engaged to audit the related accompanying statements ofnet cost,

changes in net position, budgetary resources, financing, and custodial activity for the year then ended.

The financial statements of CFTC have not been audited prior to fiscal year 2004. Therefore, we have no

assurances as to the asset, liability, and obligation balances at the beginning of the year, which enter into

the determination of net position as of the beginning of fiscal year 2004, and the net cost, the status of

budgetary resources, the reconciliation of net cost to budgetary obligations, and custodial activity for the

year ended September 30, 2004.

In our opinion, the accompanying balance sheet presents fairly, in all material respects, the financial

position of CFTC as of September 30, 2004, in conformity with accounting principles generally accepted

in the United States of America. Because of the matter discussed in the second paragraph of this section,

the scope of our work was not sufficient to enable us to express an opinion on the accompanying

statements of net cost, changes in net position, budgetary resources, financing, and custodial activity for

the year ended September 30, 2004.

The information in the Management's Discussion and Analysis section is not a required part of the

financial statements but is supplementary information required by accounting principles generally accepted

in the United States of America, or by OMB Bulletin No. 01-09, Form and Content ofAgency Financial

Statements. We have applied certain limited procedures, which consisted principally of inquiries of

management regarding the methods ofmeasurement and presentation ofthis information. However, we did

not audit this information and, accordingly, we express no opinion on it.

Our audit was conducted for the purpose of forming an opinion on the balance sheet. The Performance

Section is an integral part ofCFfC's Fiscal Year 2004 Performance and Accountability Report. However,

this information is not a required part ofthe financial statements and is presented for purposes of additional

analysis. The information in the Performance Section has not been subjected to the same auditing

procedures and, accordingly, we express no opinion on it.

Internal Control over Financial Reporting

Our consideration of internal control over financial reporting would not necessarily disclose all matters in

the internal control over financial reporting that might be reportable conditions. Under standards issued by

the American Institute of Certified Public Accountants, reportable conditions are matters coming to our

attention relating to significant deficiencies in the design or operation ofthe internal control over financial

reporting that, in our judgment, could adversely affect CFTC's ability to record, process, summarize, and

report financial data consistent with the assertions by management in the financial statements.

2
Material weaknesses arc reportable conditions in which the design or operation of one or more of the

internal control components does not reduce to a relatively low level the risk that misstatements, in

amounts that would be material in relation to the financial statements being audited, may occur and not be

detected within a timely period by employees in the normal course of performing their assigned functions.

In our fiscal year 2004 audit ofCFTC's balance sheet, we noted certain matters, described in Exhibits I and

II, involving internal control over financial reporting and its operation that we consider to be reportable

conditions. We believe that the reportable conditions presented in Exhibit I arc material weaknesses.

Exhibit II presents the other reportable conditions.

* '" '" '" *

We also noted other matters involving internal control over financial reporting and its operation that we

have reported to the management ofCFTC in a two separate Iclters, addressing information teclmology and

other matters, dated May 26 and November 16,2004, respectively.

Compliance and Other Matters

The results of our tests of compliance with certain provisions of laws, regulations, and contracts, as

described in the Responsibilities section of this report, exclusive of those referred to in the Federal

Fillallcial Mallagemellt Improvemellt Act (FFMIA), disclosed two instances of noncompliance or other

matters that arc required to be reported under Government Auditillg Stalldards and OMB Bulletin

No. 01-02, and are described below.

• Federal Information Security Management Act (FISMA). FISMA, passed as part of the

E-Governmellt Act oj 2002, requires that Federal agencies: (1) provide a comprehensive

framework for ensuring the effectiveness of information security controls over information

resources that support Federal operations and assets; (2) provide effective government-wide

management and oversight of the related information security risks; (3) provide for

development and maintenance of minimum controls required to protect Federal information

and information systems; (4) provide a mechanism for improved oversight of Federal agency

information security programs; (5) ackrowledge that commercially developed information

security products offer advanced, dynamic, robust, and effective information security

solutions, renecting market solutions for the protection of critical information infrastructures

important to the national defense and economic security of the nation that arc designed, built,

and operated by the private sector; and (6) recognize that the selection of specific technical

hardware and software information security solutions should be left to individual agencies

from among commercially developed products. OMB Circular A-130, Mallagemellt ojFederal

Informatioll Resources, provides further information security guidance. We noted that CFTC

needs continued improvement with its entity-wide security and contingency planning

programs, access controls, segregation of duties, and service continuity to fully meet these

guidelines.

These malters arc described in our separate IT report dated May 26, 2004, and we recommend that

CITC implement the recommendations presented in that report.

• Debt Collection Improvement Act of 1996 (DCtA). The DCIA is intended to significantly

enhance the Federal Government's ability to service and collect debts. Under the DClA,

Treasury assumes a significant role for improving govemment-wide receivables management.

The DClA requires Federal agencies to refer eligible delinquent non-lax debts over l80 days

to Treasury for the purpose of collection by cross-servicing or the offset program. OMB

Circular A-129, Policies Jor Federal Credit Programs Gild NOli-Tax Receivables, provides

further guidance on managing Federal receivables. Federal receivables, whether from credit

programs or other non-tax sources, must be serviced and collected in an efficient and effective

3
manner to protect the value of the Federal Government's assets. Interest, penalties and

administrative costs should be added to all debts unless a specific statute, regulation, loan

agreement, contract, or court order prohibits such charges or sets criteria for their assessment.

Agencies shall assess late payment interest on delinquent debts. Agencies must adjust the

interest rate on delinquent debt to conform to the rate established by a U.S. Court when a

judgment has been obtained. Our tests of compliance disclosed instances where CFTC was not

in compliance with certain provisions of OMB Circular A-129. Specifically, we noted that

interest receivable calculations were not accurately and systematically calculated on civil

monetary penalties, which CFfC collects on behalfofthe Treasury.

We recommend that CFTC take corrective action to calculate interest receivable in fiscal year 2005,

using the provisions ofOMB Circular A-129, as further described in Exhibit II.

The results of our test of compliance with certain provisions of other laws and regulations, exclusive of

those referred to in FFMIA, disclosed no instances of noncompliance or other matters that are required to

be reported under Government Auditing Standards or OMB Bulletin No. 01-02.

FFMIA. The results of our tests of FFMIA disclosed instances, described below and in Exhibit I, where

CFTC's financial management systems did not substantially comply with Federal financial management

systems requirements or Federal accounting standards.

• FFMIA mandates that Federal financial management be advanced by ensuring that Federal

financial management systems can and do provide reliable, consistent disclosure of financial

data, and that they do so on a basis that is uniform across the Federal government from year to

year consistently, using accounting principles generally accepted in the United States of

America. Federal agencies need to comply with FFMIA by adhering to policies established by

OMB, such as OMB Circular A-127, Financial Management Systems, and OMB Circular

A-130. A summary of the instances of FFMIA non-compliance detailed in our separate IT

report, dated May 26, 2004, follows:

FFMIA requires that Federal agencies implement information security controls and

contingency planning capabilities in accordance with OMB Circular A-130. CFTC

needs to improve in these areas to be in compliance with Circular A-130.

FFMIA requires that Federal agencies implement financial systems controls in

accordance with OMB Circular A-127. We noted areas where CFTC can improve the

controls and processes over financial systems to better comply with Circular A-127. For

example, CFfC needs to improve its funds control and financial reporting processes to

fully comply with FFMIA.

• CFTC is required to prepare its financial statements in accordance with Federal accounting

standards. As discussed in Exhibit I, we identified weaknesses that affected CFTC's ability to

prepare its financial statements in accordance with those standards.

We recommend that CFTC implement corrective actions in fiscal year 2005 to address the

recommendations in our separate IT report, dated May 26, 2004, and the recommendations in

Exhibit I to this report.

The results of our tests ofFFMIA disclosed no instances in which CFTC's financial management systems

did not substantially comply with the United States Government Standard General Ledger at the

transaction level.

AgellCY RespoIIse:

The CFfC concurs and will continue its efforts to strengthen and improve its controls as recommended in

this audit report.

4
Responsibilities

Management's Responsibilities. The Accountability ofTax Dollars Act of2002 requires CFfC to prepare

and submit to the Congress and OMB audited financial statements. To meet this requirement, CFfC

prepares annual financial statements.

Management is responsible for the financial statements, including:

• Preparing the financial statements in conformity with accounting principles generally accepted

in the United States ofAmerica;

• Establishing and maintaining internal controls over financial reporting, and preparing the

Management's Discussion and Analysis (including the performance measures); and

• Complying with laws, regulations, and contracts, including FFMIA.

In fulfilling this responsibility, estimates and judgments by management are required to assess the expected

benefits and related costs of internal control policies. Because of inherent limitations in internal control,

misstatements, due to error or fraud may nevertheless occur and not be detected.

Auditors' Responsibilities. As discussed in the Opinion section ofthis report, the scope of our work was

not sufficient to enable us to express an opinion on the accompanying statements ofnet cost, changes in net

position, budgetary resources, financing, and custodial activity, for the year ended September 30, 2004.

Our responsibility is to express an opinion on CFTC's balance sheet as of September 30, 2004 based on

our audit. We conducted our audit of the balance sheet in accordance with auditing standards generally

accepted in the United States of America, the standards applicable to financial audits contained in

Government Auditing Standards, and OMB Bulletin No. 01-02. Those standards and OMB Bulletin No.

01-02 require that we plan and perform the audit to obtain reasonable assurance about whether the balance

sheet is free ofmaterial misstatement.

An audit includes:

• Examining, on a test basis, evidence supporting the amounts and disclosures in the financial

statements;

• Assessing the accounting principles used and significant estimates made by management; and

• Evaluating the overall financial statement presentation.

We believe that our audit provides a reasonable basis for our opinion on CFfC's balance sheet as of

September 30, 2004.

In planning and performing our audit of CFfC's balance sheet as of September 30, 2004, we considered

CFfC's internal control over financial reporting by obtaining an understanding ofCFTC's internal control,

determining whether internal controls had been placed in operation, assessing control risk, and performing

tests of controls in order to determine our auditing procedures for the purpose of expressing our opinion on

the balance sheet. We limited our internal control testing to those controls necessary to achieve the

objectives described in Government Auditing Standards and OMB Bulletin No. 01-02. We did not test all

internal controls relevant to operating objectives as broadly defined by the Federal Managers' Financial

Integrity Act of 1982. The objective of our audit was not to provide assurance on internal control over

financial reporting. Consequently, we do not provide an opinion thereon.

As further required by OMB Bulletin No. 01-02, with respect to internal control related to performance

measures determined by management to be key and reported in the Management's Discussion and Analysis

section, we obtained an understanding ofthe design ofsignificant internal controls relating to the existence

and completeness assertions. Our procedures were not designed to provide assurance on internal control

over performance measures and, accordingly, we do not provide an opinion thereon.

5
As part of obtaining reasonable assurance about whether CFTC's balance sheet as of September 30, 2004

is free ofmaterial misstatement, we performed tests ofCFTC's compliance with certain provisions oflaws,

regulations, and contracts, noncompliance with which could have a direct and material effect on the

determination of financial statement amounts, and certain provisions of other laws and regulations

specified in OMB Bulletin No. 01-02, including certain provisions referred to in FFMIA. We limited our

tests of compliance to the provisions described in the preceding sentence, and we did not test compliance

with all laws, regulations, and contracts applicable to CFTC. Providing an opinion on compliance with

laws, regulations, and contracts was not an objective of our audit and, accordingly, we do not express such

an opinion.

Under OMB Bulletin No. 01-02 and FFMIA, we are required to report whether CFTC's financial

management systems substantially comply with (I) Federal financial management systems requirements,

(2) applicable Federal accounting standards, and (3) the United States Government Standard General

Ledger at the transaction level. To meet this requirement, we performed tests of compliance with FFMIA

Section 803(a) requirements.

Distribution

This report is intended for the information and use of CFfC's management, CFTC's Office of the

Inspector General, OMB, the Government Accountability Office, and the U.S. Congress, and is not

intended to be and should not be used by anyone other than these specified parties.

November 16, 2004

6
Exhibit I

Material Weaknesses

Exhibit I describes the reportable conditions that are considered to be material wealrnesses, and our

recommendations. These matters were not identified in CFTC's FMFIA assessment. CITC management's

response is presented with each item.

1. Improvement Needed in Recording Accruals and Preparing Financial Statements

CFfC does not have an adequate process in place to properly estimate or record accrued liabilities

during the year-end financial reporting process. At September 30, 2004, CFTC performed cut-off

procedures over accounts payable in an effort to estimate the balance. During our testwork, we noted

unrecorded liabilities related to fiscal year 2004 expenses for goods and services. We recommended

and CFTC recorded audit adjustments for accounts payable of approximately $855,000; operating

lease liabilities of approximately $170,000; and unfunded liabilities related to the Federal Employees

Compensation Act (FECA) of approximately $194,000. In addition, CFTC did not record an

actuarial-related FECA accrual for future amounts due on claims incurred prior to

September 30, 2004. As a result of our audit, CITC recorded an adjustment of approximately

$514,000 for the actuarial-related FECA liability.

The need for these and other adjustments in financial statement presentation delayed CITC in

preparing its financial statements timely, and caused the agency to miss the originally established

November 15, 2004 due date for submission of its FY 2004 Performance Accountability Report

(PAR) to the Office of Management and Budget. We acknowledge that CFTC received an extension

via email on November 16 to submit its PAR on November 18, 2004.

Statements ofFederal Financial Accounting Standards (SFFAS) No.5, paragraph 19, states that a

liability for federal accounting purposes is a probable future outflow or other sacrifice of resources

arising from (1) past exchange transactions; (2) government-related events; (3) governmentaclrnowledged events; or (4) nonexchange transactions that, according to current law and applicable

policy, are unpaid amounts due as ofthe reporting date.

SFFAS No.1, Accounting for Selected Assets and Liabilities, paragraph 74, states that when an

entity accepts title to goods, whether goods are received or in transit, the entity should recognize a

liability for the unpaid amount of the goods. If invoices for those goods are not available when

financial statements are prepared, the amounts should be estimated.

Recommendation:

We recommend that CITC develop and implement procedures to identify and record accrued

liabilities at year-end on a timely basis. When actual invoices have not been received, a reasonable

estimate should be used. Supporting documentation should be maintained to support all estimates.

CFTC also needs to develop a process to ensure that all financial reporting deadlines are met in the

future.

Age1lcy Response:

Management concurs with this finding and completed the adjustments to the financial statements to

reflect estimated accounts payable and FECA liabilities for September 30, 2004.

7
Exhibit I

Material Weaknesses

2. Improvement Needed in Financial Accounting Process over Journal Vouchers

CFTC's process for recording journal entries requires improvement. The process that the Office of

Financial Management (OFM) uses for making entries, during the year and at year-end, does not

include sufficient documentation of internal controls such as segregation of duties and supervisory

review and approval ofjournal vouchers. We noted that the journal voucher to record the Allowance

for Losses for Custodial Fines and Interest Receivable was improperly recorded, resulting in an

understatement of the Allowance account and an overstatement of Custodial Fines and Interest

Receivable by $9.9 million. This item was prepared and entered into the financial system by the

same lead accountant, without evidence ofsupervisory review.

The Federal Managers' Financial Integrity Act of1982 (FMFIA) requires "internal accounting and

administrative controls of each executive agency shall be established in accordance with standards

prescribed by the Comptroller General." The U.S. Government Accountability Office's (GAO)

Standards for Internal Control in the Federal Government defines internal control as "an integral

component of an organization's management that provides reasonable assurance that the following

objectives are being achieved: effectiveness and efficiency of operations, reliability of financial

reporting, and compliance with applicable laws and regulations." Standards for Internal Control in

the Federal Government lists examples of control activities that include (1) top-level reviews of

actual performance; (2) reviews by management at the functional or activity level; (3) physical

control over vulnerable assets; (4) segregation of duties; (5) proper execution of transactions and

events; (6) accurate and timely recording of transactions and events; (7) access restrictions to and

accountability for resources and records; and (8) appropriate documentation of transactions and

internal control.

ReCOlllllle"datiOll:

We recommend that CFTC develop and implement internal controls related to reviewing and

approving journal entries. Controls should include documented authorization of all journal entries

recorded prior to entering in Federal Financial Systems (FFS) and management review ofjournal

entries subsequent to posting in FFS. In addition, documentation should be maintained to support the

rationale for posting the journal voucher.

Agellcy Response:

Management concurs with this finding. The improper recording was corrected by the Lead

Accountant and reviewed and approved by the Accounting Officer. All journal vouchers generated

as a result of KPMG's audit were appropriately documented by the Lead Accountant and supported,

reviewed and approved by the Accounting Officer.

8
Exhibit I

Material Weaknesses

3. Financial Management Systems Need Improvement

Effective general Information Technology (IT) controls add assurance that data used to prepare and

report financial information and statements is complete, reliable, and has integrity. Our fiscal year

2004 IT assessment was focused on general IT controls over the CFTC's management systems and

supporting network infrastructure, using GAO's Federal Information System Controls Audit Manual

(FISCAM) as a guide. The six FISCAM general IT control review elements, are as follows:

• Entity-wide security program;

• Secure access controls;

• Application software development and change control;

• System software;

• Segregation of duties; and

• Service continuity.

A summary of our findings follows:

CFTC management has not finalized their risk determination for the General Support System (GSS)

risk assessment. A number of policies and procedures have been prepared in draft but have not been

formally approved or implemented related to: the Computer Incident Response Team, segregation of

duties, the Commission-Wide Continuity of Operations Plan, and the Disaster Recovery Plan.

Additionally, controls in the following areas need to be strengthened: granting system access to

users; access to sensitive areas of the building; sanitizing equipment prior to disposal or reuse; and

monitoring network audit logs to determine whether changes have been made within the systems;

and information security testing. Environmental controls in the data center also should be improved

to prevent damage to the computer equipment.

These weaknesses led to our determination that CFTC was not in compliance with the Federal

Information Security Management Act and the Federal Financial Management Improvement Act of

1996, as discussed in the Compliance and Other Matters section of our auditors' report.

Recommendations:

Specific recommendations are included in a separate limited distribution IT general controls report

dated May 26,2004, issued as part of the fiscal year 2004 financial statement audit. We recommend

that CFTC take steps to ensure effective implementation ofour recommendations.

AgelJcy Response:

The CFTC concurs and will continue its current efforts to strengthen and improve IT security

controls.

9
Exhibit II

Reportable Conditions

Exhibit II describes other reportable conditions and our recommendations. CFTC management's response

is presented with each item.

4. Improvement Needed in Fixed Asset System

CFfC does not have adequate internal controls to account for, record, track, or monitor its Property,

Plant, and Equipment (PP&E).

Based on discussions with OFM, and review of CFfC's fixed asset policy and records, CFTC's

assets are composed of furniture, equipment, computer hardware and software, copiers, and faxes.

CFTC has designated several individuals to track its fixed assets; however, the information

maintained by these individuals is not complete or precise as required by Federal Accounting

Standards Advisory Board (FASAB) and Joint Financial Management Improvement Program

(JFMIP) standards.

In addition, CFTC has not conducted a detailed physical inventory of all property, plant, and

equipment within the last three years. Partial inventories performed during the last three years by

different CITC groups have not been uniform or consistent with an established set of physical

inventory policies and procedures. For example, the CFTC's Office of Information Management

may perform a physical inventory using one set of guidelines and the CITC's Office ofManagement

Operations may use entirely different guidelines.

We used a substantive approach in auditing the balance of CFTC's PP&E and the related

accumulated depreciation as of September 30, 2004. OFM manually compiled all obligations,

purchase orders, and contracts related to fixed asset purchases that were recorded in FFS from 1999

through 2004, to determine total PP&E capitalizable assets. An accumulated depreciation and

write-off schedule was also prepared. We determined that adjusted PP&E balances as of

September 30, 2004 were fairly stated.

SFFAS No.6, Accounting for Plant, Property, and Equipment, paragraph 26 states that all general

PP&E shall be recorded at cost. Cost shall include all costs incurred to bring the PP&E to a form and

location suitable for its intended use.

The Federal Managers' Financial Integrity Act of 1982 requires "internal accounting and

administrative controls of each executive agency shall be established in accordance with standards

prescribed by the Comptroller General." GAO's Standards for Internal Control in the Federal

Government defines internal control as "an integral component of an organization's management that

provides reasonable assurance that the following objectives are being achieved: effectiveness and

efficiency of operations, reliability of financial reporting, and compliance with applicable laws and

regulations." Standards for Internal Control in the Federal Government lists "Five Standards for

Internal Control," to include monitoring. The standards further state "internal control should

generally be designed to assure that ongoing monitoring occurs in the course of normal operations. It

is performed continually and is ingrained in the agency's operations. It includes regular management

and supervisory activities, comparisons, reconciliations, and other actions people take in performing

their duties."

10
Exhibit II

Reportable Conditions

Recommelldatiolls:

We recommend that CITC:

• Develop a Property Management System that will do the following: (1) classify PP&E by

assets or classes described in SFFAS 6; (2) allow user defined transaction types and

automatically record the transaction type when the property record is created or updated;

(3) provide unique identification; (4) provide a complete audit trail of all changes to property

records including, but not limited to modifications, improvements, changes in value, and the

individual entering or approving the information; (5) designate property tracked in the

property management system as either capitalized or expensed; (6) allow user defined

capitalization thresholds to be established for property classes; and (7) notify the user when

depreciation, amortization, or depletion thresholds are exceeded.

• Establish internal controls, policies and procedures related to fixed assets to ensure that assets

are recorded in the financial statements on a timely basis. CITC should also ensure that

appropriate personnel are designated to maintain adequate and timely records of inventories

and property additions/disposals and that this information is communicated to the OFM on a

timely basis for recording in the financial records.

• Develop procedures for property accountability that includes tracking the movement of assets,

recording changes in physical condition and verification of physical counts. In addition, a

unique item identification system should be implemented to track each individual asset and

assist in performing physical inventories.

Agellcy Respollse:

Management concurs and reported these same findings in CFTC's fiscal year 2003 and 2004 FMFIA

reports. We have provided copies of the reports to the auditors, which include our plans for

compliance.

5. Improvement Needed in Recording Interest on Civil Monetary Penalties

The CFTC needs to improve its accounting for interest on Civil Monetary Penalties. We noted that

interest receivable amounts assessed on delinquent custodial fines were improperly calculated. In

addition, supporting documentation did not accurately substantiate the interest and penalties assessed

and included on the Report on Receivables (ROR).

The Standardsfor Internal Control in the Federal Government, requires that internal control and all

transactions and other significant events need to be clearly documented, and the documentation

should be readily available for examination. The documentation should appear in management

directives, administrative policies, or operating manuals and may be in paper or electronic form. All

documentation and records should be properly managed and maintained.

In addition, OMB Circular A-129, Policies for Federal Credit Programs and Non-tax Receivables,

Section V, Part 4: Interest, Penalties and Administrative Costs notes that Interest, penalties, and

administrative costs should be added to an debts unless a specific statute, regulation, loan agreement,

contract, or court order prohibits such charges or sets criteria for their assessment. Agencies shall

assess late payment interest on delinquent debt. Further, agencies shan assess a penalty charge of not

more than six percent (6%) per year for failure to pay a debt more than ninety (90) days past due,

unless a statute, regulation required by statute, loan agreement, or contract prohibits charging interest

11
Exhibit II

Reportable Conditions

or assessing charges or explicitly fixes the interest rate or charges. A debt is delinquent when the

scheduled payment is not paid in full by the payment due date contained in the initial demand letter

or by the date specified in the applicable agreement or instrument. Agencies shall assess

administrative costs to cover the cost of processing and handling the delinquent debt. Agencies must

adjust the interest rate on delinquent debt to conform to the rate established by a u.s. Court when a

judgment has been obtained.

Recol1ll1lelldatio"s:

We recommend that CFTC's Division of Enforcement implement procedures that (1) establish

controls over recording and documenting the custodial fines included in the Court Order for which

the Commission will be responsible for collecting the debt; (2) establish a system which properly and

accurately calculates interest and penalties on delinquent custodial fines, making sure to take into

account amounts collected on the delinquent debt; (3) maintain proper records of interest

calculations, collections, and support for amounts included on the ROR to Treasury, which can be

readily recalculated and verified; and (4) establish a management review control which documents

the reconciliation of amounts included on the ROR to supporting documentation and interest

calculations.

Agellcy RespOlue:

Management concurs with this finding and will take appropriate steps in FY 2005 to ensure

compliance.

6. Improvement Needed in Evaluating Undelivered Orders

At the end of each quarter, OFM sends correspondence to program office official responsible for

recording obligations to request the status of undelivered orders. The program office is required to

review the obligation and determine if it should be deobligated. We performed test work over

balances for a sample of 70 undelivered orders. We recalculated the outstanding balance without

exception. We also obtained a listing of all obligations that had been outstanding for more than two

years and were for goods or services that would generally not take two years for the vendor to

provide. Through review of supporting documentation, we noted four items totaling approximately

$296,000 should have been deobligated, and an audit adjustment for this amount was recorded as of

September 30, 2004.

CFTC's internal controls policies and procedures must ensure the status ofits budgetary resources is

properly recorded in the general ledger (e.g., FFS) and reported to OMB on a quarterly and year-end

basis. In addition, these policies must ensure that the status of budgetary resources is properly

reported in the statement of budgetary resources and the related notes to the financial statements.

Budget execution procedures must be improved for CFTC to ensure that accurate, complete, and

timely budgetary accounting entries are made, and that the year-end status ofbudgetary resources are

accurately reported.

Recommendatiolls:

We recommend that CFTC improve its process for analyzing the undelivered orders balance on a

quarterly and year-end basis, to determine those obligations that should be deobligated. The process

should ensure that OFM can accurately and timely identify those outstanding undelivered orders that

should be deobligated. In addition, the Contracting Office Technical Representatives should provide

12
Exhibit-II

Reportable Conditions

necessary documentation in a timely manner to support why ()utstanding obligations should remain

open.

Age/Icy Response:

Management concurs with this finding and will take appropriate steps in FY 2005 to ensure that

accurate and timely information is provided to OFM and appropriately reflected in its financial

statements.

13