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Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5110

Facsimile: (202) 418-5522

October 30, 2001

OFFICE OF

INSPECTOR GENERAL

TO:

FROM:

James E. Newsonle

Acting Chairman

A. Roy Lavik /") RcD

Inspector GenerkA

SUBJECT: Semiannual Report of the Office of the Inspector General

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

frolll April 1, 2001 through Septenlber 30, 2001. This report is subnlitted to you in

accordance with the requirenlents of Section 5 of the Inspector General Act of 1978, as

alnended.

I appreciate your continu ing support of this office.

Attachment
OFFICE OF THE INSPECTOR GENERAL

COMMODITY FUTURES TRADING COMMISSION

SEMIANNUAL REPORT

FOR THE PERIOD FROM

April 1,2001 THROUGH September 30,2001

TABLE OF CONTENTS

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

and deficiencies and a description of OIG recommendations for corrective action

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

AUDITS 1

INVESTIGATIONS 2

LEGISLATIVE AND REGULATORY REVIEWS 3

OIG RESPONSIBILITIES 3

OIG RESOURCES 4

CFTC PROGRAMS AND OPERATIONS 4

COMPLETED WORK 5

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

particularly significant report (Mandated by Section 5(a)(6) and (7) of the 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) of the Act)] .... 8

CO~CTIVE ACTION COMPLETED 8
MANAGEMENT DECISION NOT MADE [including a summary of each audit

report issued before the commencement of the reporting period for which no

management decision has been made by the end of the reporting period (including

the date and title of each such report), an explanation of the 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) of the Act)] 8

SUMMARY OF MATTERS REFERRED TO PROSECUTIVE AUTHORITIES and

the prosecutions and convictions which have resulted (Mandated by

Section 5(a)(4) of the Act) 9

SUMMARY OF EACH REPORT MADE TO THE AGENCY HEAD

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

refused or not provided (Mandated by Section 5(a)(5) of the Act) 9

REVISED MANAGEMENT DECISIONS [including description and explanation of

the reasons for any significant revised management decision made during the

reporting period (Mandated by Section 5(a)(lI) of the Act)] 9

INSPECTOR GENERAL DISAGREEMENT [including information concerning any

significant management decision with which the Inspector General is in

disagreement (Mandated by Section 5(a)(l2) of the Act)] 9

CURRENT AUDITS 9

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) of the Act) 21

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

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

11
INDEX OF IG ACT REPORTING

REQUIREMENTS

Section 5(a)(I) 1

Section 5(a)(2) 1

Section 5(a)(3) 8

Section 5(a)(4) 9

Section 5(a)(5) 9

Section 5(a)(6) 5

Section 5(a)(7) 5

Section 5(a)(8) 21

Section 5(a)(9) 22

Section 5(a)(10) 8

Section 5(a)(II) 9

Section 5(a)(12) 9

111
SUMMARY OF OIG ACTIVITIES

AUDITS

The primary objectives of the Office of the Inspector General (OIG) of the Commodity

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

and effectiveness in the administration and operation of the 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.)

Review of Enforcement Information Requirements. The objectives of this review are to

determine what the information needs of all levels in the Division of Enforcement are,

whether the information needs are being met, and if the required information can be

created, stored, and retrieved in a more effective and efficient manner. (For additional

details, see page 10.)

Review of Agency 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 of this

review is to determine how effectively the Commission is complying with GPRA's

terms. This will include an examination of the 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.)

Audit of Compliance 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 13.)

1
Peer Review of External Office of the Inspector General. Each office of the Inspector

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

to determine whether the Office of Inspector General's internal quality control system is

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

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

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

additional details, see page 13.)

Audit ofLos Angeles Lease ofReal Estate. The objectives ofthis audit are to determine

if all payments were made in accordance with the teo11S ofthe lease agreement, whether

established payment procedures were followed, and ifthe agency complied with the

Prompt Payment Act. This is the first audit conducted by the Office ofInspector

General ofthe Los Angeles, California regional office lease agreement. This audit will

cover all payments for the subject lease for the period from May 1,1993 through August

31, 2001 for all office space leased in the building at 10900 Wilshire Boulevard, Los

Angeles, California. (For additional details, see page 13.)

Completed Audits

The following audits have been completed during this reporting period.

Evaluation of the CFTC Information Security Program and Practices. GISRA. The

Government Information Security Reform Act (GISRA) requires the Inspector General

or his designee to perform annual independent evaluations of the information security

program and practices of the agency. (For additional details, see page 5.)

Review of CFTCIs Civil Monetary Penalties Collection Program. 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 objective of this review is to

verify total outstanding debts owed to the Commission, examine the Commission's

procedures for collecting outstanding debts, determine the Commission's compliance

with the DCIA and recommend improvements, if necessary, to the debt collection

process. (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 of law, rules or

regulations, or mismanagement, abuse of authority, or gross waste of funds, or a substantial

and specific danger to the public health and safety.

2
No investigations were pending as of the beginning of the reporting period. The OIG

opened one investigation during the reporting period and completed one investigation. No

investigations remained open at the end of the period. (See the section on investigations

beginning on page 6.)

LEGISLATIVE AND REGULATORY REVIEWS

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

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

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

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

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

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

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

the requirements of the Regulatory Flexibility Act and the Paperwork Reduction Act.

The Regulatory Flexibility Act requires the agency to evaluate the impact of its

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 heavily involved in legislative activities as a

member of the IG's Legislation Committee. Congressional staff and, in some instances,

members were briefed about the various IG issues.

OIG RESPONSIBILITIES

The Office of the 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 of CFTC

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

programs and operations;

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

administration of CFTC programs and operations;

3
• Review existing and proposed legislation and regulations and make

recommendations concerning their impact on the economy and efficiency of CFTC

programs and operations or the prevention and detection of fraud and abuse; and

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

in the administration of CFTC programs and operations and provide

recommendations for correction of these 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 of legislative and regulatory proposals and the

monitoring of internal CFTC operations.

OIG RESOURCES

The OIG consists of the Inspector General, two professional staff members, 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 Memorandunl of Understanding with the

Office of General Counsel (OGC). This Memorandum details the procedures that will be used

to provide the OIG with OGC legal services. An OGC staff member 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 option 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 of the Commodity Futures

Modernization Act of 2000 (CFMA).

The CFMA fundamentally transforms the Commission from a front-line regulatory

agency to an oversight regulator. Although the Commission's approach to regulation will

change, the CFTC's mission remains unchanged. The CFTC continues to be responsible for

fostering the economic utility of futures 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

4
the commodity futures markets better to serve their vital function in the nation's economy --

providing a mechanism for price discovery and a means of offsetting price risks.

COMPLETED WORK

AUDITS

The OIG is required to conduct, supervise and coordinate audits of CFTC 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 of these 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 report has been issued during the reporting period.

1. Evaluation of the CFTC Information Security Program and Practices, GISRA

Objectives.

The Government Information Security Reform Act (GISRA) requires the Inspector

General or his designee to perform annual independent evaluations of the information security

program and practices of the agency.

Status.

To accomplish the objective, the Inspector General responded to topics 2 through 13 of

the OMB Guidance. The evaluation covered the following systems: the General Support

System, the CFTC Website, Trade Practice Investigations System, Payroll and Personnel

Systems, ISS Market Surveillance System, IFR Company Financial Reporting System and the

Financial Management System. The Financial Management System consists of three

5
components entitled Financial Management System, Travel Manager System, and Electronic

Certification System.

In addition to the independent evaluation, the Inspector General produced an executive

summary characterizing the results of the independent evaluation of the agency's information

security program and practices.

2. Review of CFTC's Civil Monetary Penalties Collection Program

Objective.

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

(DCJA) direct Federal agencies to collect debts owed to the United States. During Fiscal Year

1999, forty-one civil monetary penalties totaling $42,743,240 assessed by the Commission in

administrative proceedings and/or federal court orders were due. In FY 2000, the comparable

figures are fifty-four civil monetary penalties totaling $18,209,130. All civil monetary

penalties collected by the Commission are subsequently transferred to the U.S. Treasury.

The objectives of this review were to verify the accuracy of the accounting for civil

monetary penalties, examine the Commission's procedures for collecting outstanding debts,

determine Commission's compliance with the DCJA, and recOlnmend improvements, if

necessary, to the debt collection process.

Status.

The OIG has completed this audit of the Civil Monetary Penalties Collection Program.

The final report was issued in May 2001.

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 of law, rules or

regulations, or mismanagement, abuse of authority, or gross waste of funds, or a substantial

and specific danger to the public health and safety.

There were no investigations pending as of the beginning of the reporting period. The

OIG opened one investigation during the reporting period and closed one investigation. No

investigations remained open at the end of the period.

The Commission requested that the Inspector General conduct an investigation to assure

that a particular employee had not, during his enlploylnent, violated federal conflict ofinterest

law and regulations. In response to that request, the Insp"eclor General conducted an

6
investigation. The objective ofthe investigation was to detennine whether the employee

participated personally and substantially in a particular matter in which, to his knowledge, he had

a financial interest and in \vhich the particular matter would have had a direct and predictable

effect on that interest.

The investigation detennined that the employee had not participated personally and

substantially in a particular lnatter in which, to his knowledge, he had a financial interest and in

which the particular matter would have had a direct and predictable effect on that interest.

Accordingly, this investigation was closed.

LEGISLATIVE AND REGULATORY REVIEWS

As specified in Section 4(a) (2) of the Inspector General Act of 1978, the DIG 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 GIG also reviews exchange rule proposals and

changes.

The DIG has notified the responsible Division as to any concerns with draft and final

documents for the legislation, rules or investigations listed below. Formal comments were not

filed with the Commission. A sunlmary of the principal legislation, regulations and

investigations reviewed and the GIG review results follows.

RULE REVIEWS INITIATED IN PREVIOUS REPORTING PERIODS

1. Proposed Amendments regarding Perfornlance Data and Disclosure for Commodity

Trading Advisers (CTA).

Summary of Action

Staff proposed amendments that would require rate of return performance measures

used by a CTA to be computed by dividing net performance by the nominal account size.

Previously the CFTC had required that actual deposited funds be used in the denominator.

DIG Review

The DIG urged staff to consider using a focus group to determine the relative value of

disclosure of the two methods. CFTC action on these measures is temporarily stayed.

7
2. Relevant Considerations for Default Judgements.

Summary of Action

A question has been raised about the appropriate circumstances for the entry of default

judgements.

GIG Review

GIG concluded its review of the issue and made recommendations. Staff is currently

reviewing the issue.

RULE REVIEWS INITIATED THIS REPORTING PERIOD

The GIG has reviewed the numerous rules required by the Commodity Futures

Modernization Act of 2000 ("Act"). The Act altered the relationship of the Commission and

the futures industry in many regards. The rules sought to reflect this change.

Legislative Activities

The IG continues to be involved in legislative activities as a member of the IGls

Legislative Committee. Contact has been made with congressional staff on 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 of reports issued before the commencement of the reporting

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

MANAGEMENT DECISION NOT MADE

There were no instances of reports issued before the commencement of the reporting

period for which a management decision had not been nlade by the end of the reporting period.

8
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 does not disagree with any management decisions on OIG

recommendations.

CURRENT AUDITS

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

factors: .

• Statutory and regulatory requirements;

• Adequacy of internal control systems as indicated by vulnerability assessments and

internal control reviews recommended by OMB Circular A-123;

9
• Changes in the program conditions or particular vulnerability of the 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 of CFTC programs and operations;

• Management priorities and improvements that may be possible;

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

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

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

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

appropriate, along with a description of the audit objective for each.

1. Review of Enforcement Information Requirements

Objectives.

The mission of the Division of Enforcement is to investigate and prosecute fairly and

effectively violations of the Commodity Exchange Act and the Commission's regulations in

order to safeguard the integrity of U.S. futures and options markets and to protect market

participants and futures and options customers. In the course of its activities, the division,

with headquarters and regional components, plans and follows an often complex course to

achieve its objectives and receives and creates a huge volume of documents which must be

logically stored and regularly accessed. To support the accomplishment of these tasks, the

division is relying on a collection of very old manual and automated systems to track the

progress of activities and to store and retrieve documents. The objectives of this review are to

determine what the information needs of all levels in the division are, whether the information

needs are being met, and if the required information can be created, stored, and retrieved in a

more effective and efficient manner.

Status.

The joint OIG/Enforcement team produced extensive and detailed narrative flow charts

of the current operational and administrative functions and processes of the Division of

Enforcement and delivered them to the Division of Enforcement and the Office of Information

Resources Management (OIRM). These products were designed to inform the analysts in

OIRM of the inner workings of the Division of Enforcement and to serve as the base on which

the information requirements of the Division of Enforcement will be defined.

In September 1997, in a joint meeting of representatives of the Division of

Enforcement, the OIG, and OIRM, the principals nlaoe commitnlents of six staff years of

10
effort from OIRM and approximately three staff years of effort from Enforcement to define the

system requirements of Enforcement.

The Division of Enforcement and OIRM agreed that the first priority was the

development of a system to track documents in the Division in accordance with the DivisionIs

Enforcement Procedure Number 3. The second phase was devoted to installing a system to

track production within the Division and to report that information in the required formats to

management of the Division. Phase three will concentrate on moving the functions of the

attorneys and investigators from paper to computer screen and using the resulting information

to improve the tracking of productivity information and the sharing of information within the

Division.

The final version of the first phase of what is now being called "the Enforcement

Modernization Project" was delivered to the Division of Enforcement in May 1998. This

Enforcement Procedure Number 3 System is now being used at all locations of the Division.

The second phase, a system which produces the monthly status reports from all parts of the

Division and maintains on screen data on the current status of all matters within the Division,

has been completed. Training in the use of this system was completed during March 1999.

Phase Three, designed to present the Enforcement Division with a case management,

litigation support, and document management system, to tie together the first two systems with

this new system, and to automate as many of the remaining Enforcement Division processes as

possible, began with a survey of appropriate off-the-shelf systems and an investigation of

currently available software and hardware which may meet the bulk of identified needs.

Difficulties in maintaining contractor resource levels led to delays in the pursuit of Phase 3. A

team consisting of staff from the Division of Enforcement, OIRM, and contractor personnel

was engaged in a review of available off-the-shelf case management, litigation support, and

docume"nt management software from the beginning of Calendar Year 2000.

As a result of this review of available off-the-shelf software, the Division of Enforcement

and OIRM developed a list of requirements. A Request for Proposals reflecting those

requirements was issued on July 19, 2000. None of the responses received fully met the

requirements specified in the Request for Proposals.

In FY 2001, the agency's Executive Management Council (EMC) formed an Integrated

Project Team (IPT) to define the systems requirements of the Enforcement Division.

However, the solution defined by the IPT assumed the availability of resources needed to fund

the purchase and maintenance of all elements of the proposed solution over a number of fiscal

years. Final budget dollars available for the Commission for FY 2003 will probably not be

known until at least, the second quarter of FY 2002. If the budget dollars are severely limited,

the Division of Enforcement would prefer to refocus the available resources on those elements

of the proposed solution which can be purchased and maintained within the current limits.

Enforcement's priorities are a case management system and a litigation support system.

11
If the out-year budget dollars are sufficient to fund the entire system as approved by the

EMC, then the full system may be implemented. If the out-year dollars are limited, the agency

will consider moving to the more limited solution defined by the Division of Enforcement.

2. Review of Agency Compliance with GPRA

Objective.

The Goverrunent 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 of this review is to determine how effectively the Commission is complying with

GPRA I S terms. This will include an examination of the 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 Office ofInspector General consulted with and

advised the COlnnlission's operating divisions concel11ing GPRA requirelnents. The Office of

Inspector General reviewed the Conlnlission's FY 2001, FY 2002 and FY 2003 Annual

Perfomlance Plan before each \vas sublnitted to Congress. Subsequently, we selectively

reviewed the FY 1999, FY 2000 and FY 2001 Annual Perf0l111anCe Reports after they were

submitted to Congress. We concluded that the agency had nlade inlprovelllents in defining its

goals and identifying nleasures for reaching its stated goals.

However, in the current fiscal year, the Commodity Futures Modernization Act was

enacted. This Act fundamentally changed the regulatory stnlcture for the commodity futures

markets. The Commission is now adopting new rules and procedures consistent with the

regulatory refonns presented in that Act. This wholesale change in approach will challenge each

operating division to redefine its service goals under GRPA.

To assist in this process, the Office ofthe Inspector General has 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 Office ofthe Inspector General is participating in the development of "best

practices" for measuring compliance with the requirements of GPRA.

12
3. Audit of Compliance with the Federal Managers' Financial Integrity Act

Objectives.

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.

Status.

The OIG reviewed all of the draft internal control reviews produced by the Commission

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

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

vulnerability assessments and internal control reviews. The OIG will report the results of its

review of the final submissions to the Chairman in its annual assurance letters later this

calendar year.

4. Peer Review of External Office of the Inspector General

Objectives.

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

objectives of this peer review are to determine whether the Office of Inspector General's

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

standards promulgated by the Comptroller General of the United States; and whether

established policies, procedures and applicable auditing standards are being followed in

practice.

Status.

A draft report has been prepared and will shortly be delivered to the outside agency that

we examined. We anticipate that comments and nlodifications to the draft report will be

completed within one month. The report is expected to be finalized before the end ofthe

calendar year.

5. Audit of Los Angeles Lease ofReal Estate

Objectives.

The objectives ofthis audit are to deternline if all paylnents were made in accordance

with the terms ofthe lease agreement, whether established payment procedures were followed,

and ifthe agency cOlnplied with the Prompt Paynlent Act. This is the first audit conducted by

the Office ofInspector General ofthe Los Angeles, California regional office lease agreement.

This audit will cover all payments for the subject lease for the period from May 1, 1993 through

13
August 31, 2001 for all office space leased in the building at 10900 Wilshire Boulevard, Los

Angeles, California.

Status.

The OIG has completed the review and analysis of all invoices frolu January 1995

through July 2001. In the next few weeks, the OIG hopes to acquire fronl the Federal Records

Center invoices relating to May 1993 through December 1994. At the conclusion ofthis data

gathering and analysis, the OIG will bring its analysis up to date and produce a draft report for

distribution and comment. A final report is expected before the end ofthe calendar year.

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 of CFTC programs and operations.

GAO also conducts audits of CFTC activities, and OIG plans its audits so as not to

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

audit and the methods of reaching the goals so as to minimize the requirements placed on

CPTC resources.

14
STRATEGIC PLAN

FOR THE

OFFICE OF THE INSPECTOR GENERAL

INTRODUCTION

The Office of the 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 of CFTC

programs and operations and to 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 and regulations and to make

recommendations concerning, their impact on the economy and efficiency of CFTC

programs and operations or the prevention and detection of fraud and abuse; and

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

in the administration of CFTC programs and operations and prov ide

recommendations for correction of these problems or deficiencies.

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

audit, investigation, and legislative and regulatory review. A summary of those programs

follows.

AUDIT

The primary objectives of the OIG are to promote long-term efficiency and

effectiveness in the administration and operation of the Commission and to protect against

fraud and abuse.

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

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

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

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

timely reports of the operational effects of their decision so they can detennine if the change is

15
in the direction and of the magnitude predicted. In the absence of such information, top level

managers cannot adequately perform their jobs.

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

makers may exist in some programs. Principal among them is the CommissionIs 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 of Proceedings; appeals of initial decisions in

reparations cases are transmitted to the Office of General Counsel where proposed Commission

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

handled by the Office of the 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 if it were brand new to the Commission

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

organizational lines. If the 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 of manual labor.

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

to an activity with the results of that activity. The Commission does a good job of tracking

resources expended. It can determine how much staff time 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 of increased 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 of the management of CFTC programs

and operations, the OIG will, in addition to the conduct of mandatory audits, concentrate its

audit resources on the identification of information 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 of measures and

systems of measurement 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 delnonstrating program performance.

16
INVESTIGATIONS.

The Inspector General Act of 1978, as amended, provides tha t 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 of law, rules or

regulations, or mismanagenlent, gross waste of funds, abuse of authority or a substantial and

specific danger to the public health and safety.

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

unsolicited employee complaints as the source of investigative leads. This reactive program

has resulted in only a handful of investigations per year. This strategy was followed because

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

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

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

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

agency-wide telephone book and in this semiannual report.

Because of the reactive nature of the GIG's investigative program, no investigative

agenda has been established.

LEGISLATIVE AND REGULATORY REVIEW

Because of the importance of this activity in an economic regulatory agency, the GIG

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

five 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 of the

Regulatory Flexibility Act and the Paperwork Reduction Act.

The Regulatory Flexibility Act requires the agency to evaluate the impact of its

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 DIG does not initiate legislation or, generally, regulations, the DIG

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 of Compliance with the Federal Managers' Financial Integrity Act

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

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

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

OTHER AUDITS

The OIG intends to focus the balance of its audit resources on insuring that the

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

progress of 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 of their 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 of the manual and auto~ated

systems used by an organization to gather information on its use of resources, the results of the

devotion of those resources (including definitions of measurements of accomplishment), and

the reporting of results and associated costs to the upper level managers in the Division and to

the Chairman and the Commissioners. Cataloging of these decision support systems will be

followed by an assessment of whether all concerned officials are timely receiving the

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

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

will be identified and ilnprovements will be recommended if they can be iInplemented in a

cost/beneficial manner.

If recommendations are successfully implemented, the proposed systems should allow

the Chairman, the Commissioners, and concerned program managers to track 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 of tracking 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 010 will devote resources to the audit of compliance

with the terms of agency contracts (such as, leases of space in New York, Chicago, Los

18
Angeles, and Washington, D.C.), the collection of funds (such as, compliance with the terms

of the Deq,t Collection Improvement Act of 1996 and the resultant Memorandum of

Understanding with 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 of effort will be devoted over each

of the next five years to the development of an efficient flow of information throughout the

agency. Nine-tenths staff years of effort will be devoted over each of the 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 GIG is located at 1155 2pl 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 1, 2001 - September 30, 2001)

Dollar Value

Thousands

Number Questioned Unsupported

A. For which no management decision has

been made by the commencement of the

reporting period 0 0 0

B. Which were issued during the reporting

period 0 0 0

Subtotals (A + B) 0 0 0

For which a management decision was

made during the reporting period 0 0 0

( i ) dollar value of

disallowed costs 0 0 0

( ii ) dollar value of costs not

disallowed 0 0 0

c. For which no management decision

has been made by the end of the

reporting period 0 0 0

21
Table 2

Reports Issued with Recommendations

That Funds be Put to Better Use

(April 1, 2001 - September 30, 2001)

Dollar Value

Number Thousands

A. For which no management decision has

been made by the commencement of

the reporting period 0 0

B. Which were issued during the reporting

period 0 0

Subtotals (A + B) 0 0

For which a management decision was

made during the reporting period 0 0

( i ) dollar value of

recommendations that

were agreed to by

management 0 0

( ii ) dollar value of

recommendations that

were not agreed to by

management 0 0

c. For which no management decision

has been made by the end of the

reporting period 0 0

22
The InspectorGeneral

needsyourhelpto

assurethe integrityof

CFTC's programs.

Report FRAUD, WASTE

or ABUSE to the

INSPECTOR GENERAL

HOTLINE

(202)418-551 0

Office of the Inspector General

Commodity Futures Trading Commission

1155 21ST Street, N.W.

Washington, D.C. 20581