.'

COMMODITY FUTURES TRADING COMMISSION

SEMIANNUAL REPORT

OF THE

OFFICE OF THE

INSPECTOR GENERAL

FORTHEPERIOD ENDINGSEPTEMBER30, 2003
u.s. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

115521 st Street, NW, Washington, DC 2058~

Telephone: (202) 418-5110

Facsimile: (202) 418-5522

www.cftc.gov

Office of the

Inspector General

October 30, 2003

TO:

FROM:

SUBJECT:

James E. Newsome

Acting Chaimlan

A. Roy Lavik f't (2 Inspector Gene¥\

Semiannual Report ofthe Office ofthe Inspector General

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

from April 1,2003 through September 30,2003. Tlus report is submitted to you in accordance

with the requirements of Section 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

Aprill, 2003 THROUGH September 30,2003

TABLE OF CONTENTS

SUMMARY OF OIG ACTIVITIES [including a de~cription ofsignificant problems, abuses,

and deficiencies and a description ofOIG recommendations for corrective action

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

AUDITS 1

IN"VESTIGATIONS 2

LEGISLATIVE AND REGULATORY REVIEWS , 2

OIG RESPONSffiILITIES 3

OIG RESOURCES 4

CFTC PROGRAMS AND OPERATIONS 4

COMPLETED WORK. 4

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

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

INVESTIGATIONS 8

LEGISLATIVE AND REGULATORY REVIEWS 8

AUDIT REPORTS OVER SIX MONTHS OLD 9

CORRECTNE ACTION NOT COMPLETED [including an identification ofeach

significant recommendation described in previous semiannual reports on which

corrective action has not been completed (Mandated by Section 5(a)(3) ofthe Act)] 9

CORRECTNE ACTION COMPLETED 9
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)] 9

SUMMARY OF MATTERS REFERRED TO PROSECUTIVE AUTHORITIES and

the prosecutions and convictions which have resulted (Mandated by

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

SUMMARY OF EACH REPORT MADE TO THE AGENCY HEAD

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

refused or not provided (Mandated by Section 5(a)(5) ofthe Act) .10

REVISED MANAGEMENT DECISIONS [including description and explanation of

the reasons for any significant revised management decision made during the

reporting period (Mandated by Section 5(a)(II) ofthe Act)] IO

INSPECTOR GENERAL DISAGREEMENT [including information concerning any

significant management decision with which the Inspector General is in

disagreement (Mandated by Section 5(a)(12) ofthe Act)] 10

CURRENT AUDITS 10

GAO LIAISON 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

11
INDEX OF IG ACT REPORTING

REQUIREMENTS

Section 5(a)(I) 1

Section 5(a)(2) 1

Section 5(a)(3) 9

Section 5(a)(4) 9

Section 5(a)(5) 10

Section 5(a)(6) 4

Section 5(a)(7) 4

Section 5(a)(8) 20

Section 5(a)(9) 21

Section 5(a)(1 0) 9

Section 5(a)(11) 10

Section 5(a)(12) 10

111
SUMMARY OF OIG ACTIVITIES

AUDITS

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

Futures Trading Commission (Commission, CFTC) are to help promote long-tenn 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 10.)

Review ofAgency Compliance with GPRA. The Government Perfonnance and Results

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

plans setting perfonnance goals, and report annually on actual perfonnance 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 tenns. This will

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

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

additional details, see page 11.)

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

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

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

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

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

2004 in accordance with generally accepted auditing standards, Government Auditing

Standards, and OMB Bulletin 01-02. (For additional details, see page 12.)

Audit ofCFTC Time and Attendance Report Procedures. Since the bulk ofCFTC's

funds are expended on salaries, it is imperative that we insure that payments to

employees are computed based on accurate reporting oftime and attendance. The

objective ofthis audit is to detennine ifthe procedures established to insure the accurate

completion oftime and attendance reports are adequate and are being carried out in

accordance with instructions. (For additional details, see page 13.)

1
Completed Audits

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

details, see the section on completed audits beginning on page 4.)

Review ofEmployee Usage ofGovemment Issued Purchase Cards. Government

contractor issued credit cards are issued to employees for facilitating the efficient

acquisition ofsmall dollar amount items for the agency. The first objective ofthis audit

was to ascertain compliance with existing policies for the use ofpurchase cards by

designated employees. The second objective was to ascertain ifthe agency complied

with the Prompt Payment Act. (For additional details, see page 5.)

Evaluation ofthe CFTC Information Security Program and Practices. FISMA. The

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

or his designee to perform annual independent evaluations ofthe information security

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

Review ofEnforcement Information Requirements. The objectives ofthis review are to

detennine what the information needs of all levels in the Division are, whether the

information needs are being met, and ifthe required information can be created, stored,

and retrieved in a more effective and efficient manner. (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 infonnation from the Commission's employees concerning

the possible existence ofan 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 one investigation. No

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

beginning on page 8.)

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

2
"

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

reguiations on small entities. The Paperwork Reduction Act requires the agency to manage

effectively and efficiently its infonnation collections so that they are the least burdensome

necessary to achieve the stipulated objectives. .

Legislative Activities

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

Congressional staffwere briefed about the various IG issues.

OIG RESPONSIBILITIES

The Office ofthe Inspector General in the Commodity Futures Trading Commission was

created in accordance with the Inspector General Act of 1978 (P.L. 95-452), as amended by the

Inspector General Act Amendments of 1988 (P.L. 100-504). The OIG was established to create

an independent unit to:

• Promote economy, efficiency, and effectiveness in the administration ofCFTC

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

programs and operations;

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

administration ofCFTC programs and operations;

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

recommendations concerning their impact on the economy and efficiency ofCFTC

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

• Keep the Chainnan and Congress fully 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.

3
OIG RESOURCES

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

secretary. All positions have been filled since January 2, 2000. The present Inspector General

assumed his position on October 7, 1990.

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

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

provide the OIG with OGC legal services. An OGC staffmember has been assigned to provide

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

CFTC PROGRAMS AND OPERATIONS

Congress created the Commodity Futures Trading Commission in 1974 as an

independent agency with the mandate to regulate commodity futures and options markets in the

United States. The Commission's mandate was renewed and/or expanded in 1978, 1982, 1986,

1992, and 1995. In December 2000, the Commission was reauthorized by Congress and the

President through fiscal year (FY) 2005 with the passage ofthe Commodity Futures

Modernization Act of2000 (CFMA).

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

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

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

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

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

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

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

discovery and a means ofoffsetting price risks.

COMPLETED WORK

AUDITS

The OIG is required to conduct, supervise and coordinate audits 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 econQmy, efficiency, and effectiveness and

to prevent and detect fraud and abuse.

4
The purpose ofthese audits is to ensure that:

• Funds have been expended in a manner consistent with related laws, regulations, and

policies;

• Resources have been managed effectively and efficiently;

• Stipulated program objectives have been achieved; and

• Resources have been safeguarded.

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

1. Review of Employee Usage of Government Issued Purchase Cards

Objectives.

Government contractor issued credit cards are issued to employees for facilitating the

efficient acquisition ofsmall dollar amount items for the agency. The first objective ofthis audit

was to ascertain compliance with existing policies for the use ofpurchase cards by designated

employees. The second objective was to ascertain ifthe agency complied with the Prompt

Payment Act.

Status.

In an audit report issued on September 26,2003, the OIG reported that some employees'

usage oftheir purchase cards failed to comply with existing policies. For example, the audit

found that one employee used his card for unauthorized purchases, and one employee failed to

retain adequate records. Also, the OIG audit found that the agency and the government

contractor issuer ofpurchase cards were unable to resolve disputed charges on the cards. During

the audit period ofJanuary 2002 to August 2003, these parties were unable to parse out the

disputed amount vs. the Prompt Payment Act penalties. As ofJune 30, 2003, this agency

liability exceeds $30,000 and is continuing to grow. This open and growing liability must be

resolved soon. All purchase cardholders did receive the necessary training before getting their

purchase cards.

2. Evaluation of the CYrC Information Security Program and Practices, FISMA

Objectives.

The Federal Information Security Management Act requires the Inspector General or his

designee to perform annual independent evaluations ofthe information security program and

practices ofthe agency.

5
Status.

To provide a comprehensive ~eview ofthe Commission's security program, OIRM and

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

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

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

Investigations System, PaYroll and Personnel Systems, ISS Market Surveillance System, IFR

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

Management System consists ofthree components entitled Financial Management System,

Travel Manager System, and Electronic Certification System.

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

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

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

Officer (CIO) on September 15,2003 for combination with the CIO's assessment and inclusion

in the Chairman's report to OMB on September 22,2003.

3. Review of Enforcement Information Requirements

Objectiv:es.

The mission ofthe Division ofEnforcement is to investigate and prosecute fairly and

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

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

participants and futures and options customers. In the course ofits 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 ofdocuments which must be logically stored

and regularly accessed. To support the accomplishment ofthese tasks, the Division is relying on

a collection ofvery old manual and automated systems to track the progress of activities and to

store and retrieve documents. The objectives ofthis review are to determine what the

information needs of all levels in the Division are, whether the information needs are being met,

and ifthe required information can be created, stored, and retrieved in a more effective and

efficient manner.

Status.

The joint OIG/Division ofEnforcement team produced extensive and detailed narrative

flow charts ofthe current operational and administrative functions and processes ofthe Division

ofEnforcement and delivered them to the Division ofEnforcement and the Office ofInformation

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

ofthe inner workings ofthe Division ofEnforcement and to serve as the base on which the

information requirements ofthe Division ofEnforcement will be defined.

In September 1997, in ajoint meeting ofrepresentatives ofthe Division ofEnforcement,

the OIG, and OIRM, the principals made commitments ofsix staffyears of effort from OIRM

6
and approximately three staffyears of effort from the Division ofEnforcenient to define the

system requirements ofthe Division.

The Division ofEnforcement and OIRM agreed that the first priority was the

development ofa system to track documents in the Division ofEnforcement in accordance with

the Division's 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 ofthe 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 ofproductivity information and the sharing ofinformation

within the Division.

The fmal version ofthe first phase ofwhat was being called "the Enforcement

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

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

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

Division and maintains on-screen data on the current status ofall matters within the Division, has

been completed. Training in the use ofthis system was completed during March 1999.

Phase Three, designed to present the Division ofEnforcement 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 ofthe remaining Enforcement Division processes as

possible, began with a survey ofappropriate off-the-shelfsystems and an investigation of

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

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

team consisting ofstafffrom the Division ofEnforcement, OIRM, and contractor personnel was

engaged in a review ofavailable off-the-shelfcase management, litigation support, and

document management software from the beginning ofCalendar Year 2000.

As a result ofthis review of available off-the-shelfsoftware, the Division ofEnforcement

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

requirements was issued on July 19,2000. None ofthe 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 ofthe Division ofEnforcement, examine

alternative methods for meeting the requirements and recommend a solution. The solution,

defined by the IPT and known as the eLaw project, assumed the availability of$3.7 million to

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

fiscal years.

A total of$1.15 million ofFY 2001 money was set aside for the implementation ofthe eLaw

project defined by the IPT. Congress added $2.6 million to the eLaw project to insure the

availability ofDivision ofEnforcement records in the event of a repeat ofthe September 11,

2001 terrorist attack. With the full $3.7 million now available for implementation, the agency

7
expects to move forward expeditiously with the purchase ofall ofthe elements ofthe eLaw

system.

A Request for Quote (RFQ) was issued on May 7, 2003 and resulted in the award on

September 9, 2003 ofa GSA Blanket Purchase Agreement to the winning bidder. This

contractual agreement allows the Commission to issue/award individual tasks for support as the

project progresses. The first task will include the requirements analysis phase ofthe project. A

kick-offmeeting for this first task order was held on September 16,2003.

INVESTIGATIONS

The Inspector General Act of 1978, as amended, provides that the Inspector General may

receive and investigate complaints or information from the Commission's employees concerning

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

mismanagement, abuse ofauthority, or gross waste offunds, or a substantial and specific danger

to the public health and safety.

No investigations were pending as ofthe beginning ofthe reporting period. The OIG

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

investigations remained open at the end ofthe period.

In response to several unsolicited complaints from CFTC employees regarding

disatisfaction with service rendered by employees ofthe Procurement/Contracting Office ofthe

Office ofFinancial Management, the OIG opened an investigation. A large sample ofCFTC

employees who had had dealings with the Procurement/Contracting Office were interviewed to

determine the quality ofservice being provided. The OIG's findings were that dissatisfaction

with the service being provided was a distinct minority view. The vast majority ofthose

interviewed indicated that they were pleased and satisfied with the efforts ofthe procurement and

contracting staft: Accordingly, this investigation was closed.

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 exchange rule proposals and changes.

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

documents for the legislation, rules or investigations. Formal comments were not filed with the

Commission.

8
,-.

RULE REVIEWS INITIATED IN PREVIOUS REPORTING PERIODS

There were no rule reviews initiated in previous reporting periods which were continued

into this reporting period.

RULE REVIEWS INITIATED THIS REPORTING PERIOD

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

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

to reflect this change.

Legislative Activities

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

been made with congressional staffon various IG issues.

AUDIT REPORTS OVER SIX MONTHS OLD

CORRECTIVE ACTION NOT COMPLETED

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

not been completed.

CORRECTIVE ACTION COMPLETED

There were no instances ofreports issued before the commencement ofthe reporting

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

MANAGEMENT DECISION NOT MADE

There were no instances ofreports issued before the commencement ofthe reporting

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

SUMMARY OF MATTERS REFERRED TO

PROSECUTIVE AUTHORITIES

No matters were referred to prosecutive authorities during the reporting period

9
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.

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 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 ofaudits ofCFTC programs and operations by other Federal agencies; and

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

10
"

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

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

along with a description ofthe audit objective for each.

1. Review of Agency 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 perfonnance 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 conc~rning GPRA requirements. The Office ofthe Inspector

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

before each was submitted to Congress. Subsequently, the OIG selectively reviewed the FY

1999, FY 2000 and FY 2001 Annual Performance Reports after they were submitted to

Congress. The OIG concluded that the agency had made improvements in defining its goals and

identifying measures for reaching its stated goals.

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

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

procedures consistent with the regulatory 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 OIG is participating in the development ofbest

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

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

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

report.

11
2. Audit ofCFfC Financial Statements

Objective.

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

the CFTC, along with numerous other Federal entities, to have its financial statements audited

annually. To this end, the objective ofthis audit is to acquire a contractor who will provide the

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

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

Government Auditing Standards, and OMB Bulletin 01-02.

The specific objectives ofthis audit are to detennine whether:

(1) the financial statements present fairly the fmancial position ofthe Commodity Futures

Trading Commission in accordance with generally accepted accounting principles

(GAAP) as promulgated by the Federal Accounting Standards Advisory Board (FASAB).

The six financial statements, along with all corresponding notes to be audited include: (a)

Balance Sheet; (b) Statement ofNet Cost; (c) Statement ofChanges in Net Position; (d)

Statement ofBudgetary Resources; (e) Statement ofFinancing; and (t) Statement of

Custodial Activity.

(2) management's assertions about the effectiveness ofits internal controls for achieving

internal control objectives described in AU Section 319 and the Federal Managers

Financial Integrity Act (FMFIA) are fairly stated in all material respects. The contractor

shall make this detennination in part by obtaining an understanding ofthe internal control

policies and procedures and assessing the level of control risk relevant to all significant

cycles, classes oftransactions, and account balances. For those significant control

policies and procedures that have been properly designed and placed in operation, the

contractor shall perfonn sufficient tests to provide reasonable assurance as to whether the

controls are effective and working as designed.

The independent public accountant (IPA) will limit its internal control testing to those

controls necessary to achieve the objectives described in OMB Bulletin No. 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 No. 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 No. 01-02 or the Inspector General, noncompliance with which could

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

12
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 SAS No.8, OtherInformation in Documents Containing Audited

Financial Statements.

Status.

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

2003, four firms had submitted proposals. The Technical Evaluation Committee is currently

evaluating the proposals ofthe responding independent public accounting firms. An independent

public accounting firm is expected to be selected during the fITst quarter ofFY 2004.

3. Audit ofeYre Time and Attendance Report Procedures

Objective.

Since the bulk ofCFTC's funds are expended on salaries, it is imperative that we insure

that payments to employees are computed based on accurate reporting oftime and attendance.

The objective ofthis audit is to determine ifthe procedures established to insure the accurate

completion oftime and attendance reports are adequate and are being carried out in accordance

with instructions.

Status.

The OIG has interviewed some CFTC employees who are aware ofsome problems with

implementation oftime and attendance report procedures in the past. The OIG intends to

interview the coordinator ofthe program and to select a particular organization to serve as a

sample.

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 of each audit

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

resources.

13
STRATEGIC PLAN

FOR THE

OFFICE OF THE INSPECTOR GENERAL

INTRODUCTION

The Office ofthe Inspector General (GIG) 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 GIG 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 ofa particular action across organizational

lines within the Commission.

A simple example is the Reparations Program prior to the installation of an DIG

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

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

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

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

paperwork being handled by the Office ofthe Secretariat. Each office involved in the process

had a separate tracking system without ties to the tracking systems in the offices preceding them'

or following them in the process. Each office treated the case as ifit were brand new to the

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

across organizational lines. Ifthe Chairman wanted to know how much time was spent on the

average reparations case ofa 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 ofcontinuity in the flow of

information across organizational lines from the beginning ofa 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 ofan activity constituting a violation oflaw, rules or regulations, or

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

the public health and safety.

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

unsolicited employee complaints as the source ofinvestigative leads. This reactive program has

resulted in only a handful ofinvestigations per year. This strategy was followed because the

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

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

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

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

agency-wide telephone book and in this semiannual report.

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

agenda has been established.

LEGISLATIVE AND REGULATORY REVIEW

Because ofthe importance ofthis activity in an economic r~gulatory agency, the OIG

reviews proposed and final CFTC regulations, 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 anaiysis 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 ofaltemative solutions; (5) can reasonably document that the proposal will yield

positive net benefits over the long term; and (6) has met the requirements ofthe Regulatory

Flexibility Act and the Paperwork Reduction Act.

The Regulatory Flexibility Act requires the agency to evaluate the impact ofits

regulations on small entities. The Paperwork Reduction Act requires the agency to manage

effectively and efficiently its information collections so that they are the least burdensome

necessary to achieve the stipulated objectives.

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

legislative and regulatory review program is reactive to the legislative and regulatory proposals

developed by others. Accordingly, no independent legislative and regulatory review agenda has

been established.

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 an organization to gather information on its use ofresources, the results ofthe

devotion ofthose resources (including definitions ofmeasurements of accomplishment), and the

reporting ofresults and associated costs to the upper level managers in the Division and to the

Chairman and the Commissioners. The cataloging ofthese decision support systems will be

followed by an assessment ofwhether all concerned officials are timely receiving the

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

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

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

costlbeneficial manner.

Ifrecommendations are successfully implemented, the proposed systems should allow

the Chairman, the Commissioners, and concerned program managers to track the progress of a

particular program across organizational lines and to quickly determine the effects, ifany, of

changes in policy, procedure, or staffing.

The first step in accomplishing this goal will be to concentrate on documenting, and

recommending the improvement and/or development oftracking systems in every program

element throughout the Commission.

In addition to our focus on facilitating the development of an efficient flow of

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

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

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

Collection 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 OIG estimates that approximately one staffyear of effort will be devoted over each

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

agency. Nine-tenths of a staffyear of effort will be devoted over each ofthe next five years to

the compliance audits described above. The "Annual Audits" are expected to consume

approximately one-tenth staffyear per year.

18
CONTACTING THE OFFICE OF THE

INSPECTOR GENERAL

The OIG is located at 1155 21st Street, N.W., Washington, D.C. 20581. The telephone

number is (202)418-5110. The facsimile number is (202)418-5522. The hotline number is

(202)418-5510. Regular business hours are between 8:30 AM and 5:00 PM, Monday through

Friday, except Federal holidays.

19
Table 1

Reports Issued with Questioned Costs

(Aprill, 2003 - September 30, 2003)

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
. 1'---- T_a_b_le_2 _

Reports Issued with Recommendations

That Funds be Put to Better Use

(Aprill, 2003 - September 30, 2003)

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 ~ecision 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

needs yourhelp 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 r,