Financial Reform Watch

Published — June 17, 2011 Updated — May 19, 2014 at 12:19 pm ET

CFTC watchdog flunks review, cited for sloppy procedures

Small I.G. office also lacks quality control, fails to make its reports public


The internal watchdog for the Commodity Futures Trading Commission (CFTC) flunked a recent review of its auditing operations, raising questions about its ability to prevent fraud, waste, and abuse within the agency that will soon police the multi-trillion-dollar derivatives market.

The embarrassing grade was disclosed by Inspector General A. Roy Lavik in his semiannual report to Congress, which included a summary of a review conducted by another federal inspector general. “OIG submitted to a peer review of our audit function, conducted by the Federal Election Commission Office of Inspector General. We failed, with a scope limitation,” Lavik’s semiannual report said.

“We are taking the review very seriously,” Judith Ringle, an attorney advisor in the CFTC’s Office of Inspector General, told iWatch News. “We have hired an outside consultant to help with remediation.”

Ringle did not elaborate on what fixes were planned, but said the office asked to hire one new full-time employee. The CFTC watchdog is now reviewing an improvement plan prepared by the outside consultant, and hopes to adopt it this summer, she said.

Lavik, who has been inspector general since October 1990, was criticized for sloppy procedures that fell short of the high standards of audit preparation and documentation required for watchdogs within federal government agencies. Among the many failures detailed: failing to meet government audit standards for quality control, failing to properly oversee independent accountants hired by the watchdog, failing to document annual budget requests, failing to use electronic audit software to create and maintain audit files, and failing to regularly make reports available to the public on the Internet.

The CFTC watchdog’s flunking grade is “very unusual and troublesome,” veteran inspector general Earl Devaney told iWatch News. Currently the chairman of the Recovery Accountability and Transparency Board, Devaney previously spent 10 years as inspector general for the U.S. Interior Department.

The review was especially critical of the CFTC inspector general’s 15-month audit of whether the agency was hiring contractors to replace staff in government jobs.

That audit, released in August 2008, “was insufficient to support assertions made to the CFTC Chairman and Congress regarding the cost analysis of CFTC contracts,” the review said. Specifically, the inspector general failed to perform a cost comparison analysis and reached its conclusions based only on interviews, the review said. That, along with quality control problems meant that the audit “failed to meet the stated standards,” the review said.

The 2008 audit of some 65 CFTC contractors is not available on the agency’s website. A two-paragraph summary of it appears in a seminannual report to Congress for the period ended Sept. 30, 2008.

Another shortcoming: In each semiannual report to Congress since September 2008, the inspector general said all its own recommendations following audits had been adopted by the agency, but the peer review found little or no documents tracking which recommendations were carried out and when.

The peer review recommended more than two dozen improvements. They ranged from using electronic workpapers, to boosting the staff training budget, to improving quality control with better documentation and enforcement.

It is “exceptionally rare” for a federal inspector general to fail this kind of review, said Michael Smallberg, an investigator at the nonprofit Project on Government Oversight. The grade casts doubt not only on the CFTC watchdog’s effectiveness, but also on the authority and credibility of the CFTC’s own reports, said Smallberg, who monitors the world of inspectors general.

The inspector general needs to be well equipped “especially as the CFTC takes on a larger role under the Dodd-Frank Act,” Smallberg added.

Smallberg said he could recall only one other inspector general who received a flunking grade in the past five years — Arnold Fields, the Special Inspector General for Afghanistan Reconstruction, who resigned in January. A peer review of his office’s investigative operations, released last August, found they were “not in compliance” with applicable standards.

The failing grade for the CFTC’s internal watchdog comes at a time when the agency is rapidly becoming a more important regulator of financial markets. Created in 1974 to oversee mostly agricultural futures and options, the CFTC’s work now includes complex financial futures and the agency is writing rules to begin policing the $600 trillion derivatives market by the end of this year.

In March, Republicans on the House Agriculture Committee asked Lavik to review how the CFTC assessed costs and benefits of new derivatives rules mandated by the Dodd-Frank financial reform law. The inspector general responded one month later with a controversial report urging the agency to adopt a “more robust examination” of costs and saying four proposed rules lacked verifiable data about how much each would cost banks and companies to comply.

Despite its new responsibilities, the CFTC remains small with about 667 full-time employees, compared to the Securities and Exchange Commission’s staff of 4,000. The CFTC is seeking more money in fiscal 2012 to boost its staff to 983, but House Republicans are pushing to cut the agency’s budget by 15 percent.

The CFTC inspector general’s office currently has four full-time employees: the inspector general, a senior program analyst, a secretary, and Ringle. The office must report by Sept. 30, 2011 on its progress in addressing the problems identified in the review.

The peer review also said that three of the four findings from the previous assessment of the CFTC inspector general had yet to be corrected. That review, done by the National Endowment for the Humanities inspector general in September 2007, gave the CFTC inspector general a passing grade.

Among the recommendations in the peer review, which examined how the inspector general conducted audits from Oct. 1, 2006 through March 31, 2010, was a suggestion to boost the staff training budget from its current level of $5,000 per year.

“Five thousand dollars doesn’t sound like a lot, but unfortunately, staff training is often the first to suffer under budget constraints,” Devaney said. Ideally, the training fund would have enough money in it to not only adequately train auditors within an inspector general office, but also offer leadership training to groom staff for career advancement, he said.

“The report shows that the CFTC may not be, at the moment, prepared to get all that they need to done,” Devaney said.

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