It’s extremely interesting to see CFTC taking the oversight of its members one step further by going after not only its member firms but even after their auditors – if those failed to do their job. CFTC just charged an accounting firm and one of its partners for failing to properly audit One World Capital Group – a former forex broker which ceased operations in 2007. This adds to CFTC’s aggressive pursuit of even completely foreign firms which it perceives as breaking its rules.
Firm to pay $900,000 and institute remedial measures, and Shane to pay $100,000 personally to settle CFTC action.
Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today filed and simultaneously settled an administrative proceeding against McGladrey & Pullen, LLP (McGladrey), a nationwide public accounting firm with offices in Chicago, Ill., and a McGladrey partner, David Shane, a certified public accountant (CPA) licensed in Illinois.
The proceeding arises from an audit McGladrey performed in 2006 of One World Capital Group, LLC (One World), at the time a CFTC-registered futures commission merchant. The CFTC sued One World in 2007, alleging that it failed to demonstrate compliance with capitalization requirements and to maintain required books and records (see CFTC Press Releases 5427-10, December 18, 2007, and 5786-10, March 4, 2010). One World ceased operation in 2007. Shane served as the engagement partner for the 2006 audit of One World.
According to the CFTC order, McGladrey issued an unqualified opinion that One World’s 2006 financial statements were free from material misstatements, and a report stating that it had not identified any deficiencies in One World’s internal controls that it considered to be material inadequacies. The CFTC order finds that, to the contrary, the 2006 financial statements were, in fact, materially misstated and there were material inadequacies in One World’s internal controls, as well. The order also finds that McGladrey did not conduct its audit of One World’s financial statements in accordance with generally accepted auditing standards (GAAS) as required by the CFTC’s regulations.
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In particular, the order finds that One World’s 2006 financial statements were materially misstated in various ways including: (1) the 2006 Statement of Financial Condition states that liabilities payable to all customers were over $6.9 million, when in fact information available in One World’s records showed that it may have owed at least $15 million just to forex customers alone, for whom One World served as the counterparty; and (2) the 2006 financial statements materially misstated the nature of One World’s business by failing to reflect that One World served as the counter party to its forex customers for over 90 percent of its business, according to the order.
In addition, McGladrey failed to report material inadequacies in One World’s accounting system and internal accounting controls, including the lack of a customer ledger, and an accounting system that did not properly identify the number of forex customers or the amount of customer liabilities, according to the order. These material inadequacies reasonably could, and did, lead to material misstatements in One World’s 2006 financial statements, the order finds.
CFTC Division of Enforcement Director David Meister stated: “Auditors of Commission registrants perform a critical gatekeeper role in protecting the financial integrity of the futures markets and the investing public. Auditors must understand the business operations of their clients, and conduct financial audits in accordance with GAAS. As demonstrated by today’s action, the Commission will not hesitate to impose significant sanctions on auditing firms and hold individuals personally responsible when they fail to adhere to their professional obligations as regrettably happened here.”
The CFTC’s order requires McGladrey to pay a $250,000 civil monetary penalty and orders Shane to pay a $100,000 civil monetary penalty, for which he may not be indemnified by the firm. The CFTC’s order also requires McGladrey to pay $650,000 in restitution to customers of One World who suffered losses as a result of One World’s fraud. The order also requires McGladrey and Shane to cease and desist from the violations found in the order.
Significantly, the CFTC’s order requires that McGladrey hire an independent consultant to review and improve its audit programs and create a new mandatory continuing professional education training program, focusing on audits of futures commission merchants that also conduct forex business.
CFTC Division of Enforcement staff responsible for this matter are Jennifer Diamond, Joy McCormack, Elizabeth M. Streit, Scott R. Williamson, Rosemary Hollinger, and Richard Wagner. The Division of Enforcement was assisted by Margaret Gal and Leslie Garcia of the CFTC’s Division of Clearing & Intermediary Oversight.