The NFA yesterday held a board meeting to discuss results of an independent audit by Berkeley Research Group (BRG) in response to the PFG Best fraud. The BRG provided a list of recommendations for the NFA to implement to prevent further fraud which includes daily supervision of broker and client funds as well as an increase in certified fraud examiners on staff. The NFA announced that they would implement the BRG’s suggestions.
In their prepared remarks the NFA spun the positives of the BRG reports and stated:
BRG found that, overall, “NFA audits were conducted in a competent fashion and the auditors dutifully implemented the appropriate modules that were required in the annual audits” following the standards set by the Joint Audit Committee, a representative committee of the Audit and Financial Surveillance departments of U.S. futures exchanges and regulatory organizations.
BRG also found that, unlike in the Madoff Ponzi scheme, there were no complaints from customers or attempts at whistleblowing regarding Wasendorf’s fraud. BRG concluded that Wasendorf “was able to conceal his fraud meticulously by providing numerous convincingly forged documents to NFA and others.”
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While the BRG stated that the NFA had conducted audits correctly and enforced its rules that were obviously lacking, they also added many critical points towards the regulators supervision of PFG. These points were omitted from the NFA’s Press Statement and were summarized by ” (The) BRG conducted an independent, thorough, and accurate review of NFA’s audits of Peregrine Financial, and identified areas in which NFA could have been more inquisitive,” said Todd Petzel, chairman of a Special Committee.
Omitted details included:
- “we did find that some NFA auditors did not always exhibit sufficient professional skepticism in assessing and evaluating fraud risks.”
- “We also found that some of the members of the NFA audit teams were relatively inexperienced and unfamiliar with the futures industry”
- “We found that, while training at NFA was readily available and effective, particularly for the inexperienced auditors, there was not always consistency in training sessions after important events in the industry, such as the Bernard Madoff Ponzi scheme, or the MF Global collapse, where there were opportunities for significant lessons to be learned for NFA auditors.”
- “We also found that the NFA audits of PFG did not focus adequately on internal controls of PFG. For instance, some NFA auditors were not aware that Wasendorf was the only individual within PFG who had access to the original U.S. Bank statements (which provided him the ability to falsify the statements provided to PFG’s staff and NFA),”
- “We further found that the NFA auditors had little interaction with PFG’s outside auditor, did not review the outside auditor’s workpapers, and some NFA auditors were not aware until the 2012 annual audit that PFG’s outside auditor was, in the later years, a one-person auditing firm in suburban Chicago.”
- “We also found that NFA auditors did not fully examine the fact that PFG was losing significant money in many years, Wasendorf’s frequent and significant capital contributions, or the source of his capital contributions. “
- “We found that NFA auditors did not express significant concerns about PFG’s reverse repurchase Agreements”
The entire review is available here
In other events at the NFA they recently released their annual report with financial figures for the year ended June 2012. Despite the poor year, the agency increased its revenues by 25% to $56.3 million from $45.6 million with the biggest changes coming from a 34% increase in Assessment charges which rose to $38.4 million.