Auditors Of Futures Commission Merchants: Know The Audit Rules Or You Will Be Fined

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Explore:  Audits CFTC FCMs Settlement

A recent $100,000 settlement between the Commodity Futures Trading Commission (CFTC) and an accounting firm highlights — for accounting firms auditing Futures Commission Merchants (FCM) — the importance of closely following audit rules or risk being fined. See United States Commodity Futures Trading Commission v. Tunney & Associates, P.C. & Michael Tunney

The Linn Group (TLG) is a registered CFTC FCM and as such is required to conduct yearly audits in which they certify their financial statements. In 2007, TLG terminated their previous accounting firm and went looking for a new firm. An accounting firm, Tunney & Associates and its sole owner, Michael Tunney, wanted the business but it had never provided audit services to an FCM or an entity required to hold segregated accounts for customers, and it had no understanding of the CFTC regulations related to customer secured and segregated funds or the net capital requirements or net capital computations for an FCM.

Tunney knew Mr. Y, however, and Mr. Y, while not a certified public accountant (CPA), had previously worked with TLG and TLG’s previous auditor. Tunney and Mr. Y joined forces and got the TLG auditing business. From 2007 through 2010, Mr. Y performed the vast majority of the work, but Mr. Y died in 2011 and Tunney did the audit.

Not surprisingly, given that Mr. Y was not a CPA and Tunney lacked CFTC experience, the CFTC found numerous deficiencies with the Tunney audits.

  • Tunney did not contact TLG’s previous auditor as required by Generally Accepted Auditing Standards.
  • Tunney did not have the requisite technical training and proficiency to audit an FCM as required by GAAS General Standard No. 1.
  • Tunney failed to obtain a sufficient understanding of TLG’s business, risks and internal controls to assess the risk of material misstatement of the financial statements as required by Standard of Fieldwork No. 2.
  • Tunney did not exercise due professional care as required by GAAS General Standard No. 3. Specifically, Tunney did not possess the level of knowledge, skill and ability necessary to evaluate the audit evidence obtained by Mr. Y as related to material, critical audit areas such as the computation of minimum capital requirements and customer segregation requirements. Tunney also did not conduct any planning procedures or material fieldwork, and he did not review Mr. Y’s work to any meaningful degree as required by GAAS General Standard No. 3 and GAAS Standard of Fieldwork No. 1 for the 2007 through 2010 audits.
  • Tunney failed to obtain sufficient appropriate audit evidence and to maintain work-papers and audit documentation as required by Standard of Fieldwork No. 3.

These audit failures had real-world consequences. For example, TLG deposited and held non-customer and proprietary funds in a customer omnibus trading account from 2007 to 2011 in violation of the regulations and failed to timely obtain customer segregation and secured acknowledgement letters from banks for at least nine bank accounts containing TLG’s customers’ funds between November 2007 and June 2012 as CFTC regulations require. Tunney’s audits, however, failed to include audit procedures that would have tested for TLG’s procedures for safeguarding customer and firm assets.

On April 28, 2014, the CFTC settled with Tunney for $100,000 and ,as part of that settlement, Tunney was permanently prohibited from practicing before the CFTC.

Topics:  Audits, CFTC, FCMs, Settlement

Published In: General Business Updates, Finance & Banking Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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