Accountant fined for inadequate FCM audit

The CFTC has filed and settled charges against public accounting firm McGladrey & Pullen, LLP, and firm partner David Shane. When McGladrey and Shane performed an audit on registered Futures Commission Merchant (“FCM”) One World Capital Group, LLC, they failed to report the many misstatements and inadequacies in One World’s financials and procedures. The firm has been ordered to pay $900,000 in civil monetary penalties and restitution to the FCM’s defrauded customers, and Shane will pay a separate penalty personally.

In 2006, McGladrey issued an opinion that One World’s financial statements were free from material misstatements, and stated that it did not find any material inadequacies in the firm’s internal controls. According to the CFTC order, the FCM had both misstatements in its financial records and significant problems in its internal controls. Additionally, the order finds that McGladrey did not conduct its audit in compliance with generally accepted auditing standards (GAAS).

One World’s financial statements contained a number of inaccuracies. For example, the 2006 Statement of Financial Condition asserts that the FCM’s liabilities payable were over $6.9 million, in in fact that figure was closer to $15 million for just forex customers alone. More generally, One World’s financial statements did not reflect that the firm served as a counter party to its forex customers in over 90% if its business.

Furthermore, McGladrey did not report the many failings of One World’s internal controls and accounting system. The FCM did not keep a customer ledger, and the system did not properly identify the number of forex customers or the amount of customer liabilities. These inadequacies led to the misstatements made during the 2006 audit.

In 2007, the CFTC sued One World, and the FCM shut down in 2007. The CFTC enforcement director is adamant that auditors be held accountable for their work: “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.”

As part of its settlement, McGladrey must hire an independent consultant to review and improve its auditing program and develop a mandatory continuing professional education program which focuses on FCMs that conduct forex business.

Read more about this CFTC enforcement action.
Creative Commons License photo credit: alancleaver_2000

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