Swaps Regulator Watchdog Failed U.S. Government Standards Audit

The U.S. Commodity Futures Trading Commission’s internal watchdog has “significant deficiencies” in its auditing systems and received a failing grade in a government-required review completed in March.

From October 2006 through March 2010, the agency’s Office of the Inspector General failed to meet government standards for quality control procedures, overseeing independent accountants, documenting budget requests, and auditing contractors, according to the 37-page review. The IG’s office also failed to regularly make its reports available on the Internet, the review said.

The office’s auditing system was “not suitably designed and complied with to provide CFTC OIG with reasonable assurance of performing and/or reporting in conformity with applicable professional standards in all material respects,” according to the review, conducted by Lynne A. McFarland, inspector general of the Federal Election Commission.

The report was compiled to comply with federal guidelines requiring inspectors general to undergo a peer review every three years. The review, which is a public document, was sent as three letters, dated March 31, to CFTC Inspector General A. Roy Lavik.

Three of four deficiencies identified in a 2007 peer-review audit of the watchdog office were left uncorrected, according to the review, which has not been posted on the Internet.

Lavik’s office responded as part of the report, repeatedly pledging to “implement the recommendation” and “amend our policies and procedures as necessary to assure compliance with the recommendation within six months.”

Lavik and his office didn’t immediately respond to phone calls or emails requesting comment.

New Authority

The CFTC was granted broad new authority under the Dodd- Frank Act to write and enforce new regulations for the $583 trillion international swaps market. Enacted last year, the law requires the regulations to be finalized by mid-July.

The watchdog office questioned the agency’s cost estimates for swap rules in a report dated April 15. The CFTC has relied mainly on lawyers instead of agency economists to produce “one- size-fits-all” cost estimates of new derivatives regulations, according to the investigation requested by Representative Frank D. Lucas, an Oklahoma Republican, and Representative K. Michael Conaway, a Texas Republican.

The agency has faced criticism from Republicans, CME Group Inc., the Securities Industry and Financial Markets Association and other parts of the financial industry for not adequately estimating the costs of new derivatives regulations.

To contact the reporter on this story: Silla Brush in Washington at sbrush@bloomberg.net.

To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net


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