The Commodity Futures Trading Commission proposes to amend one of its rules (Rule 14.8) to provide more guidance regarding the circumstances when accountants may be barred from practicing before the Commission.
The relevant rule currently has imprecise standards regarding unprofessional conduct that could lead to either attorneys or accountants being prohibited from practicing before the Commission: mainly that such persons: (1) lack requisite qualifications to represent others; (2) lack character or integrity; or (3) have engaged in unethical or improper professional conduct in connection with certain enumerated formal Commission interactions “or otherwise.”
Going forward, unethical and improper professional conduct for accountants is proposed to be defined as: (1) “[i]ntentional or knowing conduct, including reckless conduct, that results in a violation of applicable professional principles or standards;” (2) “[a] single instance of highly unreasonable conduct that results in a violation of applicable professional principles or standards” where the “accountant knows or should know heightened scrutiny is warranted;” or (3) “[r]epeated instances of unreasonable conduct, each resulting in a violation of applicable professional principles or standards, which indicates a lack of competence to practice before the Commission.”
The proposed amendment materially tracks an equivalent rule of the Securities and Exchange Commission (Rule 102(e)). (Click here for further details regarding this rule proposal in the article “CFTC Proposes New Rule Amendments Setting Standards to Bar Accountants” in the October 23 edition of Building Bridges.)
This proposal follows the CFTC filing and settling an enforcement action in August 2013 against Jeannie Veraja-Snelling, the external certified public accountant responsible for auditing Peregrine Financial Group’s year-end financial statements from 2001 through 2011. Peregrine, previously registered with the CFTC as a futures commission merchant, filed for bankruptcy in July 2012 after Russell Wasendorf, its owner and chief executive officer admitted to fraud in stealing customer funds.
As part of these audits, Ms. Veraja-Snelling each year issued (1) unqualified opinions stating that Peregrine’s financial statements were free from material misstatement, and (2) reports on Peregrine’s internal accounting controls concluding that the firm had no material inadequacies, as well as adequate practices and procedures for safeguarding customer funds.
According to the CFTC, Peregrine’s 2011 certified financial statement indicated that the firm was holding in excess of US$ 548 million in customer segregated and secured assets. However, that amount was exaggerated by more than US$ 200 million because of Mr. Wasendorf’s theft of customer funds for personal purposes for at least two decades.
(Click here for details on this CFTC litigation in the article “CFTC Sues Peregrine Financial Group External CPA: Says Her Audits Were Not Up To Professional Standards and She Missed Signs of Problems” in the August 26, 2013 edition of what is now known as Between Bridges.)
The CFTC’s litigation against Ms. Veraja-Snelling did not mark the first time the CFTC has filed an action against an accounting firm for failure to identify material inadequacies of a registrant to the Commission as a result of an audit.
In September 1986, the CFTC filed and settled an enforcement action involving Arthur Andersen & Co. related to its failure to report to the Commission certain material inadequacies in the internal controls of ContiCommodity Services, Inc., at the time one of the largest FCMs (click here for details regarding this action).