OFFICE OF THE INSPECTOR GENERAL

COMMODITY FUTURES TRADING COMMISSION

SEMIANNUAL REPORT

FOR THE PERIOD FROM

October 1, 1996 THROUGH March 31, 1997

SUMMARY OF OIG ACTIVITIES [including a description of

significant problems, abuses, and deficiencies and a description of OIG recommendations for corrective action (Mandated by Section 5(a)(1) and (2) of the

Act)] . . . . . . . . . . . . . . . . . . . . . . . . . . 1

AUDITS. . . . . . . . . . . . . . . . . . . . . . . . . . 1

INVESTIGATIONS. . . . . . . . . . . . . . . . . . . . . . 2

LEGISLATIVE AND REGULATORY REVIEWS. . . . . . . . . . . . 2

OIG RESPONSIBILITIES . . . . . . . . . . . . . . . . . . . . . 3

OIG RESOURCES. . . . . . . . . . . . . . . . . . . . . . . . . 4

CFTC PROGRAMS AND OPERATIONS . . . . . . . . . . . . . . . . . 4

COMPLETED WORK . . . . . . . . . . . . . . . . . . . . . . . . 5

AUDITS [including a list of each audit report issued and a summary of each particularly significant report

(Mandated by Section 5(a)(6) and (7) of the Act). . . . . 5 INVESTIGATIONS. . . . . . . . . . . . . . . . . . . . . . 7

LEGISLATIVE AND REGULATORY REVIEWS. . . . . . . . . . . . 7

AUDIT REPORTS OVER SIX MONTHS OLD. . . . . . . . . . . . . . . 10

CORRECTIVE ACTION NOT COMPLETED [including an

identification of each significant recommendation described in previous semiannual reports on which corrective action has not been completed (Mandated

by Section 5(a)(3) of the Act)] . . . . . . . . . . . . . 10

CORRECTIVE ACTION COMPLETED. . . . . . . . . . . . . . . 10

MANAGEMENT DECISION NOT MADE [including a summary of each audit report issued before the commencement of the reporting period for which no management decision has been made by the end of the reporting period (including the date and title of each such report), an explanation of the reasons such a management decision has not been made, and a statement concerning the desired timetable for achieving a management decision on each such report

(Mandated by Section 5(a)(10) of the Act)]. . . . . . . . 11

SUMMARY OF MATTERS REFERRED TO PROSECUTIVE AUTHORITIES and

the prosecutions and convictions which have resulted

(Mandated by Section 5(a)(4) of the Act). . . . . . . . . 12

SUMMARY OF EACH REPORT MADE TO THE AGENCY HEAD under

Section 6(b)(2) concerning information or assistance unreasonably refused or not provided (Mandated by

Section 5(a)(5) of the Act) . . . . . . . . . . . . . . . 12

REVISED MANAGEMENT DECISIONS [including description and explanation of the reasons for any significant revised management decision made during the reporting period (Mandated by Section 5(a)(11) of the Act)]. . . . . . . . 12

INSPECTOR GENERAL DISAGREEMENT [including information

concerning any significant management decision with which the Inspector General is in disagreement

(Mandated by Section 5(a)(12) of the Act)]. . . . . . . . 12

CURRENT AUDITS . . . . . . . . . . . . . . . . . . . . . . . . 12

GAO LIAISON. . . . . . . . . . . . . . . . . . . . . . . . . . 15

STRATEGIC PLAN . . . . . . . . . . . . . . . . . . . . . . . . 16

CONTACTING THE OFFICE OF THE INSPECTOR GENERAL . . . . . . . . 21

TABLE 1 -- REPORTS ISSUED WITH QUESTIONED COSTS (Mandated

by Section 5(a)(8) of the Act). . . . . . . . . . . . . . 22

TABLE 2 -- REPORTS ISSUED WITH RECOMMENDATIONS THAT FUNDS

BE PUT TO BETTER USE (Mandated by Section 5(a)(9) of

the Act). . . . . . . . . . . . . . . . . . . . . . . . . 23

Section 5(a)(1). . . . . . . . . . . . . . . . . . . . . . . . 1

Section 5(a)(2). . . . . . . . . . . . . . . . . . . . . . . . 1

Section 5(a)(3). . . . . . . . . . . . . . . . . . . . . . . . 10

Section 5(a)(4). . . . . . . . . . . . . . . . . . . . . . . . 12

Section 5(a)(5). . . . . . . . . . . . . . . . . . . . . . . . 12

Section 5(a)(6). . . . . . . . . . . . . . . . . . . . . . . . 5

Section 5(a)(7). . . . . . . . . . . . . . . . . . . . . . . . 5

Section 5(a)(8). . . . . . . . . . . . . . . . . . . . . . . . 22

Section 5(a)(9). . . . . . . . . . . . . . . . . . . . . . . . 23

Section 5(a)(10) . . . . . . . . . . . . . . . . . . . . . . . 11

Section 5(a)(11) . . . . . . . . . . . . . . . . . . . . . . . 12

Section 5(a)(12) . . . . . . . . . . . . . . . . . . . . . . . 12

AUDITS

The primary objectives of the Office of the Inspector General (OIG) are to help promote long-term efficiency and effectiveness in the administration and operation of the Commission and to protect against fraud and abuse. This reporting period's OIG audit activities which are listed below reflect these objectives.

Current Audits

The following are the audits being conducted during the current reporting period and continuing into the next reporting period. (For additional details, see the section on current audits beginning on page 12.)

Review of Enforcement Information Requirements. The objectives of this review are to determine what the information needs of all levels in the Division of Enforcement are, whether the information needs are being met, and if the required information can be created, stored, and retrieved in a more effective and efficient manner. (For additional details, see the section on current audits on page 13.)

Imprest Funds. The OIG will review expenditures from the Kansas City, Chicago, Washington, D.C., and New York imprest funds. (For additional details, see the section on current audits on page 14.)

Completed Audits

The following are the audits completed during this reporting period. (For additional details, see the section on completed audits on page 5.)

Audit of Compliance with the Federal Managers' Financial Integrity Act. In support of OMB Circular A-123 (Revised), the Inspector General evaluated, provided technical assistance, and advised the agency head as to whether the agency's review and evaluation process was conducted in accordance with the circular's requirements. (For additional details, see the section on completed audits on page 5.)

Audit of Imprest Fund -- Washington, D.C. The OIG determined that all funds were properly accounted for, the amount of the fund was not in excess of cash requirements, the cashier was generally following procedures that adequately protect the funds from loss or misuse, and the cashier was not making unauthorized use of the fund. (For additional details, see the section on completed audits on page 6.)

Audit of Imprest Fund -- Los Angeles. The OIG determined that all funds were properly accounted for, the cashier was following procedures that adequately protect the funds from loss or misuse, and the cashier was not making unauthorized use of the fund. (For additional details, see the section on completed audits on page 6.)

Cash Verification of Imprest Fund -- Washington, D.C. The OIG found that all funds were accounted for. (For additional details, see the section on completed audits on page 7.)

INVESTIGATIONS

The Inspector General Act of 1978, as amended, provides that the Inspector General may receive and investigate complaints or information from the Commission's employees concerning the possible existence of an activity constituting a violation of law, rules or regulations, or mismanagement, abuse of authority, or gross waste of funds, or a substantial and specific danger to the public health and safety.

No investigations were pending as of the beginning of the reporting period. The OIG opened three investigations during the reporting period and completed three investigations. No investigations remained open at the end of the period.

LEGISLATIVE AND REGULATORY REVIEWS

The OIG reviews proposed and final CFTC regulations and legislation and selected exchange rules using the following basic criteria: Whether the agency: (1) has identified specifically the problem(s) to be addressed by the proposal; (2) has defined through case study or data analysis a clear link between the proposed solution and the identified problem(s); (3) has specified clearly the means to effectively and efficiently enforce the proposal; (4) has assessed the likely efficiency and effectiveness of alternative solutions; (5) can reasonably document that the proposal will yield positive net benefits over the long term; and (6) has met the requirements of the Regulatory Flexibility Act and the Paperwork Reduction Act.

The Regulatory Flexibility Act requires the agency to evaluate the impact of its regulations on small entities. The Paperwork Reduction Act requires the agency to manage effectively and efficiently its information collections so that they are the least burdensome necessary to achieve the stipulated objectives. (For more detailed descriptions of these reviews, see the section on legislative and regulatory reviews beginning on page 7.)

Legislation reviewed during this period include:

Amendments to the Commodity Exchange Act, and the

Inspector General Act.

The Office of the Inspector General in the Commodity Futures Trading Commission (CFTC) was created in accordance with the Inspector General Act of 1978 (P.L. 95-452), as amended by the Inspector General Act Amendments of 1988 (P.L. 100-504). The OIG was established to create an independent unit to:

Promote economy, efficiency, and effectiveness in the administration of CFTC programs and operations and to detect and prevent fraud and abuse in such programs and operations;

Conduct and supervise audits and, where necessary, investigations relating to the administration of CFTC programs and operations;

Review existing and proposed legislation and regulations and make recommendations concerning their impact on the economy and efficiency of CFTC programs and operations or the prevention and detection of fraud and abuse; and

Keep the Chairman and Congress fully informed about any problems or deficiencies in the administration of CFTC programs and operations and provide recommendations for correction of these problems or deficiencies.

Given that the CFTC does not have extensive contracts or grant making authority, the OIG's efforts have been focused on the review of legislative and regulatory proposals and the monitoring of internal CFTC operations.

The OIG consists of the Inspector General, two professional staff members, and a secretary. The present Inspector General assumed his position on October 7, 1990.

The OIG, on December 4, 1989, signed a Memorandum of Understanding with the Office of General Counsel (OGC). This Memorandum details the procedures that will be used to provide the OIG with OGC legal services. An OGC staff member has been assigned to provide such services to the OIG on an as-needed basis.

The CFTC was established in 1974 as an independent agency to regulate commodity futures and options trading in the United States. The CFTC is headquartered in Washington, D.C., with additional offices in Chicago, New York, Kansas City, Los Angeles, and Minneapolis.

The basic objectives of the CFTC are to prevent manipulation of the markets, abusive trade practices, and fraudulent activities; to maintain effective oversight of the markets and self-regulatory organizations; and to enforce the Commodity Exchange Act and Commission rules without hindering the futures markets' provision of price discovery and risk shifting services. The CFTC regulates the futures activities of brokerage firms, salespersons, floor brokers, floor traders, commodity pool operators, commodity trading advisors, introducing brokers, and leverage transaction merchants. In addition, the agency ensures the effective enforcement of exchange rules, reviews the terms and conditions of proposed futures contracts and the registration of firms and individuals who provide advice or handle customer funds, and oversees the activities of the National Futures Association.

AUDITS

The OIG is required to conduct, supervise and coordinate audits of CFTC programs and operations and to ensure that the audits are conducted in accordance with generally accepted government auditing standards. The OIG is also required to recommend changes to existing and proposed CFTC programs and operations to promote economy, efficiency, and effectiveness and to prevent and detect fraud and abuse.

The purpose of these audits is to ensure that:

Funds have been expended in a manner consistent with related laws, regulations, and policies;

Resources have been managed effectively and efficiently;

Stipulated program objectives have been achieved; and

Resources have been safeguarded.

The following audit reports have been issued during the reporting period.

1. Audit of Compliance with the Federal Managers' Financial Integrity Act

Objectives.

In support of OMB Circular A-123 (Revised), the Inspector General will evaluate, provide technical assistance, and advise the agency head as to whether the agency's review and evaluation process was conducted in accordance with the circular's requirements.

Status.

The OIG reviewed all of the draft internal control reviews produced by the Commission and provided comments to the originating divisions. The OIG reported the results of its review of the final submissions to the Chairperson in its annual assurance letters. The OIG also attended the 1997 planning meeting of the CFTC Internal Control Committee and offered its services as advisor and consultant on conducting and reporting on internal control reviews.

2. Audit of Imprest Fund -- Washington, D.C.

Objectives.

The purpose of the audit is to determine whether the

imprest fund is being administered in compliance with the

Department of the Treasury Manual of Procedures and Instructions for Cashiers (Treasury Manual), the Treasury Financial Manual

(I TFM 4-3000), and CFTC Instruction 344-1. The audit is designed to ensure that all funds are properly accounted for, the amount of the fund is not in excess of cash requirements, the cashier is following procedures that adequately protect the funds from loss or misuse, and the cashier is not making unauthorized use of the funds. The audit covered the period from April 11, 1994 through June 5, 1996.

Results.

A report issued on November 26, 1996 disclosed that all funds are properly accounted for, the amount of the fund was not in excess of cash requirements, the cashier was generally following procedures that adequately protect the funds from loss or misuse, and the cashier was not making unauthorized use of the fund. OIG recommended that the cashier make a number of changes in operating procedures in order to ensure that controls are sufficient to protect the funds from loss or misuse.

3. Audit of Imprest Fund -- Los Angeles.

Objectives.

The purpose of the audit is to determine whether the

imprest fund is being administered in compliance with the

Department of the Treasury Manual of Procedures and Instructions for Cashiers (Treasury Manual), the Treasury Financial Manual

Results.

A report issued on March 31, 1997 disclosed that all funds were properly accounted for, the amount of the fund was not in excess of cash requirements, the cashier was following procedures that adequately protect the funds from loss or misuse, and the cashier was not making unauthorized use of the fund. Use of the fund was discontinued effective February 3, 1997. Consequently no recommendations were made.

4. Cash Verification of Imprest Fund -- Washington, D.C.

Objectives.

In accordance with the "Manual of Procedures and Instructions for Cashiers" distributed by the Department of the Treasury, the Commission is required to conduct an unannounced verification of the cash balance in each imprest fund at least once each quarter.

Results.

No deficiencies were noted in the December 6, 1996 cash verification of the Washington, D.C. imprest fund.

INVESTIGATIONS

There were no investigations pending as of the beginning of the reporting period. The OIG opened and closed three investigations during the reporting period. No investigations remained open at the end of the period.

LEGISLATIVE AND REGULATORY REVIEWS

As specified in Section 4(a)(2) of the Inspector General Act of 1978, the OIG reviews the impact of existing and proposed legislation and regulations on CFTC programs and operations and makes recommendations regarding more effective or efficient alternatives or protections against fraud and abuse. The OIG also reviews exchange rule proposals and changes.

The OIG has notified the responsible Division as to any concerns with draft and final documents for the legislation, rules or investigations listed below. Formal comments were not filed with the Commission. A summary of the principal legislation, regulations and investigations reviewed and the OIG review results follows.

RULE REVIEWS INITIATED IN PREVIOUS REPORTING PERIODS

1. Proposed amendments to allow certain customer orders to be placed without specified customer account identification. (CFTC Rule 1.35(a-1)).

Summary of Rule.

The CFTC proposed amendments to Regulation 1.35 that would permit orders submitted on behalf of multiple customer accounts not to have individual identifying account numbers if the person placing the orders has investment discretion as to each account and the executing FCM has a single series designation for all the accounts. The designation has to contain a predetermined order allocation applicable to all listed individual accounts.

The amendments would also permit specified institutional accounts for certain futures and options orders to be exempt from the account identification requirement if executed as part of an intermarket strategy involving securities. Such orders would have to be allocated no later than the deadline for final submission of trade data to clearing on the day the order is executed.

OIG Review.

OIG commented on various sections of the rule and its accompanying explanation. The comments focused on the coverage of the institutional accounts and the reach of disqualifying interest in the specified accounts. Staff drafted a proposed notice of interpretation and approval order interpreting regulation 1.35(a-1)(2)(i) account identification requirements as they pertain to bunched orders and approving an NFA interpretive notice. Staff continues to consider comments.

2. Exemption from Dual Trading Prohibition (CFTC Rule 155.5(d))

Summary of Rule.

Several exchanges submitted petitions for exemptions for various contracts from the dual trading prohibitions in Commission Regulation 155.5. The prohibition prevents a broker from trading for his own account and other specified accounts during the same trading session in which he has executed customers orders in an affected contract market.

OIG Review.

OIG discussed the issue with relevant staff and made comments and raised questions. Updates of the exchange petitions for exemptions have been published in the Federal Register. Staff continues to review the updated exchange petitions. The Commission will dispose of the exchanges' dual trading petitions in accordance with the August 1996 Audit Trail Report.

3. Audit Trail Review

Summary of Action.

The CFTC continued its analysis of the sufficiency of two exchanges' audit trail constructions as required by the Futures Trading Practices Act of 1992. The CFTC prepared a follow-up test to determine such sufficiency. After reviewing the results of the retest, the exchanges and the staff agreed to a number of improvements.

OIG Review.

The OIG participated in commenting on the design of the retest. The Commission is taking action on audit trail as announced in its Report on Audit Trail Status and Re-Test dated August 12, 1996.

RULE REVIEWS INITIATED THIS REPORTING PERIOD

1. Proposed Amendments to the CEA Act

Summary of Action.

Various bills have been introduced in Congress contemplating amendments to the CEA Act.

OIG Review.

The OIG advised that certain bill provisions might result in curtailment of the immunity of the Exchanges from antitrust liability.

2. Inspector General Act

Summary of Action.

A distillation of the Inspector General Act was prepared for briefing new agency heads.

OIG Review.

OIG noted that the description of the ability of agency heads to delegate general supervision of IG's was potentially confusing and should be clarified.

3. Proposed Investigation

Summary of Investigation.

Staff sought to delineate the responsibilities of Futures brokers to monitor the outside activities of their employees.

OIG Review.

The OIG raised questions about the extent of review called for under particular circumstances.

CORRECTIVE ACTION NOT COMPLETED

There were no instances of audit reports over six months old where corrective action had not been completed.

CORRECTIVE ACTION COMPLETED

1. Review of the Use of American Express Cards for Official Travel

Findings and Recommendations.

On May 8, 1996, the OIG submitted a report entitled, "Review of CFTC Employee Use of American Express Cards" to the Acting Chairman.

The review disclosed that 146 out of 185 Commission employees, who used their American Express Government Account Card during the period from late June 1995 through early January 1996, used the card only for official travel and travel related expenses. Thirty-nine employees used their American Express Cards for expenses other than those related to official travel. Of the 39 employees, 15 did not have any official travel related expenses during that period.

As a result of this review, the OIG recommended that management: 1) Continue to periodically remind employees of the nature of their contractual agreement with American Express; 2) Review the list of active cardholders in the American Express "Report of Accounts" to determine its accuracy; 3) Review procedures for canceling the American Express credit card accounts of departing employees to ensure that their individually billed accounts are being closed promptly; and 4) Develop a procedure for an annual supervisory certification to assure that each cardholder continues to be eligible because of the potential requirement to perform government travel on behalf of the Commission. In the event an employee's status has changed during the past year of coverage from that of a frequent traveler to that of a nontraveler, the procedure will give the supervisor an opportunity to direct the cancellation of the employee's American Express Card.

Action.

In a memorandum dated May 15, 1996, the Acting Chairman reminded employees of the nature of the contractual agreement with American Express. On May 13, 1996, the Director, Office of Financial Management, requested supervisors to recertify active cardholders. The procedures for canceling the American Express credit card accounts of departing employees to ensure that their individually billed accounts are being closed promptly have been reviewed; and a procedure for an annual supervisory certification to assure that each cardholder continues to be eligible has been developed.

MANAGEMENT DECISION NOT MADE

There were no instances of reports issued before the commencement of the reporting period for which a management decision had not been made by the end of the reporting period.

No matters were referred to prosecutive authorities during the reporting period.

No reports were made to the agency head under section 6(b)(2) concerning information or assistance unreasonably refused or not provided.

No management decisions were revised during the reporting period.

The Inspector General does not disagree with any management decisions on OIG recommendations.

The audit agenda and priorities for the OIG are determined based on the following factors:

Statutory and regulatory requirements;

Adequacy of internal control systems as indicated by vulnerability assessments and internal control reviews recommended by OMB Circular A-123;

Changes in the program conditions or particular vulnerability of the organization, program, activity, or function to problems or deficiencies;

Current and potential dollar magnitude and likely benefits of a review on the efficiency or effectiveness of CFTC programs and operations;

Management priorities and improvements that may be possible;

Results of audits of CFTC programs and operations by other Federal agencies; and

Availability of audit resources and the potential opportunity costs to the agency.

The audit agenda and summary of progress for each audit which has not yet been completed is summarized below. New agenda items periodically will be added, as appropriate, along with a description of the audit objective for each.

1. Review of Enforcement Information Requirements

Objectives.

The mission of the Division of Enforcement is to investigate and prosecute fairly and effectively violations of the Commodity Exchange Act and the Commission's regulations in order to safeguard the integrity of U.S. futures and options markets and to protect market participants and futures and options customers. In the course of its activities, the division, with headquarters and regional components, plans and follows an often complex course to achieve its objectives and receives and creates a huge volume of documents which must be logically stored and regularly accessed. To support the accomplishment of these tasks, the division is relying on a collection of very old manual and automated systems to track the progress of activities and to store and retrieve documents. The objectives of this review are to determine what the information needs of all levels in the division are, whether the information needs are being met, and if the required information can be created, stored, and retrieved in a more effective and efficient manner.

Status.

The joint OIG/Enforcement team has produced and distributed for comment a narrative flow chart detailing the current operational functions and processes of the Division of Enforcement. The effort to develop a narrative flow chart of the administrative processes of the Division of Enforcement is underway. These two flow charts are designed to inform the analysts of the Office of Information Resources Management of the inner workings of the Division of Enforcement and to serve as the base on which the information requirements of the Division of Enforcement will be defined.

2. Audit of Compliance with the Federal Managers' Financial Integrity Act

Objectives.

Status.

The OIG attended the 1997 planning meeting of the CFTC Internal Control Committee. It will serve as advisor and consultant on conducting and reporting on internal control reviews.

3. Imprest Funds

Objectives.

The OIG will review expenditures from all five CFTC imprest funds to determine compliance with CFTC Instruction 344-1 and the Department of the Treasury Manual of Procedures and Instructions for Cashiers. Specifically, the audits are designed to verify that all funds are properly accounted for; the amount of each fund is not in excess of the cash requirements; the cashier is following procedures that will adequately protect the funds from loss or misuse; and the cashier is not making unauthorized use of the funds. The imprest funds are maintained in Washington, D.C.; Chicago, Illinois; New York, New York; Los Angeles, California; and Kansas City, Missouri.

In addition, the Department of the Treasury Manual of Procedures and Instructions for Cashiers requires CFTC to verify cash balances of imprest funds at least once each quarter. The OIG has accepted responsibility for verifying the cash balance of the Washington D.C. imprest fund.

Status.

The OIG has scheduled audits of the Kansas City, Chicago, New York, and Washington, D.C. imprest funds for the second half of the fiscal year. Additionally, verifications of cash balances are scheduled for each fund during each quarter.

The OIG is charged with providing policy direction for, and conducting, supervising, and coordinating audits and investigations relating to CFTC programs and operations. In addition, the OIG is required to recommend policies for, and conduct, supervise, and coordinate with other Federal agencies, state and local Governmental agencies, and nongovernmental entities, audits, investigations, and evaluations regarding the economy, efficiency, and effectiveness of CFTC programs and operations.

GAO also conducts audits of CFTC activities, and OIG plans its audits so as not to duplicate GAO's efforts. Moreover, OIG in its audit activities identifies the goals of each audit and the methods of reaching the goals so as to minimize the requirements placed on CFTC resources.

INTRODUCTION

The Office of the Inspector General (OIG) in the Commodity Futures Trading Commission (CFTC) was created in accordance with the Inspector General Act of 1978 (P.L. 95-452), as amended by the Inspector General Act Amendments of 1988 (P.L. 100-504). The OIG was established to create an independent unit to:

Promote economy, efficiency, and effectiveness in the administration of CFTC programs and operations and to detect and prevent fraud and abuse in such programs and operations;

Conduct and supervise audits and investigations relating to the administration of CFTC programs and operations;

Review existing and proposed legislation and regulations and to make recommendations concerning their impact on the economy and efficiency of CFTC programs and operations or the prevention and detection of fraud and abuse; and

Accordingly, the OIG has established three programs to carry out its responsibilities: audit, investigation, and legislative and regulatory review. A summary of those programs follows.

AUDIT

The primary objectives of the OIG are to promote long-term efficiency and effectiveness in the administration and operation of the Commission and to protect against fraud and abuse.

The key to effectively and efficiently managing the Commodity Futures Trading Commission is information. Top level managers and decision makers require a steady stream of organized data on the effects of their policy decisions and resource allocations on the operations of the Commission. Once having made the decision to change resource levels or policy, managers must receive accurate and timely reports of the operational effects of their decision so they can determine if the change is in the direction and of the magnitude predicted. In the absence of such information, top level managers cannot adequately perform their jobs.

A number of obstacles to acquiring and transmitting the desired information to decision makers may exist in some programs. Principal among them is the Commission's apparent difficulty in many instances in tracking the progress of a particular action across organizational lines within the Commission.

A simple example is the Reparations Program prior to the installation of an OIG recommended unified, Commission-wide tracking system. Complaints are received and processed and hearings are held in the Office of Proceedings; appeals of initial decisions in reparations cases are transmitted to the Office of General Counsel where proposed Commission opinions are drafted; and appeals are decided by the Commission with the paperwork being handled by the Office of the Secretariat. Each office involved in the process had a separate tracking system without ties to the tracking systems in the offices preceding them or following them in the process. Each office treated the case as if it were brand new to the Commission when they received it. As a result, there was no provision for tracking information across organizational lines. If the Chairman wanted to know how much time was spent on the average reparations case of a particular description at each stage in the process, that information was unavailable without an extensive expenditure of manual labor.

A related problem is the difficulty the Commission has in associating resources devoted to an activity with the results of that activity. The Commission does a good job of tracking resources expended. It can determine how much staff time and material at what cost was spent in a particular activity. Some Commission organizations can even associate costs with particular projects. What a program manager may have great difficulty doing, however, is telling a decision maker that for a specific level of increase in resources, the program manager will deliver a specific level of increased output. Without this information from all programs competing for limited resources, decision makers cannot make reasoned resource allocation judgments. Decision makers are forced to rely on intuition and anecdotal evidence.

To increase the efficiency and the effectiveness of the management of CFTC programs and operations, the OIG will, in addition to the conduct of mandatory audits, concentrate its audit resources on the identification of information voids and the lack of continuity in the flow of information across organizational lines from the beginning of a process until its conclusion. The OIG will recommend the implementation of any system improvements where the benefits of implementing the changes exceed the costs.

INVESTIGATION

The Inspector General Act of 1978, as amended, provides that the Inspector General may receive and investigate complaints or information from the Commission's employees concerning the possible existence of an activity constituting a violation of law, rules or regulations, or mismanagement, gross waste of funds, abuse of authority or a substantial and specific danger to the public health and safety.

The OIG has to date conducted only a reactive investigative program chiefly relying on unsolicited employee complaints as the source of investigative leads. This reactive program has resulted in only a handful of investigations per year. This strategy was followed because the OIG believed that an independent regulatory agency such as CFTC without grant money or substantial contracts to award was not likely to generate a substantial investigative workload.

To insure that employee complaints could easily reach the OIG, a 24 hour hotline was established in February 1993 to receive complaints. The hotline's existence is publicized on the back cover of the agency-wide telephone book and in this semiannual report.

Because of the reactive nature of the OIG's investigative program, no investigative agenda has been established.

LEGISLATIVE AND REGULATORY REVIEW

Because of the importance of this activity in an economic regulatory agency, the OIG reviews proposed and final CFTC regulations and legislation and selected exchange rules using five basic criteria: Whether the agency: (1) has identified specifically the problem(s) to be addressed by the proposal; (2) has defined through case study or data analysis a clear link between the proposed solution and the identified problem(s); (3) has specified clearly the means to effectively and efficiently enforce the proposal; (4) has assessed the likely efficiency and effectiveness of alternative solutions; (5) can reasonably document that the proposal will yield positive net benefits over the long term; and (6) has met the requirements of the Regulatory Flexibility Act and the Paperwork Reduction Act.

Because the OIG does not initiate legislation or, generally, regulations, the OIG legislative and regulatory review program is reactive to the legislative and regulatory proposals developed by others. Accordingly, no independent legislative and regulatory review agenda has been established.

AUDIT AGENDA

ANNUAL AUDITS

The Inspector General believes that the following audits are best accomplished on an annual basis.

1. Audit of Compliance with the Federal Managers' Financial Integrity Act

2. Audit of Imprest Funds -- New York, Chicago, Kansas City, Los Angeles, and Washington

CFTC maintains imprest funds in Washington D.C., Chicago, Illinois, New York, N.Y., Kansas City, Missouri, and Los Angeles, California. These funds have been established primarily to make small purchases and travel advances. OIG has determined that an annual audit of funds is appropriate because of the detailed accountability requirements of the Treasury Manual, the personal risk of each cashier, and the potential for errors and irregularities.

3. Cash Verifications of Imprest Funds -- New York, Chicago, Kansas City, Los Angeles, and Washington.

Treasury requires that unannounced verifications of cash balances in imprest funds be made at least quarterly. Only the cash verifications of the imprest funds in Washington, D.C. will be completed by the Office of the Inspector General. Quarterly cash verifications at other locations will be completed by on site regional CFTC personnel who will send reports of their findings to the Office of the Inspector General.

OTHER AUDITS

The OIG intends to focus the balance of its audit resources on insuring that the Chairperson, the Commissioners, and program managers have timely, useful information on the progress of CFTC's programs in meeting their goals and objectives. For example, emphasis will be placed on determining whether all managerial levels engaged in a process can track the progress of their various programs. The tracking systems required in many, though not all, programs will cross formal organizational lines.

These audits will entail a cataloging and description of all of the manual and automated systems used by an organization to gather information on its use of resources, the results of the devotion of those resources (including definitions of measurements of accomplishment), and the reporting of results and associated costs to the upper level managers in the Division and to the Chairman and the Commissioners. Cataloging of these decision support systems will be followed by an assessment of whether all concerned officials are timely receiving the information they require to efficiently allocate resources to those uses which best accomplish the priorities of the Commission. If any elements are lacking in the information systems, they will be identified and improvements will be recommended if they can be implemented in a cost/beneficial manner.

If recommendations are successfully implemented, the proposed systems should allow the Chairman, the Commissioners, and concerned program managers to track progress of a particular program across organizational lines and to quickly determine the effects, if any, of changes in policy, procedure, or staffing.

The first step in accomplishing this goal will be to concentrate on documenting, and recommending the improvement and/or development of tracking systems in every program element throughout the Commission.

RESOURCES REQUIRED

The OIG estimates that approximately one and one-half staff years of effort will be devoted over each of the next five years to the audits described in "Other Audits" above. The "Annual Audits" are expected to consume approximately one-half staff year per year.

The OIG is located in Room 4092 at 1155 21st Street N.W., Washington, D.C. 20581. The telephone number is (202)418-5110. The facsimile number is (202)418-5522. The hotline number is (202)418-5510. Confidential mail may be sent to P.O. Box 33906, Washington, D.C. 20033-0906. Regular business hours are between 8:30 AM and 5:00 PM, Monday through Friday, except Federal holidays.

Reports Issued with Questioned Costs

(October 1, 1996 - March 31, 1997)

Dollar Value

Number (Thousands)

------- --------------------- Questioned Unsupported Costs Costs

---------- -----------

A. For which no management decision

has been made by the commencement

of the reporting period............... 0 0 0

B. Which were issued during the

reporting period...................... 0 0 0

Subtotals (A + B)..................... 0 0 0

C. For which a management decision

was made during the reporting

period................................ 0 0 0

(i) dollar value of

disallowed costs................. 0 0

(ii) dollar value of

costs not disallowed............. 0 0

D. For which no management decision

has been made by the end of the

reporting period...................... 0 0 0

Reports Issued with Recommendations

That Funds be Put to Better Use

(October 1, 1996 - March 31, 1997)

Dollar Value

Number (Thousands)

------ ------------

A. For which no management decision

has been made by the commencement

of the reporting period............... 0 0

B. Which were issued during the

reporting period...................... 0 0

Subtotals (A + B)..................... 0 0

C. For which a management decision

was made during the reporting

period................................ 0 0

(i) dollar value of

recommendations that

were agreed to by

management........................ 0 0

(ii) dollar value of

recommendations that

were not agreed to by

management........................ 0 0

D. For which no management decision

has been made by the end of the

reporting period...................... 0 0

April 30, 1997

TO: Brooksley Born

Chairperson

FROM: A. Roy Lavik

Inspector General

SUBJECT: Semiannual Report of the Office of the Inspector General

Attached is the Semiannual Report of the Office of the Inspector General for the period from October 1, 1996 through March 31, 1997. This report is submitted to you in accordance with the requirements of Section 5 of the Inspector General Act of 1978, as amended.

I appreciate your continuing support of this office.

Attachment