Report

National Futures Association adopts recommendations from analysis of Peregrine Financial Group audits

The National Futures Association’s board of directors has voted to accept the recommendations made by Berkeley Research Group (BRG) as part of its independent analysis of NFA's audits of Peregrine Financial Group.

NFA staff will shortly develop a plan to act on the recommendations. The board will also appoint a special committee to oversee the timely implementation of the recommendations.

According to BRG, its 21 recommendations are "designed to improve the operations of NFA audits" based on the results of its analysis.  The recommendations cover a wide range of topics, including auditor hiring, training, supervision and continuing education. In particular, the report recommended that NFA enhance its training and procedures to ensure a greater sense of professional scepticism among its audit staff.

In addition, BRG recommended that NFA conduct more testing of members' internal controls, the qualifications of outside auditors and the sources of firm capital contributions. BRG also recommended that NFA take steps to better identify potential risk factors in futures commission merchant (FCM) operations.

"BRG conducted an independent, thorough, and accurate review of NFA's audits of Peregrine Financial, and identified areas in which NFA could have been more inquisitive," says Todd Petzel, chairman of a special committee comprised of NFA's public directors that retained BRG in August 2012. "Its recommendations are smart and appropriate. With the full backing of the Board, management will implement these recommendations and we expect the result will be improved regulation and oversight and a stronger, more secure industry."

BRG found that, overall: "NFA audits were conducted in a competent fashion and the auditors dutifully implemented the appropriate modules that were required in the annual audits" following the standards set by the joint audit committee, a representative committee of the audit and financial surveillance departments of US futures exchanges and regulatory organisations.

BRG also found that, unlike in the Madoff Ponzi scheme, there were no complaints from customers or attempts at whistle-blowing regarding Wasendorf's fraud. BRG concluded that Wasendorf “was able to conceal his fraud meticulously by providing numerous convincingly forged documents to NFA and others."

"NFA has already taken steps to address some of the issues highlighted in BRG's recommendations," says NFA president Dan Roth. "For example, we have expanded our use of certified fraud examiner training for our audit staff, increased our recruiting of experienced supervisors and directed our managerial staff to spend more time in the field during audits. NFA and CME Group have created a process to receive daily confirmations from all banks holding customer segregated funds.  The segregation confirmation system will perform an automated comparison of that information with the daily reports filed by the FCMs and generate immediate alerts for any material discrepancies."

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