The US Commodity Futures Trading Commission has filed and settled charges against public accounting firms McGladrey & Pullen and Altschuler, Melvoin & Glasser and partner G. Victor Johnson II for failing to audit properly Sentinel Management Group.
Sentinel was an Illinois-based futures commission merchant that declared Chapter 11 bankruptcy in August 2007. M&P acquired assets relating to AMG’s audit practice in 2006.
The CFTC charges arise from audits of Sentinel conducted in 2004 through 2006.
The CFTC order requires M&P and AMG to pay civil monetary penalties of USD150,000 and USD350,000, respectively. The order also requires M&P to pay USD400,000 and AMG to pay USD800,000 in restitution to Sentinel’s customers who suffered losses as a result of Sentinel’s bankruptcy.
The order also permanently denies Johnson, who is licensed in Illinois, the privilege of appearing or practicing before the CFTC and requires him to cease and desist from engaging in improper unprofessional conduct within the meaning of CFTC regulation 14.8(c).
Specifically, the CFTC order finds that for the years 2004 through 2006, Sentinel’s financial statements were materially misstated and that there was a material inadequacy in Sentinel’s internal controls. Johnson was the partner responsible for each of the audits. The respondents’ audits of Sentinel were “deficient in several areas that related directly to their failure to recognize and respond appropriately to the material misstatements in Sentinel’s financial statements and the material inadequacy in Sentinel’s internal controls,” according to the CFTC order.
Additionally, the accounting firms and Johnson failed to conduct Sentinel’s audits in accordance with generally accepted auditing standards (GAAS), as required by CFTC regulations. Further, the order finds that, “the deficiencies in the audits were directly related to Johnson’s and the engagement teams’ failures to follow GAAS.”
Specifically, Sentinel maintained a loan with the Bank of New York that it collateralised, in part, with securities it removed from customer segregated accounts. The order finds that Sentinel’s financial statements reflected these securities as an asset owned by Sentinel, when, in fact, Sentinel’s financial statements should have disclosed a corresponding liability to its customers for the securities it removed from segregation. The CFTC’s order further finds that the accounting firms lacked sufficient evidence to opine that Sentinel owned the securities.
In addition, Sentinel’s 31 December 2006 financial statements include a note that describes a USD950,000 payment to Sentinel’s parent company for services performed by the parent pursuant to a management agreement. The CFTC’s order finds that the respondents lacked sufficient evidence to opine that the parent provided the services.
According to the CFTC order, Sentinel did not record the loan with the Bank of New York on its general ledger and year-end trial balance for three years. For each of those years, the accounting firms proposed an adjusting journal entry to place the loan on Sentinel’s financial statements. However, the order finds that this adjusting journal entry failed to address the failure of Sentinel’s accounting system to record the loan on Sentinel’s general ledger and year-end trial balance. This was a material inadequacy that should have been reported by the respondents, the order finds.
Johnson’s failure to conduct the audits in accordance with GAAS and to report the material inadequacy in Sentinel’s accounting system constituted improper unprofessional conduct in the performance of the audits, the order finds.