Two accounting firms agreed to pay a total of $1.7 million and a certified public accountant (CPA) agreed to a permanent bar stemming from Commodity Futures Trading Commission charges of failing to audit properly a client that was earlier accused of fraud and misuse of customer funds.
According to the CFTC, McGladrey & Pullen, LLP and Altschuler, Melvoin & Glasser LLP and partner G. Victor Johnson II failed to properly audit Sentinel Management Group, a Northbrook, Ill.-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. In April 2008, the CFTC sued Sentinel and two of its executive officers for fraud, segregation, and false reporting violations involving $562 million in customer funds.
The CFTC order requires M&P and AMG to pay civil monetary penalties of $150,000 and $350,000, respectively. The order also requires M&P to pay $400,000 and AMG to pay $800,000 in restitution to Sentinel's customers who suffered losses as a result of Sentinel's bankruptcy.
AMG and Johnson were the subjects of a previous CFTC action in which the Commission issued an order finding that Johnson had conducted audits of a commodity pool that were not conducted in accordance with GAAS.
According to the regulator, from 2004 through 2006, Sentinel's financial statements were materially misstated and there was a material inadequacy in Sentinel's internal controls.
Johnson was the partner responsible for each of the audits. The CFTC called the audits "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."
The CFTC's order also states that the accounting firms and Johnson failed to conduct Sentinel's audits in accordance with generally accepted auditing standards (GAAS), as required by CFTC regulations. The order also finds that, "the deficiencies in the audits were directly related to Johnson's and the engagement teams' failures to follow GAAS."
The CFTC noted that Sentinel maintained a loan with the Bank of New York that it collateralized, 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 December 31, 2006, financial statements include a note that describes a $950,000 payment to Sentinel's parent company for services performed by the parent pursuant to a management agreement. However, the CFTC found that the accounting firms and accountant lacked sufficient evidence to opine that the parent provided the services.
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.