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U.S. watchdog finds CFTC violated accounting law

WASHINGTON (Reuters) - The federal government watchdog has determined that the U.S. Commodity Futures Trading Commission violated a government accounting law by understating its leasing liabilities, a year-long investigation found.

Timothy Massad, Chairman of the United States Commodity Futures Trading Commission (CFTC), delivers the keynote address at the Sandler O'Neill + Partners, L.P. Global Exchange and Brokerage Conference in New York, June 3, 2015. REUTERS/Mike Segar

The finding by the Government Accountability Office, released on Thursday, follows a Reuters report last month that KPMG found a “material” accounting error that led the auditor to withdraw financial opinions on the derivatives regulator.

When the CFTC signed “multiple-year leases, it failed to record an obligation equal to the government’s total liability,” the non-partisan GAO said in its report.

The agency did include clauses on the availability of funds to its financial reports, but “they were not worded or exercised property and were therefore ineffective,” according to the GAO, which said the CFTC had violated a federal law that governs how budgetary obligations are recorded.

It stopped short, however, of saying whether the CFTC had violated another federal law called the Anti-Deficiency Act, which prohibits government agencies from obligating or spending federal funds in excess of the amount available.

Instead, it left it up to the CFTC to determine if it had broken the anti-deficiency law and told the regulator to self-report any violations it may uncover.

CFTC spokesman Steve Adamske said in a statement that the agency “will move expeditiously to address the concerns in the GAO report.”

“For years, neither the agency’s inspector general nor its independent accountants raised objections with this practice,” he added.

The GAO’s findings Thursday prompted a strong response from a number of Republican U.S. senators, including Arkansas Senator John Boozman, who chairs a subcommittee on financial services and general government appropriations and is among the lawmakers who requested a GAO review into the CFTC’s accounting practice in 2015.

“It is deeply troubling that an agency charged with regulating some of the most complex financial products and markets in the world cannot follow basic accounting standards,” Boozman said in a statement.

LEASED OFFICES

Unlike some federal agencies, the CFTC leases its own office space from private landlords in Washington, D.C., Chicago, New York and Kansas City, Missouri.

The leases generally cover a period of several years. However, in its annual budgetary financial statements, the regulator was only accounting for a year’s worth of rent - and not the full cost of the lease over time.

After the GAO started its review, the CFTC in October informed its auditors at KPMG about the issue.

Last month, the CFTC’s deputy inspector general told Capitol Hill staffers in an email that KPMG subsequently decided it had found a material error and was requesting the withdrawal of nearly a decade of financial opinions from the CFTC’s website, according to a copy of the email reviewed by Reuters.

KPMG estimated the CFTC had understated liabilities by $194 million in the year to Sept. 30, 2015 and by $212 million the previous year.

The precise consequences of the violations were not immediately clear. But they could factor into funding for the agency, as Republican lawmakers pledged to increase scrutiny of its finances in light of the report.

They have been reluctant to fully grant President Barack Obama’s annual budget requests for the agency in recent years. Many of them have not been happy with how the CFTC has crafted new rules for the over-the-counter derivatives market, criticizing the rules as too burdensome.

On Thursday, Senate Agriculture Committee Pat Roberts said in a statement that the CFTC “needs to address these accounting discrepancies” and also needs “to explain why they are just now becoming public.”

Iowa Republican Charles Grassley was also critical, noting that the “GAO opinion is yet another piece of evidence that the CFTC needs to get its books in order.”

Reporting by Lisa Lambert and Sarah N. Lynch in Washington, Editing by Soyoung Kim and Cynthia Osterman

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