October 4, 2010
Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced the filing and simultaneous settlement of charges against public accounting firms McGladrey & Pullen, LLP (M&P) and Altschuler, Melvoin & Glasser LLP (AMG) and partner G. Victor Johnson II (Johnson), a certified public accountant, for failing to audit properly Sentinel Management Group, Inc. (Sentinel). Sentinel was a Northbrook, Ill.-based futures commission merchant (FCM) 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.
M&P and AMG ordered to pay civil monetary penalties and restitution to Sentinel’s customers
The CFTC order, filed on October 4, 2010, 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. 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 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. 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.
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 (see In the Matter of G. Victor Johnson and Altschuler, Melvoin & Glasser LLP, CFTC Docket 04-29 September 30, 2004, and CFTC Press Release 5000-04, September 30, 2004). On April 28, 2008, the CFTC sued Sentinel Management Group, Inc. and two of its executive officers for fraud, segregation, and false reporting violations involving $562 million in customer funds (see CFTC News Release: 5494-08, May 1, 2008)
The CFTC Division of Enforcement staff responsible for this matter are David Terrell, Elizabeth M. Streit, Scott R. Williamson, Rosemary Hollinger and Richard Wagner. The Division of Enforcement was assisted by Lisa M. Marlow, Tamara M. Dervin and Hugh J. Rooney of the CFTC’s Division of Clearing & Intermediary Oversight.
Last Updated: October 4, 2010