Release:#3943-96 (Docket #96-10)
For Release:September 25, 1996
DELOITTE & TOUCHE AGREES TO PAY A $100,000 CIVIL PENALTY TO SETTLE A CFTC ADMINISTRATIVE COMPLAINT FILED AGAINST IT AND THOMAS D. LUX, A PARTNER IN THE ACCOUNTING FIRM
The CFTC Action Finds Deloitte & Touche Liable for Lux's Violations Arising Out of Deloitte's Audit of First Commercial Financial Group Inc. of Chicago
WASHINGTON -- The Commodity Futures Trading Commission (CFTC) announced today that it has issued an order instituting an administrative proceeding against Deloitte & Touche LLP (Deloitte), a partnership of certified public accountants and consultants headquartered in Wilton, Connecticut, and Thomas D. Lux, a former partner in Deloitte's Chicago office, for violations of CFTC regulations arising out of Deloitte's 1993-1994 audit of First Commercial Financial Group Inc. (FCFG) of Chicago, a futures commission merchant, registered with the CFTC. Simultaneous with the filing of the complaint, the CFTC accepted offers of settlement from both Deloitte and Lux.
Under the terms of the Lux settlement, Lux is censured by the CFTC for violations of CFTC regulations and for improper professional conduct, and he is ordered to cease and desist from further violations of the CFTC's regulations.
Under the terms of the Deloitte settlement, Deloitte will pay a $100,000 civil monetary penalty and will comply with undertakings, for a period of four years following the entry of the order, that 1) the concurring reviewer on each and every audit of a CFTC registrant shall have at least five years of experience auditing CFTC registrants or broker- dealers, and 2) in each year any Deloitte partner acts as a concurring reviewer on audits of futures commission merchants such partner shall take at least 8 hours of continuing professional education courses dealing with futures commission merchant and broker- dealer issues.
CFTC Director of Enforcement Geoffrey Aronow, in commenting on the settlement, stated: "This action marks the first time that the Commission has exercised its authority under the regulations to censure an individual auditor for unprofessional conduct in the audit of a CFTC registrant. It sends a clear message to accounting firms and professionals that the Commission pays attention to the way they discharge their obligations and responsibilities with respect to registered entities."
Aronow also noted that "these professionals play a vital role in maintaining the integrity of our futures markets and often provide the public with its first line of defense against undercapitalized or unscrupulous entities."
The CFTC's order finds that Lux failed to conduct the audit of FCFG's financial statements for the year ending December 31, 1993, in accordance with generally accepted auditing standards (GAAS) and failed to investigate properly and report on material inadequacies in FCFG's internal controls.
As to Deloitte & Touche, the order finds that the accounting firm is liable for Lux's violations of the CFTC's regulations under section 2(a)(1) of the Commodity Exchange Act (CEA).
Specifically, the order finds that Lux failed to make the appropriate inquiry required by GAAS when he discovered that FCFG had made disbursements, in the form of unsecured loans, in excess of $1.6 million. The unsecured loans were made subsequent to the balance sheet date, but prior to the date the audit report was issued. Moreover, the auditor's report submitted by Lux did not appropriately reflect that FCFG's financial statements failed to disclose the effect of the unsecured loans on FCFG's capitalization.
The order further finds that, during the course of the audit, Lux was made aware of material inadequacies in FCFG's internal controls, which he failed to investigate or resolve. For example, the order finds that Lux was aware of the unsecured loans and that FCFG's had failed to prepare a month-end capital computation, as required by CFTC regulations for January, 1994.
These events, when viewed in the aggregate of the surrounding circumstances, required a conclusion that material inadequacies existed in FCFG's internal controls. Without any additional inquiry Lux concluded that there were no material inadequacies in internal controls. Furthermore, he submitted a supplemental report which failed to report these material inadequacies to FCFG or the CFTC.
Finally, the order finds that Lux engaged in improper unprofessional conduct during the course of the audit. Lux ceased being a partner on June 1, 1996, and has terminated his employment with Deloitte.
Earlier, in May 1995, the CFTC Filed an Enforcement Action Against First Commercial Financial Group and Two Individuals
The CFTC on May 2, 1995, filed an administrative complaint against First Commercial Financial Group and two individuals charging all respondents with violating the CEA and CFTC regulations by, among other things, failing to maintain required net capital, operating while undercapitalized, and filing reports with the CFTC containing willfully false statements (See CFTC News Release #3841-95, May 2, 1995, Docket #95- 10). This action is still in litigation.
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