For Release: October 15, 1998
Commodity Futures Trading Commission Year 2000
Requirements For Certified Public Accountants
In Advisory 17-98, dated April 29, 1998, the Commodity Futures Trading Commission ("Commission") identified the regulations of the Commission that impose an obligation to report or disclose year 2000 systems problems on futures commission merchants (FCMs), introducing brokers (IBs), commodity pool operators (CPOs), commodity trading advisors (CTAs), applicants for registration as FCMs and IBs, self-regulatory organizations (SROs) and the public accountants who perform audits of FCMs and IBs. This Advisory amends that part of Advisory 17-98 which addressed the requirement of Commission rule 1.16, as applied to year 2000 problems, that an FCM or independent IB file concurrently with the annual audited report a supplemental report by the public accountant describing any material inadequacies (MIs) found to exist or found to have existed since the date of the previous audit (the "MI report"). This advisory changes no other requirements contained in Advisory 17-98.
The performance by a public accountant of an agreed-upon procedures (AUP) attestation engagement that meets the requirements of American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 98-8, as set forth below, will satisfy the Commission's requirements with respect to the public accountant's responsibility for the identification of MIs resulting from a year 2000 problem, as set forth in Advisory 17-98. If the FCM or IB elects to file an AUP report, the scope of any annual MI reports, for fiscal years ending between February 28, 1998 and February 28, 1999, may exclude year 2000 matters. If it is the public accountant's intention to exclude coverage of year 2000 matters in the annual MI report, the report must clearly state such intention. FCMs and IBs making this election need file only a single AUP report between issuance of this Advisory and the year 2000 even though more than one annual MI report may be filed. Filing requirements, deadlines and the circumstances under which exemptions may be available and how the process will be administered are set forth below. As noted below, filings with the Securities and Exchange Commission (SEC) by entities required to file Part II of Form BD-Y2K pursuant to SEC rule 17a-5 ("SEC Filers") may also be filed with the Commission in satisfaction of the requirements of this Advisory.
Requirements Contained In Advisory 17-98
Advisory 17-98 states that a year 2000 problem, as defined in the Advisory, is deemed by the Commission to be an MI. The Commission stated its view that an auditor must audit for and report year 2000 problems found in the auditor's annual MI report. In this connection, section 1.16(d)(1) sets forth the audit objectives which must be met when an audit of a Commission registrant is conducted. In pertinent part, rule 1.16(d)(1) states:
The scope of the audit and review of the accounting system, the internal controls, and procedures for safeguarding customer and firm assets must be sufficient to provide reasonable assurance that any material inadequacies existing at the date of the examination in (i) the accounting system, (ii) the internal accounting controls, and (iii) the procedures for safe-guarding customer and firm assets (including, in the case of a futures commission merchant, the segregation requirements of the Act and these regulations) will be discovered.
Advisory 17-98 indicated that the public accountant of an FCM or IB must also file a special report with the Commission at such time as he or she finds that the FCM or IB has failed to report an MI to the Commission. Therefore, any time a public accountant discovers an unreported MI condition at an entity, a notice must be filed at that time by the public accountant. This would apply when the public accountant is carrying out his or her agreed-upon procedures engagement or at any other time during the audit engagement. This latter requirement is separate from the annual MI reporting requirement. The requirement to file a special report any time an MI is found is unchanged by this Advisory.
Changes to Advisory 17-98
AICPA Statement of Position 98-8: Engagements to Perform Year 2000 Agreed-upon Procedures Attestation Engagements Pursuant to -- Rule 17a5 of the Securities Exchange Act of 1934, Rule 17Ad-18 of the Securities Exchange Act of 1934 and Advisories #1798 and #42-98 of the Commodity Futures Trading Commission ("SOP 98-8") was designed specifically to assist the public accountant in meeting his or her obligations under the Commission's rules in connection with the annual MI report and year 2000 matters. The Commission notes that the agreed-upon procedures were developed by an AICPA special task force of representatives from the AICPA's Auditing Standards Board, Stockbrokerage and Investment Banking Committee, and SEC Regulations Committee, in consultation with the staffs of the Commission and the Securities and Exchange Commission. These AICPA bodies are comprised of leading members of the accounting profession. The Commission further notes that the agreed-upon procedures cover all aspects of year 2000 readiness planning contemplated by Advisory 17-98.
The Commission finds that the agreed-upon procedures contained in Appendix C(1) to SOP 98-8 (or, for SEC Filers, Appendix D(2) to SOP 98-8) are comprehensive and cover the critical aspects of year 2000 readiness contemplated by Advisory 17-98. Therefore, the Commission is satisfied that the proper execution of the agreed-upon procedures contained in Appendix C (or, for SEC Filers, Appendix D) to SOP 98-8 and the filing of the AUP report with the Commission and the registrant's designated self-regulatory organization (DSRO) will be sufficient to satisfy the Commission's requirements with respect to the annual MI report and the audit procedures referred to in Rule 1.16(d)(1) and Advisory 17-98. However, as noted above, the requirement that the public accountant of an FCM or IB file a special report with the Commission at such time as he or she finds that the FCM or IB has failed to report an MI of any kind, including year 2000-related MIs, to the Commission as set forth in Advisory 17-98 remains in effect, regardless of whether the FCM or IB is an SEC Filer.
Filing Requirements For An Agreed Upon Procedure Report
The filing requirements for AUP reports set forth below are designed to address the situations of firms which presently have extensions of time to file their annual MI reports, pending issuance of SOP 98-8, and to minimize the burden upon firms which are also required to file Form BD-Y2K with the SEC. SOP 98-8 refers to an "assertion date". As used in this Advisory, "assertion date" is synonymous with "as of" date of the AUP report. The AUP reports are required to be filed and prepared as set forth below:
SEC filers, regardless of when their fiscal years end - For entities subject to Advisories #1798 and #4298 that also are SEC Filers, the agreed-upon procedures should be performed on the subject matter of an assertion as of March 15, 1999. The accountant's AUP report is to be filed with the CFTC and the DSRO by April 30, 1999. This is the same filing deadline contained in SEC Rule 17a5 for filing with the SEC.
Fiscal years ending before October 1, 1998 - For entities that are subject to Advisories #1798 and #4298 which do not file Form BD-Y2K with the SEC and that have fiscal years ending on or after February 28, 1998, but before October 1, 1998, the agreed-upon procedures should be performed on an assertion made as of a date selected by the entity between and including November 15, 1998, and December 15, 1998. The accountant's AUP report is to be filed with the CFTC and the DSRO by December 31, 1998.
Fiscal years which will end on or after October 1, 1998 - For entities other than SEC-filers that are subject to Advisories #1798 and #4298 and have fiscal years ending on or after October 1, 1998, but before February 28, 1999, the agreed-upon procedures should be performed on an assertion as of the fiscal year end. The accountant's AUP report is to be filed with the CFTC and the DSRO within 90 days after the fiscal year end.
The Commission has determined that it will not require an FCM or IB to file an AUP report provided all of the following criteria are met currently:
i) The entity is not a clearing member of an exchange.
ii) The entity carries no funds, accounts or positions for customers.
iii) The entity has no mission-critical systems which interface with other registrants or major market participants.
iv) The FCM or IB's DSRO has not provided notice to it that its exemption has been revoked. Also, the Division of Trading and Markets has not notified the FCM or IB that it will be required to file an AUP report. (These notices are discussed below.)
This exemption will be automatically provided to any FCM or IB that meets the above criteria, provided however, that the Commission hereby delegates to the DSROs the authority to revoke the exemption of any FCM or IB which in its judgment should not be provided such an exemption. The revocation may be made at the discretion of the DSRO. Upon being notified that its exemption has been revoked, an FCM or IB is required to file the AUP report on its regular due date, as set forth above, or within 30 days if the regular due date has passed or is within less than 30 days.
A single extension of 30 days to any of the above deadlines may be granted at the discretion of the FCM's or IB's DSRO.
The Commission believes the DSROs have the knowledge and experience to administer the AUP report filings, including whether exemptions should be revoked or extensions granted in particular cases. In arriving at decisions in this area, the Commission believes that it would be appropriate for the DSRO to consider an entity's cooperation with prior year 2000 information requests, including the promptness, quality and accuracy of information provided. A change in status with respect to the criteria above would also be cause for revocation. Also, the Commission hereby delegates to the Division of Trading and Markets the authority to revoke at any time the exemption of any FCM or IB which otherwise would qualify for one. In making a determination to revoke, the Division may consider the advice of the FCM or IB's DSRO or any other new information regarding the year 2000 readiness posture or change in status of an FCM and IB with regard to any of the exemption criteria set forth above. An IB or FCM must file an AUP report within 30 days after being notified of such revocation.
1 Illustrative Agreed-Upon Procedures Report Pursuant to CFTC Advisories No. 17-98 and 42-98.
2 Illustrative Combined Agreed-Upon Procedures Report Pursuant to CFTC Advisories No. 17-98 and 42-98 and SEC Rule 17a-5.