Senate committee chairman asks CFTC to explain major accounting error

WASHINGTON/NEW YORK (Reuters) - Senate Agriculture Committee Chairman Pat Roberts has asked for a full explanation from the U.S. Commodity Futures Trading Commission for an accounting error that led auditor KPMG to withdraw nearly a decade of financial opinions about the agency’s accounts.

The Republican senator "has already begun inquiries at the CFTC for a full accounting" of the problem, a spokesperson for the committee, which provides Congressional oversight of the U.S. derivatives regulator, told Reuters on Wednesday.

The request comes after Reuters exclusively reported on Tuesday that KPMG [KPMG.UL] had taken the drastic action after learning of the significant material error, and that the auditor estimated the CFTC had understated liabilities by $194 million in the year to Sept. 30, 2015, and $212 million the previous year.

The error, concerning how the regulator accounted for lease payments for its offices from fiscal years ending in 2005 through 2014, was caused by the CFTC’s "weaknesses in internal control," including lack of measures to detect or correct material problems in its financial statements, KPMG said in documents reviewed by Reuters.

CFTC spokesman Steven Adamske, who said the agency is waiting for the Government Accountability Office (GAO) to rule on how the leases should be reported, declined to comment on Roberts’ intervention. On Tuesday, he said the agency sees the error as a technical accounting issue that does not affect current lease payments or its obligation to creditors.

The issue is adding to tensions between the CFTC, which was given broad powers to regulate the derivatives market in the aftermath of the financial crisis, and Republican lawmakers who have criticized it for creating unnecessary regulatory burdens.

The problem is coming to light during an election year in which Wall Street oversight is a hot topic for candidates in both political parties.

It could cast a spotlight on the time that Gary Gensler was chairman of the CFTC between May 2009 and January 2014. Gensler, a former Goldman Sachs executive, is currently chief financial officer for Hillary Clinton’s campaign to be the Democratic presidential candidate in November’s election.

Gensler declined to comment when asked by Reuters whether he was aware of an accounting issue during his tenure. Current chairman Tim Massad took the reins in June 2014.

CALLED IN GAO

Other influential Republicans said the error showed the need for better management at the regulator. "The CFTC needs to get its books in order, whether that requires more inspector general recommendations or legislative changes from Congress," said Sen. Chuck Grassley of Iowa. The CFTC's Office of Inspector General conducts monitoring and investigations of its activities. Republicans have repeatedly expressed unhappiness over the CFTC's spending and refused to grant the full budgets for the agency requested by President Barack Obama, a Democrat, in recent years.

One of the biggest skeptics of the agency's spending, Republican Senator John Boozman of Arkansas, had asked the GAO, a non-partisan federal watchdog, to look into various issues involving CFTC leases in February 2015. When the CFTC reviewed information for the GAO, it found a potential problem with its practice of recording only a portion of payments on multi-year leases each year and brought the issue to KPMG's attention in October, according to the documents.

"This is a great example of the importance of congressional oversight. Congressman Aderholt and I saw the CFTC’s actions and requested the investigation that led to the realization of this error," Boozman said in an emailed statement to Reuters, referring to Representative Robert Aderholt, with whom he made the request.

Mark Carney, who retired in 2014 after ten years as the agency's chief financial officer, could not be immediately reached for comment. The current CFO Mary Jean Buhle, declined to comment.

"LITTLE JUSTIFICATION"

The Jan. 15 KPMG report to the CFTC alleges that the CFTC violated Generally Accepted Accounting Principles, the accounting rules used in the United States. The agency may also have violated a federal law that prohibits agencies from spending federal funds beyond the amount available, it said.

Accounting experts said the error did run afoul of basic accounting principles. The understatements, the equivalent to more than 75 percent of the CFTC's $250 million annual budget, could have been avoided by the CFTC recording its full lease obligations from the start of the lease, instead of accounting for it in a series of year-long leases, they said. They also questioned why KPMG did not flag the problem until now, given that it has reviewed the CFTC's financial statements as far back as 2005. KPMG declined to comment, citing client confidentiality.

“KPMG and the CFTC should have got this accounting right the first year," said Lynn Turner, former chief accountant at the U.S. Securities and Exchange Commission. He is now a forensic accounting consultant for LitiNomics.

Calling it "a major accounting gaffe," Robert Willens, an independent accounting and taxation consultant, said: "There is very little justification, if any, that I can think of."

(This Jan. 20 story corrects the fiscal years associated with the corresponding shortfalls in the third paragraph.)

(Reporting by Lisa Lambert in Washington, Suzanne Barlyn and Dena Aubin in New York; editing by Soyoung Kim and Martin Howell)