Auditor Finds ‘Significant Deficiency’ in FTC Accounting to Tune of $7M

The Federal Trade Commission emotes a righteous tone in its crusade against corporate monetary misdeeds, whether excoriating an auto dealer for payment-packing or condeming competitors for improperly sharing pricing data.

Now, in what may be cathartic to companies humbled by virtuous regulators, the commission has been called out for its own financial sins—some for inadequate communication with the agency’s general counsel’s office.

The FTC’s independent auditor, in the agency’s 102-page fiscal year 2024 report, noted a “significant deficiency” in the FTC’s own financial reporting to the tune of $7.44 million.

The discovery forced the FTC to restate prior financial statements, deeming them not in accordance with generally accepted accounting principles and Office of Management and Budget reporting requirements.

“Internal control related to the preparation and review of the financial statements and footnotes was not properly designed and implemented to prevent, detect or correct errors and omissions,” wrote Allmond & Co., a Lanham, Maryland-based accounting firm.

Based on Statement of Federal Financial Accounting Standards 21, “[the] FTC is reporting a material misstatement from September FY 2023 that has been restated. This resulted from four software projects not being classified correctly starting in 2020,” the FTC acknowledged in the financial report.

However, given the FTC’s $425.7 million FY 2024 budget, the $7.44 million seems more like a rounding error. And its effect is more confined to the arcane realm of accounting, resulting mostly in a rejiggered balance sheet.

Once discovered, management “notified auditors and reclassified the projects from being expensed into asset accounts, netting out any depreciation expense,” the FTC wrote.

The net effect of the restatements on 2023 financial statements was an increase of capital assets and cumulative results of operations by $7.44 million and a decrease in net cost of operations of $1.7 million.

“It did not impact the statement of budgetary resources,” the FTC noted in the financial report.

Nor did the discovery affect the independent auditor’s highest-possible opinion on the agency’s financial reporting—the 28th consecutive “unmodified” opinion, FTC Chair Lina Khan said in the report.

“The independent auditors did not identify any material weaknesses or instances of non-compliance with internal controls, financial systems, or laws and regulations,” Khan added.

Nevertheless, FTC Chief Financial Officer Stephen Laurence acknowledged the significant deficiency in internal controls over financial reporting.

“The FTC concurs with this finding and has already begun to implement processes and procedures to resolve this deficiency,” he said.

Among causes identified by Allmond & Co. was the use of incorrect or outdated guidance and failure to provide to the preparer information involving contingent liabilities related to legal matters.

“Communications between the General Counsel’s Office and Financial Management Office occur as a result of the auditor’s inquiries and not as a routine part of the preparation process,” Allmond & Co. wrote.

Among the firm’s recommendations is that the FTC management should “proactively and independently” initiate discussions with legal at least quarterly to identify contingent liabilities.

Moreover, the Office of Inspector General also weighed in on the FTC’s challenges in its most recent fiscal year.

It noted that court decisions in recent years have made it “increasingly challenging” for the FTC to effectively bring cases in support of its consumer protection and competition enforcement.

These decisions include the Supreme Court’s 2021 ruling in AMG Capital Management v FTC, which blocked the commission from obtaining monetary redress and disgorgement using §13(b) of the FTC Act.

From nearly $800 million disgorged in 2020, money returned from defendants to consumers plunged to $178.5 million in 2021. However that amount ticked up in FY 2024 to $267.6 million from $193.8 million in FY 2023.

Now the FTC is forced to pursue some cases through injunctive relief in the federal courts, which can be more costly and drag on for years.

Indeed, in just the first nine months of fiscal 2024, the FTC “had nearly exhausted its $18 million budget for expert witnesses.”

The Office of Inspector General said the FTC has been administering administrative cases and has been using alternative remedial authorities (such as partnering with state attorneys general) to obtain monetary relief for consumers.

For the current fiscal year, the FTC has asked Congress for an additional $15 million for expert witness contracts, OIG said.