The Peregrine Fraud

Full Answer Section

1. Insufficient Due Diligence: The NFA's audits were found to be generally thorough but lacked the necessary depth to uncover the fraud. In some cases, auditors may have been too trusting or relied too heavily on information provided by PFG management.
2. Regulatory Oversight Limitations: The NFA's regulatory framework and resources may have been insufficient to detect such a complex fraud. The organization may have lacked the necessary expertise or tools to identify and investigate red flags.
3. Lack of Professional Skepticism: In some cases, auditors may have failed to maintain a sufficient level of professional skepticism. This can lead to a reluctance to question management or to dismiss potential red flags.

The NFA's failure to detect the fraud led to significant consequences for investors and the futures industry. In response to the scandal, the NFA implemented reforms to strengthen its oversight and improve its ability to detect and prevent fraud. These reforms include increased regulatory scrutiny, enhanced auditing procedures, and improved risk management practices.

Sample Answer

The National Futures Association (NFA) faced criticism for its failure to uncover the fraud perpetrated by Peregrine Financial Group (PFG). Several factors contributed to this oversight:  

1. Complex Fraud Scheme: Wasendorf's fraud was sophisticated and meticulously planned. He forged documents, manipulated records, and used his position as CEO to conceal the scheme. The complexity of the fraud made it difficult to detect.  
2. Lack of Red Flags: While there were some indications of financial irregularities, they were not immediately apparent or deemed significant enough to trigger a thorough investigation.