[ by Howard Haykin ] How should we be feel after hearing these admissions of shameful negligence? Should we feel good and pat an NFA examiner on the back, because, for once, a major regular "faced the music" and admits it had been fooled and it had acted negligently upon accepting, year after year, forged documents and statements that were provided by the head of the futures broker under examination. - rather than, say, independent third parties, like custody banks. Or should we shudder knowing that the NFA and its personnel may not have adequate resources or training for their oversight and examination responsibilities.  That the procedures, steps,  documentation and training methodologies contain so many gaps and deficiencies as to render them ineffective.  Do examiners understand the transactions they're supposedly auditing.  Do they speak the lingo, understand what takes place on the various trading desks? Do they employ basic audit procedures CPA firms and Wall Street Internal Auditors have been using to great success for 20, 30, 40 years now - some of which are designed to uncover the inconsistencies created by the fraud - like books being out of balance with physical assets held in custody at banks and in firm possession. Frontline Regulator as the Weak Link. Let's face it, the NFA was the frontline regulator for futures brokers.  And the NFA was the backline regulator for these broker examinations.  There were few, if any backstops in the examination procedure. If something was missed or overlooked in the first round, it stayed unnoticed, unless an unrelated for-cause investigation required the examiners to re-examine the same documents - at which point they might discover inconsistencies, such as gaps between cash in banks vs .cash on the books.  The stolen money is gone and the records are no doubt out-of-balance. It all comes down to which documents an examiner chooses to look at, or what secondary audit procedures might they employ, like vault counts. On Tuesday, Russell Wasendorf Sr., the frustrated, embattled chief executive of the Peregrine Financial Group, a futures brokerage house, said he purposely set out to fool the regulators who, during earlier audits, had behaved as adversaries rather than partners of the firm is seeking out deficiencies, errors and potential violations, rather than as partners of the firm that seeks out the same issues, but does so to strengthen the firm's controls for the future. And so, on Wednesday, the futures regulator, the NFA stood front and center and admitted they had been fooled and they had committed serious, negligent, and unnecessary errors in judgment. There are further discussion on specific types of errors and oversights in the article.  For further details, go to:  [Reuters, 7/25/12].