oversight

FY 2004

Published by the Farm Credit Administration, Office of Inspector General on 2004-11-03.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

Office of
Inspector General



            Audit of FCA’s Financial Statements
                               Fiscal Year 2004
     




                                November 2004
                                    TABLE OF CONTENTS




Inspector General’s Transmittal Letter of Auditor’s Report ________________________ 1


Auditor’s Opinion Letter on the Financial Statements ____________________________ 5 


Auditor’s Opinion Letter on Internal Control ____________________________________ 6 


Auditor’s Opinion Letter on Compliance with 

Certain Laws and Regulations _______________________________________________7 





For the financial statements and related notes to each fiscal year’s financial audit report, refer to
FCA’s Performance and Accountability Report (PAR) for that year. The PARs can be found at
www.fca.gov/reports/performance_reports.html.
                                                       



Farm Credit Administration	                                                 Office of Inspector General
                                                                            1501 Farm Credit Drive
                                                                            McLean, Virginia 22102-5090
                                                                            (703) 883-4000




November 3, 2004

The Honorable Nancy C. Pellett
Chairman of the Board
Farm Credit Administration
1501 Farm Credit Drive
McLean, Virginia 22102-5090

Dear Chairman Pellett:

This letter transmits the report on the audit of the Farm Credit Administration’s (FCA) financial statements
for the fiscal year ended September 30, 2004. The Office of Inspector General (OIG) tasked Harper,
Rains, Knight, and Company, P.A. (HRK), an independent accounting firm, to perform the audit. This
letter also incorporates a summary of what I believe are the most significant management and
performance challenges facing the agency as described in the OIG Semiannual Report to the Congress
dated September 30, 2004.

HRK issued an unqualified opinion. HRK opined FCA’s principal financial statements present fairly, in all
material respects, the financial position of FCA as of September 30, 2004 and 2003, in conformity with
generally accepted accounting principles. HRK issued two other reports. The report on the internal control
noted no matters involving the internal control and its operation that HRK considered to be material
weaknesses. The HRK report on compliance with laws and regulations does not note any instances of
noncompliance. In our opinion, HRK’s work provides a reasonable basis on which to render its opinion
and we concur with the reports.

The task order required HRK to perform the audit in accordance with Government Auditing Standards
issued by the Comptroller General of the United States, and the Office of Management and Budget
Bulletin No. 01-02, Audit Requirements for Federal Financial Statements. To ensure the quality of the
work performed, the OIG:

•   reviewed HRK’s approach and planning of the audit;
•   evaluated the qualifications and independence of the auditors;
•   monitored progress of the audit;
•   examined working papers; and
•   reviewed the audit report.

As part of the Performance and Accountability Report, the Inspector General is required to provide an
opinion on the most serious management and performance challenges facing the Agency. In the most
recent Semiannual Report to Congress, I outlined major challenges confronting the Farm Credit
Administration. These challenges fall into two general categories. First are the challenges related to the
FCA’s core mission of ensuring a dependable supply of credit to agriculture through the institutions it has
chartered. These challenges are often shaped and influenced by events that are outside the control of the
Agency. Second, but no less important, are those challenges related to the Agency’s operations.




Audit of FCA’s 2004 Financial Statements 	                                                            Page 1
 
                                                         


The Farm Credit System (FCS or System) is a single industry lender and is vulnerable to economic
swings. While the System is presently sound, there are many challenges facing agriculture and rural
America today that raise the question of whether there should be modifications to the Farm Credit Act
(Act) in order to enhance agricultural and rural economies of the future.

As a financial regulator, FCA must maintain a flexible and responsive regulatory environment. FCA is
pressed to test the limits of its flexibility within the bounds of the Act. The constraints of the Act may be
part of the reason that one of the largest institutions recently announced it would be applying to terminate
its charter. The FCA Board has faced pressures to consider loan syndications to be “participations”
instead of “loans” to avoid certain provisions in the Act. The Board has faced similar issues related to
preferred stock.

The FCA is challenged to balance the often competing demands of ensuring the FCS fulfills it public
purpose, proactively examining risk in the regulated institutions both individually and systemically, and
controlling the cost of the regulator. FCA’s challenge is more complex because it has become
increasingly difficult to reconcile significant provisions of the Act with the realities of the agricultural
industry, the business environment, and financial markets in the 21st Century. FCA management fully
understands this challenge and the Chairman recently provided testimony to Congress that clearly
identifies the challenge.

         “What we learned is that we must maintain a flexible and responsive regulatory
         environment. And where appropriate, we should eliminate or revise regulations that
         unnecessarily impair the System’s activities.

         However, the limits of that flexibility are currently being tested as the changes in
         agriculture and rural America have eclipsed the legislative parameters initially granted
         to the System. The mission-driven desire and sometime financially-driven need of the
         System to expand its operations, not only within agriculture but also to rural America
         presents some challenges within existing authorities.”

Human Capital—The OIG recommended FCA develop a human capital plan in March 2001. FCA
management agreed to this recommendation, yet FCA still does not have a plan. The problem had been
the lack of a consistent strategic approach to marshalling, managing, and maintaining human capital to
maximize FCA performance and assure its accountability.

FCA has the opportunity to consider organizational approaches that recognize the reality of evolving
technology, a changing workforce, and other environmental forces. For example, as competitive sourcing,
electronic government (E-Government), financial management, and other initiatives lead to changes—
how FCA meets its mission may need to change, including the skill sets it needs and how it organizes
those skills to meet its mission.

FCA can also improve its performance by building commitment and accountability through involving and
empowering employees. FCA staff and its leaders must understand the rationale for making
organizational and cultural changes. Everyone has a stake in helping to shape and implement initiatives
as part of the Agency’s efforts to meet current and future challenges. The cooperation of leaders and
employees throughout the organization can lead to effective and sustained changes.

Agency management has made a renewed commitment to develop a human capital plan. Part of that
commitment is evidenced by a study that the Chairman announced to FCA staff to evaluate the Agency’s
needs over a five to seven year planning horizon. The Chairman plans to evaluate the examination
function, the regulatory development function and then the functions that support these operations. This
approach is promising because it is a methodical and cohesive strategy designed to produce measurable
results addressing the human capital needs of the Agency. It is also promising because the Chairman has
communicated her plans to all staff—building understanding of and commitment to the organization’s
needs.


Audit of FCA’s 2004 Financial Statements                                                                  Page 2
 
                                                       


Agency Governance—The Act provides for a full time three-member Board. The Board members are
appointed by the President and confirmed by the Senate. A small full-time Board presents a challenge in
terms of defining the roles and responsibilities of the Board members relative to the governance of the
Agency. The Board’s rules of operation are a foundation for trust and shared expectations among Board
members. A collegial Board founded on mutual trust and respect is essential to FCA’s ultimate
effectiveness.

The Chairman has taken action to address this challenge by sharing authority and tasking a Board
member with the responsibility to lead the Board in its efforts on governance issues. This represents a
positive and concrete commitment with accompanying resources to address this longstanding
management challenge.

Strategic Planning—The FCA Board adopted a Strategic Plan a year ago. A change in chairmanship is an
opportunity for management to refine strategies and alignment to ensure the Board’s vision is
accomplished.

The Board and Agency staff will face the significant challenge of refining performance measures to
enhance a results oriented culture at FCA. The Agency will need to achieve a balance among results,
public expectations, and employee issues. FCA should evaluate its performance measures to ensure
that they challenge and stretch the organization. Performance measures can be a powerful tool to
continue the push into a results-oriented organization. An effective performance management system
fosters performance and accountability at the individual, organizational, and ultimately overall Agency
levels.

Financial Management—Timely, accurate, and useful financial information is essential for making day-to-
day decisions; managing the Agency’s operations more efficiently, effectively, and economically;
supporting results-oriented management approaches; and ensuring accountability on an ongoing basis.
During September 2003, the Agency decided to reprogram funds and purchase a new financial system.
Management originally scheduled implementation of the new system during FY 2004. However,
implementation has been delayed until June 2005. OIG has noted significant improvements are needed in
project management to successfully complete implementation.

Management’s challenge is to bring yet another system on line at a reasonable cost to the FCA and
concurrently leverage the system to deliver timely financial information critical for making well-informed
management decisions. The challenge forces the Agency to develop new measures of financial
management success. Financial management success goes far beyond an unqualified financial
statement audit opinion. Measures such as delivering financial information that managers can use for
day-to-day operations, and developing reports that capture the full cost of programs and projects can help
bring about improvements.

Financial management represents a challenge that goes to the fiber of FCA’s business operations and
management culture. FCA needs to ensure that underlying financial management processes, procedures,
and information are in place for effective program management. FCA already has information that is
readily available. However, the Chief Financial Officer (CFO) seems to be stuck in controlling the
distribution of the information. This type of information control serves as a roadblock to improved
management. FCA needs to take steps to get information into the hands of managers. FCA will also need
to improve managers’ ability to use the information to measure, control, and manage costs, to manage for
results, and to make timely and fully informed decisions about allocating limited resources.

Security and Disaster Preparedness—Recently, management has made significant strides towards
improving its preparedness by acting on OIG suggestions for an expedited effort to prepare for an
emergency. Management completed a Continuity of Operations Plan, conducted drills and revised
procedures based upon those drills. The Agency’s level of preparedness is improving but it remains
a management challenge to continue to refine procedures to ensure that the Agency reduces its
vulnerability to significant disruption in operations in the event of an emergency. The speed of change in
the security environment will be a challenge for all government organizations. This is especially true and a

Audit of FCA’s 2004 Financial Statements                                                              Page 3
 
                                                      


challenge for smaller organizations like FCA where an increased emphasis on physical and information
security competes with program areas for limited budget funding.

Leveraging Technology—Information technology (IT) is a key element of management reform efforts that
can help dramatically reshape government to improve performance and reduce costs. The Agency has
recognized that in order to meet the constraints of its budget, it must be able to maximize its return on
investment in technology. FCA’s challenge is to establish effective mechanisms to ensure that current
and future staff has the skills to use technology to operate in an efficient and effective manner.

Internally, there is an opportunity for IT to complement human capital initiatives to reformulate the work
processes of FCA. In order for this to come about, FCA will need to invest in training and reward
employees who are able to develop innovative approaches to accomplish Agency goals using technology.

Externally, E-Government offers many opportunities to better serve the public, make FCA more efficient
and effective, and reduce costs. FCA has begun to implement some E-Government applications,
including the use of the Internet to collect and disseminate information and forms. Here, FCA’s challenge
is to identify opportunities to develop partnerships with other agencies to develop joint E-Government
strategies.

Respectfully,

/s/ Stephen G. Smith

Stephen G. Smith
Inspector General




Audit of FCA’s 2004 Financial Statements                                                            Page 4
 
                                                                       


                                     INDEPENDENT AUDITOR’S REPORT 

                                      ON THE FINANCIAL STATEMENTS


FARM CREDIT ADMINISTRATION
The Board and Office of Inspector General

We have audited the balance sheets of the Farm Credit Administration (FCA) as of September 30, 2004
and 2003, and the statements of net cost, changes in net position, budgetary resources, and financing for
the years then ended. These financial statements are the responsibility of the FCA’s management. Our
responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States
of America; the standards applicable to financial statements contained in Government Auditing
Standards, issued by the Comptroller General of the United States; and Office of Management and
Budget (OMB) Bulletin 01-02, “Audit Requirements for Federal Financial Statements”. These standards
require that we plan and perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as, evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion the financial statements referred to above present fairly, in all material respects, the assets,
liabilities, and net position of the Farm Credit Administration as of September 30, 2004 and 2003, and the
net cost, changes in net position, budgetary resources, and reconciliation of net cost to budgetary
resources for the years then ended in conformity with accounting principles generally accepted in the
United States of America.

Our audits were conducted for the purpose of forming an opinion on the FY 2004 and 2003 principal
financial statements of the FCA. The accompanying financial information, discussed below, is not a
required part of the principal financial statements.

The Management Discussion and Analysis on pages 2-23; and the Required Supplemental Information
on pages 70-71 is supplementary information required by the Federal Accounting Standards Advisory
Board. We have applied certain limited procedures, which consisted principally of inquiries of
management regarding the methods of measurement and presentation of the information. However, we
did not audit the information and express no opinion on it.




November 1, 2004




Audit of FCA’s 2004 Financial Statements                                                                Page 5
 
                                                                       
                                       INDEPENDENT AUDITOR’S REPORT 

                                           ON INTERNAL CONTROL 


FARM CREDIT ADMINISTRATION
The Board and Office of Inspector General

We have audited the Principal Statements (hereinafter referred to as "financial statements") of Farm
Credit Administration (FCA) as of and for the year ended September 30, 2004 and 2003, and have issued
our report thereon dated November 1, 2004. We conducted our audits in accordance with auditing
standards generally accepted in the United States of America; the standards applicable to financial audits
contained in Government Auditing Standards, issued by the Comptroller General of the United States;
and, Office of Management and Budget (OMB) Bulletin No. 01-02, "Audit Requirements for Federal
Financial Statements."

In planning and performing our audits, we considered FCA's internal control over financial reporting by
obtaining an understanding of the agency's internal control, determined whether internal controls had
been placed in operation, assessed control risk, and performed tests of controls in order to determine our
auditing procedures for the purpose of expressing our opinion on the financial statements. We limited our
internal control testing to those controls necessary to achieve the objectives described in OMB Bulletin
No. 01-02. We did not test all internal controls relevant to operating objectives as broadly defined by the
Federal Managers' Financial Integrity Act of 1982, such as those controls relevant to ensuring efficient
operations. The objective of our audits was not to provide assurance on internal control. Consequently,
we do not provide an opinion on internal control.

Our consideration of the internal control over financial reporting would not necessarily disclose all matters
in the internal control over financial reporting that might be reportable conditions. Under standards issued
by the American Institute of Certified Public Accountants, reportable conditions are matters coming to our
attention relating to significant deficiencies in the design or operation of the internal control that, in our
judgment, could adversely affect the agency's ability to record, process, summarize, and report financial
data consistent with the assertions by management in the financial statements. Material weaknesses are
reportable conditions in which the design or operation of one or more of the internal control components
does not reduce to a relatively low level the risk that misstatements in amounts that would be material in
relation to the financial statements being audited may occur and not be detected within a timely period by
employees in the normal course of performing their assigned functions. Because of inherent limitations in
internal controls, misstatements, losses, or noncompliance may nevertheless occur and not be detected.
However, we noted no matters involving the internal control and its operation that we considered to be
material weaknesses as defined above.

With respect to internal control related to performance measures reported in the Performance report, we
obtained an understanding of the design of significant internal controls relating to the existence and
completeness assertions, as required by OMB Bulletin No. 01-02. Our procedures were not designed to
provide assurance on internal control over reported performance measures, and, accordingly, we do not
provide an opinion on such controls.

This report is intended solely for the information and use of the management of FCA, OMB and
Congress, and is not intended to be and should not be used by anyone other than these specified parties.



                                                                 
November 1, 2004 



Audit of FCA’s 2004 Financial Statements                                                                Page 6
 
                                                                    
                                   INDEPENDENT AUDITOR’S REPORT 

                              ON COMPLIANCE WITH LAWS AND REGULATIONS 


FARM CREDIT ADMINISTRATION
The Board and Office of Inspector General

We have audited the Principal Statements (hereinafter referred to as "financial statements") of the Farm
Credit Administration (FCA) as of and for the year ended September 30, 2004 and 2003, and have issued
our report thereon dated November 1, 2004. We conducted our audits in accordance with: auditing
standards generally accepted in the United States of America; the standards applicable to financial audits
contained in Government Auditing Standards, issued by the Comptroller General of the United States;
and, Office of Management and Budget (OMB) Bulletin No. 01-02, "Audit Requirements for Federal
Financial Statements."

The management of FCA is responsible for complying with laws and regulations applicable to the agency.
As part of obtaining reasonable assurance about whether the agency's financial statements are free of
material misstatement, we performed tests of its compliance with certain provisions of laws and
regulations, noncompliance with which could have a direct and material effect on the determination of
financial statement amounts, and certain other laws and regulations specified in OMB Bulletin No. 01-02,
including the requirements referred to in the Federal Financial Management Improvement Act (FFMIA) of
1996. We limited our tests of compliance to these provisions and we did not test compliance with all laws
and regulations applicable to FCA.

The results of our tests of compliance with the laws and regulations described in the preceding paragraph
exclusive of FFMIA disclosed no instances of noncompliance with laws and regulations that are required
to be reported under Government Auditing Standards and OMB Bulletin No. 01-02.

Under FFMIA, we are required to report whether the agency's financial management systems
substantially comply with the Federal financial management systems requirements, applicable Federal
accounting standards, and the United States Government Standard General Ledger at the transaction
level. To meet this requirement, we performed tests of compliance with FFMIA section 803(a)
requirements.

The results of our tests disclosed no instances in which the agency's financial management systems did
not substantially comply with the Federal financial management systems requirements, United States
Government Standard General Ledger at the transaction level and applicable Federal accounting
standards.

Providing an opinion on compliance with certain provisions of laws and regulations was not an objective
of our audits and, accordingly, we do not express such an opinion.

This report is intended solely for the information and use of the management of FCA, OMB and
Congress, and is not intended to be and should not be used by anyone other than these specified parties.




November 1, 2004 




Audit of FCA’s 2004 Financial Statements                                                            Page 7
 
 




          R E P O R T                                          

    Fraud    |    Waste    |    Abuse    |    Mismanagement
 




                                                       

                    FARM CREDIT ADMINISTRATION
 
                    OFFICE OF INSPECTOR GENERAL
 
                                   

        • Phone:  Toll Free (800) 437‐7322; (703) 883‐4316
 
        • Fax:	       (703) 883‐4059
 
        • E‐mail:	  fca‐ig‐hotline@rcn.com 
        •	 Mail:   Farm Credit Administration 
                   Office of Inspector General 
                   1501 Farm Credit Drive
 
                   McLean, VA  22102‐5090