oversight

FY 2007

Published by the Farm Credit Administration, Office of Inspector General on 2007-11-07.

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 2007
     




                                November 2007
                                    TABLE OF CONTENTS




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


Auditor’s Opinion Letter on the Financial Statements ____________________________ 4 


Auditor’s Opinion Letter on Internal Control ____________________________________ 5 


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 7, 2007

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’s or Agency’s)
financial statements, internal control over financial reporting, and compliance with certain laws and
regulations for the fiscal year ended September 30, 2007. The Office of Inspector General (OIG)
contracted with the U.S. Department of the Treasury’s Bureau of the Public Debt (BPD) to hire the
independent accounting firm Brown & Company CPAs, PLLC, (Brown & Co.) to perform the audit.

Brown & Co. issued an unqualified opinion on the Agency’s financial statements. It opined that FCA’s
principal financial statements present fairly, in all material respects, the financial position of the Agency as
of September 30, 2007 and 2006, in conformity with generally accepted accounting principles. Brown &
Co. issued two other reports. Its report on internal control noted no material weaknesses. Brown & Co.’s
report on compliance with laws and regulations relating to the Agency’s determination of financial
statement amounts does not note any instances of noncompliance. In OIG’s opinion, Brown & Co.’s work
provides a reasonable basis on which to render its opinion, and we concur with its reports.

OIG’s contract with BPD required that Brown & Co. perform the audit in accordance with “Government
Auditing Standards” issued by the Comptroller General of the United States and Office of Management
and Budget Bulletin No. 07-04, “Audit Requirements for Federal Financial Statements.” To ensure the
quality of the work performed, OIG

•   reviewed Brown & Co.’s approach to, and planning of, the audit;
•   evaluated the qualifications and independence of the auditors;
•   monitored the progress of the audit;
•   examined work papers; and
•   reviewed the audit reports.

As part of the Agency’s annual Performance and Accountability Report, the Inspector General is required
by law to provide a summary statement on the most serious management and performance challenges
facing the Agency. These challenges fall into two general categories. First are the challenges related to
FCA’s mission of ensuring a safe, sound, and dependable Farm Credit System (FCS or System) as a
source of credit and related services to agriculture. Some of these challenges may be influenced by
events outside the control of the Agency. Second, but no less important, are the challenges related to
Agency operations.




Audit of FCA’s FY 2007 Financial Statements 	                                                             Page 1
 
Management and Performance Challenges
Farm Credit System
The System is a lender to a single industry, agriculture, and is therefore vulnerable to economic swings in
that industry. Nevertheless, the FCS remains sound in all material respects. Earnings and capital levels
have continued to strengthen, and asset quality remains high. The Agency’s challenge is to continue to
ensure the System’s ability to withstand this vulnerability through effective examination and regulatory
activities. The Agency’s regulatory attention must also address other vulnerabilities in the System. Among
these are scope of lending excesses and risks associated with exposure to new enterprises, such as
alternative fuel production.

There continue to be many issues facing agriculture and rural America today that raise the question of
whether there should be modifications to the Farm Credit Act of 1971, as amended, (Act) to enable the
System to better serve agricultural and rural economies of the future. On the basis of FCS studies of
agriculture’s future financial needs and the System’s ability to meet those needs, the FCS proposed to
Congress in early 2007 legislative changes to the Act. FCA also met with Congress to discuss potential
amendments to the Act.

Farm Credit Administration
Despite whether there are modifications to the Act, the Agency should anticipate that the System will seek
broad regulatory interpretations. However, as a financial regulator, FCA must continue to maintain an
independent and objective, yet flexible and responsive, regulatory environment for the System, geared to
continually ensuring the FCS fulfills its public policy purpose. Key to this for FCA is effective examination
and regulation of System institutions by maintaining a properly staffed and resourced Agency.

Agency Governance—The Act provides for a full-time, three-member FCA Board to govern the Agency.
FCA Board members are appointed by the President and confirmed by the Senate. The FCA Board’s
rules of operation are a foundation for trust and shared expectations among its members. They are
intended to enable the FCA Board to engage in professional policy debate and to set a sound course for
the Agency.

However, a small, full-time FCA Board presents a challenge in defining the roles and responsibilities of its
members. Periodic changes in the chairmanship and composition of the FCA Board also present both
challenges and opportunities. The Chairman has addressed these challenges and taken advantage of
these opportunities by creating an environment that promotes a constructive working relationship among
FCA Board members.

Strategic Planning—In December 2003, the FCA Board adopted the Strategic Plan for Fiscal Years
2004–2009. Since the adoption of this plan, the FCA Board has acquired a new Chairman and two new
members. These changes in leadership have provided an opportunity to revise the plan to ensure it
incorporates the current FCA Board’s vision. In 2005, the FCA Board established a Strategic Planning
Committee (SPC) composed of Agency staff to facilitate FCA Board input into the plan and the planning
process.

While the SPC has initiated strategic planning discussions between the FCA Board and management,
this has not culminated in a revised strategic plan. The Agency is required to revise its strategic plan at
least every three years. The FCA Board should adopt an updated strategic plan.

Human Capital—In March 2001, OIG recommended that FCA develop a human capital plan, and FCA
management agreed. Chairman Pellett assumed the chairmanship in May 2004. In 2006, a five-year
strategic human capital plan was completed.




Audit of FCA’s FY 2007 Financial Statements                                                             Page 2
 
FCA’s challenge is to continue to implement the human capital plan to ensure that FCA has the staff it
needs to effectively regulate a constantly evolving FCS. In meeting this challenge, the Agency should
continue to address the attrition of seasoned staff by

•   recruiting new employees;
•   training staff;
•   implementing succession planning; and
•   capturing, preserving, and transferring knowledge from departing employees.

To ensure the viability of the examination staff, a critical component of the Agency’s regulatory capability,
the Agency should

•   carefully recruit and train examiners, 

•   maintain a rigorous commissioning program, and 

•   organize examiners to promote effective work processes and efficient use of the examiner workforce. 


These measures should ensure that FCA examiners have the skills they need to do their jobs and
maintain ongoing credibility with System institutions, and that there is continuity in the examination
workforce.

Financial Management—Timely, accurate, and useful financial information is essential for

•   making day-to-day decisions,
•   managing the Agency’s operations more effectively,
•   supporting results-oriented management approaches, and
•   ensuring accountability.

In April 2006, FCA outsourced the accounting, financial reporting, and procurement functions to the BPD.
Subsequent to that outsourcing, management determined it was not getting timely and efficient service in
procurement and therefore brought the procurement function back into the Agency. To ensure the
ongoing effectiveness of the outsourcing of the other functions, the Agency will need to continually assess
both cost-effectiveness and BPD’s performance in providing timely service, useful financial reporting, and
improved efficiencies to the Agency.

Leveraging Technology—Information technology (IT) is a key element in management’s efforts to
continually improve Agency performance. The Agency is in the early stages of a major infrastructure
transition designed to promote efficient work processes and to provide staff with enhanced
communication and collaboration tools. The challenge is to stay abreast of emerging technologies and to
establish an IT infrastructure that provides FCA staff with IT tools and skills to operate in an efficient,
effective, and secure manner. In addition, the Agency must ensure that its technical staff has the skills
and knowledge to implement and maintain its infrastructure, and initiatives in this regard are underway.

Respectfully,




Carl A. Clinefelter 

Inspector General





Audit of FCA’s FY 2007 Financial Statements                                                              Page 3
 
                                                                                                              


            INDEPENDENT AUDITOR'S REPORT ON THE FINANCIAL STATEMENTS

Farm Credit Administration
The Board and Office of Inspector General

We have audited the accompanying balance sheet of the Farm Credit Administration as of September 30,
2007, and the related statements of net cost, changes in net position, and budgetary resources for the
year then ended. The balance sheet as of September 30, 2006, and the related statements of net cost,
changes in net position and financing, and the combined statement of budgetary resources for the year
then ended were audited by other auditors, whose report dated November 3, 2006, expressed an
unqualified opinion on those statements. These financial statements are the responsibility of the Farm
Credit Administration’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 and the standards applicable to financial audits contained in U.S. Government Auditing
Standards, issued by the Comptroller General of the United States; and Office of Management and
Budget (OMB) Bulletin No. 07-04, Audit Requirements for Federal Financial Statements. Those standards
and OMB Bulletin No. 07-04 require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. 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
financial position of the Farm Credit Administration as of September 30, 2007 and 2006, and its net costs,
changes in net position, and budgetary resources for the years then ended in conformity with accounting
principles generally accepted in the United States of America.

In accordance with U.S. Government Auditing Standards and OMB Bulletin No. 07-04, we have also
issued a report dated November 5, 2007 on our consideration of the Farm Credit Administration’s internal
control over financial reporting and its compliance with provisions of laws and regulations. Those reports
are an integral part of an audit performed in accordance with U.S. Government Auditing Standards and
should be read in conjunction with this report in considering the results of our audit.

The information in “Management’s Discussion & Analysis” is presented for the purpose of additional
analysis and is required by OMB Circular No. A-136, revised Financial Reporting Requirements. We have
applied certain limited procedures, which consisted principally of inquiries of management regarding the
methods of measurement and presentation of the supplementary information. However, we did not audit
the information and, accordingly, express no opinion on it.



Largo, Maryland
November 5, 2007


Audit of FCA’s FY 2007 Financial Statements                                                         Page 4
 
                                                                                                                  
 

                      INDEPENDENT AUDITOR’S REPORT ON INTERNAL CONTROL 


Farm Credit Administration
The Board and Office of Inspector General

We have audited the financial statements of the Farm Credit Administration as of and for the year ended
September 30, 2007, and have issued our report thereon dated November 5, 2007. We conducted our
audit in accordance with auditing standards generally accepted in the United States of America; and the
standards applicable to financial audits contained in U.S Government Auditing Standards, issued by the
Comptroller General of the United States; and Office of Management and Budget (OMB) Bulletin No. 07-
04, Audit Requirements for Federal Financial Statements.

In planning and performing our audit, we considered the Farm Credit Administration’s internal control over
financial reporting by obtaining an understanding of the Farm Credit Administration’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. 07-04. 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 audit was not to provide an
opinion on internal control and therefore, we do not express 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 significant deficiencies. Under standards
issued by the American Institute of Certified Public Accountants and OMB Bulletin No. 07- 04, a
significant deficiency is a deficiency in internal control, or a combination of deficiencies, that adversely
affects the entity’s ability to initiate, authorize, record, process, or report financial data reliably in
accordance with generally accepted accounting principles such that there is more than a remote
likelihood that a misstatement of the entity’s financial statements that is more than inconsequential will not
be prevented or detected. 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 a material
weakness. A material weakness is a significant deficiency, or combination of significant deficiencies, that
result in a more than remote likelihood that a material misstatement of the financial statements will not be
prevented or detected. Because of inherent limitations in internal controls, misstatements, losses, or non-
compliance may nevertheless occur and not be detected. However, we noted no matters involving the
internal control and its operation that we considered to be significant deficiencies or material weaknesses
as defined above.

In addition, with respect to internal control objective related to the performance measures included in the
“Management’s Discussion & Analysis,” we obtained an understanding of the design of internal controls
relating to the existence and completeness assertions, and determined whether they have been placed in
operation as required by OMB Bulletin No. 07-04. Our procedures were not designed to provide opinion
on internal control over reported performance measures, and, accordingly, we do not express an opinion
on such controls.




Audit of FCA’s FY 2007 Financial Statements                                                             Page 5
 
                                                                                                       

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




Largo, Maryland
November 5, 2007                                




Audit of FCA’s FY 2007 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 financial statements of the Farm Credit Administration as of and for the year ended
September 30, 2007, and have issued our report thereon dated November 5, 2007. We conducted our
audit in accordance with auditing standards generally accepted in the United States of America, and the
standards applicable to financial audits contained in U.S. Government Auditing Standards, issued by the
Comptroller General of the United States; and Office of Management and Budget (OMB) Bulletin No. 07-
04, Audit Requirements for Federal Financial Statements.

The management of the Farm Credit Administration is responsible for complying with laws and
regulations applicable to the Farm Credit Administration. As part of obtaining reasonable assurance about
whether the Farm Credit Administration’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. 07-04. We limited our tests of
compliance to these provisions and we did not test compliance with all laws and regulations applicable to
the Farm Credit Administration.

The results of our tests of compliance disclosed no reportable instances of noncompliance with other laws
and regulations discussed in the preceding paragraph that are required to be reported under U.S.
Government Auditing Standards or OMB Bulletin No. 07-04.

Providing an opinion on compliance with certain provisions of laws and regulations was not an objective
of our audit, and, accordingly, we do not express such an opinion. However, we noted no noncompliance
with laws and regulations, which could have a direct and material effect on the determination of financial
statement amounts.

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




    Largo, Maryland
    November 5, 2007




Audit of FCA’s FY 2007 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