oversight

FY 2011 Audit of FCA's Financial Statements

Published by the Farm Credit Administration, Office of Inspector General on 2011-11-08.

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 2011


                              A-11-FS




                              November 2011
                                  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..……………………………………………… 7

Auditor’s Opinion Letter on Compliance with
     Certain Laws and Regulations………………………………………………………… 8




For the financial statements and related notes to each fiscal year’s financial audit reports, 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
     C      Administratio
                        on                                             Offfice of Inspec
                                                                                       ctor General
                                                                       150
                                                                         01 Farm Cred  dit Drive
                                                                       MccLean, VA 22  2102-5090
                                                                       (70
                                                                         03) 883-4030




Novembe
      er 8, 2011


The Honorable Lelan nd A. Strom, Chairman and
                                          a Chief Exxecutive Offiicer
The Honorable Kenn  neth A. Spea
                               arman, Board
                                          d Member
The Honorable Jill Lo
                    ong Thomps son, Board Member
                                          M
Farm Cre
       edit Adminisstration
1501 Farrm Credit Drrive
McLean, Virginia 222102-5090

Dear Cha
       airman Strom
                  m and Board
                            d Members Spearman
                                      S        a
                                               and Long Thompson:

This lette
         er transmits the
                       t reports on o the audit of the Farm Credit Adm    ministration’s (FCA’s or
Agency’s s) financial statements,
                      s             internal conttrol over fina
                                                              ancial reportiing, and com
                                                                                       mpliance withh
certain la
         aws and regu  ulations for the
                                    t fiscal yea  ar (FY) ende ed September 30, 2011.. The Office  e of
Inspector General (O  OIG) contrac cted with the U.S. Depart  rtment of the
                                                                          e Treasury’s Bureau of thhe
Public Deebt (BPD) fo or Brown & Company
                                   C           CP
                                                PAs, PLLC ((Brown & Co    o.), an independent
accountinng firm, to peerform the audit.
                                   a

Brown & Co. issued an unqualifie   ed opinion on
                                               o the Agenccy’s financia  al statementss. It opined that
FCA’s prrincipal finan
                     ncial statemeents present fairly, in all material resspects, the fiinancial position
of the Ag            t FYs ended Septemb
         gency as of the                       ber 30, 2011 and 2010, iin conformityy with generrally
accepted d accountingg principles. Brown & Co   o. issued twoo other repoorts. Its repo
                                                                                      ort on internaal
control noted no mattters conside ered to be material
                                              m         weakknesses. Brrown & Co.’ss report on
complian nce with laws
                     s and regula ations relating to the Age ency’s determ mination of ffinancial
statemen nt amounts cited
                     c     no instaances of non ncompliance  e. In the OIGG’s opinion, Brown & Co   o.’s
work provides a reas sonable basiis on which to t render its opinions an  nd we concur with its rep ports.
All three reports from
                     m Brown & Co.
                                 C are dated   d November 7, 2011.

The OIG’s contract with
                    w BPD req quired that Brown
                                           B     & Co. perform thee audit in acccordance witth
Governm ment Auditing
                    g Standards issued by th
                                           he Comptrolller General of the Unite
                                                                              ed States and d
Office of Management and Budg              N 07-04, A udit Require
                              get Bulletin No.                    ements for FFederal Finan ncial
Statemen nts, as amen         nsure the quality of the w
                    nded. To en                        work perform
                                                                  med, the OIG G

     reviewed Brown & Co.’s ap  pproach to and planning of the auditt,
     eva
        aluated the qualifications
                    q             s and indepe
                                             endence of tthe auditors,,
     monitored the progress
                    p          of the
                                  t audit,
       amined work
      exa           k papers, and d
     rev
        viewed the audit reports.
 

                         Management and Performance Challenges

As part of the Agency’s annual Performance and Accountability Report, the Inspector General is
required by law to provide a summary statement on management and performance challenges
facing the Agency. The challenges identified fall into two general categories. First is the
challenge related to FCA’s mandate of ensuring a safe, sound, and dependable Farm Credit
System (FCS or System) as a source of credit and related services to agriculture and rural
America, even though some factors affecting this challenge may be influenced by events that
are outside the control of the Agency. Second, but no less important, is the challenge related to
the Agency remaining an independent, objective, and effective regulator of the FCS.

                                       Farm Credit System

Safety and Soundness

The System is a lender to a single industry – agriculture – and is therefore vulnerable to the
economic volatility and risks in that industry. While the FCS remains generally safe and sound,
recent adversity in several major commodity groups has caused deterioration in a number of
FCS institutions, although very recently this deterioration seems to have stabilized. The
Agency’s challenge is to continue to ensure the System’s ability to withstand such
vulnerabilities in the long-term and to remain safe and sound.

Mission

Further, the overall environment facing agriculture, rural America, and the FCS is ever-
changing, presenting new opportunities and altering historical perspectives on System
operations. FCA’s challenge in this environment is to continue to ensure the FCS fulfills its
public policy purpose of providing constructive credit to farmers, ranchers, rural residents,
agricultural and rural utility cooperatives, and other eligible borrowers.

                                   Farm Credit Administration

System Oversight

Even though farm income on the whole remains strong, several factors have caused
deterioration in a number of FCS institutions in recent years. This deterioration and the effect
these factors have on the ongoing condition of the FCS continue to warrant the careful attention
of FCA. As represented by FCA’s Office of Examination (OE), some of these factors are

       inadequate oversight and management by some institution boards and management
        teams, respectively;
       severe weather conditions ranging from extreme heat in the Midwest, to drought in Texas
        and other southern states, to flooding along the Mississippi and other rivers;
       stress in livestock and dairy operations as a result of high feed prices;
       stress in the poultry, forestry, and nursery sectors; and
       escalated land values that may not be sustainable.




                                                 2
 

Other factors that may affect agriculture and FCS institutions negatively are potential demand
issues for agricultural products should the global economy continue to decline and should there
be reductions in farm program payments.

In providing for System oversight, the challenge for the Agency is twofold: to continue to be an
independent, objective, and effective regulator; and to continue to assess in a timely manner
economic and operational conditions affecting System institutions, and to take prompt
preemptive or remedial actions to ensure their ongoing safety and soundness.

Staffing

The Agency has a comprehensive 5-year Human Capital Plan covering FYs 2012-2016.
Recent recruitment initiatives for all levels within the Agency have utilized broad search criteria,
and focused on obtaining the best skill-sets and achieving diversity in FCA’s workforce.

FCA’s Board of Directors and senior management recognize the area of human capital as
critical for the ongoing success of FCA as an effective Federal financial regulator. A few of the
factors contributing to the critical nature of human capital, as delineated by the Agency’s Office
of Management Services, are

       projections indicate that one-third of the Agency workforce is eligible to retire during the
        next five years;
       the loss of employees during this period will challenge the Agency to retain historical
        knowledge and perspectives on the programs, practices, and mission of the FCS as well
        as that of the FCA; and
       the evolution of FCA, agriculture and rural America, the FCS, and the financial services
        industry means FCA will need to continue to attract and maintain an experienced and
        qualified professional staff to meet the anticipated growth and complexity of the FCS and
        its environment.

The Agency’s challenge is to continue to emphasize the implementation of its human capital
plan to ensure FCA has the staff it needs to remain an effective regulator of the FCS by, for
example, identifying the critical skills needed in the future, appropriately allocating resources
between line and staff functions, and by ensuring continuity in both management positions and
other professional staff.

Organization

Although the Agency’s statutory mission has remained constant, other factors affect the
Agency’s operations and organization. A major factor is the recurring turnover in the FCA
Board’s composition and Chairmanship. Additionally, since the most recent substantive FCA
reorganization some 6 years ago, the heads of several offices have changed, FCS’s banks and
associations have continued merging, geographic territories of merged institutions have
changed, FCS institutions’ products and the examination thereof have become more complex,
and one conditionally approved merged bank will likely exceed $100 billion in total assets in the
foreseeable future.




                                                   3
 
These an  nd other facttors bear on FCA’s organizational sttructure, parrticularly thatt of the OE, as it
is the larg
          gest FCA un nit and potenntially most affected
                                                a        by cchanges in tthe FCS. Fo  or example, an
OE organ  nizational co
                      onsideration could be the e number an nd location o
                                                                        of its examinnation field
offices, in
          n addition to
                      o its ongoing overall struc
                                                cture.

Given thaat change afffecting the FCS
                                  F     and FC CA is ongoing   g as describ          and that the most
                                                                          bed above, a
recent ch
        hanges to FCCA’s organiz  zation occurred several yyears ago, a challenge to the FCA
Board annd senior maanagement is to periodic    cally reassesss FCA’s org ganizational structure to
ensure it remains optimal in relattion to all rellevant factorrs.

                ology
Leveraging Techno

The Agency’s ability to leverage investments      s in new tech  hnologies is a key eleme ent in
managem   ment’s effortts to continually improve  e Agency perrformance b   by increasingg the efficien
                                                                                                      ncy
and effec ctiveness of operations. The Agenc      cy has an acttive informattion resourcce managem   ment
planning process tha  at identifies, reviews, and  d prioritizes new informa ation technoology (IT)
initiatives
          s to improve Agency ope    erations. Ov ver the past few years, tthe Agency m   made significant
investme  ents in new technologies   s and began implementin     ng several to
                                                                             ools to improove
communication, colla   aboration, an  nd efficiency
                                                  y of operatio ns. The Age  ency’s challlenge is to
maximize  e the use of new IT investments that will increasse Agency e      efficiency andd
effectiven ness. The successful
                      s             im
                                     mplementatio  on of new te echnologies wwill provide FCA staff with
the IT toools and skills
                       s that will ennable the Age ency to

     impprove the quality and avaailability of data
                                                d    without creating an undue burden on the FC     CS;
     stre
         eamline busiiness proces sses and build businesss intelligence e to provide ddecision-ma  akers
      with
         h timely mannagement information;
     devvelop electro
                     onic recordkeeeping and knowledge
                                                 k          m
                                                            managemen   nt capability ffor capturing
                                                                                                   g,
      maintaining, annd sharing in
                                 nstitutional knowledge;
     impprove communication witth stakehold    ders; and
     pro
        otect FCA infformation syystems and datad    from evver-increasin
                                                                        ng external aand internal
      thre
         eats.

Respectffully,



Carl A. Clinefelter
        C
Inspector General
 




                                                     4
         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 (FCA) as of
September 30, 2011 and 2010 and the related statements of net cost, changes in net position, and
budgetary resources, for the years then ended (collectively referred to as the financial statements). These
financial statements are the responsibility of FCA’s management. Our responsibility is to express an
opinion on these financial statements based on our audit.

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 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, as amended. Those standards
and OMB Bulletin No. 07-04, as amended, 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 audit provides 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 FCA as of September 30, 2011 and 2010 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, as amended, we
have also issued our reports dated November 7, 2011 on our consideration of the FCA internal control
over financial reporting and its compliance with certain 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.

Accounting principles generally accepted in the United States of America require that the Management
Discussion and Analysis (MD&A) be presented to supplement the basic financial statements. The
MD&A, although not a part of the basic financial statements, is required by OMB Circular A-136,
Financial Reporting Requirements, as revised. As such, it is considered to be an essential part of
financial reporting for placing the basic financial statements in an appropriate operational, economic, or
historical context. We have applied certain limited procedures to the required supplementary information
in accordance with auditing standards generally accepted in the United States of America, which
consisted of inquiries of management about the methods of preparing the information and comparing the
information for consistency with management's responses to our inquiries, the basic financial statements,
and other knowledge we obtained during our audit of the basic financial statements. We do not express an
opinion or provide any assurance on the information because the limited procedures do not provide us
with sufficient evidence to express an opinion or provide any assurance.



                                                    5
                  LARGO                                                            RICHMOND
   1101 MERCANTILE LANE, SUITE 122                                    1504 SANTA ROSA ROAD, SUITE 107
             LARGO, MD 20774                                                  RICHMOND, VA 23229
    (240) 492-1400 - FAX: (301) 773-2090                               (804) 288-2006 - FAX: (804) 288-2233
           mail@brownco-cpas.com                                             tdavis@brownco-cpas.com
      This report is intended solely for the information and use of the management of the FCA, the Office of
      Inspector General of FCA, OMB and Congress, and is not intended to be and should not be used by
      anyone other than these specified parties.


      Largo, Maryland
      November 7, 2011




                                                                                        6



IE::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::== BROWN   &   COMPANY CPAS, PLLC ==::::::::==:==::::::::::==:==:==:::::::::3~
                           INDEPENDENT AUDITOR’S REPORT
                   ON INTERNAL CONTROL OVER FINANCIAL REPORTING


Farm Credit Administration
The Board and Office of Inspector General

We have audited the financial statements of the Farm Credit Administration (FCA) as of and for the year
ended September 30, 2011 and have issued our report thereon dated November 7, 2011. We conducted
our audit in accordance with auditing standards generally accepted in the United States of America; 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, as amended.

In planning and performing our audit, we considered the FCA’s internal control over financial reporting
by obtaining an understanding of the FCA’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, as amended. 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 a material weakness or significant
deficiency. Under standards issued by the American Institute of Certified Public Accountants and OMB
Bulletin No. 07-04, as amended, a material weakness is a deficiency, or combination of deficiencies, in
internal control, such that there is a reasonable possibility that a material misstatement of the entity’s
financial statements will not be prevented, or detected and corrected on a timely basis. A significant
deficiency is a deficiency in internal control, or a combination of deficiencies, in internal control that is
less severe than a material weakness, yet important enough to merit attention by those charged with
governance. 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 a material weakness as defined above.

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


Largo, Maryland
November 7, 2011




                                                     7
                   LARGO                                                            RICHMOND
    1101 MERCANTILE LANE, SUITE 122                                    1504 SANTA ROSA ROAD, SUITE 107
              LARGO, MD 20774                                                  RICHMOND, VA 23229
     (240) 492-1400 - FAX: (301) 773-2090                               (804) 288-2006 - FAX: (804) 288-2233
            mail@brownco-cpas.com                                             tdavis@brownco-cpas.com
                           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 (FCA) as of and for the year
ended September 30, 2011 and have issued our report thereon dated November 7, 2011. We conducted
our audit in accordance with auditing standards generally accepted in the United States of America; 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, as amended.

The management of the FCA is responsible for complying with laws and regulations applicable to the
FCA. As part of obtaining reasonable assurance about whether the FCA’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,
as amended. We limited our tests of compliance to these provisions and we did not test compliance with
all laws and regulations applicable to the FCA.

The results of our tests of compliance with laws and regulations disclosed no reportable instances of
noncompliance with 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, as amended.

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 FCA, the Office of
Inspector General of FCA, OMB and Congress, and is not intended to be and should not be used by
anyone other than these specified parties.


Largo, Maryland
November 7, 2011




                                                    8
                  LARGO                                                           RICHMOND
   1101 MERCANTILE LANE, SUITE 122                                   1504 SANTA ROSA ROAD, SUITE 107
             LARGO, MD 20774                                                 RICHMOND, VA 23229
    (240) 492-1400 - FAX: (301) 773-2090                              (804) 288-2006 - FAX: (804) 288-2233
           mail@brownco-cpas.com                                            tdavis@brownco-cpas.com