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 email@example.com firstname.lastname@example.org 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 email@example.com firstname.lastname@example.org 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 email@example.com firstname.lastname@example.org
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)