Office of Inspector General Audit of FCA’s Financial Statements Fiscal Year 2013 A-13-FS November 20, 2013 TABLE OF CONTENTS Inspector General’s Transmittal Letter of Auditor’s Report………………………………. 1 Auditor’s Opinion Letter on the Financial Statements……………………………………. 5 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 http://www.fca.gov/reports/performance_reports.html. Farm Credit Administration Office of Inspector General 1501 Farm Credit Drive McLean, VA 22102-5090 (703) 883-4030 November 20, 2013 The Honorable Jill Long Thompson, Board Chair and Chief Executive Officer The Honorable Kenneth A. Spearman, Board Member The Honorable Leland A. Strom, Board Member Farm Credit Administration 1501 Farm Credit Drive McLean, Virginia 22102-5090 Dear Board Chair Long Thompson and FCA Board Members Spearman and Strom: This letter transmits the report on the audit of the Farm Credit Administration’s financial statements for the fiscal year (FY) ended September 30, 2013. The Office of Inspector General (OIG) contracted with the U.S. Department of the Treasury’s Bureau of the Fiscal Service for Brown & Company CPAs, PLLC, an independent public accounting firm, to perform the audit. Brown & Co. issued an unmodified 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 the FYs ended September 30, 2013 and 2012, in conformity with generally accepted accounting principles. Brown & Co. considered FCA’s internal control over financial reporting to determine the audit procedures that were appropriate for the limited purpose of expressing an opinion on the financial statements. Although Brown & Co. did not express an opinion on the effectiveness of FCA’s internal controls, it did not identify any deficiencies in internal controls considered to be a material weakness. Additionally, Brown & Co. performed tests of FCA’s compliance with certain provisions of laws, regulations, contracts, and grant agreements that could have a direct and material effect on the financial statements. Although Brown & Co. did not express an opinion on compliance with those provisions, it did not identify any instances of noncompliance or other matters required to be reported under Government Auditing Standards or OMB Bulletin No. 07-04, as amended. In the OIG’s opinion, Brown & Co.’s audit provides a reasonable basis on which to render its opinion, and we concur with the report dated November 6, 2013. 1 The OIG’s contract with the Bureau of the Fiscal Service 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, as amended. To ensure the quality of the work performed, the 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. 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. However, it should be recognized that some factors affecting this challenge may be influenced by events outside the control of the Agency. Second, and of equal importance, is the challenge related to the Agency, remaining an independent, arm’s-length, 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 continuing market volatility and uncertain economic conditions. Although the System’s overall condition and performance is sound, there are many highly correlated uncontrollable or macroeconomic forces directly affecting agriculture. While the FCS remains generally safe and sound, the current risk environment is a challenge in some FCS institutions, requiring heightened oversight and supervision. System institutions continue to grow in both size and complexity, requiring greater risk management skills and oversight responsibilities both in examination and regulation. In providing for System oversight, the challenge for the Agency is twofold: to continue to be an independent, objective, arm’s-length and effective regulator; 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. Mission Further, the overall environment facing agriculture, rural America, and the FCS is ever- changing, presenting new vulnerabilities and opportunities. 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. 2 Farm Credit Administration Agency Governance The Farm Credit Act of 1971, as amended, provides for a full-time three-member Board to govern the Agency. Board members are appointed by the President and confirmed by the Senate, and the President designates the Chairman. Board Chair Long Thompson, an FCA Board member since March 2010, replaced Board Member Strom as Chair in November 2012. Board Chair Long Thompson’s term expires in May 2014. Board Member Spearman was appointed in October 2009, and his term expires in May 2016. Board Member Strom’s term expired October 2012. In accordance with law, he may continue to serve until the President appoints a successor. All three current Board members are well-experienced, with each having been on the Board for a number of years. Nevertheless, a full-time three-member Board, particularly when a new Chairman is named and a new member(s) joins the Board, presents an ongoing challenge of coordination and cooperation for the Chairman and Board members in defining roles and responsibilities. In this regard, the Board’s various rules of operation are a significant asset; they provide a foundation for trust and shared expectations among its members, enable the Board to engage in professional and constructive policy debate, and provide continuity of operations and a sound course for the Board and the Agency. Agency Organization Although the Agency’s statutory mission has remained constant, many factors affect the Agency’s operations and organization. A major factor is the periodic turnover in the Board’s composition and chairmanship. In addition, the banks and associations of the FCS have continued merging, geographic territories of merged institutions have changed, and FCS institutions’ products and the examination thereof have become more complex. These and other factors bear on FCA’s organizational structure. An ongoing challenge to the Board and senior management is to periodically reassess FCA’s organizational structure to ensure it remains optimal. Agency Staffing The Agency has a comprehensive five-year Human Capital Plan covering FYs 2014 to 2018. Recent recruitment initiatives for all levels within the Agency have broad search criteria and have focused on obtaining the best skill sets and achieving diversity in FCA’s workforce. The Board 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 as follows: • Projections indicate that a substantial portion of the Agency’s workforce is eligible to retire during the next several 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 FCA. 3 • 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, continuing to identify the critical skills needed in the future, appropriately allocating resources between line and staff functions, and ensuring continuity within senior management and other staff positions. Leveraging Technology The Agency’s ability to leverage investments in technologies is a key element in management’s efforts to continually improve Agency performance by increasing the efficiency and effectiveness of operations. The Agency has an active information resource management planning process that identifies, reviews, and prioritizes information technology initiatives to improve Agency operations. The Agency has made significant investments in technologies and implemented several tools to improve communication, collaboration, and efficiency of operations. The Agency’s challenge is to continue to maximize the use of information technology investments that will increase Agency efficiency and effectiveness. The successful implementation of technologies will provide FCA staff with the tools and skills that will enable the Agency to continue to • improve the quality and availability of financial data that can be used to examine potential risks across the FCS without creating an undue burden on the FCS; • streamline business processes and build business intelligence to provide decision- makers with timely management information; • develop electronic recordkeeping and knowledge management capability for capturing, maintaining, and sharing institutional knowledge; and • protect and secure FCA information systems and data from ever-increasing external and internal threats. Respectfully, Elizabeth M. Dean Inspector General 4 INDEPENDENT AUDITOR'S REPORT Farm Credit Administration The Board and Office of Inspector General Report on the Financial Statements We have audited the accompanying balance sheets of the Farm Credit Administration (FCA) as of September 30, 2013 and 2012, 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), and the related notes to the financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. 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 Government Auditing Standards, issued by the Comptroller General of the United States; and the 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 from material misstatements. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 1101 MERCANTILE LANE, SUITE 122 ● LARGO, MD 20774 PHONE: (240) 770-4900 ● FAX: (301) 773-2090 ● firstname.lastname@example.org ● www.brownco-cpas.com 5 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of FCA as of September 30, 2013 and 2012, 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. Other Matters Accounting principles generally accepted in the United States of America require that the information in the Management’s Discussion and Analysis (MD&A), Required Supplementary Information, and Required Supplementary Stewardship Information sections be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Federal Accounting Standards Advisory Board, who considers it 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. Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered the FCA’s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of FCA’s internal control. Accordingly, we do not express an opinion on the effectiveness of FCA’s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. 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, 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. Our consideration of the internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over financial reporting that might be deficiencies, significant deficiencies or material weaknesses. In our fiscal year 2013 audit, we did not identify any deficiencies in internal control that we consider to be a material weakness. However, material weaknesses may exist that have not been identified. Compliance and Other Matters As part of obtaining reasonable assurance about whether FCA’s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those 6 provisions was not an objective of our audit, and accordingly, we do not express such an opinion. Our fiscal year 2013 audit, disclosed no instances of noncompliance or other matters that are required to the reported under Government Auditing Standards or OMB Bulletin No. 07-04, as amended. This report is intended solely for the information and use of the management of 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 6, 2013 7
FY 2013 Audit of FCA's Financial Statements
Published by the Farm Credit Administration, Office of Inspector General on 2013-11-20.
Below is a raw (and likely hideous) rendition of the original report. (PDF)