oversight

First Quarter FY 2015 FCS Survey

Published by the Farm Credit Administration, Office of Inspector General on 2015-03-26.

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

OFFICE OF                 Survey Report  
INSPECTOR GENERAL 
                               Survey of 
                     Farm Credit System InsƟtuƟons  
                        Regarding the Agency’s  
                         ExaminaƟon FuncƟon 


                              First Quarter  
                            Fiscal Year 2015 
                         (Oct. 1 ‐ Dec. 31, 2014) 

                         Issued March 26, 2015 




                        FARM CREDIT ADMINISTRATION 
                        First Quarter FY 2015 OIG Summary Report on the Survey of FCS Institutions
                                        Regarding the Examination Function
_________________________________________________________________________________________________________



                         First Quarter (October 1 – December 31, 2014)

                             Fiscal Year (FY) 2015 Summary Report


 OFFICE OF INSPECTOR GENERAL’S (OIG) SURVEY OF FARM CREDIT SYSTEM (FCS)
       INSTITUTIONS REGARDING THE AGENCY’S EXAMINATION FUNCTION


Introduction

During the period October 1 – December 31, 2014, the Office of Examination identified 10 FCS
institutions that were in a position to provide meaningful survey responses.

The OIG sent surveys to those 10 institutions on February 10, 2015. Of the 10 institutions
surveyed, 8 submitted completed surveys (80% response rate). When outstanding responses
from prior quarters are received, they are included in the next quarterly report. The OIG did not
receive any responses to prior surveys; therefore, no additional responses are included in this
report.

The OIG will continue to provide an email report to you based on each FY quarter-end, i.e.,
December 31, March 31, June 30, and September 30, so that you may timely take whatever
action you deem necessary to address the responses. The fourth quarter report will include FY
2015 summary data.

The survey asks respondents to rate the eight survey statements from "1" (Completely Agree)
to "5" (Completely Disagree). The rating options are as follows:

           Completely Agree                 1

           Agree                            2

           Neither Agree nor Disagree       3

           Disagree                         4

           Completely Disagree              5


There is also an available response of “6” (Does Not Apply) for each survey statement. These
responses are not included in averages.

Narrative responses are provided verbatim, except identifying information has been removed
and any grammatical, punctuation and spelling errors may have been corrected. Any narrative
in “brackets” is explanatory information provided by the OIG based on conversations with
institution management.

Survey Results – First Quarter FY 2015

Average numerical responses to survey statements 1–8 ranged from 1.5 to 2.4 for the first
quarter of FY 2015.

                       Average Numerical Response Range to Survey Statements 1–8
      st                         th                       rd                        nd
    1 Quarter FY15              4 Quarter FY14           3 Quarter FY14           2 Quarter FY14
           1.5 – 2.4                  1.6 – 2.1                1.8 – 2.4                 2.0 – 2.2
                       Fourth Quarter FY 2014 OIG Summary Report on the Survey of FCS Institutions
                                       Regarding the Examination Function
_________________________________________________________________________________________________________



The average response for all survey statements was 1.9 for the first quarter of FY 2015.

                             Average Response for all Survey Statements
      st                        th                           rd                         nd
    1 Quarter FY15             4 Quarter FY14               3 Quarter FY14            2 Quarter FY14
           1.9                        1.9                          2.0                         2.2

In this quarter, there were more positive than negative narrative comments to survey
statements 1–8. (Negative comments of any degree are color coded in maroon.)

Survey item 9 asks for feedback on the most beneficial aspect of the examination process.
Consistent with prior quarters’ responses to this survey item, many very positive comments
were provided about the examiners and the examination process.

Survey item 10 asks for feedback on the least beneficial aspect of the examination process.
While most were negative, as would be expected, several comments provide a perspective that
should prove constructive.

Survey item 11 asks for any additional comments from the board as a whole. It elicited a
number of thoughtful responses from full boards, which was the objective of the question.


Responses to Survey Statements 1–8

                                      EXAMINATION PROCESS

Survey Statement 1:             The scope of examination activities was focused on areas of risk
                                to the institution and appropriate for the size, complexity, and risk
                                profile of the institution.

    Average Response:           2.4             Statement    1st   2nd   3rd   4th     FY
                                                    1        Qtr   Qtr   Qtr   Qtr   Average

                                                  FY 15      2.4                       2.4

                                                  FY 14      2.0   2.2   2.4   1.9     2.1
                                                  FY 13      2.0   1.7   1.9   2.0     1.9
                                                  FY 12      1.9   2.1   2.1   1.8     2.0

    Comments:
    •	 The Board felt the scope of examination was appropriate and comprehensive.
    •	 Consistent with the strength of our institution, financial, credit, and management.
    •	 The institution's main risk is credit risk. Acknowledging the institution's loan portfolio is
       exceptionally strong right now, it seems this main risk area got very little attention,
       instead focusing resources on areas of low risk.




  March 26, 2015                                                                                            2
                       Fourth Quarter FY 2014 OIG Summary Report on the Survey of FCS Institutions
                                       Regarding the Examination Function
_________________________________________________________________________________________________________



Survey Statement 2:	            Examiners appropriately applied laws, regulations, and other
                                regulatory criteria to examination findings and conclusions.

    Average Response:           2.0            Statement    1
                                                             st
                                                                   2
                                                                    nd
                                                                          3
                                                                           rd
                                                                                     4
                                                                                      th
                                                                                                   FY
                                                   2        Qtr    Qtr    Qtr        Qtr         Average

                                                 FY 15      2.0                                    2.0

                                                 FY 14      1.8    2.1    1.9        1.8           1.9
                                                 FY 13      1.9    1.6    1.8        2.3           1.9
                                                 FY 12      1.8    1.8    1.9        2.0           1.9



    Comments:
    •	 We agree that examiners were correct in their application of laws and regulations.
    •	 Conclusions and recommendations on standards of conduct were based on questionable
       interpretation of the regulations.


Survey Statement 3:	            The recommendations, required actions, and any supervisory
                                agreement with FCA assisted the board and management in
                                addressing the risks of the institution.

    Average Response:           2.1            Statement     1
                                                              st
                                                                    2
                                                                     nd
                                                                           3
                                                                                rd
                                                                                       4
                                                                                           th
                                                                                                     FY
                                                   3         Qtr    Qtr    Qtr         Qtr         Average

                                                 FY 15      2.1                                      2.1

                                                 FY 14      1.7     2.0    2.1         2.1           2.0

                                                 FY 13      2.0     2.0    1.8         2.2           2.0

                                                 FY 12      2.1     2.0    2.4         2.0           1.8




    Comments:
    •	 The recommendations were appropriate and reasonable.
    •	 Risk arising from the issues was minimal at most.
    •	 The institution's main risk is credit risk. Acknowledging the institution's loan portfolio is
       exceptionally strong right now, it seems this main risk area got very little attention,
       instead focusing resources on areas of low risk. [same response to statement 1]


Survey Statement 4:	            The examiners were professional and efficiently conducted
                                examination activities.

    Average Response:           1.5             Statement    1st    2nd     3rd            4th       FY
                                                    4        Qtr    Qtr     Qtr            Qtr     Average

                                                  FY 15      1.5                                         1.5

                                                  FY 14      1.4    2.2     1.8            1.6           1.8

                                                  FY 13      1.5    1.3     1.4            2.0           1.6

                                                  FY 12      1.7    1.7     1.6            1.8           1.9




  March 26, 2015                                                                                               3
                       Fourth Quarter FY 2014 OIG Summary Report on the Survey of FCS Institutions
                                       Regarding the Examination Function
_________________________________________________________________________________________________________


    Comments:
    •	 On-site and electronic examination activities were all handled professionally and 

       efficient.

    •	 Examiners were professional, provided good explanations for their conclusions (we just
       did not agree with all conclusions) and made their best efforts to avoid disrupting
       operations during the exam.
    •	 Examiners were good to work with. However, not sure how efficient they were.



                                        COMMUNICATIONS

Survey Statement 5: 	           Communications between the Office of Examination staff and the
                                institution were clear, accurate, and timely.

    Average Response:           1.5
                                                            st    nd     rd     th
                                               Statement   1     2     3       4        FY
                                                   5       Qtr   Qtr   Qtr     Qtr    Average

                                                FY 15      1.5                          1.5

                                                FY 14      1.6   2.2   2.0     1.7      1.9

                                                FY 13      1.9   1.5   1.4     2.1      1.8

                                                FY 12      1.7   1.9   1.9     2.0      1.8




    Comments:
    •	 Overall communications were clear, accurate and timely - particularly with the EIC.


Survey Statement 6: 	           Examination communications included the appropriate amount
                                and type of information to help the board and audit committee
                                fulfill their oversight responsibilities.

    Average Response:           2.0            Statement   1st   2nd   3rd    4th      FY
                                                   6       Qtr   Qtr   Qtr    Qtr    Average

                                                 FY 15     2.0                         2.0

                                                 FY 14     2.1   2.2   1.8    1.9      2.0
                                                 FY 13     1.7   1.6   1.6    1.9      1.7
                                                 FY 12     1.7   1.8   2.3    1.9      1.8



    Comments:
    •	 Communications were both informative and helpful.
    •	 More information for the basis of standards of conduct conclusions by FCA would have
       been helpful.
    •	 Communications were adequate but were often not regarding high risk areas.




  March 26, 2015                                                                                            4
                       Fourth Quarter FY 2014 OIG Summary Report on the Survey of FCS Institutions
                                       Regarding the Examination Function
_________________________________________________________________________________________________________


Survey Statement 7:             Examiners fairly considered the views and responses of the
                                board and management in formulating conclusions and
                                recommendations.

    Average Response:           1.8                         st    nd    rd    th
                                               Statement   1     2     3     4       FY
                                                   7       Qtr   Qtr   Qtr   Qtr   Average

                                                 FY 15     1.8                       1.8

                                                 FY 14     1.8   2.2   1.9   2.1     2.0

                                                 FY 13     1.8   1.6   1.6   2.0     1.8

                                                 FY 12     1.8   1.9   2.1   1.9     1.9


    Comments:
    •	 Examiners were open to dialogue in all areas prior to formulating conclusions.


Survey Statement 8:	            FCS-wide guidance from the Office of Examination was proactive
                                and helpful.

    Average Response:           1.9
                                               Statement   1st   2nd   3rd   4th     FY
                                                   8       Qtr   Qtr   Qtr   Qtr   Average

                                                 FY 15     1.9                       1.9

                                                 FY 14     2.0   2.2   2.0   2.1     2.1

                                                 FY 13     2.6   2.4   1.9   2.1     2.3

                                                 FY 12     2.0   1.9   2.3   2.1     1.9


    Comments:
    •	 Guidance is readily available and helpful for most areas.
    •	 OE communications through informational Memorandums, bookletters, and other

       correspondence is helpful.



Responses to Survey Items 9–11

Survey Item 9:          What aspect of the examination process did you find most beneficial?

    Comments:
    •	 Good communications and dialogue with [name withheld] and [name withheld].
    •	 Professional appearance and conduct as well as open communication approach exhibited
       by all FCA staff members assigned to this institution's recent examination.
    •	 Open and clear communication with the EIC prior to and during the exam process.
    •	 Confirmation our controls are adequate.
    •	 Being able to ask questions during the exit meetings was helpful.
    •	 The overall communication process between management, the Board and the examiners
       was beneficial to the institution. Discussions about the focus areas of FCA and the
       challenges facing the institution and the System were also beneficial.
    •	 Exam for this year was best in years from an examiner in charge perspective. Clear
       communication and a willingness to understand local practices.


  March 26, 2015                                                                                            5
                       Fourth Quarter FY 2014 OIG Summary Report on the Survey of FCS Institutions
                                       Regarding the Examination Function
_________________________________________________________________________________________________________


Survey Item 10:	        What aspect of the examination process did you find least beneficial?

    Comments:
    •	 Heavy focus on Standards of Conduct.
    •	 The time needed to devote to the overall examination can be burdensome.
    •	 Regulatory overreach.
    •	 Amount of time spent on low risk areas.
    •	 We are not aware of any areas that might be characterized as "least beneficial." We
       honestly did not identify areas of the examination that we considered unproductive.


Survey Item 11:	        Please provide any comments from the Board as a whole regarding the
                        examination process not provided in the preceding responses.

    Comments:
    •	 Comments from the Board as a whole reflect appreciation for depth of review in regards to
       the institution's policies and procedures as well as asset review.
    •	 The Board considered the overall examination to be informative, candid and helpful to our
       institution.
    •	 This survey was reviewed by the Board during its February 2015 meeting. The Board
       continues to be concerned about costs related to the FCA examination as annual costs to
       the institution go up every year. It seems the amount of resources used to complete the
       audit did not compare well with the level of benefits received. Reflecting over the years of
       Board experience, the number of audit exceptions which affected the institution's safety
       and soundness has been very low in comparison to the number of very technical
       suggestions for changes to policies and procedures. The Board routinely asks questions
       during the FCA exam presentations to the Board as to what the institution might consider
       doing differently to enhance the institution, basis the FCA's experience through
       examinations of other institutions, but has never received any suggestions. The FCA
       appears to be taking more of a micro-management approach than an auditing or regulator
       approach. During post-audit conversations between the Board and FCA, examiners have
       said that a high level of scrutiny will be applied in the next year due to a change in
       management, even though the management team in their new positions has significant
       experience and training and the institution spent several years specifically planning for the
       transition. In general, the FCA staff was professional while dealing with the Board.




  March 26, 2015                                                                                            6