oversight

Fourth Quarter and FY 2014 Summary, FCS Survey

Published by the Farm Credit Administration, Office of Inspector General on 2015-01-20.

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

                       Fourth Quarter FY 2014 OIG Summary Report on the Survey of FCS Institutions
                                       Regarding the Examination Function
_________________________________________________________________________________________________________



                       Fourth Quarter (July 1 – September 30, 2014)
                        and Fiscal Year (FY) 2014 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 July 1 – September 30, 2014, the Office of Examination identified 16 FCS
institutions that were in a position to provide meaningful survey responses.

The OIG sent surveys to those 16 institutions on October 28, 2014. Of the 16 institutions
surveyed, 12 submitted completed surveys (75% response rate). When outstanding responses
from prior quarters are received, they are included in the next quarterly report. Two responses
to the third quarter survey were received and are included in this report. Therefore, this report
includes a total of 14 responses.

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. This fourth quarter report includes FY
2014 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 – Fourth Quarter FY 2014

Average numerical responses to survey statements 1–8 ranged from 1.6 to 2.1.

               FY 2014 Average Numerical Response Range to Survey Statements 1–8
         th                        rd                        nd                       st
       4 Quarter                  3 Quarter                 2 Quarter                1 Quarter
        1.6 – 2.1                 1.8 – 2.4                 2.0 – 2.2                 1.4 – 2.1
                       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.

                        FY 2014 Average Response for all Survey Statements
         th                        rd                             nd                              st
       4 Quarter                  3 Quarter                  2 Quarter                           1 Quarter
              1.9                       2.0                            2.2                             1.8

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.

Survey Results – FY 2014 Summary
For FY 2014, the OIG issued 62 surveys and received 50 completed surveys (81% response
rate). An FY 2014 Summary Report is provided at the end of this report.

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

                                                  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

                                                  FY 11     1.8        2.0   1.8   1.8     1.9

    Comments:
    • National Oversight Plan may affect audit plan more than the Bank's performance and
      issues would warrant.
    • Looked at larger credits and Participations purchased, which is appropriate.
    • Areas of concern were standards of conduct and other non-loan areas which are today’s
      concerns, and not necessarily of service to the financial well-being of the institution.
    • While the purpose of the exam was to focus on areas of “risk” in the institution, it was heavily
      weighted toward reviewing Standards of Conduct compliance by primarily board members in
      an institution that has never been found to have any significant findings in previous exams.
      Scope in this area seemed excessive based on risk and past performance of this institution.

  January 20, 2015                                                                                           2
                       Fourth Quarter FY 2014 OIG Summary Report on the Survey of FCS Institutions
                                       Regarding the Examination Function
_________________________________________________________________________________________________________


    •   The board felt the scope of the examination was appropriate.
    •   The examination activities were thorough, comprehensive and focused on key risk areas.


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

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

                                                 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
                                                 FY 11     1.9    2.1    1.7    2.4       2.1


    Comments:
    • Lack of consistency in interpretation of FCA regulations among reviewers.
    • We are generally in agreement with the findings and interpretation of laws, regs, etc.
    • There were some disagreements dealing with interpretations of some of the regulations
      and/or bookletters.
    • Examiners were pragmatic and thoughtful in their application and interpretation of
      regulatory requirements.
    • Examiners were well versed in laws, regulations and examination modules. Discussions
      were open regarding concerns and final conclusions were focused on areas requiring
      attention.


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    1st    2nd    3rd     4th       FY
                                                   3        Qtr    Qtr    Qtr     Qtr     Average

                                                 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

                                                 FY 11     1.5     2.0    1.7     1.9       1.8


    Comments:
    • Recommendations are largely reasonable and appropriate.
    • Areas of note were SOC & Business Planning. For the most part, recommendations and
      required actions seemed appropriate.
    • The recommendations made in this exam were helpful in providing additional efficiencies
      in two areas of board reporting.
    • The recommendations and actions were appropriate and were immediately addressed by
      the staff.
    • The recommendations and required actions were very constructive in focusing on the risk
      and best practices.
    • All recommendations and required actions were focused on key risks faced by the
      institution.

  January 20, 2015                                                                                          3
                       Fourth Quarter FY 2014 OIG Summary Report on the Survey of FCS Institutions
                                       Regarding the Examination Function
_________________________________________________________________________________________________________


    •   In the area of IT the recommendations were excessive in the area of Local Administrative
        Rights. We were asked to complete a risk assessment (not excessive) and then told that
        any mitigating procedures would be considered temporary. It is hard to believe that without
        knowing what the mitigating procedures might be that they are not good enough for our
        risk environment. We have discussed Local Administrative Rights with other Farm Credit
        Institutions and none of the Associations we have talked with have eliminated Local Admin
        Rights. More effort in understanding our IT environment is necessary.


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

    Average Response:           1.6            Statement   1st   2nd   3rd   4th     FY
                                                   4       Qtr   Qtr   Qtr   Qtr   Average

                                                 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

                                                 FY 11     1.9   2.2   1.8   1.9     2.0


    Comments:
    • Only on our most recent review.
    • Good attitude and willing to be open in communication.
    • Examiners were on time and very professional with their interactions with staff.
    • Examiners were very pleasant to work with and professional. However, exam
      efficiencies could be improved by reducing the amount of information required and then
      not used in the exam process. Also, providing us with longer lead time in their request
      for documentation would have been appreciated as well. The various exam “segments”
      could do a better job of coordinating information requests as the process was “strung
      out” and seemed to lack coordination.
    • The examiners were professional, but it seems like we are a training ground for new
      auditors. Taking time to train new auditors takes away valuable time for our day to day
      operations for our staff.
    • Very good communication skills and professional in their approach. On-site
      examinations were not overly distracting and staff were complementary about the skill
      levels and discussions held with the examination teams.
    • Bob Day’s professionalism was not always there. He talked as if he was in a hurry,
      used scare tactics, was pushy and didn’t use collaboration when trying to understand
      our environment. Other auditors were professional.




  January 20, 2015                                                                                          4
                       Fourth Quarter FY 2014 OIG Summary Report on the Survey of FCS Institutions
                                       Regarding the Examination Function
_________________________________________________________________________________________________________



                                        COMMUNICATIONS

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

    Average Response:           1.7
                                                            st    nd     rd     th
                                               Statement   1     2     3       4        FY
                                                   5       Qtr   Qtr   Qtr     Qtr    Average

                                                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

                                                FY 11      1.4   2.0   1.9     1.8      1.8


    Comments:
    • Communications were generally clear and delivered timely.
    • Communications from Examiners were, for the most part, accurate and on time. With
      Co-CEOs some written communication did not get to both CEOs.
    • [same response to statement 4] Examiners were very pleasant to work with and
      professional. However, exam efficiencies could be improved by reducing the amount of
      information required and then not used in the exam process. Also, providing us with
      longer lead time in their request for documentation would have been appreciated as
      well. The various exam “segments” could do a better job of coordinating information
      requests as the process was “strung out” and seemed to lack coordination.
    • Regular quarterly conference calls allow for strong communications between the
      agency and the institution. Normal discussions surrounding institution developments
      and examination activities have been professional and thorough, but respectful of
      everyone’s time.


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

                                                 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
                                                 FY 11     1.7   2.0   1.5    1.7      1.8



    Comments:
    • Findings were clearly identified and concerns communicated well enough to facilitate an
      appropriate response.
    • The amount and type of information the Board and Audit Committee received from FCA
      are adequate for our oversight of the audit process.



  January 20, 2015                                                                                          5
                       Fourth Quarter FY 2014 OIG Summary Report on the Survey of FCS Institutions
                                       Regarding the Examination Function
_________________________________________________________________________________________________________


    •   Exams of this type only validate, or do not validate, management’s efforts in complying
        with required laws and regulations. They provide little in the way of new information that
        helps the Board and/or Audit Committee in their oversight responsibilities.
    •   Results of individual reviews and the overall audit have been shared with the audit
        committee and they feel adequately informed. The examination team has met with the
        board to introduce the team and to discuss the 18-month examination cycle
        conclusions. Information was beneficial to the board in conducting their oversight
        responsibilities.


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

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

                                                 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

                                                 FY 11     1.5   2.0   2.1   2.1     1.9


    Comments:
    • Examiners considered and were generally reasonable in their consideration of Bank
      board and staff responses.
    • Willing to consider comments and questions from board and management.
    • Examiners listened to institution responses to possible exceptions and provided some
      leeway to comply, given the extraordinary circumstances currently facing the institution.
    • The exam team was willing to listen to management’s rationale and interpretations of
      various regulations in the completion of their final report.
    • Examiners were good about thoroughly investigating potential issues or concerns and
      listening to the responses. Conclusions appeared to be well-researched.


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

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

                                                 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

                                                 FY 11     1.8   2.0   1.7   1.5     1.8


    Comments:
    • Information provided was timely. What was helpful was the resource material provided
      by our examination supervisor Linda Jew.
    • Guidance in both the individual examinations and in the 18-month review cycle
      conclusions was thoughtful and helpful to institution management and the board.

  January 20, 2015                                                                                          6
                       Fourth Quarter FY 2014 OIG Summary Report on the Survey of FCS Institutions
                                       Regarding the Examination Function
_________________________________________________________________________________________________________


    •   The Office of Examination could be more specific in the area of IT. If an Informational
        Memorandum is sent and it references the work of Federal Financial Institutional
        Examination Council please state whether or not we will be required to implement
        FFIEC standards.


Responses to Survey Items 9–11

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

    Comments:
    • Noted a shift in the reviewers’ willingness to consider an institution point of view and logic
      concerning issues or questions posed during the review process. This has not been the
      case in prior reviews and offered a refreshing change by the agency.
    • The exam teams were clear in stating the exam objectives and following a reasonable
      exam process. Examiners had appropriate interaction with staff to clarify concerns and
      took staff input constructively. Interim observations allowed examiners and staff to focus
      on the most critical issues.
    • Review and feedback on the risk identification processes utilized by the institution.
    • Summary of their findings and discussion in close-out. Good discussion with board also.
    • Review of the institution credit functions.
    • Meeting with the full board.
    • The exam process is adequate. However, the enormity of the regulations and bookletters
      that require compliance does not provide any value added systems or efficient business
      practices for the institution.
    • Great communication on the most relevant issues.
    • The time spent with the board reviewing their findings and ways to improve that would be
      beneficial to the organization.
    • The exit sessions were especially helpful because of the ample time for discussion and
      the additional guidance and recommendations to Board members. The one-on-one
      discussion (during the exam process) that provided an open dialogue seemed to create
      the best environment for learning and building both consensus and relationships.
    • Examinations were thorough and auditors had a good understanding of institution
      practices. The examination teams demonstrated excellent communication skills and a
      willingness to listen and learn as much as possible before drawing conclusions.
    • We continue to get added value from our EIC and her supervisor.
    • We appreciated the "Best Practices" that were provided by the examiners.


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

    Comments:
    • Individual and inconsistent application and interpretation of FCA regulations, GAAP
      accounting, and other regulations. This creates an environment lacking confidence in the
      review process and noted a need for uniform training by the agency.
    • The scope of the exam seems to be driven more by national focus than by specific
      concerns with the Bank.
    • Recommendations for enhancements to an existing board report.



  January 20, 2015                                                                                          7
                       Fourth Quarter FY 2014 OIG Summary Report on the Survey of FCS Institutions
                                       Regarding the Examination Function
_________________________________________________________________________________________________________


    •   Exorbitant amount of time, energy spent on conduct issues were not helpful and inefficient
        use of time.
    •   It appears that the exam team had been directed to strongly urge the institution to find
        ways to increase the allowance for loan loss even though FASB rules limit this without
        strong documentation. Encouraging us to do anything different was frustrating.
    •   The time spent training new auditors.
    •   Examinations are always time consuming, but we’ve appeared to develop communication
        tools and systems with this team to make them as efficient as possible.
    •   The IT Examination.
    •   We provided the same information multiple times to examiners. This was time consuming
        and could be done in a more efficient manner.


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

    Comments:
    • The board feels that the Bank FIRS does not accurately reflect the high level of
      performance and capacity of the Bank.
    • Giving similar weight to the recommendations as required actions.
    • Going forward would like to see more time spent on areas that pose risk to the institution and
      less on conduct and [other] areas [with which] the institution has not had issues, and pose
      limited to no risk.
    • Appreciated candid discussion.
    • The notification of review "as of dates" and on-site visit timing was clear. The exam team’s
      visit with the Audit Committee and Board before our exam began was helpful in
      understanding the areas of emphasis as well as providing a forum for the committee to ask
      any questions of the exam team. At our close-out, the team seemed to understand our
      institution issues and the steps we are taking to resolve them.
    • Overall, everyone felt the examination was fair, thorough and complete.
    • Over the years as board members we have seen an increase in the amount of audits and
      information that is needed to complete the audits. At times there seems to be an
      abundance of overlap in audits which seems like auditors auditing other auditors. As a
      board and staff, we try to watch our costs for our patrons. The increase in audits and audit
      information causes extra work for our staff which increases the overall cost of operation.
      As a board we understand that the audits are necessary, but feel they could be
      streamlined so the audits wouldn't be so overlapping. This would allow our staff to have
      more time with the day to day operations.

        One other concern is the satisfactory and unsatisfactory comment at the end of each
        finding in the audit. Several of our auditors always point out areas that may need
        adjustments or improvements to help the overall operations of the organization. Making
        these adjustments and improvements has made the organization operate more efficiently
        and effectively. We know that the auditors see lots of other organizations in the audit
        process. We would like the auditors to express or point out what things we are really doing
        good at. It is always easy to point out areas of improvement and that is important for the
        staff and board to address. We would appreciate the auditors also giving us a pat on the
        back for areas that we are really doing good at. The satisfactory and unsatisfactory ratings
        are fine, but the board feels that they can reach out a little more beyond those two ratings.


  January 20, 2015                                                                                          8
                       Fourth Quarter FY 2014 OIG Summary Report on the Survey of FCS Institutions
                                       Regarding the Examination Function
_________________________________________________________________________________________________________


    •   Our institution was released from a regulatory agreement in January, 2014. During our
        time under this supervision and through the present, the FCA Staff were very considerate
        and friendly, but firm, in presenting the required guidance. Throughout the process, they
        acknowledged our progress and the improvement in the Board and Management of the
        institution. We appreciate their assistance and acknowledge their contribution to our
        present level of expertise.




  January 20, 2015                                                                                          9
                              Fourth Quarter FY 2014 OIG Summary Report on the Survey of FCS Institutions
                                              Regarding the Examination Function
       _________________________________________________________________________________________________________




                                              FY 2014 Summary Report

                                   Numeric Responses to Survey Statements 1–8




                                         PERCENTAGE OF TOTAL RESPONSES
                                                                                                       Total No.    Average
Statement
            Completely                       Neither Agree                 Completely    Does Not     Responses    Response
              Agree              Agree       nor Disagree    Disagree       Disagree      Apply *
               (1)                (2)             (3)           (4)            (5)          (6)
   1         6     12.0%   38        76.0%    2       4.0%   2      4.0%   2      4.0%   0     0.0%      50          2.1
   2        12     24.0%   33        66.0%    3       6.0%   1      2.0%   1      2.0%   0     0.0%      50          1.9
   3        12     24.0%   31        62.0%    4       8.0%   2      4.0%   1      2.0%   0     0.0%      50          2.0
   4        21     42.0%   22        44.0%    5      10.0%   1      2.0%   1      2.0%   0     0.0%      50          1.8
   5        15     30.0%   30        60.0%    2       4.0%   1      2.0%   2      4.0%   0     0.0%      50          1.9
   6         8     16.0%   37        74.0%    2       4.0%   1      2.0%   2      4.0%   0     0.0%      50          2.0
   7        10     20.0%   30        60.0%    9      18.0%   0      0.0%   1      2.0%   0     0.0%      50          2.0
   8         6     12.0%   36        72.0%    6      12.0%   0      0.0%   2      4.0%   0     0.0%      50          2.1
Total
Responses   90             257                33             8             12            0                           2.0



       Note: Responses of “6” (Does Not Apply) were not calculated in percentages or averages.




        January 20, 2015                                                                                            10