oversight

Second Quarter FY 2007 FCS Survey

Published by the Farm Credit Administration, Office of Inspector General on 2007-06-01.

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

    Second Quarter FY 2007 OIG Report on the Survey of FCS Institutions Regarding
                  the Agency’s Examination Function for the Period
                          January 1, 2007 – March 31, 2007

Introduction

Based on the interface FCS institutions had with the Agency's examination function during the
period January 1 - March 31, 2007, OE identified 14 FCS institutions that were in a position to
provide meaningful survey responses. (Institutions are surveyed no less frequently than every
18 months and, generally, no more frequently than every 12 months.)

The OIG sent surveys to those 14 institutions on April 19, 2007. A follow-up e-mail was sent to
nonresponding institutions on May 21. Of the 14 institutions surveyed, 12 submitted completed
surveys. If the two nonresponding institutions subsequently send a completed survey, they will
be included in the next quarterly report.

Three responses to surveys issued for the first quarter were received subsequent to the first
quarter report and are included in this second quarter report. As a result, this report covers a
total of 15 responding institutions.

The OIG will provide an e-mail report to you based on each fiscal year quarter-end, i.e.,
December 31, March 31, and June 30, so that you may timely take whatever action you deem
necessary to address the responses. A summary report will be issued to you covering
aggregate survey results for each fiscal year ended September 30.

The survey asked respondents to rate each survey statement 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 "Does Not Apply" for each survey statement.

Narrative responses are provided verbatim, except that any identifying information has been
removed and any grammatical or punctuation errors may have been corrected. Information in
the comments in brackets has been substituted by the OIG in an effort to ensure the
confidentiality of responses.

Survey Results - Second Quarter FY 2007

   1. Average numerical responses to survey statements 1 - 10 range from 1.7 to 2.2, the
      same as in the first quarter report.

   2. The average response for all survey statements is 1.9, also the same as in the first
      quarter report.
                        Second Quarter FY 2007 OIG Report on the Survey of FCS Institutions
                                       Regarding the Examination Function
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One institution responded to one survey statement with "Does Not Apply." The survey statement
was number 9, "The results and recommendations of the Office of Examination’s national
examination activities and its reports on identified best practices have assisted your institution."
In a telephone call to the CEO, he indicated that they have never received a report on a national
examination activity.

Two institutions rated a survey statement as a "4" (Disagree). One institution so rated survey
statement 2 [The examination process helped the institution understand its authorities and
comply with laws and regulations.]. The corresponding comment was "We know our authorities,
laws and regulations. We didn't need an examination to confirm." The other institution so rated
survey statement 6 [Examination communications included the appropriate amount and type of
information to help the board and audit committee fulfill their oversight responsibilities.]. The
corresponding comment was "Verbal information provided during the onsite examination
included inaccurate and inappropriate statements about the audit committee’s duties, oversights
and responsibilities." In my follow-up with the CEO on this comment, he indicated that he and
members of the Audit Committee thought the lead examiner was incorrect in stating that the
Audit Committee was not following governance guidelines. They also felt the lead examiner's
tone was not constructive.

The majority of comments to survey statements 1 - 10 were positive, many very much so.
However, 40 percent of the comments were negative to varying degrees. These comments are
listed below under numbers 1, 2, and 4 - 10. They may provide opportunities for you to refine
examination methodology and communications, and examiner training.

Survey item 11a asks for feedback on the most beneficial aspects of the examination process.
Many very positive comments were provided about the examiners and the examination process.

Survey item 11b asks for feedback on the least beneficial aspects of the examination process.
The comments received to this question may also provide opportunities for you to refine
examination methodology and communications, and examiner training.

Survey item 12 asks for any other comments. There was only one slightly negative comment.
The remaining three comments on this survey item were very positive, reflecting well on the
examiners and the examination process.

Responses to Survey Statements 1–10

                                 Risk-Based Examination Process

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

        Average Response: 1.9 (1.8 in the first quarter report)

        Comments:

            •   Areas of risk were focused on during the ongoing offsite review. Our association
                was examined by the training team. The [lead examiner] seemed to set a very

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                                       Regarding the Examination Function
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                poor example for the young FCA trainees. [The lead examiner's] presentation of
                findings, including delivery tone, did not meet the high standards typically
                exhibited by FCA senior examiners. (In discussing this comment with the CEO,
                he indicated that the lead examiner's attitude during the presentation of
                examination results to the Audit Committee was condescending, creating
                resentment among members of the Audit Committee.)
            •   Overall, good approach. Coverage areas were relevant and timely and
                addressed risks also identified by the board and management. The 18-month
                rotation schedule was appropriate and worked well with the interim
                communications during the exam.
            •   Onsite activity greatly reduced over the last five years.


Survey Statement 2:             The examination process helped the institution understand its
                                authorities and comply with laws and regulations.

        Average Response: 2.2 (2.0 in the first quarter report)

        Comments:

            •   This was achieved only after FCA was able to interpret their regulations
                internally. Initially and in prior years, the agency supplied completely different
                interpretations. (In a telephone call with the CEO, he indicated that this comment
                is based on their perception of inconsistency among examiners and within the
                Agency about the interpretation of scope of lending guidelines.)
            •   We know our authorities, laws and regulations. We didn’t need an examination to
                confirm.
            •   Sometimes it creates confusion, e.g., governance and bylaw requirements.
            •   We already had good agreement with FCA.
            •   We understand our authorities.


Survey Statement 3:             The results and recommendations of the examination process
                                covered matters of safety and soundness, and compliance with
                                laws and regulations.

        Average Response: 1.9 (1.8 in the first quarter report)

        Comments:               None


Survey Statement 4:             Examiners were knowledgeable and appropriately applied laws,
                                regulations, and other regulatory criteria.

        Average Response: 1.9 (1.9 in the first quarter report)

        Comments:



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                        Second Quarter FY 2007 OIG Report on the Survey of FCS Institutions
                                       Regarding the Examination Function
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            •   The final report appropriately applied these but discussions with examiners
                during the onsite examination resulted in inappropriate and incorrect accusations,
                interpretation of regulations continued to be inconsistent. (The explanation for
                this is the same as for the first bullet under survey statement number 6, i.e., the
                Audit Committee and the CEO thought the lead examiner was incorrect in stating
                that the Audit Committee was not following governance guidelines.)
            •   Some examiners seemed to have difficulty with scope of lending, e.g., other
                financing needs of farmers. Examiner in charge was able to resolve.
            •   Examiners have been very knowledgeable of issues.
            •   Very good area. Experienced examiners helped.
            •   Training and development examination team.


                              Communications and Professionalism

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

        Average Response: 1.7 (1.7 in the first quarter report)

        Comments:

            •   In the past at times – timeliness could be improved from completion of the review
                to the time the final report is given to the Board. We also realize that meeting all
                of the schedules can be very hard.
            •   Communications were accurate and clear but only after a delay caused by
                examiners seeking input and guidance from others offsite.
            •   During the board presentation, we had a very good exchange of ideas and good
                clarity.
            •   Communication was not very timely.
            •   Excellent.
            •   The team did a good job of communicating with us about areas of weakness or
                concern and made a point of getting our feedback before they finalized a
                decision.


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: 1.8 (1.8 in the first quarter report)

        Comments:

            •   Verbal information provided during the onsite examination included inaccurate
                and inappropriate statements about the audit committee’s duties, oversights and
                responsibilities. (In my follow-up with the CEO, he indicated the Audit Committee
                and he thought the lead examiner was incorrect in stating that the Audit
                Committee was not following governance guidelines.)

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                        Second Quarter FY 2007 OIG Report on the Survey of FCS Institutions
                                       Regarding the Examination Function
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            •   As participation loans become larger and more complex, it raises board and audit
                committee’s due diligence concerns.
            •   Communication with the Board is generally at a very high overview level.
            •   Well done! The communications with the board through the planning process, the
                exam and close out were appropriate and informative.
            •   Good reporting process.


Survey Statement 7:             The examiners were organized and efficiently conducted
                                examination activities.

        Average Response: 1.9 (1.7 in the first quarter report)

        Comments:

            •   Most was offsite. Not always clear what FCA wanted and when.
            •   Yes, from a board reporting perspective.
            •   Minimum disruption of staff time. Professional and courteous.


Survey Statement 8:             Examiners fairly considered the views and responses of the board
                                and management in formulating conclusions and
                                recommendations.

        Average Response: 1.8 (2.0 in the first quarter report)

        Comments:

            •   Examiners do consider the views and responses of management in formulating
                conclusions and recommendations. By the time the Board receives the report, it
                usually cannot be changed at this point.


                            Best Practices and Regulatory Guidance

Survey Statement 9:             The results and recommendations of the Office of Examination’s
                                national examination activities (e.g., information technology,
                                finance, credit, etc.) and its reports on identified best practices
                                have assisted your institution.

        Average Response: 2.1 (2.2 in the first quarter report)

        Comments:

            •   Issuance of findings needs to be expedited. It was almost 6 months before we
                received the written report on findings.
            •   Because of the change in the process that occurred in 2006, we struggled with
                the concept of “national” exams. We were very concerned that any findings
                relevant to our individual Association would be shared with other Farm Credit

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                        Second Quarter FY 2007 OIG Report on the Survey of FCS Institutions
                                       Regarding the Examination Function
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                institutions. And we still have that concern. FCA needs to be very diligent in the
                reporting process for national exams and respect the confidentiality of individual
                institutions.
            •   The OE national examination activities do provide knowledge of best practices,
                but one size does not fit all and FCA should allow individual offices determine
                which is appropriate for them.
            •   Overall good, getting better with new approach. The reports on national
                examinations were helpful in assessing risk areas and benchmarks for
                developing and monitoring internal audit reports, risk management and
                disclosure areas.


Survey Statement 10:            FCS-wide guidance from the Office of Examination (e.g.,
                                bookletters, informational memoranda, etc.) was timely, proactive
                                and helpful.

        Average Response: 1.9 (1.9 in the first quarter report)

        Comments:

            •   The Informational Memorandum, Significant Asset Growth and its Implications, is
                redundant in its direction to Boards of Directors regarding their responsibility.
            •   New approach much better.
            •   The correspondence from FCA has been helpful and the McLean staff has been
                very helpful in supplying additional insight when requested.


                    Responses to Additional Survey Items 11a, 11b, and 12

Survey Item 11a: What aspects of the examination process did you find most beneficial?

            •   The interview dialogue with audit committee prior to the examination.
            •   Having the face to face interview, provides the most opportunity for beneficial
                feedback.
            •   Help given in bringing the association into compliance with new gov. regs.
            •   External look at financial/accounting/technology.
            •   Overview report, the listing of best practices.
            •   Discussion of issues of credit and scope of lending.
            •   Overall it was a good exam. The experience and expertise of the examiners on
                the team for this exam generated positive feedback and resulted in a
                comprehensive review of the areas under scope. Specifically, the examination of
                block funding initiatives and policies provided another assessment that the board
                can have confidence in the new practices established.
            •   Having the opportunity to work with bright, articulate but young examiners that
                are trying to learn how to apply FCA regulations.
            •   The explanation of and process for evaluating risk management.
            •   The closing discussions and examiner observations.
            •   Streamlined process worked well. Reporting to Audit committee.
            •   The good communication with the team.

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                        Second Quarter FY 2007 OIG Report on the Survey of FCS Institutions
                                       Regarding the Examination Function
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Survey Item 11b: What aspects of the examination process did you find least beneficial?

            •   Some aspects of the timeliness of reports from beginning to end is probably the
                least beneficial.
            •   The review of complex loans.
            •   Governance suggestions regarding bylaws and policies were confusing and
                appeared to be nonflexible. Some organizational discretion is still appropriate
                and necessary.
            •   The portion of the report dealing with results of examination on a nationwide
                basis.
            •   Governance review.
            •   Not sure about the study/survey of structural/reorganization changes at this point
                in time.
            •   The least beneficial process was when the examiners met with the audit
                committee to present their findings prior to the findings being discussed with
                management. This was unprofessional and could have been very divisive to our
                newly formed organization.

Survey Item 12: Please provide any additional comments about the examination process and
related communications.

            •   More time should be spent on the overall risk in the association rather than
                “dotting i’s and crossing t’s.
            •   The formation of the exam team from different offices and the use of offsite work
                through technology was very efficient. I believe it is important for the full board to
                be involved in this survey so have presented it to them for additional comments
                included herein.
            •   The process was not disruptive for our staff and normal daily business.
            •   Our board and management team have always maintained a professional
                relationship with FCA at all levels. We will continue to do so.




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