oversight

Second Quarter FY 2014 FCS Survey

Published by the Farm Credit Administration, Office of Inspector General on 2014-06-18.

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

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



                   Second Quarter Fiscal Year (FY) 2014 Summary Report 

                              (January 1 – March 31, 2014) 


 OFFICE OF INSPECTOR GENERAL’S (OIG) SURVEY OF FARM CREDIT SYSTEM (FCS) 

       INSTITUTIONS REGARDING THE AGENCY’S EXAMINATION FUNCTION 



Introduction

During the period January 1 – March 31, 2014, the Office of Examination identified 21 Farm
Credit System institutions that were in a position to provide meaningful survey responses.

The OIG sent surveys to those 21 institutions on April 24, 2014. Of the 21 institutions
surveyed, 16 submitted completed surveys. When outstanding responses from prior quarters
are received, they are included in the next quarterly report. Two responses to the survey issued
for the first quarter of FY 2014 was received and are included in this second quarter FY 2014
report. Therefore, this report includes a total of 18 responses.

The OIG will continue to provide an email report to you based on each fiscal year 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 as
of September 30 will continue to include fiscal year 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 or punctuation errors may have been corrected. Any narrative in
“brackets” is explanatory information provided by the OIG based on conversations with
institution management.

Survey Results – Second Quarter FY 2014

Average numerical responses to survey statements 1–8 were 2.0 to 2.2. (For the first quarter
FY 2014 the range averaged 1.4 to 2.1.)

The average response for all survey statements was 2.2. (For the first quarter FY 2014 the
average response was 1.8.)



June 18, 2014
                       Second Quarter FY 2014 OIG Summary Report on the Survey of FCS Institutions
                                       Regarding the Examination Function
_________________________________________________________________________________________________________




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 First Quarter 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:           2.2 (first quarter was 2.0)

    Comments:
            	 For some years now, we have had an effective internal credit review process
               and it has been identified as “Satisfactory” by the FCA in prior years’
               Reports of Examination. Yet from our experience, the level of reliance by
               the FCA on our own Internal Credit Review results has not changed over the
               years as we would have expected.
            	 The most recent FCA examination of our institution focused on material
               safety and soundness issues, internal controls, portfolio management, and
               regulatory compliance. These are areas we would anticipate for review.
            	 Are they still focused on safety and soundness—seems like we are in
               peripheral areas.
            	 Examination activities were disproportionately focused on areas of
               immaterial risk to the institution.
            	 The scope of the FCA examination was consistent with the guidance
               provided by FCA and was centered on items that could bring risk into the
               institution.
            	 The Standard of Conduct for our Directors has not been an issue in the past,
               so we’re not sure the risk is truly present.
            	 Encourage FCA to consider increased use of electronic data in support of
               more examiners working offsite at their office locations. Would anticipate
               significant cost savings.




   June 18, 2014                                                                                            2
                       Second Quarter FY 2014 OIG Summary Report on the Survey of FCS Institutions
                                       Regarding the Examination Function
_________________________________________________________________________________________________________


                	 The Examination focused on many risk areas associated with an institution
                   of our size as well as following up on other items noted from previous
                   examinations during the year.

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

    Average Response:           2.1 (first quarter was 1.8)

    Comments:
            	 There were a couple ”required actions” noted in our exam report that were
               directly tied to regulatory criteria as would be viewed as appropriate by our
               institution.
            	 A lot of Standards of Conduct discussion when it was good the year before,
               enhanced since then and then issues never before brought up.
            	 Examiners introduced new interpretations of laws and regulations to justify
               examination findings without giving regulated institutions the opportunity of
               prior notice and comment. Examination findings are often without factual
               support or sound reasoning.
            	 Examination recommendations were informative to the institution and useful in
               identifying areas where the institution could improve policy clarity and improved
               implementation of procedures.
            	 Process for conducting NEA/MEA is effective in providing detailed findings
               regarding examination topic for institution participants and for other System
               institutions.
            	 We would lift up the concern that the regs are not being applied equally across
               every system institution. FCA can literally place one institution at a
               disadvantage versus another simply by enforcing requirements differently in
               various institutions. Standard of Conduct issues are one of those issues.

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:           2.0 (first quarter was 1.7)

    Comments:
            	 There were also three “recommended actions” noted in the exam report that
               were reviewed by Board and management, and agreed to be appropriate
               processes or practices and of benefit for our institution. In each case, required
               and recommended actions were taken as prescribed by FCA.
            	 The most burdensome recommendations and required actions in the
               examination report bear no substantive relationship to the risk the institution
               actually faces.
            	 Examination findings are clearly presented in the report with process for
               communicating management’s correct action response.
            	 Portions of the Supervisory Agreement were redundant and the overlap added
               to the institution’s compliance cost.


   June 18, 2014                                                                                            3
                       Second Quarter FY 2014 OIG Summary Report on the Survey of FCS Institutions
                                       Regarding the Examination Function
_________________________________________________________________________________________________________


                	 The recommendations and required actions noted in the Report of Examination
                   validated some actions already noted by the institution in which actions have
                   been taken or are planned to be taken.

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

    Average Response:           2.2 (first quarter was 1.4)

    Comments:
                    FCA Examiners were in each instance professional and courteous. 

                    Communication good, follow through good. Professional.

                    Examiners’ demeanor was professional, but examination activities were not 

                     efficient. Too much time and too many resources at both the institution and
                     the agency have been devoted to issues that never should have been raised
                     based on the materiality of the risk to the institutions involved and the
                     weakness of the regulatory basis for the finding.
                	   The exam team was flexible in their use of the institution’s new “Auditor
                     Website,” a technological solution to providing FCA examination team
                     members with needed information regarding loans under exam.
                	   Our exam team and leader were very professional and cooperative.
                	   The institution’s and FCA’s time would have been better spent answering all
                     questions during one conference call/meeting instead of multiple
                     calls/meetings with various examiners.
                	   Institution makes concerted effort to provide information needed to facilitate
                     the examination. No issues with examiners.
                	   Examiners were very professional in doing their jobs. We would continue to
                     challenge examiners to work toward a greater efficiency in conducting the
                     examinations.
                	   The examination team on this examination was professional throughout this
                     particular examination.

                                        COMMUNICATIONS

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

    Average Response:           2.2 (first quarter was 1.6)

    Comments:
            	 1) Communications regarding issues or concerns about Board leadership,
               governance and responsibilities should be communicated directly with the
               Board earlier in the examination process. If FCA needs a management
               liaison for facilitating Board communications, then the FCA should work with
               the Board to determine and develop the best process. Although using
               management as the liaison has not created Board/management issues with
               the current management team, it has created Board/management tension
               with past management. The Board wants to avoid this issue going forward.


   June 18, 2014                                                                                            4
                       Second Quarter FY 2014 OIG Summary Report on the Survey of FCS Institutions
                                       Regarding the Examination Function
_________________________________________________________________________________________________________


                     The Board prefers a process that provides FCA a direct and accurate Board
                     perspective. Going directly to the Board with Board issues makes for an
                     effective and efficient process and provides the Board with the confidence
                     that their perspective has been clearly and accurately communicated.
                     2) Significant time elapsed between the completion of fieldwork and the
                     reporting of findings and recommendations to management. 3) Within the
                     credit area, examiners often do not have a basic understanding of our
                     business prior to beginning the examination, leading to several hours of
                     “education” on our part. We have tried to short circuit this by having a
                     webinar prior to the beginning of the work such that examiners could come
                     better prepared as to the business model and how it differs from that of a
                     primary lender (another FCS institution).
                	   The EIC, supervisor, and staff were good at raising questions to ensure
                     clarity and understanding of situations before making conclusions. We
                     appreciate the opportunity to discuss situations with questions.
                	   [Name removed] did this VERY well.
                	   Overall communication with EIC and staff are excellent. Communication by
                     EIC with individual board members is welcome but the need and purpose of
                     the calls should be examination related. It would also be helpful if the
                     frequency of the communication be challenged and the practice of asking
                     multiple directors the same question be avoided except when it is
                     considered necessary based upon examination findings.
                	   Communications from OE staff were timely, but not clear or accurate. The
                     legal and factual basis for examination findings were not well supported.
                	   Seemed to be rushed and disorganized during the examination. Questions
                     could be sent ahead of time and we could have all answers for them upon
                     arrival.
                	   The EIC did a good job of communicating with the institution.

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:           2.2 (first quarter was 2.1)

    Comments:
            	 Exam communications, both verbal and written, during the exam process
               that management was able to communicate to the Board and Audit
               Committee, and the exam report findings that were communicated by FCA
               directly to the Board and Audit Committee were all viewed as adequate and
               appropriate.
            	 Exam thorough enough to assure a look by FCA at most areas.
            	 In some areas, communication was appropriate, but in other areas, the legal
               and factual basis for examination findings was not well supported and was of
               no value to the Board/Audit Committee as a guide to managing the
               institution’s risk.
            	 The examination team maintained open communication with the Board and
               management throughout the examination cycle.



   June 18, 2014                                                                                            5
                       Second Quarter FY 2014 OIG Summary Report on the Survey of FCS Institutions
                                       Regarding the Examination Function
_________________________________________________________________________________________________________


                	 Please reference the list of Considerations that the institution Board shared
                   with FCA’s Lead Examination Team members during the closeout.
                	 Findings are clearly communicated and segmented by degree of concern to
                   help the Board’s understanding and oversight of institution’s corrective regs.
                	 The overall positive results of the examination findings appear to validate the
                   safety and soundness of the institution as well as the positive operations of
                   the institution from a management and board perspective.

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

     Average Response:          2.2 (first quarter was 1.8)

     Comments:
            	 [Same answer given to No. 5] 1) Communications regarding issues or
               concerns about Board leadership, governance and responsibilities should be
               communicated directly with the Board earlier in the examination process. If
               FCA needs a management liaison for facilitating Board communications,
               then the FCA should work with the Board to determine and develop the best
               process. Although using management as the liaison has not created
               Board/management issues with the current management team, it has
               created Board/management tension with past management. The Board
               wants to avoid this issue going forward. The Board prefers a process that
               provides FCA a direct and accurate Board perspective. Going directly to the
               Board with Board issues makes for an effective and efficient process and
               provides the Board with the confidence that their perspective has been
               clearly and accurately communicated. 2) Significant time elapsed between
               the completion of fieldwork and the reporting of findings and
               recommendations to management. 3) Within the credit area, examiners
               often do not have a basic understanding of our business prior to beginning
               the examination, leading to several hours of “education” on our part. We
               have tried to short circuit this by having a webinar prior to the beginning of
               the work such that examiners could come better prepared as to the business
               model and how it differs from that of a primary lender (another FCS
               institution).
            	 In each case of finding, FCA examiners brought to our attention questions or
               observations that allowed for management response before FCA
               conclusions were made. We appreciated that opportunity.
            	 Discussions and thoughts were objective.
            	 Examiners went through the motions of attempting to hear the views and
               responses of the Board and management, but there is no evidence that they
               listened. The examination report included a statement of management’s
               objections, but did not answer them, other than to re-assert the examiners’
               original findings.
            	 Generally we are in agreement with the view, however because we were
               provided a very limited amount of time to review the draft report, we were
               not able to provide additional information that could have addressed some of
               the report comments.


   June 18, 2014                                                                                            6
                       Second Quarter FY 2014 OIG Summary Report on the Survey of FCS Institutions
                                       Regarding the Examination Function
_________________________________________________________________________________________________________




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

     Average Response:          2.2 	(first quarter was 2.0)

     Comments:
            	 Yes, there was good dialogue between our institution and FCA staff on the
               varied topics and issues that arose during the course of the exam.
            	 We felt we were being examined on Standards of Conduct with direction that
               had just come out. Overreach but we understand and understood what
               material issues were.
            	 With respect to the contested issues, FCS-wide guidance did not notify the
               institution of the regulatory interpretation and was not helpful at all. Notice
               through examination findings was the first and only notice that our institution
               received of any regulatory issue.
            	 FCS-wide guidance continually provides opportunities for management
               teams to proactively evaluate current practices in each part of our
               organization.
               Appreciate Office of Examination annual sharing the National Oversight Plan
               Focus/Risk Topics.


                          GENERAL QUESTIONS 9, 10, and 11

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

                  Hearing from FCA on broader perspectives of system-wide business activity
                   and practices is always beneficial.
                 The in-person meeting with the Board helped provide context for the written
                   report.
                 Discussions at closeout around how to understand what was really intended in
                   the report in Standards of Conduct.
                 Examination results were well communicated, fair, and balanced.
                 It is difficult to say that any part of the process was beneficial. The institution
                   appreciated the opportunity to present its objections to the examiners.
                   Unfortunately, this opportunity did not have any meaningful impact.
                	 FCA separate meeting with Board Chairman, and Audit Committee Chairmen
                   was beneficial. Also, guidance regarding effective nominating committee policy
                   and charter.
                	 We appreciate FCA staff sharing “best practices” from other FCS institutions
                   with us. As a relatively small, regional institution, it is difficult to keep up with
                   what the rest of the Farm Credit world is doing.
                	 Communication with management and staff was excellent. The examination
                   team was fair and open in their discussions regarding the current activities at
                   the institution.
                 Sharing themes of common issues and best practices.
                 I found the wrap-up meeting after the examination to be helpful.

   June 18, 2014                                                                                            7
                       Second Quarter FY 2014 OIG Summary Report on the Survey of FCS Institutions
                                       Regarding the Examination Function
_________________________________________________________________________________________________________


                	 Appreciate them sharing best practices from other institutions.
                	 The opportunity to review and respond to draft examination findings and
                   confirmation that the institution was complying or needed improvement.
                	 FCA seems to have adopted an attitude that it is ok to try and help institutions
                   develop ideas for how to meet requirements. To be clear, examiners are not
                   telling us how to do it, but giving ideas and suggestions for ways to possibly
                   meet those requirements. That is helpful, while keeping the accountability at
                   the institution where it should be.
                	 [Same answer given to No. 6] The overall positive results of the examination
                   findings appear to validate the safety and soundness of the institution as
                   well as the positive operations of the institution from a management and
                   board perspective.

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

                	 Today’s business environment is always busy. Review processes require a
                   certain time commitment by management that takes away from conducting
                   other areas of business responsibility.
                	 Standards of Conduct
                	 Individual questions or conversations on a particular issue may be duplicated
                   during the course of examination activity.
                	 The examiners’ use of a novel regulatory interpretation that appears to have
                   been created on an ad hoc basis solely to support an examination objective
                   unrelated to the purpose of the regulation that was cited.
                	 It seems that examiners are increasingly regulating through Informational
                   Memorandums, Bookletters, and other guidance which has made it difficult to
                   ensure that our institution is in compliance with FCA regulations.
                	 The first stab at utilizing the institution’s Audit Website posed some challenges
                   for the examination team, additional experience with the new technology will
                   further improve the institution’s ability to deliver information to FCA.
                	 Some focus areas in the review.
                	 The inefficiency of time and meetings with the various examiners that ask the
                   same questions.
                	 Multiple exit conferences discussing the same topics each time. The lead
                   examiners met with our Board at our monthly Board meeting at the conclusion
                   of the two-week review to discuss the exam; the lead examiners scheduled a
                   teleconference call with senior management and Board members the following
                   month to discuss the review; and then met onsite with our Board the month
                   after that for the final report.
                	 The number of visits throughout the year to various locations of the institution;
                   however we recognize the necessity of the examination process.


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

                	 [Same answer given to No. 5] 1) Communications regarding issues or
                   concerns about Board leadership, governance and responsibilities should be
                   communicated directly with the Board earlier in the examination process. If

   June 18, 2014                                                                                            8
                       Second Quarter FY 2014 OIG Summary Report on the Survey of FCS Institutions
                                       Regarding the Examination Function
_________________________________________________________________________________________________________


                     FCA needs a management liaison for facilitating Board communications,
                     then the FCA should work with the Board to determine and develop the best
                     process. Although using management as the liaison has not created
                     Board/management issues with the current management team, it has
                     created Board/management tension with past management. The Board
                     wants to avoid this issue going forward. The Board prefers a process that
                     provides FCA a direct and accurate Board perspective. Going directly to the
                     Board with Board issues makes for an effective and efficient process and
                     provides the Board with the confidence that their perspective has been
                     clearly and accurately communicated.
                	   The preceding responses take into consideration the Board’s input.
                	   Exam process was fine.
                	   The Board believes that the FCA examination function has lost sight of
                     FCA’s role as an arm’s length safety and soundness regulator and has
                     inappropriately used the examination process to achieve management
                     objectives to eliminate the benefits of the federated cooperative structure.
                     The Board appreciated the open communications with EIC and Supervisory
                     Examiner throughout the year.
                	   A list of considerations was presented by the Board to the leaders of the
                     Examination Team.
                	   The transition of our new EIC went smoothly.
                	   The board and management team as a whole appreciates the feedback and
                     open dialogue from the examination process.




   June 18, 2014                                                                                            9