oversight

March 2003

Published by the Farm Credit Administration, Office of Inspector General on 2003-03-01.

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

April 28, 2003




The Honorable Michael M. Reyna
Chairman of the Board and
 Chief Executive Officer
Farm Credit Administration
McLean, Virginia 22102

Dear Mr. Reyna:

Enclosed is the semiannual report on the activities of the Farm Credit Administration’s Office of
Inspector General for the period from October 1, 2002 through March 31, 2003. We are filing
this report in accordance with the Inspector General Act of 1978, as amended. This is the
twenty-eighth report since creation of the office on January 22, 1989. Section 5(b) of the Act
requires that you send this report to the appropriate Congressional committees and
subcommittees within 30 days after the date of this transmittal, with management’s report on the
status of audit recommendations.

With a full complement of Board members, we look forward to unprecedented advancement in
governance of the Farm Credit Administration and its leadership to the Farm Credit System,
continually aiming to improve quality of life in rural America.



Respectfully,




Stephen G. Smith
Inspector General



Enclosure
                                                                      FCA SEMIANNUAL REPORT TO CONGRESS
                                                                            OCTOBER 1, 2002 – MARCH 31, 2003



                                             CONTENTS

REPORTING REQUIREMENTS ______________________________________________________________ ii
EXECUTIVE SUMMARY ____________________________________________________________________ 1
BACKGROUND ____________________________________________________________________________ 2
MANAGEMENT CHALLENGES _____________________________________________________________ 2
  FARM CREDIT SYSTEM RISK _________________________________________________________________ 2
  ORGANIZATIONAL LEADERSHIP _______________________________________________________________ 2
  STRATEGIC PLANNING ______________________________________________________________________ 3
  HUMAN CAPITAL___________________________________________________________________________ 3
  FINANCIAL MANAGEMENT ___________________________________________________________________ 3
  SECURITY ________________________________________________________________________________ 3
  LEVERAGING TECHNOLOGY__________________________________________________________________ 4
AUDIT AND INSPECTION REPORTS ISSUED _________________________________________________ 4
  INDEPENDENT FINANCIAL AUDIT ______________________________________________________________ 4
STATUS OF UNIMPLEMENTED AGREED UPON ACTIONS ____________________________________ 4
  AUDITS___________________________________________________________________________________ 5
  INSPECTIONS ______________________________________________________________________________ 5
  INVESTIGATIONS ___________________________________________________________________________ 6
  LEGISLATION AND REGULATIONS _____________________________________________________________ 6
  OTHER ACTIVITIES _________________________________________________________________________ 6
   Management Advisories____________________________________________________________________ 6
   Farm Credit System Insurance Corporation _____________________________________________________ 6
   Survey of Farm Credit System Institutions______________________________________________________ 7
   OIG Performance Measures_________________________________________________________________ 7
   Staff Participation in Activities of the Professional Community______________________________________ 7
   Staff Participation in Agency Organizations_____________________________________________________ 7
   Peer Review _____________________________________________________________________________ 7
APPENDIX 1 _______________________________________________________________________________ 8
  AUDIT / INSPECTION REPORTS ISSUED BY FCA OIG ______________________________________________ 8
  INSPECTOR GENERAL ISSUED REPORTS WITH QUESTIONED COSTS __________________________________ 8
  INSPECTOR GENERAL ISSUED REPORTS WITH RECOMMENDATIONS THAT FUNDS BE PUT TO BETTER USE ___ 9
APPENDIX 2 ______________________________________________________________________________ 10
  FCA ORGANIZATION CHART ________________________________________________________________ 10
APPENDIX 3 ______________________________________________________________________________ 11
  FCA OFFICE OF INSPECTOR GENERAL ORGANIZATION CHART ____________________________________ 11




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                                                                                                       FCA SEMIANNUAL REPORT TO CONGRESS
                                                                                                             OCTOBER 1, 2002 – MARCH 31, 2003




  REPORTING REQUIREMENTS

INSPECTOR GENERAL ACT CITATION AND REQUIREMENT                                                                               PAGE

Section 4(a)(2) Review of Legislation and Regulations ......................................................................... 6

Section 5(a)(1) Significant Problems, Abuses and Deficiencies........................................................ none

Section 5(a)(2) Recommendations With Respect to Significant ........................................................ none
     Problems, Abuses and Deficiencies

Section 5(a)(3) Prior Recommendations Not Yet Implemented...........................................................4-5

Section 5(a)(4) Matters Referred to Prosecutive Authorities .............................................................. none

Section 5(a)(5) Summary of Instances Where Information ............................................................... none
     and 6(b)(2) Was Unreasonably Refused or Not Provided

Section 5(a)(6) List of OIG Audit/Inspection Reports............................................................................. 4

Section 5(a)(7) Summary of Each Particularly Significant Report......................................................... 4

Section 5(a)(8) Statistical Table on Management Decisions................................................................. 8
     on Questioned Costs

Section 5(a)(9) Statistical Table on Management Decisions on............................................................ 9
     Recommendations that Funds be Put to Better Use

Section 5(a)(10) Summary of Each Audit Over Six Months Old for .................................................. none
     Which No Management Decision Has Been Made

Section 5(a)(11) Significant Revised Management Decisions ........................................................... none

Section 5(a)(12) Significant Management Decisions With Which ..................................................... none
     the Inspector General Disagrees

Section 5(a)(13) Compliance of Agency Financial Management System ............................................ 3




                                                                                      ii
EXECUTIVE SUMMARY

     This semiannual report to the Congress summarizes the activities and accomplishments of
     the Farm Credit Administration (FCA or agency), Office of Inspector General (OIG) and
     covers the period October 1, 2002 through March 31, 2003. Our efforts were directed toward
     performing audits, inspections, and evaluations of the FCA programs and operations,
     conducting several investigations, and providing technical assistance and advice on FCA
     programs.

     The FCA Board is at full strength. Moreover, the Board members are engaged in healthy
     discussions about regulatory and enforcement issues facing the FCA. The Board members
     are embracing a collegial relationship that is vital to the organization. We believe that prior
     work we performed on governance will help serve as a building block for a strong Board.

     The Board is reaching out to the public to gain their views on regulatory approach, in part, due
     to the comments from the survey on Regulatory Development that was conducted by OIG
     during the last reporting period. The Board is making an effort to reach out to the public and
     Congress to gain broad input into carrying out the agency’s mission. An Ombudsman has
     been appointed to further enhance the public outreach effort.

     Under the Chairman’s leadership, the FCA has made significant strides towards resolving
     agreed upon management actions. The focus on progress towards resolving agreed upon
     actions and recommendations at monthly Board briefings has resulted in corrective action on
     several long-standing issues and quick resolution of new agreed upon actions.

     The OIG advised managers on multiple issues that came to our attention. This advice
     encourages managers to take proactive actions. For example, we encouraged agency
     managers to adopt “change management” practices in reviewing operations to improve
     effectiveness. We also identified improvements needed in several agency policies.        OIG
     input contributed to improved efficiency and controls in areas such as emergency planning.
                                                                  FCA SEMIANNUAL REPORT TO CONGRESS
                                                                        OCTOBER 1, 2002 – MARCH 31, 2003




 BACKGROUND

         The FCA is an independent Federal agency of the United States government responsible
         for the regulation, examination and supervision of institutions chartered under the Farm
         Credit Act of 1971, as amended (Farm Credit Act). FCA is a nonappropriated agency with
         a fiscal year (FY) 2003 budget of $38,033,000 for administrative costs. The FY 2003
         budget for the OIG was $829,601. FCA is a “designated Federal entity” within the
         meaning of the Inspector General Act of 1978, as amended.

         FCA currently has 280 employees, about half of which are examiners located at five field
         offices. Also included in the agency positions are five approved positions for the OIG.
         Appendix 2 displays the current organizational structure of FCA and Appendix 3 displays
         the OIG within that structure.


 MANAGEMENT CHALLENGES

         This section of the report outlines major challenges confronting the agency as it works to
         fulfill its mission. These challenges fall into two general categories. First are the
         challenges related to the FCA’s core mission of ensuring a dependable supply of credit to
         agriculture through the institutions it has chartered. These challenges are often shaped
         and influenced by events that are outside the control of the agency. Second, but no less
         important, are those challenges related to the agency’s operations. These management
         challenges were incorporated in the previous semiannual report but have been updated to
         reflect changes and progress in meeting the challenges.

Farm Credit System Risk

         The Farm Credit System (FCS) is a single industry lender and therefore is vulnerable to
         economic swings. The FCA is challenged to balance the often-competing demands of
         ensuring the FCS fulfills it public purpose, proactively examining risk in the regulated
         institutions both individually and systemically, and controlling the cost of the regulator.

Organizational Leadership

         The Farm Credit Act provides for a full time three-member Board. The Board members
         are appointed by the President and confirmed by the Senate. The rapidly changing,
         complex financial and banking environment makes the Board’s task both challenging and
         important. The Board must be able to engage in professional policy debate and set a
         sound course for the agency.

         The Board is in an important period of transition. On August 6, 2002, the Board returned
         to full strength ending a 19-month period with only two Board members. The return to a
         full strength Board is an important element in setting clear priorities and deliberating fully
         on the issues.

         A relatively small full-time Board also presents a challenge in terms of defining the roles
         and responsibilities of the Board members relative to the governance of the agency. As



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                                                                     FCA SEMIANNUAL REPORT TO CONGRESS
                                                                           OCTOBER 1, 2002 – MARCH 31, 2003



           the membership on the Board changes, it needs to update its rules of operation to ensure
           it fulfills its statutory role in the governance of FCA.

Strategic Planning

           The FCA Strategic Plan was updated and revised for FY 2000 to reflect the FCA Board’s
           priorities at that time. The current FCA Strategic Plan reflects an environment that has
           changed significantly since it was adopted – the composition of the Board, the economy,
           the structure of the FCS, and the President’s Management Agenda. The FCA Board is
           getting input from a cross section of stakeholders and taking a fresh look at the substance
           of FCA’s mission, goals and objectives. The Board will have the opportunity to set a
           course for FCA that focuses on the results that it wants to achieve through clear and
           balanced performance measures. The change in the Board’s composition will allow the
           new Board to develop a new perspective that is not unduly constrained by past practices
           but builds on the experience of prior FCA Boards.

Human Capital

           The President identified human capital as a critically needed management reform in the
           Federal government. FCA needs to develop a comprehensive, integrated approach to
           human capital issues. In light of the changes in the competitive environment, advances in
           technology, and the tenure of its workforce; the agency will be challenged to closely
           evaluate business processes, their associated costs, and alternatives available through
           competitive sourcing. The General Accounting Office’s (GAO) High-Risk1 report outlined
           four pervasive human capital challenges that the government faces:

                  •   Planning strategic human capital and organizational alignment;
                  •   Planning for succession and leadership continuity;
                  •   Acquiring and developing staffs whose size, skills, and deployment meet agency
                      needs; and
                  •   Creating results-oriented performance cultures.

Financial Management

           During FY 2001, FCA successfully implemented a financial management system using
           the services of the Department of Interior’s National Business Center. FCA has received
           an unqualified audit opinion on its financial statements. However, financial management
           success goes beyond an unqualified financial statement audit opinion. Management’s
           challenge is to leverage the system to deliver timely financial information that is critical for
           making well-informed management decisions. Meeting this challenge requires new
           measures of success. Measures such as delivering financial information that managers
           can use for day-to-day operations; and developing reports that capture the full cost of
           programs and projects can help bring about a transition.

Security

           In the recent report on information security, the OIG found a strong foundation for security
           practices. However, the speed of change in the security environment will be a challenge

           1
               GAO-01-263


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                                                                FCA SEMIANNUAL REPORT TO CONGRESS
                                                                      OCTOBER 1, 2002 – MARCH 31, 2003



         for all government organizations. This is especially true for smaller organizations like FCA
         where an increased emphasis on physical and information security will compete with
         program areas for tight budget funding. Therefore, security remains a major challenge for
         the agency. The Continuity of Operations Plan needs to be updated and practiced. OIG
         has provided suggestions to management to facilitate an expedited effort in this regard.

Leveraging Technology

         The agency has recognized that in order to meet the constraints of its budget, it must be
         able to maximize its return on investment in technology. FCA will need effective
         mechanisms to ensure that current and future staff has the technical skills to use
         technology to operate in an efficient manner.


 AUDIT AND INSPECTION REPORTS ISSUED

         We conduct all audits in accordance with the standards established by the Comptroller
         General of the United States for audits of Federal organizations, programs, activities, and
         functions. Inspections are in accordance with the President’s Council on Integrity and
         Efficiency’s Quality Standards for Inspections. Copies of most OIG reports are available
         on FCA’s Web site (www.fca.gov/oig), by contacting the OIG on 703/883-4030, or by e-
         mail at IG_information@fca.gov.

Independent Financial Audit

         In January 2003, the OIG transmitted Harper, Rains, Stokes & Knights, PA (HRSK)
         reports on the audit of the FCA’s financial statements for the fiscal year ended September
         30, 2002. HRSK issued an unqualified opinion. HRSK opined the financial statements
         present fairly, in all material respects, the financial position of FCA as of
         September 30, 2002 and 2001, in conformity with generally accepted accounting
         principles. HRSK issued two other reports. The report on the internal control noted no
         matters that HRSK considered to be material weaknesses. The HRSK report on
         compliance with laws and regulations did not note any instances of noncompliance. In
         addition to the three reports, a management letter was issued.




 STATUS OF UNIMPLEMENTED AGREED UPON ACTIONS


         At the beginning of the period there were 10 unimplemented agreed upon actions. During
         the reporting period, management took final action on 5 of these. During this period, no
         agreed upon actions or recommendations were issued. At the end of this reporting period,
         5 agreed upon actions remain open.




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                                                                   FCA SEMIANNUAL REPORT TO CONGRESS
                                                                         OCTOBER 1, 2002 – MARCH 31, 2003



Audits

             The following table summarizes the final actions management took on open agreed upon
             actions.

                                           AUDIT AGREED UPON ACTIONS

                                                                             Final
                                                       Open during
                                                                         Management             Open on
                           Audit Report                this 6-month
                                                                        Actions during          4/01/2003
                                                          period
                                                                          this period
Performance Budgeting
………Issued March 23, 2001                                     4                  1                    3
Office of the Chief Financial Officer
………Issued January 24, 2002                                   3                  1                    2
FCA Contracting Activity
………Issued August 27, 2002                                    2                  2                    0

             Totals                                          9                  4                    5

             The audit report of Performance Budgeting was issued more than 24 months ago. Three
             of the original 14 agreed upon actions remain open. Once the agency takes actions on
             the remaining agreed upon actions, FCA should be capable of continuously monitoring its
             performance achievement against the related costs.

             The OIG issued the audit report on the Office of the Chief Financial Officer more than 12
             months ago. The two remaining agreed upon actions address the role of the Chief
             Financial Officer and the staffing of the organization.


Inspections

             The following table summarizes the final action management took on an open agreed
             upon action.

                                         INSPECTION AGREED UPON ACTIONS

                                                                              Final
                                                       Open during
                                                                          Management            Open on
                 Inspection Report                     this 6-month
                                                                         Actions during        04/01/2003
                                                          Period
                                                                           this period
Purchase Card Program
..............Issued September 9, 2002                       1                   1                   0

             Totals                                          1                   1                   0

             Management took prompt action and closed the one remaining agreed upon action on the
             Purchase Card Program Inspection.




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                                                                  FCA SEMIANNUAL REPORT TO CONGRESS
                                                                        OCTOBER 1, 2002 – MARCH 31, 2003



Investigations

          Most OIG Hotline calls and emails dealt with FCS borrower complaints and were referred
          to the FCA office responsible for reviewing such matters. All other Hotline calls and
          emails did not require investigative work by this office and were referred to the appropriate
          FCA office or other Federal agency.

          Three investigations were open at the beginning of this reporting period. These
          investigations substantiated allegations of misuse of government purchase cards and
          travel cards and were closed when management took administrative action. Two new
          investigations were opened this period, with one being closed unsubstantiated.

Legislation And Regulations

          OIG staff reviewed several FCA regulations in both proposed and final form. Statutory
          and regulatory compliance issues were reviewed as they arose in the evaluative process.
          Also, we reviewed and commented on proposed legislation affecting the Inspectors
          General community through the legislation committee of the President’s Council on
          Integrity and Efficiency and the Executive Council on Integrity and Efficiency (PCIE/ECIE).

          The Accountability of Tax Dollars Act of 2002, Pub. L. 107-289 (Nov. 7, 2002) requires
          annual financial statements for agencies, unless exempted by OMB. FCA has had an
          annual financial statement audit since the early 1990’s so this will not impose anything
          new.

          This reporting period we reviewed the Draft Super Circular distributed for comments by the
          Office of Management and Budget. Comments were submitted. We also reviewed
          several legislative proposals being considered as a revision to the Inspector General Act.

Other Activities

          Management Advisories

          During this reporting period, the OIG has continued the use of management advisories.
          These advisories provide management with feedback on issues that came to our attention
          during the process of performing other OIG work. In this 6-month period, we advised
          agency managers on issues including billings for reimbursable activities, credit card
          issuance and monitoring processes, travel policies, security practices, continuity of
          operations planning, and agency outreach activities.

          Farm Credit System Insurance Corporation

          The Farm Credit System Insurance Corporation (FCSIC or Corporation) has assets
          exceeding $1.7 billion. The mission of FCSIC is closely tied to the mission of FCA. The
          Farm Credit Act (12 USC 2277a-8) recognizes the interrelationship between FCA and
          FCSIC by establishing a common board structure. The Farm Credit Act also states “To
          the extent practicable, the Corporation shall use the personnel and resources of the Farm
          Credit Administration to minimize duplication of effort and to reduce costs.”

          The Inspector General advised the FCSIC Board that there is no explicit authority
          providing the FCA Inspector General the authority to examine FCSIC activities without


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                                                        FCA SEMIANNUAL REPORT TO CONGRESS
                                                              OCTOBER 1, 2002 – MARCH 31, 2003



FCSIC’s permission. However, the legislative history of the Inspector General Act
indicates that Federal entities, such as FCSIC, may obtain the needed level of internal
audit from an appropriate authority such as an existing OIG. The Inspector General
continues to believe it is in the FCSIC Board’s best interest to have an appropriate level of
independent audit oversight that the OIG can provide.

Survey of Farm Credit System Institutions

OIG administers an ongoing agency survey of the regulated institutions of the FCS. This
survey is designed to provide the FCA Board and senior management with independent
feedback about how well FCA performs its examination and enforcement activities. The
feedback is based on confidential responses received from FCS institutions. We surveyed
the Chairman of the Board and the Chief Executive Officer of each FCS institution,
following their receipt of FCA’s report of examination, for their voluntary feedback on the
quality and consistency of the examination and enforcement processes. OIG reports the
results of the survey annually. During this 6-month period we mailed 56 surveys and
received 26 responses, equating to a 46 percent response rate. Overall, the average
rating for the questions answered during this reporting period was slightly less favorable
(1.7) [1=completely agree; 5=completely disagree] than the prior semiannual reporting
period (1.66).

OIG Performance Measures

OIG’s performance measures were developed in 1995. Each year we review these
measures and issue a report on our performance. It is available on the FCA OIG Web
page at www.fca.gov/oig.

Staff Participation in Activities of the Professional Community

OIG staff members are encouraged to take part in organizations that contribute to the
mission of the Inspector General community, as well as their individual professional
development. Most staff is actively involved in one or more professional organizations as
well as ad hoc activities of the PCIE/ECIE.

Staff Participation in Agency Organizations

Staff is active on several agency workgroups and task forces. During this reporting period
the OIG was represented in Blacks in Government, FCA Employees’ Council,
Administrative Burden Reduction Workgroup, the Federal Women’s Program, the Budget
and Planning task force, the Employee Pay Workgroup and the Farm Credit Club.

Peer Review

OIG staff conducted a peer review of the National Labor Relations Board, Office of
Inspector General.




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                                                                           FCA SEMIANNUAL REPORT TO CONGRESS
                                                                                 OCTOBER1, 2002 – MARCH 31, 2003
                                                                                                    APPENDIX 1



 APPENDIX 1

AUDIT / INSPECTION REPORTS ISSUED BY FCA OIG


                                         NUMBER OF                                     RECOMMENDATIONS THAT
                                      RECOMMENDATIONS/                QUESTIONED          FUNDS BE PUT TO
        TITLE OF REPORT              AGREED UPON ACTIONS                COSTS               BETTER USE


     FCA Financial Statement                      0                          0                       0

              Total                               0                         $0                      $0



INSPECTOR GENERAL ISSUED REPORTS WITH QUESTIONED COSTS

                                                             Number                        Dollar Value

                                                                                 Questioned        Unsupported
                                                      Reports     Recs.            Costs              Costs
A.    For which no management decision
      has been made by the commencement                  0             0             $0                   $0
      of the reporting period

B.    Which were issued during the
                                                        0             0              $0                   $0
      reporting period

Subtotals (A+B)                                         0             0              $0                   $0

C.    For which a management decision was
                                                        0             0              $0                   $0
      made during the reporting period

      (i) dollar value of disallowed costs              0             0              $0                   $0

      (ii) dollar value of costs not disallowed         0             0              $0                   $0

D.    For which no management decision
      has been made by the end of the                   0             0              $0                   $0
      reporting period

E.    For which no management decision
      was made within six months of                     0             0              $0                   $0
      issuance




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                                                                FCA SEMIANNUAL REPORT TO CONGRESS
                                                                      OCTOBER1, 2002 – MARCH 31, 2003
                                                                                         APPENDIX 1


INSPECTOR GENERAL ISSUED REPORTS WITH
RECOMMENDATIONS THAT FUNDS BE PUT TO BETTER USE

                                                                    Number


                                                          Reports             Recs.           Dollar Value
A. For which no management decision has been
   made by the commencement of the reporting                0                   0                  $0
   period

B. Which were issued during the reporting period            0                   0                  $0

Subtotals (A + B)                                           0                   0                  $0

C. For which a management decision was made
                                                            0                   0                  $0
   during the reporting period

    (i) dollar value of recommendations            that
                                                            0                   0                  $0
        were agreed to by management

        --based on proposed management
                                                            0                   0                  $0
          action

        -- based on proposed legislative action             0                   0                  $0

    (ii) dollar value of recommendations           that
                                                            0                   0                  $0
         were not agreed to by management

D. For which no management decision has been
                                                            0                   0                  $0
   made by the end of the reporting period

E. For which no management decision was made
                                                            0                   0                  $0
   within six months of issuance




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                              FCA SEMIANNUAL REPORT TO CONGRESS
                                    OCTOBER1, 2002 – MARCH 31, 2003
                                                       APPENDIX 2


      APPENDIX 2

     FCA Organization Chart
10
 APPENDIX 3




                  Farm Credit Administration
                  Office of Inspector General



                                              Inspector General
                                                Stephen G. Smith


                     Investigator     Counsel to IG            Auditor       Management Analyst
                   Joan D. Ohlstrom   Elizabeth Dean       Veronica McCain   Mary Beth Barbagallo




FCA Office of Inspector General Organization Chart