oversight

Third Quarter FY 2014 FCS Survey

Published by the Farm Credit Administration, Office of Inspector General on 2014-10-22.

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

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



                      Third Quarter Fiscal Year (FY) 2014 Summary Report
                                    (April 1 – June 30, 2014)

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


Introduction

During the period April 1 – June 30, 2014, the Office of Examination identified 11 Farm Credit
System institutions that were in a position to provide meaningful survey responses.

The OIG sent surveys to those 11 institutions on July 25, 2014. Of the 11 institutions surveyed,
6 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
second quarter of FY 2014 were received and are included in this third quarter FY 2014 report.
Therefore, this report includes a total of 8 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 – Third Quarter FY 2014

Average numerical responses to survey statements 1 – 8 were 1.8 to 2.4.


                        Average Numerical Responses to Survey Statements 1 – 8
               rd                              nd                              st
              3 Qtr                           2 Qtr                          1 Qtr
            1.8 – 2.4                          2.0 – 2.2                          1.4 – 2.1


October 22, 2014
                        Third Quarter FY 2014 OIG Summary Report on the Survey of FCS Institutions
                                        Regarding the Examination Function
_________________________________________________________________________________________________________



The average response for all survey statements was 2.0.

                             Average Response for all Survey Statements
               rd                             nd                                          st
             3 Qtr                          2 Qtr                                       1 Qtr
               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.

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:           2.4         Question    1st   2nd   3rd   4th
                                                                                Average
                                               1        Qtr   Qtr   Qtr   Qtr

                                             FY 14      2.0   2.2   2.4

                                             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:
            •        We always appreciate the scope of the examination to include an evaluation
                     of risks in our organization, particularly the loan portfolio and credit risk.
                     This year those areas were covered, but the focus was on standards of
                     conduct and business continuity.
                •    As a “financial” institution, it was discouraging to see the examination place
                     such little focus and emphasis on credit risk. There was far too much focus
                     on standards of conduct, board elections, etc.
                •    EIC properly focused the exam team to our satisfaction and the institution's
                     benefit.



  October 22, 2014                                                                                          2
                        Third Quarter FY 2014 OIG Summary Report on the Survey of FCS Institutions
                                        Regarding the Examination Function
_________________________________________________________________________________________________________


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

    Average Response:           1.9
                                                       st    nd     rd     th
                                          Question    1     2      3      4
                                                                                  Average
                                             2        Qtr   Qtr    Qtr    Qtr

                                            FY 14     1.8   2.1    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:
            •        Examiners appeared to have applied a written check-list approach. We heard
                     more than once – your process is not wrong and complies with FCA regulations
                     but it is not like everyone else does it.
                •    The certification process the agency has implemented has produced some
                     talented, knowledgeable, and professional examiners. We are impressed with
                     their knowledge of our business operations as well as laws and regulations.
                •    The examiners were well versed on regulation, however, not very familiar with
                     agriculture, credit, and credit risk.


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

                                            FY 14     1.7    2.0    2.1

                                            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:
            •        The required and recommended actions were a laundry list and difficult for the
                     Board to determine materiality.
                •    Our Audit Committee and Board always embrace the examination process.
                     We view examinations as another risk management tool. The examiners make
                     their findings easy to understand and they respond appropriately to our
                     questions. We agree with the examination findings and recommendations.
                •    Again, there seemed to be a disproportionate focus on standards of conduct
                     instead of what truly constitutes “risk” to our institution.




  October 22, 2014                                                                                          3
                        Third Quarter FY 2014 OIG Summary Report on the Survey of FCS Institutions
                                        Regarding the Examination Function
_________________________________________________________________________________________________________


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

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

                                             FY 14    1.4   2.2   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:
            •        Examiners were very professional but it seemed to management there was
                     minimal time for the examiners to understand the “why” behind institution
                     practices.
                •    The examiners are always professional. The planning of on-site work is well
                     coordinated and results in little disruption to our ongoing activities.
                •    The senior examiner on-site was exceptionally professional and level
                     headed. The rest of the examination team could use a large dose of polish,
                     common sense, and experience.

                                        COMMUNICATIONS

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

    Average Response:           2.0        Question   1st   2nd   3rd   4th
                                                                              Average
                                              5       Qtr   Qtr   Qtr   Qtr

                                            FY 14     1.6   2.2   2.0

                                            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:
            •        There were numerous conversations but it appeared to the institution team
                     the examination process did not allow the examiners sufficient time to
                     understand the “why” behind the institution operating processes.
                •    The communications between examiners and our audit staff, management
                     and board of directors is efficient and effective. There are never any
                     surprises and that is good.
                •    Discussions that were held face-to-face on site did not translate well to the
                     written report.




  October 22, 2014                                                                                          4
                        Third Quarter FY 2014 OIG Summary Report on the Survey of FCS Institutions
                                        Regarding the Examination Function
_________________________________________________________________________________________________________


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
                                          Question    1st    2nd    3rd    4th
                                                                                  Average
                                             6        Qtr    Qtr    Qtr    Qtr

                                            FY 14     2.1    2.2    1.8

                                            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:
            •        The in-person meeting between FCA EIC and Director, along with institution
                     Board and management was a good dialogue and exchange of ideas.
                     Communications took place during the in-person meeting.
                •    We really appreciate the time the examiners allow for entrance and exit
                     conferences with our staff and directors. The examination’s results
                     presentation with the Audit Committee is very well organized and
                     professional. In fact, the information presented is very easy to understand
                     and the examiners provide valuable information and insight into their
                     findings.


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

     Average Response:          1.9        Question    1st    2nd    3rd    4th
                                                                                   Average
                                              7        Qtr    Qtr    Qtr    Qtr

                                            FY 14     1.8     2.2    1.9

                                            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:
            • FCA EIC and Director listened and had an exchange of ideas with the
               institution Board during our meeting.
            • The interaction between examiners and management and board is excellent.
               The reasons for a concern or finding is communicated clearly and our
               questions are always answered in a way that we understand.
            • Agree, however, this was done after reports and findings were issued
               instead of on the front end. Better communication while conducting the
               examination instead of after the report is issued would be most beneficial.




  October 22, 2014                                                                                          5
                        Third 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:          2.0         Question   1
                                                        st
                                                             2
                                                              nd
                                                                   3
                                                                    rd
                                                                         4
                                                                          th
                                                                               Average
                                               8       Qtr   Qtr   Qtr   Qtr

                                              FY 14    2.0   2.2   2.0

                                              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:
            • The focus areas distributed from FCA Office of Examination are beneficial to
               the institution Board and management.
            • The National oversight activities are shared with the Audit Committee so our
               organization can learn from the reviews conducted elsewhere in the country.
               Many times the business issues being reviewed are appropriate and specific
               to our organization and sometimes the findings are related to activities that
               we are not experiencing or the activity is minimal for our organization.


                           GENERAL QUESTIONS 9, 10, and 11

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

                •    The discussion with the FCA EIC and Director.
                •    We are always looking for feedback concerning risk in our organization and
                     how well we are managing that risk.
                •    All beneficial.
                •    Face-to-face discussions with the senior examiner that was on site was very
                     beneficial. The supervising officer that assisted in presenting the exam to
                     the Audit Committee was great as well.
                •    The examiners were beneficial in providing some understanding of FCA
                     regulations.
                •    Ratification of the institution’s business practices, candid discussion with
                     examiners regarding best practices within the system, and open discussion with
                     examiners regarding internal processes to make valuable improvements.
                •    Borrower Rights Requirements/Guidance.

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

                •    It appeared to institution management the "matrix" approach utilized to form the
                     examination teams contributed to a cumbersome examination process. The
                     examination process/timeframes seemed to have examiners rushed and
                     minimal time to talk with institution leaders when a process did not exactly
                     match the FCA check-list. While examiners were onsite they were working on
                     prior institution examination section summaries plus trying to do onsite work for
                     the examination. Once the team left onsite there were many calls and emails
                     asking questions. It seemed difficult for examiners -- while working offsite -- to

  October 22, 2014                                                                                          6
                        Third Quarter FY 2014 OIG Summary Report on the Survey of FCS Institutions
                                        Regarding the Examination Function
_________________________________________________________________________________________________________


                     grasp answers to questions if the response did not conform to the FCA check-
                     list.
                •    There is great diversity among institutions across the country. At times we are
                     made aware of activity or situations that transpire in other parts of the country
                     that have not occurred here or are unlikely to occur here. Many times the
                     response from the agency is to address or respond to specific local issues with
                     a system wide response rather than address the issue where the activity took
                     place.
                •    Many misunderstandings of questions and answers from the EIC and his staff.
                     It would have been very beneficial to have had a draft of the final report in
                     advance to clear up the misunderstandings and confusion.
                •    Evaluation and testing of items that are compliance-related (regulatory not
                     consumer lending compliance) but are immaterial to business operations and
                     pose low risk to our customers and the Farm Credit mission.
                •    Although necessary for FCA, the large number of new trainees was somewhat
                     cumbersome on institution staff and senior management.

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

                •    The institution Board felt that the examiners listened to their comments and that
                     discussion was encouraged and appreciated.
                •    It would be helpful if more clarity would be provided with regards to examination
                     activity when new regulations are implemented. With the examination modules
                     coming long after effective dates of regulations, it makes it very challenging to
                     ensure compliance.
                •    The board thanks FCA for its guidance and assistance.
                •    As Audit Committee Chair, the examination process seemed to be effective and
                     beneficial to the institution as noted above. The reporting by the examination team
                     was clear and helped the board to understand the areas reviewed and the
                     recommendations that resulted with clear context and reasoning. Further, our EIC
                     was receptive to suggestions and ideas to improve the examination in the future.
                •    The Board felt it was a little cumbersome having the summary of examination
                     done by conference call with the entire Board AND in person at a regular Board
                     meeting.




  October 22, 2014                                                                                          7