Internal Control Over Financial Reporting

FARM CREDIT ADMINISTRATION <CFR>12 CFR Parts 620 and 630</CFR> <RIN>RIN 3052-AD56</RIN> <SUBJECT>Internal Control Over Financial Reporting</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Farm Credit Administration. <HD SOURCE="HED">ACTION:</HD> Proposed rule. <SUM> <HD SOURCE="HED">SUMMARY:</HD> The Farm Credit Administration (FCA, we, or Agency) is seeking comments on this proposed rule to amend the reporting regulations to require Farm Credit System (System) associations that meet certain asset thresholds or conditions, as well as all System banks, to obtain annual attestation reports from their external auditors that express an opinion on the effectiveness of internal control over financial reporting (ICFR), are made in accordance with generally accepted auditing standards (GAAS) as promulgated by the American Institute for Certified Public Accountants (“AICPA”) or the Public Company Accounting Oversight Board's (“PCAOB”) auditing standards, and accompany management's assessment and be included with the System Institution's annual report (these attestation reports are hereinafter referred to as “Attestation Reports”). The proposed rule would also require Attestation Reports obtained by the Federal Farm Credit Banks Funding Corporation (Funding Corporation) be made in accordance with GAAS. </SUM> <DATES> <HD SOURCE="HED">DATES:</HD> Comments on this proposed rule must be submitted on or before January 28, 2025. </DATES> <HD SOURCE="HED">ADDRESSES:</HD> For accuracy and efficiency, please submit comments by email or through FCA's website. We do not accept comments submitted by fax because faxes are difficult to process. Also, please do not submit comments multiple times; submit your comment only once, using one of the following methods: • Send an email to <E T="03">reg-comm@fca.gov.</E> • Use the public comment form on our website: 1. Go to <E T="03">https://www.fca.gov.</E> 2. Click inside the “I want to. . .” field near the top of the page. 3. Select “comment on a pending regulation” from the dropdown menu. 4. Click “Go.” This takes you to the comment form. • <E T="03">Send the comment by mail to the following:</E> Autumn R. Agans, Deputy Director, Office of Regulatory Policy, Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA 22102-5090. We post all comments on the FCA website. We will show your comments as submitted, including any supporting information; however, for technical reasons, we may omit items such as logos and special characters. Personal information that you provide, such as phone numbers and addresses, will be publicly available. However, we will attempt to remove email addresses to help reduce internet spam. To review comments on our website, go to <E T="03">https://www.fca.gov</E> and follow these steps: 1. Click inside the “I want to. . .” field near the top of the page. 2. Select “find comments on a pending regulation” from the dropdown menu. 3. Click “Go.” This will take you to a list of regulatory projects. 4. Select the project in which you're interested. If we have received comments on that project, you will see a list of links to the individual comments. You may also review comments at the FCA office in McLean, Virginia. Please call us at (703)883-4056 or email us at <E T="03">reg-comm@fca.gov</E> to make an appointment. <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> <E T="03">Technical information:</E> Aaron M. Livernois, Senior Policy Accountant, Office of Regulatory Policy, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4414, TTY (703) 883-4056. <E T="03">Legal information:</E> Andra Grossman, Attorney Advisor, Office of General Counsel, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4323, TTY (703) 883-4056. </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">I. Summary of Proposed Objectives and Amendments</HD> The objective of this proposed rule is to strengthen the safety and soundness of the System's ICFR by requiring Attestation Reports from certain institutions. As further discussed in section II, complexity and concentration of System banks and their affiliated associations have changed dramatically since 2006 (the fiscal year before § 630.5 was last amended), leading to an increased risk that an internal control weakness or failure, such as an undetected management error, negligence, or fraud event at one association could affect the safety and soundness of the entire System. By requiring certain associations to obtain an Integrated Audit, FCA's proposed rule would help reduce undetected and evolving financial reporting risks in the System. The amendments in the proposed rule include changes to financial reporting requirements set forth in 12 CFR 620.3 and 630.5 that: • Revise § 620.3 to mandate all System banks obtain an Attestation Report from their external auditors. • Revise § 620.3 to mandate all System associations that meet the following thresholds or conditions obtain an Attestation Report from their external auditors: ○ The association's total assets were one percent or more of total System assets as of December 31 of the previous fiscal year; or ○ The association's direct note payable to its bank was 15 percent or more of the bank's direct loans to associations as of December 31 of the previous fiscal year; or ○ FCA staff determines that a material weakness exists in the association's ICFR, or other developments have occurred or are expected to occur that could adversely impact, or result in significant changes to, the association's ICFR that impacts the safety and soundness of the association. • Revise § 630.5(d)(2), to correspond with the proposed language in § 620.3(d)(2) and (3) that an Attestation Report be made in accordance with GAAS. Refer to section II for additional information. FCA believes requiring associations to obtain an Attestation Report when their assets equal or exceed one percent of total System assets is appropriate because this threshold captures the associations that pose a systemic risk to the System. FCA also believes requiring associations to obtain an Attestation Report when their direct note payable to their bank equals or exceeds 15 percent of the bank's direct loans to associations is appropriate because these associations hold a large concentration of their bank's direct loans and may pose a systemic risk to the safety and soundness of their bank without meeting the one percent of total System assets. This requirement ensures associations that hold a large concentration of bank direct loans also obtain an Attestation Report. An association would generally have three fiscal years to obtain its Attestation Report. Additionally, the proposed rule also details how and when merging associations are to obtain Attestation Reports. All System banks currently obtain an Integrated Audit, as required by the Funding Corporation. FCA now proposes to formalize this requirement in this regulation. <HD SOURCE="HD1">II. Background</HD> <HD SOURCE="HD2">A. Law and Regulation</HD> The Farm Credit Amendments Act of 1985  <SU>1</SU> <FTREF/> revised the Farm Credit Act of 1971, as amended (Act), <SU>2</SU> <FTREF/> to require FCA regulate the disclosure and reporting practices of System institutions and require each System institution to prepare and publish annual financial reports to shareholders. Section 5.19(b) of the Act requires financial statements be prepared in accordance with generally accepted accounting principles (GAAP) and be audited by an independent public accountant. <FTNT> <SU>1</SU>  Public Law 99-205, 99 Stat. 1678, Dec. 23, 1985. </FTNT> <FTNT> <SU>2</SU>  Public Law 92-181, 85 Stat. 583, Dec. 10, 1971. </FTNT> In December 2006, FCA issued a final rule at 12 CFR 630.5(d) (71 FR 76111) that, in part, requires the Funding Corporation to require its external auditor to express an opinion on the Funding Corporation's effectiveness of ICFR in preparing disclosures to investors in System-wide and consolidated bank debt obligations. When proposed, FCA stated that a System-wide opinion at the Funding Corporation level on ICFR would accomplish many of the same objectives as requiring an opinion on ICFR at the bank and association levels. <SU>3</SU> <FTREF/> <FTNT> <SU>3</SU>  71 FR 13040, 13043 (March 14, 2006). </FTNT> Additionally, 12 CFR 620.3(d) of FCA regulations requires all System institutions with over $1 billion in total assets at the end of the prior fiscal year include in their annual reports a report by management assessing the effectiveness of ICFR. These institutions must also report to their board of directors and disclose in their quarterly and annual reports any material changes in ICFR during the reporting period. Associations with assets of less than $1 billion in total assets do not have reporting requirements. As discussed below, the complexity and concentration of System banks and associations have changed dramatically, leading to an increased risk that an internal control weakness or failure at one institution could affect the safety and soundness of the entire System, due to the System's cooperative structure. This proposed rule, if adopted, would decrease risks related to the detection and reporting of internal control weakness or failure. FCA believes an Integrated Audit will strengthen the safety and soundness of the System. <HD SOURCE="HD2">B. Definitions Used in the Preamble</HD> <E T="03">Internal Control over Financial Reporting.</E> ICFR is a process consisting of policies and procedures designed to assess financial statement risk and provide reasonable assurance that an institution prepares reliable financial statements. <SU>4</SU> <FTREF/> <FTNT> <SU>4</SU>  AICPA Standard AU-C 940.05, <E T="03">An Audit of Internal Contro ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 36k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━