Pub. 6 2017 Issue 7

l e a d i n g a d v o c a t e f o r t h e b a n k i n g i n d u s t r y i n k a n s a s 24 BERT ELY’S FARM CREDITWATCH® FCS Hit by Yet Another Accounting Scandal T he FCS has been hit by yet another accounting scandal, this time at Lone Star Ag Credit, which is headquartered in Fort Worth, Texas. Lone Star reported total assets of $1.72 billion on March 31, 2017. On Aug. 9, Lone Star issued a Notification of Non-Reliance on Previously Issued Financial Statements which stated in part that “management has determined the Association’s financial statements as of and for the year ended Dec. 31, 2016, as well as the three months ended March 31, 2017, should no longer be relied upon.” The notice stated that “during the second quarter of 2017, Association management discovered appraisal and accounting irregularities affecting a segment of the Association’s lending portfolio …Through our investigation of the portfolio to date, we identified loans totaling $3.3 million that should have been charged off in 2016, and an additional $5.8 million that should have been charged-off during the first quarter of 2017.” This notice further stated that the issuance of these erroneous financial statements was “the result of a material weakness in certain internal controls.” A crucial question at this time: Has management identified the full extent of Lone Star’s internal-control weaknesses? Will additional losses surface as this accounting fiasco is investigated? Lone Star’s regulator, the Farm Credit Administration (FCA) has not issued any statement regarding the Lone Star mess, although it did erase links to Lone Star’s call reports for 2016 and 2017 and noted that erasure in a deeply buried disclosure on this FCA webpage. The FCA apparently was unaware of the seriousness of Lone Star’s accounting problems as there were no FCA enforcement orders outstanding against any FCS association as of June 30, 2017. Surely if FCA examiners had uncovered Lone Star’s accounting shortcomings it would have issued an enforcement order (what the FCA calls a written agreement) against Lone Star. On July 31, the FCA appointed a new Inspector General, Wendy Laguarda, a long-time FCA attorney. An early task for Ms. Laguarda should be to find out what went wrong at Lone Star and whether FCA examiners were slow to catch its internal-control weaknesses. FCW readers may remember a similar episode at FCS Southwest (Southwest), the FCS association that served Arizona and a portion of southern California. I first reported on Southwest’s accounting problems in the November 2014 FCW. Those problems were so serious that Southwest effectively was forced by the FCA into a sort-of merger with California-based Farm Credit West on Nov. 1, 2015, as Southwest will continue to operate as an independent subsidiary of Farm Credit West for