The Illinois Department of Agriculture
(Department) has had the responsibility for licensing and regulating grain
dealers and warehouses since the Grain Dealers Act was created in 1967. Warehouses provide facilities to store grain
until the producer decides to either sell or use the grain, while grain dealers
provide producers with a ready market in which to sell their grain. According to Department data, as of February
2003 there were a total of 423 State licensed grain dealers and warehouses with
1,148 locations and a storage capacity of over one billion bushels.
In 1983, the Illinois Grain Insurance Act
created a pool (the Grain Insurance Fund) funded by the licensed participants,
to be used to cover claims in the event of a grain dealer or warehouse
failure. In August 2001, Ty-Walk Liquid
Sales, Inc. (Ty-Walk) failed, leaving approximately $9 million in claims to be
paid by the Grain Insurance Fund (GIF).
The Illinois Grain Code (240 ILCS 40/1-1 et seq.) states that if amounts in the Fund are insufficient to pay
all valid claims, the General Assembly shall appropriate to the Grain Insurance
Corporation amounts sufficient to satisfy the valid claims. Because the Grain Insurance Fund had an
insufficient fund balance to cover these claims at the time of the failure, $4
million was transferred from the General Revenue Fund to the GIF to pay these
claims.
The Illinois Department of Agriculture’s
system of regulation and oversight includes licensing and examination
requirements. The Illinois Grain Code
and the Illinois Administrative Code (8 Ill. Adm. Code 281.10 through 281.90)
contain specific requirements for licensing and examining grain dealers and
grain warehouses in the State of Illinois.
The Grain Code also contains provisions that allow for corrective
actions and penalties related to violations of the Grain Code, financial
deficiencies, administrative penalties, and suspension and revocation of a
license. Although the Department has
implemented some changes in its regulation and oversight, the Department could
further strengthen its regulation and oversight by:
·
Checking the backgrounds of owners, managers,
and board members of licensees during the license application and renewal
process;
·
Requiring a second review and approval of all
the license applications;
·
Providing training to examiners in areas such as
accounting and financial fraud detection;
·
Having examiners file a conflict of interest or
impairment disclosure form either annually or for each examination performed;
·
Promulgating rules to implement the new
examination requirement contained in Public Act 93-225;
·
Consider requiring training of licensees and
implementing a licensure test or training certification program for grain
managers/merchandisers; and
·
Creating a centralized database that allows the
Department to access data regarding licensing, examinations, and corrective
actions. Currently the Department’s
data is kept in several locations and corrective actions such as Memorandums of
Adjustment and license suspensions are not tracked. The Department also does not track officers, directors, managers,
and partners of former licensees that have had their license terminated or
revoked or who have improperly manipulated books and records or undertaken
other improper business practices.
The Department’s responsibilities
regarding the process of liquidation and adjudication of claims in the event of
a failure are delineated in the Grain Code and administrative code, including
specific timelines for submitting claims and determining compensation. We reviewed the claims process and sampled
claims for two failures (Ty-Walk and Ashley Elevator) to determine whether
requirements established by the Grain Code and
administrative rules for
processing claims are adequate and being followed by the Department of
Agriculture. The Department should
establish specific procedures outside the Grain Code to determine what is a
valid claim. There is potential for
claimants to spread the claim amounts to different family members to avoid the
maximum limit for claims set forth in the Grain Code.
The Grain Code requires that the
Department determine the validity, category, and amount of claims within 120
days after the date of failure. It also
requires that the claimant be compensated within approximately 180 days of the
date of failure. The Department should
develop procedures to ensure that timelines relating to claims are met. Our sample of claims showed that it took an
average of 227 days from the date of failure to compensate Ty-Walk
claimants. Department officials noted
that the process was slowed because of bankruptcy proceedings. Our sample of Ashley Elevator claims showed
it took on average 156 days to compensate the claimant from the date of
failure. According to Department
officials, several variables affect the timeliness of claimant compensation
including the size and type of failure, the types of claims and contracts
involved, the make-up of creditors, the amount of inventory, and whether
bankruptcy is involved.
For the Ty-Walk failure, in 36 cases the
claimant appealed the initial determination made by the Department. In seven cases the Department’s original
determination was overturned with these claimants being awarded an additional
$163,134. Seven claimants appealed
their claims to the circuit court and as of September 2003, three Department
determinations were affirmed and four cases were still pending in circuit
court, which could potentially amount to $115,311.
As of June 30, 2003, a total of
$31,717,287 was paid to 281 Ty-Walk claimants.
Five claimants received 76 percent of the total payout (over $24
million). These claimants were banks
and other entities that held collateral warehouse receipts for grain stored at
Ty-Walk. Although a majority of the
claimants were producers, they received $7,568,886 or 24 percent of the total
payout.
On March 21, 2002, $4 million was
transferred from the General Revenue Fund to the Grain Insurance Fund
(GIF). According to the Department’s
projected plan, General Revenue Fund repayment should take approximately three
years, but it may take longer depending on several variables, including the
number or size of future failures, the collection of assessments, the amount of
post draw recoveries, or other market conditions. As of June 2003, total assets of the GIF were $1,166,397, and no
funds had been repaid to the General Revenue Fund. Although Public Act 93-225 established a new minimum GIF balance
of $6 million and a Reserve Fund of $2 million, the GIF balance, even when
fully funded, may not be sufficient to cover another major failure such as
Ty-Walk. The Department should
periodically evaluate the GIF’s capacity to help ensure there are adequate
resources in the GIF and determine whether further changes to the Grain Code
are needed. The Department should also
ensure that all sub-accounts under the Grain Indemnity Trust Account are used
for their designated purpose.
Public Act 93-225, effective July 21,
2003, made several changes to the Grain Code that should assist the Department
in its regulation and oversight of grain dealers and warehouses. The Act also contained many changes
regarding the GIF including establishing two new assessments: a grain seller
initial assessment and a lender assessment.
Both assessments will be difficult to track because the Act requires the
licensee to notify, collect, or remit the assessment to the Department. We recommended that the Department should
take steps to ensure the correct amount is assessed and collected for the new
grain seller and lender assessments.
BACKGROUND
On December 11, 2002, the Legislative
Audit Commission adopted Resolution Number 125, which directed the Auditor
General to conduct a management audit of the Illinois Department of Agriculture
and the Grain Insurance Corporation with regard to the regulation of grain
dealers and warehousemen and the administration of the Grain Insurance
Fund.
The Resolution asks the Auditor General
to determine:
·
Whether there are sufficient resources in the
Grain Insurance Fund, and if shortages exist, the plans to obtain funds needed
to pay valid claims;
·
Whether the rules established for processing
claims filed against grain dealers and warehousemen who chose or become
insolvent are adequate; and
·
Whether oversight of grain dealers and
warehousemen, including the conduct of any audits, site examinations, or other
reviews, is sufficient to protect the interests of grain producers, other grain
dealers and warehousemen, and the State of Illinois.
Grain dealers and warehouses play an
important role in Illinois agriculture.
Warehouses provide facilities to store grain until the producer decides
to either sell or use the grain. Grain
dealers provide producers with a ready market in which to sell their
grain. This expedites the flow of grain
from farm to market.
The
Illinois Department of Agriculture is responsible for the regulation and
oversight of grain dealers and warehouses in the State.
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·
When a grain elevator stores grain for a farmer, the elevator is acting as a warehouse. The farmer is given a warehouse receipt or a scale ticket as
evidence that the grain is stored.
·
When an elevator buys grain from a farmer, it is acting as a grain dealer. Farmers may
sell grain to an elevator under several different arrangements.
Illinois
Department of Agriculture
Under the provisions of the Illinois
Grain Code (240 ILCS 40/1-15), the Director of the Illinois Department of
Agriculture is responsible for the regulation and oversight of grain dealers
and warehouses in the State. Inspecting
and licensing grain dealers and most warehouses in Illinois is undertaken
through the Department’s Division of Agriculture Industry Regulation, Bureau of
Warehouses.
The
number of closings over the past three years ranged from 25 in 2000 to 34
closings in 2002.
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Grain
dealers and warehouses may close for many reasons, including voluntarily
surrendering their license, selling the facility, merger/consolidation, or
forming a new entity. The number of
closings over the past three years ranged from 25 in 2000 to 34 closings in
2002. Of these closings, only 1 or 2
per year meet the definition of a failure, according to the Illinois Department
of Agriculture. In some closings, the Department
of Agriculture works with the licensee and their boards toward an orderly
liquidation or sale in order to avoid a failure and the need to request a
transfer from the Illinois Grain Insurance Fund.
Illinois
Grain Insurance Corporation
The Illinois Grain Insurance Corporation
was established in 1983. The primary
functions of the Corporation are to make investments with funds assessed and
collected by the Department of Agriculture and to transfer funds from the Grain
Insurance Fund to the Grain Indemnity Trust Account when the Director of the
Department of Agriculture determines it necessary in order to compensate
claimants.
The Illinois Grain Insurance Fund (GIF)
was established in 1983 by the Illinois Grain Insurance Act. The GIF was created to protect producers in
the event of a failure of a licensed grain dealer or warehouse and to ensure
the existence of an adequate resource so that persons holding valid claims may
be compensated for losses in the event of a failure. The Department of Agriculture is responsible for requesting monies
from the GIF. (pages 3-8)
REGULATION AND OVERSIGHT
The Illinois Department of Agriculture’s
system of regulation and oversight includes licensing and examination
requirements. The Illinois Grain Code
(240 ILCS 40/1-1 et seq.) and the
Illinois Administrative Code (8 Ill. Adm. Code 281.10 through 281.90) contain
specific requirements for licensing and examining grain dealers and grain
warehouses in the State of Illinois.
The Grain Code and administrative rules also contain provisions that
allow for corrective actions and penalties related to violations of the Grain
Code, financial deficiencies, administrative penalties, and suspension and
revocation of a license. (page 13)
LICENSING PROCESS
When an application for a grain dealer or
warehouse license is received by the Illinois Department of Agriculture,
several checks are conducted.
Department personnel use the audited financial statements that are sent
with the application to calculate the current ratio of assets to liabilities
(which must be at least 1:1) and the adjusted debt to equity (which cannot be
more than 3:1) for each applicant. For
license renewals, if the financial ratios are not sufficient, then the Grain
Code permits the applicant to post collateral in an amount to meet the
financial requirements. New licensees
are not allowed to post collateral to meet the financial ratios required for
licensure.
The Department also checks to see that
the license applicant has insurance and whether the most recent audit of the
licensee contained a qualified opinion.
The Department may also disallow some assets when calculating the
financial ratios. These disallowances
may be for reasons such as a “receivable due from a related party” or “loans
due from an affiliated company.”
There
was no evidence that the Department had conducted background checks of
applicants.
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We found that:
·
In many cases reviewed (20 of 30), only one
Department employee completed the financial analysis, reviewed the application,
and approved the license applications.
In 10 of the cases, a second review was conducted. A second review would ensure accuracy of
financial analysis and provide for additional controls.
·
In all 30 cases, there was no evidence that the
Department had conducted background checks of applicants.
The Grain Code states that an applicant
cannot have had its license terminated or revoked by the Department, the United
States, or by any other state or jurisdiction within two years of the date of
application (this includes officers, directors, partners, or managers), leaving
unsatisfied indebtedness to claimants, unless the applicant or licensee makes a
sufficient showing to the Department that the person or related party was not
materially and substantially involved as a principal in the business that had
its license terminated. The Department
does not track these individuals, and therefore cannot ensure that licensees
are complying with these requirements of the Grain Code.
We recommended that the Department
should: ensure that all license applications and related financial analyses are
reviewed and approved by a supervisor; conduct background checks of all license
applicants including its officers, directors, partners, and managers; and track
officers, directors, managers, and partners of former licensees that have had
their licenses terminated or revoked or who have improperly manipulated books
and records or undertaken other improper business practices. (pages 15-19)
EXAMINATIONS
The
Department is required by law to conduct an examination and inspect each
licensed grain dealer and grain warehouse at least once each calendar year.
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The Department is required by law to
conduct an examination and inspect each licensed grain dealer and grain
warehouse at least once each calendar year (240 ILCS 40/1-15). In addition to performing a physical inventory
and financial analysis, examiners perform several types of procedures and
reviews to verify financial information and check compliance with grain
regulations. The most recent examiner’s
manual lists a total of 13 spot checks that may be performed during an examination. The checks include areas such as price later
contracts (contracts that establish the grain price after delivery), warehouse
receipts, scale tickets, and daily position records. However, the number and type of spot checks performed depends upon
the activities that are undertaken by the licensee.
According to data provided by the
Department, there were 877 examinations of licensed grain dealers and
warehouses conducted during Calendar Year 2002. We determined that all licensees received at least one subsequent
examination during calendar year 2002.
Examination
Requirement Changes In Public Act 93-225
Public Act 93-225, effective July 21,
2003, made several changes to the Grain Code.
The new examination requirements in Public Act 93-225 establish three
types of examinations to be conducted based upon the activities of the
licensee. It also requires the
Department to promulgate rules regarding the specific components and guidelines
of these exams. The current
administrative rules do not contain provisions regarding the components or
guidelines for examinations. The
Department may also engage the services of accounting experts, grain risk
management experts, or both as part of any intermediate or advanced
examination.
There
are no formal written guidelines regarding supervisory review or timelines in
which the review should be conducted.
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Supervisory
Review
The average amount of time between
completion of the subsequent exam and when the Department’s central office
personnel reviewed the exam was 28.5 days, for the 30 files we reviewed. The number of days between exam completion
and central office review ranged from 79 days to 3 days. The exam which took 79 days between
completion and review date occurred in late 2001, during the failure and liquidation
of Ty-Walk. There are no formal written
guidelines regarding supervisory review or timelines in which the review should
be conducted.
Closeout
Exams
When a licensee closes or is bought
through a successor agreement, a closeout examination is performed. We found that some closeout exams were not
being conducted prior to the company closing or a successor agreement being in
effect. In one case it took
approximately 3 ½ months from the date of closing before the Department
conducted the closeout examination. In
the exam it stated that the examiner could not verify unreceipted storage,
grain payables, open purchase contracts, and unfilled sales contracts.
Distribution
and Notification of Examination Results
Board
members of the cooperatives or companies that are licensed grain dealers or
warehouses are not required to attend the exit conferences or sign off on the
examination results.
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Board members of the cooperatives or
companies that are licensed grain dealers or warehouses are not required to attend
the exit conferences or sign off on the examination results. Also, according to Department officials,
board members are not sent a copy of the examinations. Having an active and informed board can play
a vital role in the success or failure of any organization and boards are often
the first line of defense against misguided management.
We recommended that the Department should
promulgate rules to implement the new examination process delineated in Public
Act 93-225; consider engaging the services of accounting experts and grain risk
management experts; consider establishing a time limit and guidelines for
examinations, and documenting supervisory review of examinations; establish
guidelines for notification of successor agreements and closeout examinations;
consider requiring at least one board member to be present at exit conferences
and sign the examination certification form; and consider providing copies of
examinations to board members, directors, and owners of licensees. (pages 19-27)
EXAMINERS
As of July 2003, the Bureau of Warehouses
had 24 examiners, 23 who conducted field exams of licensees and one who
reviewed the exams in the Springfield office.
In addition, there were two Public Service Administrators that supervise
the work of the examiners.
Training
The Department has not established
training requirements for new examiners or a formal written training plan. The Department also does not track training
examiners receive. The Department could
not provide the number of hours of training that each examiner had received
each year because this is not in the personnel files or tracked by the Bureau
of Warehouses or Human Resources. There
was no evidence that examiners had received training in grain accounting or
detecting fraud.
Conflicts
of Interest
Conflicts
were not always taken into account and there were potential conflicts of
interest that were not reported.
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According to Department officials, each
examiner files a conflict of interest statement with the Department to disclose
potential impairments. However, our
review showed that these conflicts were not always taken into account and there
were potential conflicts of interest that were not reported.
·
Nine examiners conducted 32 exams of licensees
that they listed as having a conflict between 1994 and 2003. Twenty-eight of these were between
1999-2003; and
·
Examiners did not always list former employers
that are licensees as a conflict.
We recommended that the Department should
provide training to examiners in grain accounting and fraud detection; track
training received by examiners; and identify potential examiner conflicts of
interest by requiring examiners to file an annual statement or a statement
prior to each engagement. (pages 27-31)
The
Department has no formal written guidelines regarding when a licensee should
be placed on an accelerated exam schedule, be required to file an audit
within 60 days of the end of the licensee’s fiscal year, or be required to
file additional reports.
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CORRECTIVE ACTIONS
The Illinois Department of Agriculture
has several courses of action it can take to correct violations of the Grain
Code. These actions include issuing a
Memorandum of Adjustment, assessing financial penalties, requiring collateral,
increasing reporting requirements, suspending or revoking a license, and
criminal prosecution.
Guidelines
and Tracking Corrective Actions
The system of corrective actions and
monitoring is inconsistent. We compared
the licensees that were (1) on an accelerated exam schedule, (2) those required
to submit an audit within 60 days of the end of their fiscal year, and (3)
those required to file additional reports.
Our review showed that one or two of the actions listed above were
required for some licensees while others were required to do all three.
The Department has no formal written
guidelines regarding when a licensee should be placed on an accelerated exam
schedule, be required to file an audit within 60 days of the end of the
licensee’s fiscal year, or be required to file additional reports. Written guidelines would help the Department
take more consistent corrective actions against those licensees that violated
the Grain Code and other Department requirements.
Digest Exhibit 1
CORRECTIVE ACTIONS
Fiscal Years 1999-2002
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|
Action Taken
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1999
|
2000
|
2001
|
2002
|
|
Formal
Hearings
|
16
|
22
|
20
|
22
|
|
Penalties
|
9
|
17
|
16
|
18
|
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Penalty
Amount
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$2,750
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$7,250 |
