Report No. 2010-90
August 2010
Complete Audit Report

Findings in the audit of the Department of Agriculture, Grain Regulatory Services program
According to department officials, grain producers suffered losses valued at over $32 million when two licensed grain dealers became insolvent in February 2009. The Director of the Department of Agriculture subsequently requested an audit of the Grain Regulatory Services program (GRS). Our audit objectives were to (1) evaluate GRS examination policies and procedures, including the regulatory efforts taken in relation to two recent grain dealer failures, and (2) evaluate and compare Missouri's grain dealer and warehouse laws, regulations, and procedures to those of other states and the federal government.

GRS Examinations of Failed Licensees
Better execution of GRS examination procedures during 2008 GRS examinations would have detected irregularities occurring at two licensed grain dealers. For the 2008 GRS examinations of these entities, improper execution of examination procedures by GRS auditors prevented the earlier detection of one insolvency and precluded further regulatory action to reduce the losses from the other pending insolvency.

GRS examination procedures did not always adhere to established requirements. During the September 2008 examination of the Martinsburg dealer, the GRS did not verify that detailed information (such as dates, grain type and quantity, and producer name) on canceled checks and producer settlements was in agreement with information on scale tickets obtained at the time the dealer delivered the grain for sale. Had the required procedures been performed properly, the GRS would have determined the dealer had not truthfully disclosed obligations for the current and previous examinations, and had not paid for grain within 30 days as required for a Class IV dealer license. If the GRS had discovered the fraud during the September 2008 examination, the loss to producers may have been limited. The GRS also did not perform examinations of the Martinsburg dealer in accordance with established frequency intervals.

During the April and September 2008 examinations of the Gallatin dealer, the auditors noted large negative grain equities (about $699,000 and $639,000, respectively), but the GRS did not require additional bonding to be provided by the dealer, and the auditors improperly considered owner assets that were not related to the operation of the grain dealer.

GRS Examination Procedures
GRS confirmations were not effective in disclosing unrecorded obligations at both the Martinsburg and Gallatin dealers because producers did not return confirmation forms notifying the GRS of unrecorded obligations. GRS examination procedures could be enhanced by requiring auditors to review additional licensee sales revenue records including bank deposits and settlement sheets of the purchasing elevator or grain terminal. GRS procedures do not require the review of bank deposits that were made immediately prior to the time of the examination. GRS procedures do not require the auditor to reconcile, on a test basis, the quantities of grain recorded as sold on the licensee's daily position record and individual producer settlements to settlements from the purchasing grain entity. GRS regulations do not require licensees to utilize pre-numbered contracts, settlement sheets, or receipts for direct farm-to-market transactions. The GRS has assigned few licensees to accelerated examination frequencies and is often unable to conduct those examinations within the assigned frequency.

Other Regulatory Concerns
The GRS does not require licensees to submit audited financial statements and does not require more frequent submission of financial reports from licensees with financial solvency concerns. Missouri state law provides the GRS the authority to impose additional financial reporting requirements upon licensees as needed. The bonding amounts required of licensees by the GRS may be too low to adequately protect grain producers. In addition, the GRS has not imposed adequate additional dealer bonding for licensees with financial solvency concerns. The bonds for the Martinsburg and Gallatin dealers provided producers with only about 1 percent and 12 percent of the value of their claims, respectively. State requirements for minimum net worth of licensees are low and outdated. The GRS should consider the benefits of an indemnity fund, including the additional financial protection afforded grain producers, and consult with the General Assembly regarding the establishment of an indemnity fund.

Complete Audit Report
Missouri State Auditor's Office
moaudit@auditor.mo.gov