Local Savings are the key to maintaining a viable cooperative. You hear it from us in every audit meeting report, from the bank, and at management and director training programs you attend. The percentage of local savings is the key factor in determining a cooperative’s profitability. It is the cornerstone for providing essential benefits to the member patrons of your companies, such as; needed facilities and equipment, the ability to hire and maintain high quality employees, pay patronage, and subsequently redeem any deferred patronage through estate and equity retirement payments.

So, how do you know if you’re generating adequate local savings? Hopefully you are doing many of the items mentioned above; growing, adding new assets, keeping good employees­– meeting the needs of your patrons, and of course, keeping your banker happy! Though there are several factors to consider, most cooperatives use a percentage number, local savings divided by sales, to determine if their local savings are on the right track. Depending on your cooperative’s mix of grain and supply sales, as well as commodity prices, that percentage should be in the 1 – 3% range. Our clients have been very profitable throughout the last several years. The following is an average of what we have seen over the past three year period:

• Sales up to $50 million = 1.75%

• Sales $500 – $150 million = 2.06%

• Sales $150 – $300 million = 1.92%

• Sales over $300 million = 1.48%

So, how does your local savings stack up? We know that every cooperative faces it’s own unique set of challenges and growth opportunities. If you’d like to discuss possible ways to improve your local savings, we’d be happy to speak with you.

 You may have noticed in the past few years that your annual audit seems to take longer than it once did. Changes in accounting and auditing standards, increased disclosure requirements, and the unprecedented growth of our clients are causing us to spend more time planning, documenting, and completing our audit procedures than ever before.

One afternoon, a member of my staff asked why we went to see our client that day. At first, I was surprised by the question, but quickly wondered the same thing. We had done what we were accustomed to; we packed up our computers and parked ourselves in the client’s boardroom. Over the next 6 hours, the client continued to email information, reports and files as needed, periodically popping in to make sure the items in the emails were what we wanted. The client had also provided us with access to their system so we were able to get our own reports and printouts as needed. We really needed very little face to face interaction with the client that day.

I wondered, can we be more efficient when working with our clients? Can we successfully accomplish many of the same audits tasks by the exchange of information electronically? Many data processing systems allow for outside access and it is becoming more common for employees to work from home using technology; can it be possible for us, as auditors, to do more work in our office?

For many clients, this may not be preferred, or even possible, but it may be time for all of us to have conversations about ways we can use our time more wisely. Being able to complete a larger percentage of planning, testing, documenting and research from our office versus yours can save travel time and expenses, costs of the audit that continue to rise annually. It also allows us to spend less time driving and more time working for you. We also get the personal benefit of additional opportunities to spend more evenings with our families.

As we continue to strive for ways to provide better service and value to our clients as costs continue to increase, please feel free to discuss with us alternatives to what we have done in the past. Open communication is not only the key to successful relationship, but also provides for a more successful audit.

2. Is a cash register used in the business?

3. Is a bank lockbox used for processing customer payments?

4. Are deposits made daily and secured prior to depositing in a safe?

5. Are incoming checks restrictively endorsed?

6. Is the monthly bank statement received and reviewed by someone other than the person handling the cash and checks?

7. Is the monthly bank reconciliation completed by someone other than the person handling the deposits or with check-signing authority?

8. If there are discounts/coupons, are they approved by management?

9. Are returns, voided transactions, and credit memos greater than 10% of all sales transactions?

10. Do cash transactions exceed 20% of all sales transactions?

11. Are actual, itemized receipts required for reimbursement?

12. Is a detailed list of names of guests and the type of business activity or entertainment required for expense reimbursement?

13. Are employees encouraged to report concerns about fraudulent activities?

Cybercrime can be defined simply as committing a crime via the internet. While this is a pretty broad definition (though for good reason), one major concern is on safeguarding against intrusive cyber crime, or hacking. Hackers typically look for weak spots in online networks, and dig for information that they can later use in a criminal manner. Unfortunately, all online networks can have weak spots, such as; outdated networks, obvious or old passwords, firewalls with several holes and network hosts running unnecessary services.

The human factor is another major concern. Cyber criminals often play on the naievity of computer users by attaching malware to programs or files, disguising it as useful information for download, or simply emailing it as an attachment that launches upon opening the email. Viruses, worms and trojans are all common forms of malware that make their way into computers via user error. Users can also be easily taken advantage of by cyber criminals simply because of negligence. Using public computers, writing down passwords and saving passwords to a computer leaves the user, and potentially the company, wide open for attack.

While the prevention of cyber crime goes beyond the scope of our business, we know how detrimental it can be to your bottom line. That is why we are partnering with Arthur J. Gallagher to bring to you valuable information regarding the variety of cyber crimes risks that can threaten your business, and how to help safeguard against them. At the seminar, you’ll learn to assess the risks your business faces when doing business online, and what you can do about them. You’ll also have the chance to interact with two experts on cyber liability, risk and crime. If you have any questions or would like to learn more, please call our Des Moines office. We hope you’ll join us for this important, complimentary seminar!

When: Tuesday, April 30th, 2013 from 10 AM- 12 PM

Where: Hilton Garden Inn, 8600 Northpark Drive, Johnston, IA 50131

RSVP: penni_briles@ajg.com

We hope to see you there!

Occupational fraud is a scheme in which an employee abuses the trust placed in him or her by an employer for personal gain. Its formal definition is: The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.

Asset misappropriation schemes were the most common type of occupational fraud, comprising 87% of the cases reported to the Association of Certified Fraud Examiners in their 2012 Report to the Nations on Occupational Fraud and Abuse. Financial statement fraud schemes made up 8% of these cases but caused the greatest amount of losses. Corruption schemes occurred in approximately one-third of the cases.  

Nearly half of the organizations reporting to the Association of Certified Fraud Examiners did not recover any losses that they suffered due to the fraud. The very nature of fraud involves efforts at concealment, with many of the frauds never being detected, and of those that are, the full amount of losses might never be determined or reported. 

External audits should not be relied upon as an organization’s primary fraud detection method. Such audits were most commonly implemented control in their study; however they detected approximately 3% of the frauds reported and ranked poorly in limiting fraud losses. Providing individuals a means to report suspicious activity is a crucial part of an anti-fraud program. Fraud reporting tools for an organization, such as hotlines, should be set up to receive tips from both internal and external sources and should allow anonymity and confidentiality. Occupational fraud is more likely to be detected by a tip than by any other method. The majority of tips reporting fraud come from employees within the victim organization.

Talk to your audit team to discuss ways to implement anti-fraud measures.  

Reprinted with permission – The Association of Certified Fraud Examiners

Many factors contribute to a cooperative’s efficiency, not the least of which is the use of technology. The agriculture industry has invested significantly in technology over the years. It is weaved throughout so much of a cooperative’s organization, operations and facility already, where else might it be useful in improving the bottom line?

Emerging technology is helping cooperatives to reduce the cost of shrink, and over a short period of time, lead to a net reduced cost to the bottom line. This technology, known as AGM (Advanced Grain Management), has recently been accepted by some cooperatives that have chosen to automate their grain management decisions. We encourage our clients to invest in agriculture technology where it is appropriate, and while Gardiner Thomsen doesn’t endorse any particular product or brand, we think that this new technology is worth taking a look at.

We were recently introduced to Scott Haugan, President of HOWGAN SCC, the developer of the HOWGAN AMP (Asset Management Plan) and largest US dealer of OPI/Integris Advanced Grain Management system. This AGM system allows cooperatives to proactively monitor and control temperature, airflow and moisture content; prevent lost grain and lost profits due to spoilage, hot spots and over-drying; and help to measure, monitor and manage grain to reduce the impact of shrink while driving down energy costs.

As Scott explained to us, this technology has fully automated monitoring, alarms, and automated aeration controls. His systems are designed to maximize storage profitability by optimizing grain quality, minimizing shrink and spoilage, reducing energy costs and increasing grain dryer throughput. In addition, Scott said that target grain temperature and moisture can be achieved in less time because the system identifies the most effective time to automatically run your fans. The HOWGAN AGM system also detects insects, monitors weather conditions, and monitors grain inventory levels to within a 3% margin of error. Scott also said that cooperatives are able to add this technology to existing bins or to new projects to manage fans and electrical usage.

Since the inherent purpose of purchasing new technology and equipment is to drive improved results and have a positive impact on the bottom line, we wanted to talk with some current users of this technology. We recently spoke with Mark Kistenmacher of Mid-Iowa Coop, a customer of HOWGAN SCC who has invested in Integris AGM. Mark said that he views the purchase of the system as an investment in his facility, and offered his perspective that being on the cutting edge of technology in the agriculture industry is more of a business philosophy for his cooperative. Mark believes in being responsible with his investments and that AGM aligns with his cooperative’s goals.

Randy Dunn, Grain Department Manager at First Coop, said that they began installing the HOWGAN AGM system 5 years ago and now have it at 7 of their locations, built into new projects as well as retrofitted into old ones. First Coop uses the HOWGAN AGM system primarily for temperature and moisture control, but it has also had a great impact on reducing their electrical bill.

He said, “Our electrical usage is on a demand meter, so we pay a higher rate during peak usage. With (AGM) we don’t have to run our fans at those peak times, and that’s been a pretty big savings for us.”

We asked Scott Haugan how people are accepting this new technology, which can change the paradigm from simply accepting shrink to proactively managing it. He said that early adopters, like Mark Kistenmacher, are present. Out of the top 20 cooperatives, who have over 400 locations, HOWGAN has 12% of the facilities now measuring and managing their temperature and moisture to drive improved results. These early adopters have equipment paid for with savings, before others are willing to change their status quo.

When asked about status quo, Mark Kistenmacher said, “Status quo is unacceptable once you realize that your investment will drive a significant ROI. Avoiding change is no longer acceptable when you realize that investing today drives improved results today”.

But is “today” the right time for your coop to invest in technology improvements? Cooperatives should also consider the time investment necessary for training staff on how to use such advanced technology.

Dave Holm, Executive Director of the Iowa Institute for Cooperatives, described his introduction to the HOWGAN AGM system; “I met with Scott Haugan in January to learn more about it. Once we got talking about what this thing can do, I thought… Oh my goodness! We’re going from riding bicycles to flying jet airplanes! This is truly a loaded up system.”

Dave commented that this is a very sophisticated grain management system. He thinks the industry will move toward it over time, but he’s not certain that every cooperative is prepared to do this today. A great deal of training is necessary to fully utilize all the functions this system can perform.

“The ironic thing is, a lot of times, once you incorporate that technology and learn how to run it, it’s actually easier than the way we were doing it. But it’s just the idea of learning how to run it that might be the issue.” Dave said. He still suggests that every coop should at least learn about what the Integris AGM system can do, but make their own decisions about whether it’s right for their coop, and if it’s the right time.

Moving beyond time constraints, another obstacle HOWGAN SCC has encountered is that some grain elevators are concerned about not having “money in the budget” as they spec out a project. With a supposed 18 month ROI potential, the decision to invest in this new technology could be more of a cash flow concern rather than an “expense vs. investment” concern. It also could depend on the cooperative’s business philosophy regarding emerging technology.

So, we’d like to ask our clients– do you consider technology improvement to be a budgeted expense, or long-term investment? What other factors do you take into consideration when making improvements to your facilities? As I mentioned before, while we don’t endorse any particular product or brand regarding AGM, we are very curious about it and encourage our clients to take a closer look to see if it would be a benefit to them. We would also be happy to talk with you about AGM and to see how it might potentially impact your bottom line.

• Short crop and free storage programs will have an impact on future operating results.
• Reduced local income; possibly some local losses. Regional income even higher than last year. Tightening of belts, particularly for expenses.
• Continued investments in grain storage, fertilizer plants and feedmills, but a tempering of asset additions if the drought continues.
• Continued use of 50% bonus depreciation.
• Maximizing the benefit of the domestic production activities deduction (Section 199), which will have many different applications. Several will still retain the benefits, but more will allocate the benefit to the patron members.
• Continued growth in the use of non-qualified patronage allocations.
• Returning more earnings to the patron-owners than what has been done in the past few years; revisiting the question: “how much retained savings is enough?”
• More conversions to “limited cooperatives” (501A in Iowa/308B in Minnesota), or finding other avenues through the articles of incorporation and by-laws to allow for preferred stock, and potentially, outside equity.
• Cooperatives will look to outside equity to maintain a strong balance sheet; provide more borrowing ability or to fund capital expenditures.
• Greater use of technology in delivering services and communicating with patrons.
• More merger and joint venture discussions; leveraging the strengths of each cooperative for the benefit of both.
• Continued struggles in finding and retaining experienced staff.
• Changes to the audit opinion report – stay tuned!

Many of you signed up for our door prize giveaway. The winners were:

• Carmen Grawe, SilverEdge Coop, Edgewood, IA: Apple iPad Mini and cover

• Roger Kienholz, Crystal Valley Coop, Lake Crystal, MN: Keurig K-Cup Personal Brewer

• Dave Seykora, Central Valley Coop Owatonna, MN:$50 American Express Gift Card

Thanks for visiting with us at the 2012 CHS Annual Meeting, we hope to see you again at the next one!