Testimony 

Before the Committee on Finance, U.S. 

Senate

United States General Accounting Office 

GAO

For Release on Delivery 

Expected at 11:00 a.m. EDT 

Wednesday, June 16, 2004 FARM PROGRAM 

PAYMENTS 

USDA Should Correct 

Weaknesses in Regulations 

and Oversight to Better 

Ensure Recipients Do Not 

Circumvent Payment 

Limitations 

Statement of Lawrence J. Dyckman, Director 

Natural Resources and Environment 

GAO-04-861T 
www.gao.gov/cgi-bin/getrpt?GAO-04-861T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Lawrence J. 

Dyckman, at (202) 512-3841or 

dyckmanl@gao.gov. 

Highlights of GAO-04-861T, testimony 

before the Committee on Finance, U.S. 

Senate 

June 2004

FARM PROGRAM PAYMENTS 

USDA Should Correct Weaknesses in 

Regulations and Oversight to Better 

Ensure Recipients Do Not Circumvent 

Payment Limitations 

GAO’s survey of USDA’s field offices showed that for the compliance 

reviews the offices conducted, about 99 percent of payment recipients 

asserted they met eligibility requirements through active personal 

management. However, USDA’s regulations to ensure recipients are actively 

engaged in farming do not provide a measurable standard for what 

constitutes a significant contribution of active personal management. The 

figure below shows field offices’ views on whether regulations describing 

active personnel management could be improved. By not specifying such a 

measurable standard, USDA allows individuals who may have limited 

involvement with the farming operation to qualify for payments. Moreover, 

USDA’s regulations lack clarity as to whether certain transactions and 

farming operation structures that GAO found could be considered schemes 

or devices to evade, or that have the purpose of evading, payment 

limitations. Under the 1987 Act, if a person has adopted such a scheme or 

device, then that person is not eligible to receive payments for the year in 

which the scheme or device was adopted or the following year. Because it is 

not clear whether fraudulent intent must be shown to find that a person has 

adopted a scheme or device, USDA may be reluctant to pursue the question 

of whether certain farming operations, such as the ones GAO found, are 

schemes or devices. 

According to GAO’s survey and review of case files, USDA is not effectively 

overseeing farm payment limitation requirements. That is, USDA does not 

review a valid sample of farm operation plans to determine compliance and 

thus does not ensure that only eligible recipients receive payments, and 

compliance reviews are often completed late. As a result, USDA may be 

missing opportunities to recoup ineligible payments. For about one-half of 

the farming operations GAO reviewed for 2001, field offices did not use 

available tools to determine whether persons were actively engaged in 

farming. 

Field Offices’ Views on Whether Specific Improvements Would Strengthen Active Personal 

Management 

Farmers receive about $15 billion 

annually in federal payments to 

help produce major crops, such as 

corn, cotton, rice, and wheat. The 

Farm Program Payments Integrity 

Act of 1987 (1987 Act) limits 

payments to individuals and 

entities—such as corporations and 

partnerships—that are “actively 

engaged in farming.” 

This testimony is based on GAO’s 

report, Farm Program Payments: 

USDA Needs to Strengthen 

Regulations and Oversight to 

Better Ensure Recipients Do Not 

Circumvent Payment Limitations

(GAO-04-407, April 30, 2004). 

Specifically, GAO (1) determined 

how well USDA’s regulations limit 

payments and (2) assessed USDA’s 

oversight of the1987 Act. 

GAO recommended, among other 

things, that USDA (1) develop 

measurable standards for a 

significant contribution of active 

personal management; (2) clarify 

regulations on what constitutes a 

scheme or device to effectively 

evade payment limits; (3) improve 

its selection method for reviewing 

farming operations and (4) develop 

controls to ensure it uses all tools 

to assess compliance with the act. 

USDA agreed to act on most 

recommendations, but it stated that 

its regulations are sufficient for 

determining active engagement in 

farming and assessing whether 

operations are designed to evade 

payment limits. We disagree.
Page 1 GAO-04-861T 

Mr. Chairman and Members of the Committee: 

I am pleased to be here today to discuss the Committee’s interest in the 

U.S. Department of Agriculture’s (USDA) implementation of the Farm 

Program Payments Integrity Act of 1987 (1987 Act). My testimony today is 

based on our recent report on this subject, which was requested by the 

Chairman of the Senate Committee on Finance and which is being publicly 

released today.1

Between 1999 and 2002, USDA paid farmers an average of $15 billion 

annually to help support the production of major commodities, including 

corn, cotton, rice, soybeans, and wheat. These payments go to 1.3 million 

producers: individuals and entities such as corporations, partnerships, and 

trusts. Annually, almost two-thirds of these payments go to about 10 

percent of the producers. 

After hearing several concerns about farm payments going to individuals 

not involved in farming, the Congress enacted the 1987 Act, which, among 

other things, set eligibility conditions to limit the number of payments 

going to recipients and to ensure that only individuals and entities 

“actively engaged in farming” received payments. To be considered 

actively engaged in farming, an individual recipient must make significant 

contributions to the farming operation in two areas: (1) capital, land, or 

equipment and (2) personal labor or active personal management. An 

entity is considered actively engaged in farming if the entity separately 

makes a significant contribution of capital, land, or equipment, and its 

members collectively make a significant contribution of personal labor or 

active personal management to the farming operation. For both 

individuals and entities, their share of the farming operation’s profits or 

losses must also be commensurate with their contributions to the farming 

operation and those contributions must be at risk. 

My testimony today focuses on two primary issues discussed in the report: 

(1) how well USDA’s regulations for active engagement in farming help 

limit farm program payments and (2) the effectiveness of USDA’s 

oversight of farm program payments’ requirements for active engagement 

in farming. 

 1

U.S. General Accounting Office, Farm Program Payments: USDA Needs to Strengthen 

Regulations and Oversight to Better Ensure Recipients Do Not Circumvent Payment 

Limitations, GAO-04-407, (Washington, D.C.: April 30, 2004). 
Page 2 GAO-04-861T 

In summary, we found the following: 

• Individuals may circumvent the farm payment limitations because of 

weaknesses in USDA’s regulations. These regulations are designed to 

ensure recipients are actively engaged in farming. However, they do not 

provide a measurable standard for what constitutes a significant 

contribution of active personal management. By not specifying such a 

measurable standard, USDA allows individuals who may have limited 

involvement with the farming operation to qualify for payments. According 

to our survey of USDA’s field offices, in the compliance reviews they 

conducted, about 99 percent of payment recipients asserted they met 

eligibility requirements through active personal management. Moreover, 

USDA’s regulations lack clarity as to whether certain transactions and 

farming operation structures that we found could be considered schemes 

or devices to evade, or that have the purpose of evading, payment 

limitations. Under the 1987 Act, if a person has adopted such a scheme or 

device, then that person is not eligible to receive payments for two years. 

• According to our survey and review of case files, USDA is not effectively 

overseeing farm program payments. That is, USDA does not review a valid 

sample of farm operation plans to determine compliance and thus does 

not ensure that only eligible recipients receive payments. Also, USDA’s 

compliance reviews are often completed late. As a result, USDA may be 

missing opportunities to recoup ineligible payments. Further, for about 

one-half of the farming operations we reviewed for 2001, field offices did 

not use available tools to determine whether persons were actively 

engaged in farming. 

In our report to you, we made eight recommendations to the Secretary of 

Agriculture to strengthen FSA’s oversight of farmers’ compliance with the 

1987 Act. In commenting on the report, USDA agreed to act on most of the 

recommendations. However, USDA stated that its current regulations are 

sufficient for determining active engagement in farming and for assessing 

whether operations are schemes or devices to evade payment limitations. 

We still believe measurable standards and clarified regulations would 

better assure the act’s goals are realized. 

The 1987 Act requires that an individual or entity be actively engaged in 

farming in order to receive farm program payments. To be considered 

actively engaged in farming, the act requires an individual or entity to 

provide a significant contribution of capital, land, or equipment, as well as 

a significant contribution of personal labor or active personal management 

to the farming operation. Hired labor or hired management may not be 

Background 
Page 3 GAO-04-861T 

used to meet the latter requirement. The act’s definition of a “person” 

eligible to receive farm program payments includes an individual, as well 

as certain kinds of corporations, partnerships, trusts, or similar entities. 

Recipients must also demonstrate that their contributions to the farming 

operation are in proportion to their share of the operation’s profits and 

losses and that these contributions are at risk. The 1987 Act also limits the 

number of entities through which a person can receive program payments. 

Under the act, a person can receive payments as an individual and through 

no more than two entities, or through three entities and not as an 

individual. The statutory provision imposing this limit is commonly known 

as the three-entity rule. Under the Farm Security and Rural Investment Act 

of 2002, “persons”—individuals or entities—are generally limited to a total 

of $180,000 annually in farm program payments, or $360,000 if they are 

members of up to three entities.2

Some farming operations may reorganize to overcome payment limits to 

maximize their farm program benefits. Larger farming operations and 

farming operations producing crops with high payment rates, such as rice 

and cotton, may establish several related entities that are eligible to 

receive payments. However, each entity must be separate and distinct and 

must demonstrate that it is actively engaged in farming by providing a 

significant contribution of capital, land or equipment, as well as a 

significant contribution of personal labor or active personal management 

to the farming operation. 

Within USDA, the Farm Service Agency (FSA) is responsible for enforcing 

the actively engaged in farming and payment limitation rules. FSA field 

offices review a sample of farming plans at the end of the year to help 

monitor whether farming operations were conducted in accordance with 

approved plans, including whether payment recipients met the 

requirement for active engagement in farming and whether the farming 

operations have the documents to demonstrate that the entities receiving 

payments are in fact separate and distinct legal entities. FSA selects its 

sample of farming operations based on, among other criteria, (1) whether 

 2

Under the Farm Security and Rural Investment Act of 2002, each of the income support 

programs has a separate payment limit. For example, a recipient generally may only receive 

up to $40,000 in direct payments, up to $65,000 in counter-cyclical payments, and up to 

$75,000 in loan deficiency payments and marketing assistance loan gains, for a total of 

$180,000 per year. Benefits received through commodity certificate gains and marketing 

loan forfeitures do not count against the payment limitations. Farm Security and Rural 

Investment Act of 2002, Pub. L. No. 107-171, 116 Stat. 134, 213. 
Page 4 GAO-04-861T 

the operation has undergone an organizational change in the past year by, 

for example, adding another entity or partner to the operation and (2) 

whether the operation receives payments above a certain threshold. These 

criteria have principally resulted in sampling farming operations in areas 

that produce cotton and rice—Arkansas, California, Louisiana, Mississippi, 

and Texas. 

Many recipients meet one of the farm program payments’ eligibility 

requirements by asserting that they have made a significant contribution of 

active personal management. Because FSA regulations do not provide a 

measurable, quantifiable standard for what constitutes a significant 

management contribution, people who appear to have little involvement 

are receiving farm program payments, according to our survey of FSA field 

offices and our review of 86 case files. Indeed, most large farming 

operations meet the requirement for personal labor or active personal 

management by asserting a significant contribution of management. 

Survey respondents provided information on 347 partnerships and joint 

ventures for which FSA completed compliance reviews in 2001; these 

entities comprised 992 recipients, such as individuals and corporations 

that were members of these farming operations. Of these 992 recipients, 46 

percent, or 455, asserted that they contributed active personal 

management; 1 percent, or 7, asserted that they contributed personal 

labor; and the remaining 53 percent (530) asserted they provided a 

combination of active personal management and personal labor to meet 

the actively engaged in farming requirement. 

While FSA’s regulations define active personal management more 

specifically to include such things as arranging financing for the operation, 

supervising the planting and harvesting of crops, and marketing the crops, 

the regulations lack measurable criteria for what constitutes a significant 

contribution of active personal management. FSA regulations define a 

“significant contribution” of active personal management as “activities that 

are critical to the profitability of the farming operation, taking into 

consideration the individual’s or entity’s commensurate share in the 

farming operation.” In contrast, FSA provides quantitative standards for 

what constitutes a significant contribution of active personal labor, 

capital, land, and equipment. For example, FSA’s regulations define a 

significant contribution of active personal labor as the lesser of 1,000 

hours of work annually, or 50 percent of the total hours necessary to 

conduct a farming operation that is comparable in size to such individual’s 

or entity’s commensurate share in the farming operation. By not specifying 

quantifiable standards for what constitutes a significant contribution of 

Individuals May 

Circumvent Farm 

Payment Limitations 

Because of 

Weaknesses in FSA’s 

Regulations 
Page 5 GAO-04-861T 

active personal management, FSA allows recipients who may have had 

limited involvement in the farming operation to qualify for payments. 

Some recipients appeared to have little involvement with the farming 

operation for 26 of the 86 FSA compliance review files we examined in 

which the recipients asserted they made a significant contribution of 

active personal management to the farming operation. For example, in 

2001, 11 partners in a general partnership operated a farm of 11,900 acres. 

These partners asserted they met the actively engaged in farming 

requirement by making a significant contribution of equipment and active 

personal management. FSA’s compliance review found that all partners of 

the farming operation were actively engaged in farming and met all 

requirements for the approximately $1 million the partnership collected in 

farm program payments in 2001. However, our review found that the 

partnership held five management meetings during the year, three in a 

state other than the state where the farm was located, and two on-site 

meetings at the farm. Some of the partners attended the meetings in 

person while others joined the meetings by telephone conference. 

Although all 11 partners claimed an equal contribution of management, 

minutes of the management meetings indicated seven partners 

participated in all five meetings, two participated in four meetings, and 

two participated in three meetings. All partners resided in states other 

than the state where the farm was located, and only one partner attended 

all five meetings in person. Based on our review of minutes documenting 

the meetings, it is unclear whether some of the partners contributed 

significant active personal management. If FSA had found that some of the 

partners had not contributed active personal management, the 

partnership’s total farm program payments would have been reduced by 

about 9 percent, or $90,000, for each partner that FSA determined was 

ineligible. State FSA officials agreed that the evidence to support the 

management contribution for some partners was questionable and that 

FSA reviewers could have taken additional steps to confirm the 

contributions for these partners. 

According to our survey of 535 FSA field offices, FSA could make key 

improvements to strengthen the management contribution standard. These 

offices reported that the management standard can be strengthened by 

clarifying the standard, including providing quantifiable criteria, certifying 

actual contributions, and requiring management to be on-site.3

 More than 

 3

Certifying actual contributions could include requiring an affidavit from each recipient 

delineating management activities performed. 
Page 6 GAO-04-861T 

60 percent of those surveyed, for example, indicated that clarifying the 

standard would be an improvement. In addition, in 2003, a USDA 

commission established to look at the impact of changes to payment 

limitations concluded that determining what constitutes a significant 

contribution of active management is difficult and lack of clear criteria 

likely makes it easier for farming operations to add recipients in order to 

avoid payment limitations.4

We also found that some individuals or entities have engaged in 

transactions that might constitute schemes or devices to evade payment 

limitations, but neither FSA’s regulations nor its guidance address whether 

such transactions could constitute schemes or devices. Under the 1987 Act 

as amended, if the Secretary of Agriculture determines that any person has 

adopted a “scheme or device” to evade, or that has the purpose of evading, 

the act’s provisions—in other words, the payment limitations—then that 

person is not eligible to receive farm program payments for the year the 

scheme or device was adopted and the following crop year.5

 According to 

FSA’s regulations, this statutory provision includes (1) persons who adopt 

or participate in adopting a scheme or device and (2) schemes or devices 

that are designed to evade or have “the effect of evading” payment 

limitation rules. The regulations state that a scheme or device shall include 

concealing information that affects a farm program payment application, 

submitting false or erroneous information, or creating fictitious entities for 

the purpose of concealing the interest of a person in a farming operation.6

We found several large farming operations that were structured as one or 

more partnerships, each consisting of multiple corporations that increased 

farm program payments in a questionable manner. The following two 

examples illustrate how farming operations, depending on how the FSA 

regulations are interpreted, might be considered to evade, or have the 

effect of evading, payment limitations. In one case, we found that a family 

had set up the legal structures for its farming operation and also owned 

the affiliated nonfarming entities. This operation included two farming 

partnerships comprising eight limited liability companies. The two 

partnerships operated about 6,000 acres and collected more than $800,000 

 4

See U.S. Department of Agriculture, Office of the Chief Economist, Commission on the 

Application of Payment Limitations for Agriculture, Report of the Commission on the 

Application of Payment Limitations for Agriculture (Washington, D.C.: August 2003). 

5

7 U.S.C. § 1308-2. 

6

7 C.F.R. § 1400.5. 
Page 7 GAO-04-861T 

in farm program payments in 2001. The limited liability companies 

included family and non-family members, although power of attorney for 

all of the companies was granted to one family member to act on behalf of 

the companies, and ultimately the farming partnerships. The operation 

also included nonfarming entities—nine partnerships, a joint venture, and 

a corporation—that were owned by family members. The affiliated 

nonfarming entities provided the farming entities with goods and services, 

such as capital, land, equipment, and administrative services. The 

operation also included a crop processing entity to purchase and process 

the farming operation’s crop. According to our review of accounting 

records for the farming operation, both farming partnerships incurred a 

small net loss in 2001, even though they had received more than $800,000 

in farm program payments. In contrast, average net income for similarsized farming operations in 2001 was $298,000, according to USDA’s 

Economic Research Service. The records we reviewed showed that the 

loss occurred, in part, because the farming operations paid above-market 

prices for goods and services and received a net return from the sale of the 

crop to the nonfarming entities that appeared to be lower than market 

prices because of apparent excessive charges. The structure of this 

operation allowed the farming operation to maximize farm program 

payments, but because the farm operated at a loss these payments were 

not distributed to the members of the operation. In effect, these payments 

were channeled to the family-held nonfarming entities. Figure 1 shows the 

organizational structure of this operation and the typical flow of 

transactions between farming and nonfarming entities. 
Page 8 GAO-04-861T 

Figure 1: Large Operation Containing Farming and Nonfarming Entities 

Note: Percentages shown are share of ownership. 

Similarly, we found another general partnership that farmed more than 

50,000 acres in 2001 and that conducted business with nonfarming entities, 
Page 9 GAO-04-861T 

including a land leasing company, an equipment dealership, a petroleum 

distributorship, and crop processing companies, with close ties to the 

farming partnership. The partnership, which comprised more than 30 

corporations, collected more than $5 million in farm program payments in 

2001.7

 The shareholders who contributed the active personal management 

for these corporations were officers of the corporations. Each officer 

provided the active personal management for three corporations. Some of 

these officers were also officers of the nonfarming entities—the entities 

that provided the farming partnership goods and services such as the 

capital, land, equipment, and fuel. The nonfarming entities also included a 

gin as well as grain elevators to purchase and process the farming 

partnership’s crops. Our review of accounting records showed that even 

though the farming partnership received more than $5 million in farm 

payments, it incurred a net loss in 2001, which was distributed among the 

corporations that comprised the partnership.8

As in the first example, factors contributing to the loss included the abovemarket prices for goods and services charged by the nonfarming entities 

and the net return from the sale of crops to nonfarming entities that 

appeared to be lower than market prices because of apparent excessive 

charges for storage and processing. For example, one loan made by the 

nonfarming financial services entity to the farming partnership for $6 

million had an interest rate of 10 percent while the prevailing interest rate 

for similar loans at the time was 8 percent. Similarly, the net receipts from 

the sale of the harvested crop, which were sold almost exclusively to the 

nonfarming entities, were below market price. For example, in one 

transaction the gross receipt was about $1 million but after the grain 

elevators deducted fees for the quality of the grain and such actions as 

drying and storing the grain, the net proceeds to the farming entity were 

only about $500,000. In this particular operation, all of the nonfarming 

entities had common ownership linked to one individual. This individual 

had also set up the legal structure for the farming entities but had no direct 

ownership interest in the farming entities. 

It is unclear whether either of these operations falls within the statutory 

definition of a scheme or device or whether either otherwise circumvents 

 7

In 2003, the operation divided into six new farming partnerships comprised of the same 

corporations. 

8

The accounting records also showed that the capital (equity) account for each of the 

corporations carried a negative balance, indicating multiple years of net losses. 
Page 10 GAO-04-861T 

the payment limitation rules. State FSA officials in Arkansas, Louisiana, 

Mississippi, and Texas, where many of the large farming operations are 

located, believed that some large operations with relationships between 

the farming and nonfarming entities were organized primarily to 

circumvent payment limitations. In this manner, these farming operations 

may be reflective of the organizational structures that some Members of 

Congress indicated were problematic when enacting the 1987 Act and the 

scheme or device provision. The House Report for the 1987 Act states: “A 

small percentage of producers of program crops have developed methods 

to legally circumvent these limitations to maximize their receipt of 

benefits for which they are eligible. In addition to such reorganizations, 

other schemes have been developed that allow passive investors to qualify 

for benefits intended for legitimate farming operations.”9

 In our 

discussions with FSA headquarters officials in February 2004 on the issue 

of farming operations that circumvent the payment limitation rules, they 

noted that while an operation may be legally organized, it may be 

misrepresenting who in effect receives the farm program payments. FSA 

has no data on how many of the types of operations that we identified 

exist. However, FSA is reluctant to question these operations because it 

does not believe current regulations provide a sufficient basis to take 

action. 

Other FSA officials said that USDA could review such an operation under 

the 1987 Act’s scheme or device provision if it becomes aware that the 

operation is using a scheme or device for the purpose of evading the 

payment limitation rules. However, these FSA officials stated it is difficult 

to prove fraudulent intent—which they believe is a key element in proving 

scheme or device—and requires significant resources to pursue such 

cases. In addition, they stated that even if FSA finds a recipient ineligible 

to receive payments, its decision might be overturned on appeal within 

USDA. The FSA officials noted that when FSA loses these types of cases, 

the loss tends to discourage other field offices from aggressively pursuing 

these types of cases. 

It is not clear whether either the statutory provision or FSA’s regulations 

require a demonstration of fraudulent intent in order to find that someone 

has adopted a scheme or device. As discussed above, the statute limits 

payments if the Secretary of Agriculture determines that any person has 

adopted a scheme or device “to evade, or that has the purpose of evading,” 

 9

H.R. Rep. No. 100-391 (1987) (emphasis added). 
Page 11 GAO-04-861T 

the farm payment limitation provisions. The regulations state that 

payments may be withheld if a person “adopts or participates in adopting a 

scheme or device designed to evade or that has the effect of evading” the 

farm payment limitations. The regulations note that schemes or devices 

shall include, for example, creating fictitious entities for the purpose of 

concealing the interest of a person in a farming operation. Some have 

interpreted this provision as appearing to require intentionally fraudulent 

or deceitful conduct. On the other hand, FSA regulations only provide this 

as one example of what FSA considers to be a scheme or device. The 

regulations do not specify that all covered schemes or devices must 

involve fraudulent intent. As previously stated, covered schemes or 

devices under FSA regulations include those that have “the effect of 

evading” payment limitation rules. Finally, guidance contained in FSA 

Handbook Payment Limitations, 1-PL (Revision 1), Amendment 40, 

does not clarify the matter because it does not provide any additional 

examples for FSA officials of the types of arrangements that might be 

considered schemes or devices. This lack of clarity over whether 

fraudulent intent must be shown in order for FSA to deny payments under 

the scheme or device provision of the law may be inhibiting FSA from 

finding that some questionable operations are schemes or devices. 

In addition to the weaknesses described above, FSA does not effectively 

oversee farm program payments in five key areas, according to our 

analysis of FSA compliance reviews and our survey of FSA field offices. 

First, FSA does not review a valid sample of recipients to be reasonably 

assured of compliance with the payment limitations. In 2001, FSA selected 

1,573 farming operations from its file of 247,831 entities to review 

producers’ compliance with actively engaged in farming requirements. 

FSA’s sample selection focuses on entities that have undergone an 

organizational change during the year or received large farm program 

payments. Field staff responsible for these reviews seek waivers for 

farming operations reviewed within the last 3 to 5 years—the time frame 

varies by state. As a result, according to FSA officials, of the farming 

operations selected for review each year, more than half are waived and 

therefore not actually reviewed. Many of the waived cases show up year 

after year because FSA’s sampling methodology does not take into 

consideration when an operation was last reviewed. In 2001, the latest 

year for which data are available, only 523 of 1,573 sampled entities were 

Other Weaknesses in 

FSA’s Oversight May 

Also Enable Ineligible 

Farmers to Receive 

Program Payments 
Page 12 GAO-04-861T 

to be reviewed.10 Field offices sought and received waivers for 966 entities 

primarily because the entities were previously reviewed or the farming 

operation involved only a husband and wife.11 According to FSA 

headquarters officials, the sampling process was developed in the mid1990s and it can be improved and better targeted. 

Second, field offices do not always conduct compliance reviews in a 

timely manner. Only 9 of 38 FSA state offices responsible for conducting 

compliance reviews for 2001 completed the reviews and reported the 

results to FSA headquarters within 12 months, as FSA policy requires.12

FSA headquarters selected the 2001 sample on March 27, 2002, and 

forwarded the selections to its state offices on April 4, 2002. FSA 

headquarters required the state offices to conduct the compliance reviews 

and report the results by March 31, 2003. Six of the 26 FSA state offices 

that failed to report the results to headquarters had not yet begun these 

reviews for 470 farming operations as of summer 2003: Arkansas, 

California, Colorado, Louisiana, Ohio, and South Carolina. Until we 

brought this matter to their attention in July 2003, FSA headquarters staff 

were unaware that these six states had not conducted compliance reviews 

for 2001. Similarly, they did not know the status of the remaining 20 states. 

Because of this long delay, FSA cannot reasonably assess the level of 

recipients’ compliance with the act and may be missing opportunities to 

recapture payments that were made to ineligible recipients if a farming 

operation reorganizes or ceases operations. 

Third, FSA staff do not use all available tools to assess compliance. For 

one-half of the case files we reviewed for 2001, field offices did not use all 

available tools to determine whether persons are actively engaged in 

farming. FSA compliance review policy requires field staff to interview 

persons asserting that they are actively engaged in farming before making 

a final eligibility decision, unless the reason for not interviewing the 

 10For 72 of the 1,573 sampled entities, survey respondents did not provide information on 

whether the reviews for these entities were waived or will be conducted in the future. In 

addition, we were unable to determine the field offices responsible for reviewing 12 of the 

1,573 sampled entities. 

11State offices may waive selected compliance reviews for farming operations that were 

previously reviewed and did not receive an adverse determination, and for which the 

reviewing authority has no reason to believe there have been changes that affect the 

original eligibility decision. 

12Three additional FSA state offices submitted the required report after the due date. 
Page 13 GAO-04-861T 

person is obvious and adequately justified in writing.13 Indeed, 83 percent 

of the field offices responding to our survey indicated that interviews are 

helpful in conducting compliance reviews. However, in 27 of the 86 case 

files we reviewed in six states, field staff did not interview these persons 

and did not adequately document why they had not done so. In one of the 

states we visited, field staff had not conducted any interviews. We also 

found that some field offices do not obtain and review certain key 

financial information regarding the farming operation before making final 

eligibility decisions. For example, our review of case files indicated that 

for one-half of the farming operations, field staff did not use financial 

records, such as bank statements, cancelled checks, or accounting 

records, to substantiate that capital was contributed directly to the 

farming operation from a fund or account separate and distinct from that 

of any other individual or entity with an interest in the farming operation, 

as required by FSA’s policy.14 Instead, FSA staff often rely on their personal 

knowledge of the individuals associated with the farming operation to 

determine whether these individuals meet the requirement for active 

engagement in farming. 

Fourth, FSA does not consistently collect and analyze monitoring data. 

FSA has not established a methodology for collecting and summarizing 

compliance review data so that it can (1) reliably compare farming 

operations’ compliance with the actively engaged in farming requirements 

from year to year and (2) assess its field offices’ conduct of compliance 

reviews. Under Office of Management and Budget Circular A-123, agencies 

must develop and implement management controls to reasonably ensure 

that they obtain, maintain, report, and use reliable and timely information 

for decision-making. Because FSA has not instituted these controls, it 

cannot determine whether its staff are consistently applying the payment 

eligibility requirements across states and over time. 

Finally, these problems are exacerbated by a lack of periodic training for 

FSA staff on the payment limitations and eligibility rules. Training has 

generally not been available since the mid-1990s. 

In conclusion, the Farm Program Payments Integrity Act of 1987, while 

enacted to limit payments to individuals and entities actively engaged in 

farming, allows farming operations to maximize the receipt of federal farm 

 13FSA Handbook Payment Limitations, 1-PL (Revision 1), Amendment 40. 

14FSA Handbook Payment Limitations, 1-PL (Revision 1), Amendment 40. 
Page 14 GAO-04-861T 

payments as long as all recipients meet eligibility requirements. However, 

we found cases where payment recipients may have developed methods to 

circumvent established payment limitations. This seems contrary to the 

goals of the 1987 Act and was caused by weaknesses in USDA’s regulation 

and oversight. The regulations need to better define what constitutes a 

significant contribution of active personal management and clarify 

whether fraudulent intent is necessary to find that someone has adopted a 

scheme or device. Without specifying measurable standards for what 

constitutes a significant contribution of active personal management, FSA 

allows individuals who may have had limited involvement in the farming 

operation to qualify for payments. Moreover, FSA is not providing 

adequate oversight of farm program payments under its current 

regulations and policies. 

In our report to you, we made eight recommendations to the Secretary of 

Agriculture for improving FSA’s oversight of compliance with the 1987 

Act, including: developing measurable requirements defining a significant 

contribution of active personal management; clarifying regulations and 

guidance as to what constitutes a scheme or device; improving its 

sampling method for selecting farming operations for review; and 

developing controls to ensure all available tools are used to assess 

compliance with the act. USDA agreed to act on most of our 

recommendations. However, USDA stated that its current regulations are 

sufficient for determining active engagement in farming and assessing 

whether operations are schemes or devices to evade payment limitations. 

Mr. Chairman, this concludes my prepared statement. We would be happy 

to respond to any questions that you or other Members of the Committee 

may have. 

For further information about this testimony, please contact Lawrence J. 

Dyckman, Director, Natural Resources and Environment, (202) 512-3841, 

or by email at dyckmanl@gao.gov. Ron Maxon, Thomas Cook, Cleofas 

Zapata, Carol Herrnstadt Shulman, and Amy Webbink made key 

contributions to this statement. 

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