Financial Audit: Federal Deposit Insurance Corporation's 1999 and 1998
Financial Statements (Letter Report, 05/26/2000, GAO/AIMD-00-157).

Pursuant to a legislative requirement, GAO reviewed the financial
statements of the Bank Insurance Fund, the Savings Association Insurance
Fund, and the Federal Savings and Loan Insurance Corporation Resolution
Fund for the years ended December 31, 1999 and 1998. GAO also reviewed:
(1) the Federal Deposit Insurance Corporation (FDIC) management's
assertions regarding the effectiveness of its internal controls as of
December 31, 1999; and (2) FDIC's compliance with laws and regulations
during 1999.

GAO noted that: (1) the financial statements of each fund are presented
fairly, in conformity with generally accepted accounting principles; (2)
although certain internal controls should be improved, FDIC had
effective internal control over financial reporting (including
safeguarding of assets) and compliance with laws and regulations; and
(3) there were no reportable noncompliance with the laws and regulations
that GAO tested.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-00-157
     TITLE:  Financial Audit: Federal Deposit Insurance Corporation's
	     1999 and 1998 Financial Statements
      DATE:  05/26/2000
   SUBJECT:  Financial statement audits
	     Internal controls
	     Fund audits
	     Auditing standards
	     Information systems
	     Reporting requirements
	     Financial records
IDENTIFIER:  Bank Insurance Fund
	     Savings Association Insurance Fund
	     FSLIC Resolution Fund

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GAO/AIMD-00-157

14

Statements of Financial Position 14

Statements of Income and Fund Balance 15

Statements of Cash Flows 16

Notes to Financial Statements 17

34

Statements of Financial Position 34

Statements of Income and Fund Balance 35

Statements of Cash Flows 36

Notes to Financial Statements 37

52

Statements of Financial Position 52

Statements of Income and Accumulated Deficit 53

Statements of Cash Flows 54

Notes to Financial Statements 55

Appendix I: Comments From the Federal Deposit Insurance
Corporation

72

Appendix II: GAO Contacts and Staff Acknowledgments

73

Table 1: FRF's Assets as of December 31, 1999 and 1998 11

BIF Bank Insurance Fund

FDIC Federal Deposit Insurance Corporation

FIRREA Financial Institutions Reform, Recovery, and Enforcement Act

FMFIA Federal Managers' Financial Integrity Act of 1982

FRF FSLIC Resolution Fund

FSLIC Federal Savings and Loan Insurance Corporation

REFCORP Resolution Funding Corporation

RTC Resolution Trust Corporation

SAIF Savings Association Insurance Fund

B-283439

May 26, 2000

To the President of the Senate and the
Speaker of the House of Representatives

This report presents our opinions on the financial statements of the Bank
Insurance Fund, the Savings Association Insurance Fund, and the FSLIC
Resolution Fund (FRF) for the years ended December 31, 1999 and 1998. These
financial statements are the responsibility of the Federal Deposit Insurance
Corporation (FDIC), the administrator of the three funds. This report also
presents (1) our opinion on the effectiveness of FDIC's internal control as
of December 31, 1999, and (2) our evaluation of FDIC's compliance with laws
and regulations during 1999. In addition, it discusses a reportable weakness
in information systems control detected during our 1999 audits, ongoing
litigation affecting FRF, and the current status of FRF's liquidation
activities.

We conducted our audits pursuant to the provisions of section 17(d) of the
Federal Deposit Insurance Act, as amended (12 U.S.C. 1827(d)), and in
accordance with generally accepted government auditing standards.

We are sending copies of this report to the Honorable Donna Tanoue, Chairman
of the Board of Directors of the Federal Deposit Insurance Corporation; the
Honorable Alan Greenspan, Chairman of the Board of Governors of the Federal
Reserve System; the Honorable John Hawke, Jr., Comptroller of the Currency;
the Honorable Ellen Seidman, Director of the Office of Thrift Supervision;
Senator Phil Gramm, Chairman, and Senator Paul Sarbanes, Ranking Minority
Member, of the Senate Committee on Banking, Housing and Urban Affairs;
Representative James Leach, Chairman, and Representative John LaFalce,
Ranking Minority Member, of the House Committee on Banking and Financial
Services; the Honorable Lawrence Summers, Secretary of the Treasury; the
Honorable Jacob Lew, Director of the Office of Management and Budget; and
other interested parties.

David M. Walker
Comptroller General
of the United States

B-283439

To the Board of Directors
Federal Deposit Insurance Corporation

We have audited the statements of financial position as of December 31, 1999
and 1998, for the three funds administered by the Federal Deposit Insurance
Corporation (FDIC), the related statements of income and fund balance
(accumulated deficit), and the statements of cash flows for the years then
ended. In our audits of the Bank Insurance Fund (BIF), the Savings
Association Insurance Fund (SAIF), and the FSLIC Resolution Fund (FRF), we
found

ï¿½ the financial statements of each fund are presented fairly, in conformity
with generally accepted accounting principles;

ï¿½ although certain internal controls should be improved, FDIC had effective
internal control over financial reporting (including safeguarding of assets)
and compliance with laws and regulations; and

ï¿½ no reportable noncompliance with the laws and regulations that we tested.

The following sections discuss our conclusions in more detail. They also
present information on (1) the scope of our audits, (2) a reportable
condition1 related to information systems control noted during our 1999
audits, (3) the current status of the goodwill litigation cases, (4) the
current status of FRF's liquidation activities, and (5) our evaluation of
the Corporation's comments on a draft of this report.

The financial statements and accompanying notes present fairly, in all
material respects, in conformity with generally accepted accounting
principles, the Bank Insurance Fund's financial position as of December 31,
1999 and 1998, and the results of its operations and its cash flows for the
years then ended.

The financial statements and accompanying notes present fairly, in all
material respects, in conformity with generally accepted accounting
principles, the Savings Association Insurance Fund's financial position as
of December 31, 1999 and 1998, and the results of its operations and its
cash flows for the years then ended.

The financial statements and accompanying notes present fairly, in all
material respects, in conformity with generally accepted accounting
principles, the FSLIC Resolution Fund's financial position as of
December 31, 1999 and 1998, and the results of its operations and its cash
flows for the years then ended.

As discussed in note 8 of FRF's financial statements, a contingency exists
from approximately 100 lawsuits pending in the United States Court of
Federal Claims concerning the counting of goodwill assets as part of
regulatory capital. Based on information currently available, a reasonable
estimate cannot be made regarding future losses and settlements related to
these cases. Information on the current status of the goodwill cases is
presented later in this report.

Although certain internal controls should be improved, FDIC management
maintained, in all material respects, effective internal control over
financial reporting and compliance as of December 31, 1999, that provided
reasonable assurance that misstatements, losses, or noncompliance, material
in relation to the Corporation's financial statements would be prevented or
detected on a timely basis. FDIC management asserted that its internal
control was effective based on criteria established under the Federal
Managers' Financial Integrity Act (FMFIA) of 1982. In making its assertion,
FDIC management also fairly stated the need to improve certain internal
controls.

Our work identified the need to improve information systems control, as
described in a later section of this report. The weakness in information
systems control, although not considered material, represents a significant
deficiency in the design or operations of internal control that could
adversely affect FDIC's ability to meet its internal control objectives as
described later in this report. Although the weakness did not materially
affect the 1999 financial statements, misstatements may nevertheless occur
in other FDIC-reported financial information as a result of the internal
control weakness.

Our tests for compliance with selected provisions of laws and regulations
disclosed no instances of noncompliance that would be reportable under
generally accepted government auditing standards. However, the objective of
our audits was not to provide an opinion on overall compliance with laws and
regulations. Accordingly, we do not express such an opinion.

FDIC's management is responsible for

ï¿½ preparing the annual financial statements in conformity with generally
accepted accounting principles;

ï¿½ establishing, maintaining, and assessing internal control to provide
reasonable assurance that the broad control objectives of FMFIA are met; and

ï¿½ complying with applicable laws and regulations.

We are responsible for obtaining reasonable assurance about whether
(1) the financial statements are presented fairly, in all material respects,
in conformity with generally accepted accounting principles; and
(2) management maintained effective internal control, the objectives of
which are

ï¿½ financial reporting--transactions are properly recorded, processed, and
summarized to permit the preparation of financial statements in conformity
with generally accepted accounting principles, and assets are safeguarded
against loss from unauthorized acquisition, use, or disposition; and

ï¿½ compliance with laws and regulations--transactions are executed in
accordance with laws and regulations that could have a direct and material
effect on the financial statements.

We are also responsible for testing compliance with selected provisions of
laws and regulations that have a direct and material effect on the financial
statements and for performing limited procedures with respect to certain
other information appearing in FDIC's 1999 Annual Report and 1999 Chief
Financial Officers Act Report.

In order to fulfill these responsibilities, we

ï¿½ examined, on a test basis, evidence supporting the amounts and disclosures
in the financial statements;

ï¿½ assessed the accounting principles used and significant estimates made by
management;

ï¿½ evaluated the overall presentation of the financial statements;

ï¿½ obtained an understanding of internal control related to financial
reporting, including safeguarding assets, and compliance with laws and
regulations, including the execution of transactions in accordance with
management's authority;

ï¿½ tested relevant internal controls over financial reporting, including
safeguarding assets, and compliance; evaluated the design and operating
effectiveness of internal control; and evaluated management's assertion
about the effectiveness of internal control;

ï¿½ considered FDIC's process for evaluating and reporting on internal control
based on criteria established by FMFIA; and

ï¿½ tested compliance with selected provisions of the Federal Deposit
Insurance Act, as amended; the Chief Financial Officers Act of 1990; and the
Federal Home Loan Bank Act, as amended.

We did not evaluate all internal controls relevant to operating objectives
as broadly defined by FMFIA, such as those controls relevant to preparing
statistical reports and ensuring efficient operations. We limited our
internal control testing to controls over financial reporting and
compliance. Because of inherent limitations in internal control,
misstatements due to error or fraud, losses, or noncompliance may
nevertheless occur and not be detected. We also caution that projecting our
evaluation to future periods is subject to the risk that controls may become
inadequate because of changes in conditions or that the degree of compliance
with controls may deteriorate.

We did not test compliance with all laws and regulations applicable to FDIC.
We limited our tests of compliance to those which we deemed applicable to
the financial statements for the year ended December 31, 1999. We caution
that noncompliance may occur and not be detected by these tests and that
such testing may not be sufficient for other purposes.

We conducted our audits from July 1999 through May 2000. We did our work in
accordance with generally accepted government auditing standards.

FDIC provided comments on a draft of this report. FDIC's comments are
discussed and evaluated in a later section of this report and are reprinted
in appendix I.

As part of the financial statement audits, we reviewed FDIC's information
systems (IS) general controls. The primary objectives of IS general controls
are to safeguard data, protect computer application programs, prevent system
software from unauthorized access, and ensure continued computer operations
in case of unexpected interruption. IS general controls include
corporatewide security program planning and management, access controls,
system software, application software development and change controls,
segregation of duties, and service continuity controls. The effectiveness of
application controls2 is dependent on the effectiveness of general controls.
Both IS general controls and application controls must be effective to help
ensure the reliability, appropriate confidentiality, and availability of
critical automated information.

In performing our tests, we found FDIC's IS general controls to be
ineffective. We identified weaknesses in FDIC's corporatewide security
program, access controls, segregation of duties, and service continuity. The
weaknesses in IS general controls significantly impair the effectiveness of
FDIC's application controls, including financial systems. We considered the
effect of the information system control weaknesses and determined that
other management controls mitigated their effect on the financial
statements. FDIC recognizes the significance of the IS general control
issues and has begun planning and initiating corrective actions. Because of
their sensitive nature, the details surrounding these weaknesses and
vulnerabilities are being communicated to FDIC management, along with our
recommendations for corrective action, through separate correspondence.

In addition to these weaknesses, we identified less significant matters
involving FDIC's system of internal accounting control that we will be
reporting in a separate correspondence to FDIC management.

As discussed in note 8 of FRF's financial statements, a contingency exists
from the goodwill-related lawsuits against the United States government
pending in the United States Court of Federal Claims. These lawsuits assert
that certain agreements were breached when Congress enacted, and the Office
of Thrift Supervision implemented, the Financial Institutions Reform,
Recovery, and Enforcement Act (FIRREA), which affected the thrift industry.
The legislation changed the computation for regulatory capital requirements,
thereby eliminating the special accounting treatment previously allowed for
goodwill assets acquired when institutions merged with or acquired failing
thrifts. The changes in regulatory treatment of goodwill assets caused some
institutions to fall out of capital compliance. In such cases, institutions
had to take action to meet capital requirements or they were subject to
regulatory action.

On July 1, 1996, the United States Supreme Court concluded that the
government is liable for damages in three cases, consolidated for appeal to
the Supreme Court, in which the changes in regulatory treatment required by
FIRREA led the government to not honor its contractual obligations related
to the accounting treatment of goodwill assets. The cases were then referred
back to the Court of Federal Claims for trials to determine the amount of
damages. On July 23, 1998, the Department of the Treasury determined, based
on an opinion of the Department of Justice, that FRF is legally available to
satisfy all judgments and settlements in the goodwill litigation involving
supervisory action or assistance agreements, in which the former Federal
Savings and Loan Insurance Corporation (FSLIC) was a party to those
agreements. Treasury further determined that FRF is the appropriate source
of funds for payment of any such judgments and settlements.

During 1999, damage awards in three significant goodwill-related cases were
decided. On April 9, 1999, the Court of Federal Claims ruled that the
federal government must pay Glendale Federal Bank $908.9 million for
breaching the contract that allowed the thrift to count goodwill toward
regulatory capital. The plaintiffs were seeking up to $2 billion in damages.
On April 16, 1999, the Court of Federal Claims awarded $23 million in
damages to California Federal Bank, which had been seeking more than
$1 billion in damages. On September 30, 1999, the Court of Federal Claims
awarded approximately $5 million to LaSalle Talman Bank, which had been
seeking more than $1.2 billion in damages. All parties in these cases have
appealed. Subsequent to December 31, 1999, the Court of Federal Claims
awarded $21.5 million to Landmark Land Company, which had been seeking
approximately $750 million in damages in its supervisory goodwill case
against the government. All parties in the Landmark Land case have appealed.

Because of the appeals and differences in awarding damages in the cases thus
far, the final outcome in the cases and the amount of any possible damages
remain uncertain. With regard to the approximately 100 remaining cases at
the trial court level, the outcome of each case and the amount of any
possible damages remain uncertain. However, FDIC has concluded that it is
probable that FRF will be required to pay additional, possibly substantial,
amounts as a result of future judgments and settlements. Because of the
uncertainties surrounding the cases, such losses are currently not
estimable.

FDIC, as administrator of FRF, is responsible for liquidating the assets and
liabilities of the former Resolution Trust Corporation (RTC), 3 as well as
the former FSLIC's assets and liabilities. FDIC continues to make
significant progress in liquidating FRF's assets. As of December 31, 1999,
FRF held total assets valued at $7.0 billion. Of that total, $2.9 billion
was held in cash and cash equivalents, with $4.1 billion in assets remaining
to be liquidated. These asset levels represent a significant decrease from
the prior year, as shown in table 1.

 Dollars in billions
                           1999  1998   (Decrease)
 Cash and cash equivalents $2.9  $ 4.6  ($1.7)
 Assets not yet liquidated 4.1   6.1    ( 2.0)
 Total Assets              $7.0  $10.7  ($3.7)

The RTC Completion Act required the FDIC to return to the U.S. Treasury any
funds that were transferred to the RTC pursuant to the RTC Completion Act
but not needed by RTC. The RTC Completion Act made available $18.3 billion
of additional funding. Prior to RTC's termination on December 31, 1995, RTC
drew down $4.6 billion of the $18.3 billion made available by the RTC
Completion Act. During 1999, FDIC returned
$4.2 billion to the U.S. Treasury. Subsequent to December 31, 1999, FDIC
made approximately $400 million in payments to the U.S. Treasury, so that as
of February 3, 2000, the full amount of the appropriation transferred to RTC
pursuant to the RTC Completion Act had been repaid.

After providing for all outstanding RTC liabilities, FDIC must transfer the
net proceeds from the sale of RTC-related assets to the Resolution Funding
Corporation (REFCORP). Any funds transferred to REFCORP are used to pay the
interest on REFCORP bonds issued to provide funding for the early RTC
resolutions. On April 10, 2000, FDIC transferred $533 million to REFCORP.
The payments to REFCORP benefit the U.S. Treasury, which is otherwise
obligated to pay the interest on the bonds. The final amount of unused funds
available for transfer to REFCORP will not be known with certainty until all
of FRF's remaining assets and liabilities are liquidated.

Funds available in FRF-FSLIC will be used to pay future liabilities of
FRF-FSLIC, including the contingency related to the goodwill litigation
cases. Because additional and possibly substantial amounts could be paid out
of FRF-FSLIC for the goodwill cases, FRF has been provided with an
indefinite permanent appropriation for the payment of judgments and
settlements in the goodwill litigation.

In commenting on a draft of this report, FDIC acknowledged the IS control
weaknesses, and stated a commitment to implementing a strong IS security
program for the FDIC and fostering an environment that makes all employees
aware of their security responsibilities. We plan to evaluate the
effectiveness of FDIC's corrective actions in IS security as part of our
audits of FDIC's 2000 financial statements.

FDIC also stated that it will continue to monitor the other matters
discussed in our report, including the status of the goodwill litigation
cases and FRF's liquidation activities. We also plan to monitor these issues
as a part of our 2000 audits.

David M. Walker
Comptroller General
of the United States

May 5, 2000

Bank Insurance Fund's Financial Statements

Statements of Financial Position
Statements of Income and Fund Balance
Statements of Cash Flows
Notes to Financial Statements
Savings Association Insurance Fund's Financial Statements

Statements of Financial Position
Statements of Income and Fund Balance
Statements of Cash Flows
Notes to Financial Statements
FSLIC Resolution Fund's Financial Statements

Statements of Financial Position
Statements of Income and Accumulated Deficit
Statements of Cash Flows
Notes to Financial Statements
Comments From the Federal Deposit Insurance Corporation

GAO Contacts and Staff Acknowledgments

Linda M. Calbom (202) 512-9508
Jeanette M. Franzel (202) 512-9471
Lynda E. Downing (202) 512-9168

In addition to those named above, the following staff made key contributions
to this report: Wendy M. Albert, Patricia P. Blumenthal, Gary P. Chupka,
Dennis L. Clarke, John C. Craig, Diane B. Davis, and Theresa A. Patrizio.

The following staff from the FDIC Office of Inspector General also
contributed to this report: Robert W. Allmang, James J. Ballenger, Arlene S.
Boateng, Rhonda G. Bunte, Warren V. Bush, W. Kevin Hainsworth,
R. William Harrington, Phillip S. Hodge, Paul S. Johnston, James Paul
McDougal, Foxhall A. Parker, Michael L. Rexrode, Duane H. Rosenberg, Titus
S. Simmons, Dale W. Seeley, Ross E. Simms, Sharon R. Spencer, Charles E.
Thompson, Joseph E. Uricheck, and R. Leon Wellons.

(917709)

Table 1: FRF's Assets as of December 31, 1999 and 1998 11
  

1. Reportable conditions involve matters coming to the auditor's attention
that, in the auditor's judgment, should be communicated because they
represent significant deficiencies in the design or operation of internal
control and could adversely affect FDIC's ability to meet the control
objectives described in this report.

2. Application controls consist of the structure, policies, and procedures
that apply to separate, individual systems, such as accounts payable and
general ledger systems.

3. On January 1, 1996, FRF assumed responsibility for all remaining assets
and liabilities of the former RTC.
*** End of document. ***