    Financial Audit: Federal Deposit Insurance Corporation's 1996 and 1995
    Financial Statements (Letter Report, 06/30/97, GAO/AIMD-97-111).

    GAO audited: (1) the financial statements of the Bank Insurance Fund and
    the Savings Association Insurance Fund (SAIF) for the years ended
    December 31, 1996 and 1995, and the financial statements of the FSLIC
    Resolution Fund for the years ended December 31, 1996. GAO also
    reviewed: (1) the Federal Deposit Insurance Corporation (FDIC)
    management's assertions regarding the effectiveness of its internal
    control as of December 31, 1996; (2) FDIC's compliance with laws and
    regulations during 1996; and (3) the impact of legislation in 1996 on
    the capitalization of SAIF and the status of the FSLIC Resolution Fund's
    liquidation activities and funding.

    GAO noted that: (1) the financial statements of each fund were reliable
    in all material respects; (2) although certain internal controls should
    be improved, FDIC management fairly stated that internal controls in
    place on December 31, 1996, were effective in safeguarding assets from
    material loss, assuring material compliance with relevant laws and
    regulations, and assuring that there were no material misstatements in
    the financial statements of the three funds administered by FDIC; and
    (3) there was no reportable noncompliance with laws and regulations GAO
    tested.

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

     REPORTNUM:  AIMD-97-111
         TITLE:  Financial Audit: Federal Deposit Insurance Corporation's
                 1996 and 1995 Financial Statements
          DATE:  06/30/97
       SUBJECT:  Internal controls
                 Accounting procedures
                 Reporting requirements
                 Federal corporations
                 Financial statement audits
                 Auditing standards
                 Fund audits
                 Bank failures
    IDENTIFIER:  Bank Insurance Fund
                 Savings Association Insurance Fund
                 FSLIC Resolution Fund
                 BIF
                 SAIF

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    Cover
    ================================================================ COVER

    Report to the Congress

    June 1997

    FINANCIAL AUDIT - FEDERAL DEPOSIT
    INSURANCE CORPORATION'S 1996 AND
    1995 FINANCIAL STATEMENTS

    GAO/AIMD-97-111

    FDIC's 1996 and 1995 Financial Statements

    (917706)

    Abbreviations
    =============================================================== ABBREV

      BIF - Bank Insurance Fund
      DIFA - Deposit Insurance Funds Act of 1996
      DOF - Division of Finance
      DRR - Division of Resolutions and Receiverships
      FDIC - Federal Deposit Insurance Corporation
      FDICIA - Federal Deposit Insurance Corporation Improvement Act
      FICO - Financing Corporation
      FIRREA - Financial Institutions Reform, Recovery, and Enforcement
         Act
      FMFIA - Federal Managers' Financial Integrity Act
      FRF - FSLIC Resolution Fund
      FSLIC - Federal Savings and Loan Insurance Corporation
      RTC - Resolution Trust Corporation
      SAIF - Savings Association Insurance Fund

    Letter
    =============================================================== LETTER

    B-275155

    June 30, 1997

    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 and the Savings Association Insurance Fund for
    the years ended December 31, 1996 and 1995, and our opinion on the
    financial statements of the FSLIC Resolution Fund for the year ended
    December 31, 1996.  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 FDIC management's assertions regarding the effectiveness
    of its internal control as of December 31, 1996, and (2) our
    evaluation of FDIC's compliance with laws and regulations during
    1996.  In addition, it discusses FDIC's progress in correcting
    internal control weaknesses and presents our recommendations for
    further improvement.  The report also highlights the impact of
    legislation in 1996 on the capitalization of the Savings Association
    Insurance Fund and the status of the FSLIC Resolution Fund's
    liquidation activities and funding.

    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 Acting Chairman of the
    Board of Directors of the Federal Deposit Insurance Corporation; the
    Chairman of the Board of Governors of the Federal Reserve System; the
    Comptroller of the Currency; the Acting Director of the Office of
    Thrift Supervision; the Chairmen and Ranking Minority Members of the
    Senate Committee on Banking, Housing and Urban Affairs and the House
    Committee on Banking and Financial Services; the Secretary of the
    Treasury; the Director of the Office of Management and Budget; and
    other interested parties.

    This report was prepared under the direction of Robert W.  Gramling,
    Director, Corporate Audits and Standards.  Other major contributors
    to this report are listed in appendix II.

    James F.  Hinchman
    Acting Comptroller General
    of the United States

    Letter
    =============================================================== LETTER

    B-275155

    To the Board of Directors
    Federal Deposit Insurance Corporation

    We have audited the statements of financial position as of December
    31, 1996 and 1995, of the two deposit insurance funds administered by
    the Federal Deposit Insurance Corporation (FDIC), the related
    statements of income and fund balance, and the statements of cash
    flows for the years then ended.  We have also audited the statements
    of financial position as of December 31, 1996, and January 1, 1996,
    of the FSLIC Resolution Fund, which is also administered by FDIC, and
    the related statement of income and accumulated deficit and the
    statement of cash flows for the year ended December 31, 1996.

    In our audits of the Bank Insurance Fund (BIF), the Savings
    Association Insurance Fund (SAIF), and the FSLIC Resolution Fund
    (FRF), we found

      -- the financial statements of each fund were reliable in all
         material respects;

      -- although certain internal controls should be improved, FDIC
         management fairly stated that internal controls in place on
         December 31, 1996, were effective in safeguarding assets from
         material loss, assuring material compliance with relevant laws
         and regulations, and assuring that there were no material
         misstatements in the financial statements of the three funds
         administered by FDIC; and

      -- no reportable noncompliance with laws and regulations we tested.

    The following sections discuss our conclusions in more detail.  They
    also discuss (1) the scope of our audits, (2) additional information
    including recent legislation affecting SAIF and an update on the
    current status of FRF liquidation activities and funding, (3) FDIC's
    progress in addressing reportable conditions\1 identified during our
    1995 audits, and reportable conditions identified during our 1996
    audits, (4) recommendations from our 1996 audits, and (5) the
    Corporation's comments on a draft of this report and our evaluation.

    --------------------
    \1 Reportable conditions involve matters coming to the auditor's
    attention relating to significant deficiencies in the design or
    operation of internal controls that, in the auditor's judgment, could
    adversely affect an entity's ability to (1) safeguard assets against
    loss from unauthorized acquisition, use, or disposition, (2) ensure
    the execution of transactions in accordance with management's
    authority and in accordance with laws and regulations, and (3)
    properly record, process, and summarize transactions to permit the
    preparation of financial statements and to maintain accountability
    for assets.  A material weakness is a reportable condition in which
    the design or operation of the internal controls does not reduce to a
    relatively low level the risk that losses, noncompliance, or
    misstatements in amounts that would be material in relation to the
    financial statements may occur and not be detected within a timely
    period by employees in the normal course of their assigned duties.

       OPINION ON BANK INSURANCE
       FUND'S FINANCIAL STATEMENTS
    ------------------------------------------------------------ Letter :1

    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, 1996 and 1995, and the results of its operations
    and its cash flows for the years then ended.

       OPINION ON SAVINGS ASSOCIATION
       INSURANCE FUND'S FINANCIAL
       STATEMENTS
    ------------------------------------------------------------ Letter :2

    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, 1996 and 1995, and the results
    of its operations and its cash flows for the years then ended.

       OPINION ON FSLIC RESOLUTION
       FUND'S FINANCIAL STATEMENTS
    ------------------------------------------------------------ Letter :3

    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, 1996, and January 1, 1996, and the results of its
    operations and its cash flows for the year ended December 31, 1996.

    As discussed in notes 1 and 2 of FRF's financial statements, on
    January 1, 1996, FRF assumed responsibility for liquidating the
    assets and satisfying the obligations of the Resolution Trust
    Corporation (RTC).\2 This statutorily-mandated merger resulted in a
    significant one-time transfer of assets and liabilities into FRF on
    January 1, 1996.  For this reason, FDIC concluded that providing
    year-end 1995 comparative information on FRF would not be practical
    on a fully consistent basis of accounting, and therefore only
    presented FRF's financial statements for 1996.  Additionally, the
    transfer of RTC's assets and liabilities into FRF required FDIC to
    make certain adjustments and reclassifications to 1996 opening
    balances on FRF's statement of financial position to ensure
    consistent treatment in presentation.  For this reason, certain
    amounts on FRF's January 1, 1996, statement of financial position
    will not be readily traceable to the combined year-end 1995 balances
    reported on FRF's and RTC's statements of financial position.

    As discussed in note 8 of FRF's financial statements, there are
    approximately 120 pending lawsuits which stem from legislation that
    resulted in the elimination of supervisory goodwill and other
    forbearances from regulatory capital.  These lawsuits assert various
    legal claims including breach of contract or an uncompensated taking
    of property resulting from the FIRREA provisions regarding minimum
    capital requirements for thrifts and limitations as to the use of
    supervisory goodwill to meet minimum capital requirements.  One case
    has resulted in a final judgment of $6 million against FDIC, which
    was paid by FRF, and another case to which FDIC is a party defendant
    and where a judgment of $26.9 million (plus post judgment interest)
    has been entered is currently on appeal.  FDIC has established a
    reserve on FRF's financial statements for this second judgment.  The
    remainder of these cases are pending in the Court of Federal Claims
    with the United States as the named defendant.

    On July 1, 1996, the United States Supreme Court concluded that the
    government is liable for damages in three other 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.  However, because the lower courts had not
    determined the appropriate measure or amount of damages, the Supreme
    Court returned the cases to the Court of Federal Claims for further
    proceedings.  As of May 20, 1997 -- the end of our fieldwork -- only
    one of these three cases had gone to trial, and the trial was still
    ongoing.  Until the amount of damages are determined by the court the
    amount of additional costs from these three cases is uncertain.
    Further, with respect to the other pending cases, the outcome of each
    case and the amount of any possible damages will depend on the facts
    and circumstances, including the wording of agreements between thrift
    regulators and acquirers of troubled savings and loan institutions.

    As discussed in note 8 of FRF's financial statements, FDIC believes
    that judgments in such cases are properly paid from the Judgment
    Fund.\3 The extent to which FRF will be the source for paying other
    judgments in such cases is uncertain.

    --------------------
    \2 The Resolution Trust Corporation was created by the Financial
    Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA)
    to manage and resolve all troubled savings associations that were
    previously insured by FSLIC and for which a conservator or receiver
    was appointed during the period January 1, 1989, through August 8,
    1992.  This period was extended to September 30, 1993, by the
    Resolution Trust Corporation Refinancing, Restructuring, and
    Improvement Act of 1991 and was further extended on December 17,
    1993, to a date not earlier than January 1, 1995, nor later than July
    1, 1995, by the Resolution Trust Corporation Completion Act of 1993
    (RTC Completion Act).  The RTC Completion Act stated that the final
    date would be determined by the Chairperson of the Thrift Depositor
    Protection Oversight Board.  On December 5, 1994, the Chairperson
    made the determination that RTC would continue to resolve failed
    thrift institutions through June 30, 1995.  Finally, the RTC
    Completion Act required RTC to terminate its operations no later than
    December 31, 1995.

    \3 The Judgment Fund is a permanent, indefinite appropriation
    established by 31 U.S.C.  Sec.  1304, and is administered by the
    Department of the Treasury.

       OPINION ON FDIC MANAGEMENT'S
       ASSERTIONS ABOUT THE
       EFFECTIVENESS OF INTERNAL
       CONTROLS
    ------------------------------------------------------------ Letter :4

    For the three funds administered by FDIC, we evaluated FDIC
    management's assertions about the effectiveness of its internal
    controls designed to

      -- safeguard assets against loss from unauthorized acquisition,
         use, or disposition;

      -- assure the execution of transactions in accordance with
         provisions of selected laws and regulations that have a direct
         and material effect on the financial statements of the three
         funds; and

      -- properly record, process, and summarize transactions to permit
         the preparation of reliable financial statements and to maintain
         accountability for assets.

    FDIC management fairly stated that those controls in place on
    December 31, 1996, provided reasonable assurance that losses,
    noncompliance, or misstatements material in relation to the financial
    statements would be prevented or detected on a timely basis.  FDIC
    management made this assertion based on criteria established under
    the Federal Managers' Financial Integrity Act of 1982 (FMFIA).  FDIC
    management, in making its assertion, also fairly stated the need to
    improve certain internal controls.

    Our work also identified the need to improve certain internal
    controls, as described in a later section of this report.  These
    weaknesses in internal controls, although not considered material
    weaknesses, represent significant deficiencies in the design or
    operation of internal controls which could have adversely affected
    FDIC's ability to fully meet the internal control objectives listed
    above.  While these weaknesses did not significantly affect the
    financial statements of the three funds, misstatements may
    nevertheless occur in other FDIC-reported financial information as a
    result of these internal control weaknesses.  These weaknesses are
    discussed in detail in a later section of this report.

       COMPLIANCE WITH LAWS AND
       REGULATIONS
    ------------------------------------------------------------ Letter :5

    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.

       OBJECTIVES, SCOPE, AND
       METHODOLOGY
    ------------------------------------------------------------ Letter :6

    FDIC's management is responsible for

      -- preparing the annual financial statements in conformity with
         generally accepted accounting principles;

      -- establishing, maintaining, and evaluating the internal control
         to provide reasonable assurance that the broad control
         objectives of FMFIA are met; and

      -- complying with applicable laws and regulations.

    We are responsible for obtaining reasonable assurance about whether
    (1) the financial statements are free of material misstatement and
    presented fairly, in all material respects, in conformity with
    generally accepted accounting principles and (2) FDIC management's
    assertion about the effectiveness of internal controls is fairly
    stated, in all material respects, based upon the criteria established
    under FMFIA.  We are also responsible for testing compliance with
    selected provisions of laws and regulations and for performing
    limited procedures with respect to certain other information in
    FDIC's annual financial report.

    In order to fulfill these responsibilities, we

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

      -- assessed the accounting principles used and significant
         estimates made by management;

      -- evaluated the overall presentation of the financial statements;

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

      -- tested relevant internal controls over safeguarding, compliance,
         and financial reporting and evaluated management's assertion
         about the effectiveness of internal controls; and

      -- 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 those
    controls necessary to achieve the objectives outlined in our opinion
    on management's assertion about the effectiveness of internal
    controls.  Because of inherent limitations in any internal control,
    losses, noncompliance, or misstatements 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 conducted our audits between July 1996 and May 1997.  Our audits
    were conducted 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
    included in appendix I.

       ADDITIONAL INFORMATION ON
       SAIF'S CAPITALIZATION AND FRF'S
       LIQUIDATION ACTIVITIES
    ------------------------------------------------------------ Letter :7

    The following sections discuss (1) the affect of 1996 legislation on
    SAIF's capitalization and (2) FRF's liquidation activities and status
    of funding at year-end 1996.

          1996 LEGISLATION RESULTED IN
          SAIF'S CAPITALIZATION
    ---------------------------------------------------------- Letter :7.1

    In our 1995 audit report, we noted that a significant differential in
    premium rates charged by BIF and SAIF developed in 1995 after BIF
    achieved its designated capitalization level and FDIC lowered premium
    rates charged to BIF-insured institutions.\4 We reported that, absent
    a legislative solution, this premium rate differential would likely
    remain for many years.  We noted that, while SAIF's reserves
    continued to increase during 1995, its ratio of reserves to insured
    deposits was still substantially below its designated capitalization
    level.  We also noted that such a differential in premium rates could
    result in further decreases to SAIF's assessment base beyond those
    already being experienced.  We reported that this could jeopardize
    the stability of the Fund and increase the risk of a default on the
    thrift industry's obligation to pay the annual interest on 30-year
    bonds issued by the Financing Corporation (FICO) in an earlier
    attempt to resolve the thrift crisis of the 1980s.\5

    As discussed in notes 1 and 7 of SAIF's financial statements, on
    September 30, 1996, the Congress enacted the Deposit Insurance Funds
    Act of 1996 (DIFA).  DIFA included provisions to capitalize SAIF to
    its designated ratio of reserves to insured deposits.  SAIF was fully
    capitalized through a special assessment totaling $4.5 billion
    against SAIF-assessable deposits.  The special assessment was
    sufficient to increase SAIF's reserves to the Fund's designated
    reserve ratio of $1.25 for each $100 of insured deposits effective as
    of October 1, 1996.  DIFA also provided that banks bear part of the
    cost of the future annual FICO bond interest, which previously had
    been paid from SAIF-member assessments.  The DIFA provisions
    resulting in the capitalization of SAIF and the spreading of the
    annual FICO bond interest between banks and thrifts effectively
    addressed the insurance premium disparity between BIF and SAIF.  The
    legislation also provides for the merger of BIF and SAIF on January
    1, 1999, if no thrift institution exists on that date.\6

    --------------------
    \4 We had previously reported on the potential for a significant
    differential in premium rates to develop between BIF and SAIF in
    1995, as well as the potential consequences of such a differential,
    in Deposit Insurance Funds:  Analysis of Insurance Premium Disparity
    Between Banks and Thrifts (GAO/AIMD-95-84, March 3, 1995).

    \5 FICO was established in 1987 to recapitalize the Federal Savings
    and Loan Insurance Fund, the former insurance fund for thrifts.  FICO
    was funded mainly through the issuance of public debt offerings which
    were initially limited to $10.8 billion but were later effectively
    capped at $8.2 billion by the RTC Refinancing, Restructuring, and
    Improvement Act of 1991.  Neither FICO's bond obligations or the
    interest on these obligations are obligations of the United States
    nor are they guaranteed by the United States.  The annual FICO
    interest obligation, on average, equals approximately $780 million.

    \6 The Deposit Insurance Funds Act directs the Secretary of the
    Treasury to conduct a study of issues relevant to developing a common
    charter for all insured depository institutions and the abolition of
    separate and distinct charters between banks and savings
    associations, and to make recommendations with respect to
    establishing a common charter.

          STATUS OF FRF'S LIQUIDATION
          ACTIVITIES AND FUNDING
    ---------------------------------------------------------- Letter :7.2

    As discussed earlier, on January 1, 1996, FRF assumed responsibility
    for the assets and liabilities of the former RTC.  During 1996, FDIC
    continued its liquidation activities for FSLIC-related assets and
    liabilities, as well as those of the former RTC.  As shown in table
    1, the majority of FRF's losses from liquidation activities have been
    realized as of December 31, 1996.

                                    Table 1

                    FRF's Realized and Unrealized Losses as
                              of December 31, 1996

                             (Dollars in billions)

                                                      FRF-    FRF-   Total
                                                       RTC   FSLIC     FRF
    ----------------------------------------------  ------  ------  ------
    Realized losses                                  $82.5   $41.5  $124.0
    Unrealized losses                                  3.9     1.0     4.9
    ======================================================================
    Total realized and unrealized losses             $86.4   $42.5  $128.9
    ----------------------------------------------------------------------
    Losses are realized when failed financial institution assets at
    receiverships are disposed of and the proceeds from the asset
    dispositions are not sufficient to repay amounts disbursed by FRF to
    receiverships and are recorded on FRF's financial statements as
    receivables from thrift resolutions.  Losses are also realized when
    assets FRF purchases from terminating receiverships (investments in
    corporate-owned assets) are later disposed of for less than the price
    FRF paid when it purchased the assets from the receiverships.
    Uncertainties still exist with regard to the unrealized losses, as
    the amount will not be known with certainty until all remaining
    assets and liabilities are liquidated.

    In total, the Congress made available $149.2 billion in funding to
    cover liabilities and losses associated with the former FSLIC and RTC
    resolution activities, of which $105 billion was made available to
    the former RTC.\7 Of the $105 billion in funding available, $91.3
    billion was received by RTC through December 31, 1995, the date of
    RTC's termination, to cover losses and expenses associated with
    failed institutions from its caseload.  FRF received $44.2 billion to
    cover the liabilities and losses associated with the former FSLIC
    activities.  In total, $135.5 billion was received to cover
    liabilities and losses associated with the former FSLIC and RTC
    resolution activities.

    As shown in table 2, after reducing the total amount of funding
    received by the amount of estimated funds needed, $6.6 billion in
    available funds will remain.

                                    Table 2

                    Estimated Unused Funds After Completion
                        of FRF's Liquidation Activities

                             (Dollars in billions)

                                                      FRF-    FRF-   Total
                                                       RTC   FSLIC     FRF
    ----------------------------------------------  ------  ------  ------
    Total funds received                             $91.3   $44.2  $135.5
    Less: estimated funds needed                      86.4    42.5   128.9
    Estimated unused funds                           $ 4.9   $ 1.7   $ 6.6
    ----------------------------------------------------------------------
    The final amount of unused funds will not be known with certainty
    until all of FRF's remaining assets and liabilities are liquidated.
    Further, $13.7 billion in loss funds not received by RTC prior to
    RTC's termination are available until December 31, 1997, for losses
    incurred by the SAIF, if the conditions set forth in the Resolution
    Trust Corporation Completion Act are met.\8 Also, according to the
    act, unused loss funds will be returned to the general fund of the
    Treasury.

    --------------------
    \7 FIRREA provided an initial $50 billion to RTC.  The Resolution
    Trust Corporation Funding Act of 1991 provided an additional $30
    billion.  The Resolution Trust Corporation Refinancing,
    Restructuring, and Improvement Act of 1991 provided $25 billion in
    December 1991, which was only available for obligation until April 1,
    1992.  In December 1993, the RTC Completion Act removed the April 1,
    1992, deadline, thus making the balance of the $25 billion that was
    not obligated prior to April 1, 1992, $18.3 billion, available to RTC
    for resolution activities.

    \8 The RTC Completion Act makes available to SAIF, during the 2-year
    period beginning on the date of RTC's termination, any of the $18.3
    billion in appropriated funds made available by the RTC Completion
    Act and not needed by RTC.  However, prior to receiving such funds,
    FDIC must first certify, among other things, that SAIF cannot fund
    insurance losses through industry premium assessments or Treasury
    borrowings without adversely affecting the health of its member
    institutions and causing the government to incur greater losses.

       REPORTABLE CONDITIONS
    ------------------------------------------------------------ Letter :8

    The following sections discuss (1) FDIC's progress in addressing
    reportable conditions identified during our 1995 audits and (2)
    reportable conditions found during our 1996 audits.

          PROGRESS ON WEAKNESSES
          IDENTIFIED IN PREVIOUS
          AUDITS
    ---------------------------------------------------------- Letter :8.1

    In our 1995 audit report on the three funds administered by FDIC, we
    identified reportable conditions which affected FDIC's ability to
    ensure that internal control objectives were achieved.\9 These
    weaknesses related to FDIC's internal controls designed to ensure
    that (1) estimated recoveries for failed institution assets were
    determined in accordance with FDIC's estimation methodology, were
    supported by asset file information, and incorporated the impact of
    events through year-end, (2) time and attendance reporting procedures
    were effective, and (3) electronic data processing controls were
    effective.  During 1996, FDIC's actions addressed the weaknesses we
    identified in our 1995 audit report.

    For example, during our 1995 audits, we identified weaknesses in
    FDIC's controls to ensure that recovery estimates for assets acquired
    from failed financial institutions complied with FDIC's revised asset
    recovery estimation methodology, including being supported by asset
    file documentation, and weaknesses in the cut-off date for asset
    recovery information used by FDIC in its year-end allowance for loss
    estimation process.  FDIC's implementation of the Standard Asset
    Valuation Estimation methodology and related Asset Loss Reserve
    project in 1996 have addressed our previously identified weaknesses
    surrounding FDIC's use of noncurrent asset recovery values and the
    lack of adherence to its asset recovery estimation methodology.
    Additionally, although we continued to find instances where relevant
    file documentation was not always used in estimating asset recovery
    values during our 1996 audits, these problems did not affect the
    financial statements, and appear to be a result of first-year
    implementation issues.  We will continue to review individual asset
    recovery estimates during 1997.

    During our 1995 audits, we also continued to identify weaknesses in
    FDIC's time and attendance reporting process.  We reported that we
    had continued to identify deficiencies in adherence to required
    procedures in preparing time and attendance reports, separation of
    duties between timekeeping and data entry functions, and
    reconciliation of payroll reports to time cards.  During 1996, FDIC
    implemented new time and attendance reporting procedures to address
    these deficiencies.  The new procedures were intended to streamline
    and improve the time and attendance reporting process by focusing
    accountability for verifying the accuracy of time reports with
    supervisors, segregating the timekeeping and data entry functions,
    and redefining post-audit responsibilities for time and attendance
    reporting.  We found that the implementation of these new procedures
    effectively addressed the internal control issues we identified in
    the time and attendance reporting process in our prior year audits.

    During our 1995 audits, we also identified a weakness related to
    FDIC's electronic data processing general controls.  This weakness,
    because of its sensitive nature, was communicated in a separate
    correspondence to FDIC management, along with our recommendations for
    corrective action.  During 1996, FDIC took action which effectively
    addressed the issue we raised in this separate correspondence.
    Additionally, in our final audit of the Resolution Trust
    Corporation's (RTC) 1995 financial statements,\10 we identified
    weaknesses related to general controls over RTC's computerized
    information systems which required corrective actions.  During our
    1996 audits, we found that FDIC took action to address a number of
    these general control weaknesses.  Several other general control
    related issues had not been fully addressed by FDIC at the time of
    completion of our 1996 audits.  However, we believe the issues are
    not significant enough to be considered a reportable condition.

    --------------------
    \9 Financial Audit:  Federal Deposit Insurance Corporation's 1995 and
    1994 Financial Statements (GAO/AIMD-96-89, July 15, 1996).

    \10 Financial Audit:  Resolution Trust Corporation's 1995 and 1994
    Financial Statements (GAO/AIMD-96-123, July 2, 1996).

          REPORTABLE CONDITIONS
          IDENTIFIED IN 1996
    ---------------------------------------------------------- Letter :8.2

    The following reportable conditions represent significant
    deficiencies in FDIC's internal controls and should be corrected by
    FDIC management.

    1.  Controls over the integrity of information used to calculate the
    allowance for losses on receivables from resolution activities and
    investment in corporate-owned assets need to be improved.
    Specifically, FDIC did not have effective procedures in place to
    ensure that data used in the calculation of the year-end allowance
    for losses was adequately reviewed for accuracy prior to inclusion in
    the year-end calculation.

    FDIC estimates recoveries on assets acquired from failed financial
    institutions and uses these estimates to calculate the allowance for
    losses on receivables from resolution activities and investment in
    corporate-owned assets.  FDIC uses multiple data sources to calculate
    the estimated recoveries from these assets.  Much of the data are
    gathered from decentralized sources and some of the operations
    performed on the data are handled in a decentralized manner.
    Consequently, it is critical that procedures be in place to ensure
    the accuracy and quality of the data and that such procedures clearly
    require review for accuracy and quality of the data used in the
    year-end allowance for losses calculation.  However, during our 1996
    audits, we found deficiencies in FDIC's procedures for reviewing the
    compiled data and the related calculations.  As a result, FDIC
    management did not consistently have assurance that the estimated
    recoveries were properly recorded, processed, and reliable.

    For example, FDIC personnel made errors in calculating the estimated
    recoveries for a portfolio of equity investments.  The resulting
    error of about $97 million was not detected by FDIC.  In addition,
    FDIC made a number of errors in the process of updating the June 30,
    1996, estimated recoveries for assets maintained at failed
    institution receiverships.  The estimated recoveries for many of
    these assets were erroneously changed and some were inadvertently
    deleted.  In addition, FDIC did not always follow its procedures for
    discounting recovery estimates during its update process, resulting
    in improper discount rates being used to derive the updated values
    for a number of assets.  Finally, we also found instances where FDIC
    personnel did not review the integrity of the estimated recoveries on
    securities assets prior to including these recoveries in the
    allowance for losses calculations.

    The nature of these errors was such that, had an effective process
    been in place for reviewing the compiled data and related
    calculations, FDIC could have identified and corrected the errors.
    The errors we identified generally caused estimated asset recoveries
    to be understated and the related allowance for losses to be
    overstated at December 31, 1996.  While the effect of these
    misstatements was not material, misstatements in future financial
    statements could occur if corrective action is not taken.

    FDIC has proposed enhanced review procedures for 1997 which, if
    properly implemented, should reduce the risk of future errors or
    misstatements.  We will assess the effectiveness of these review
    procedures during our 1997 audits.

    2.  FDIC's oversight of asset servicers contracted to manage and
    dispose of failed financial institution assets needs to be
    strengthened.  During our 1996 audits, we found that FDIC had limited
    assurance that contracted asset servicers properly safeguarded failed
    institution assets and accurately reported financial information to
    FDIC because of deficiencies in FDIC's contractor oversight program.
    Specifically, FDIC's contractor oversight personnel did not always
    ensure that (1) contracted asset servicers have adequate controls
    over daily collections and bank reconciliations, (2) servicers' fees
    and reimbursable expenses are valid, accurate and complete, and (3)
    servicers' loan system calculations relating to the allocation of
    principal and interest are accurate.

    As of December 31, 1996, approximately $4.8 billion of the $8.7
    billion (about 55 percent) in FDIC's inventory of failed financial
    institution assets was serviced by contracted asset servicers.  These
    servicers accounted for over $3.7 billion of the $5.9 billion (about
    63 percent) in FDIC's collections during 1996 related to asset
    management and disposition activities.  Consequently, it is critical
    that FDIC maintain an effective contractor oversight program.

    FDIC attributes some of the problems noted above to reorganizations
    and realignments of responsibilities as a result of the merging of
    RTC activities into FDIC during 1996 coupled with the continued
    downsizing of the Corporation.  Division of Finance (DOF) officials
    informed us that they intend to implement a full visitation program
    which will include oversight procedures addressing each of the
    deficiencies noted above.  DOF anticipates having its revised
    visitation program begin operation in July 1997.  Additionally, DOF
    and the Division of Resolutions and Receiverships (DRR) have
    established a task force to develop Memorandums of Understanding to
    more clearly define their oversight roles, with concurrence from the
    Division of Administration.  We will assess the adequacy of FDIC's
    corrective actions during our 1997 audits.

    In addition to the weaknesses discussed above, we noted other less
    significant matters involving FDIC's system of internal accounting
    controls and its operations which we will be reporting separately to
    FDIC.

       RECOMMENDATIONS
    ------------------------------------------------------------ Letter :9

    To address weaknesses identified in this year's audits in the process
    for calculating the allowance for losses on receivables from
    resolution activities and investment in corporate-owned assets, we
    recommend that the Chairman of the Federal Deposit Insurance
    Corporation direct the heads of the Division of Resolutions and
    Receiverships and the Division of Finance to implement formal
    procedures for reviewing data used in the allowance for losses
    calculations.  Such procedures should provide for

      -- a thorough review of all data elements used in the allowance for
         loss calculations to ensure that the data are accurate, current,
         and reliable; and

      -- a clear designation and assignment of review responsibilities to
         ensure that all major sources of data used in the calculations
         are reviewed and verified.

    To address weaknesses identified in this year's audits in contracted
    asset servicer oversight, we recommend that the Chairman of the
    Federal Deposit Insurance Corporation direct the heads of the
    Division of Resolutions and Receiverships and Division of Finance to
    enhance their contractor oversight program to ensure that their
    procedures for overseeing contracted asset servicers are followed.
    Such procedures should ensure

      -- routine monitoring of contracted asset servicers' controls over
         daily collections, such as opening mail containing monetary
         items under dual control, the preparation and maintenance of
         control totals, and the reconciliation of collections processed
         and deposited to the control totals;

      -- routine review of contracted asset servicers' bank
         reconciliations to ensure no unresolved differences exist
         between the servicers' reported cash balances and those
         reflected on the servicers' bank statements, and to ensure that
         funds collected are remitted to FDIC in accordance with
         contractual requirements;

      -- routine verification of the validity, accuracy, and completeness
         of contracted asset servicers' fees and reimbursable expenses;
         and

      -- verification that contracted asset servicers are accurately
         applying loan payments between principal and interest.

       CORPORATION COMMENTS AND OUR
       EVALUATION
    ----------------------------------------------------------- Letter :10

    In commenting on a draft of this report, FDIC acknowledged the
    internal control weaknesses cited in the report and commented on
    initiatives it has underway to address the issues raised regarding
    the allowance for losses calculation and oversight of contracted
    asset servicers.  We plan to evaluate the adequacy and effectiveness
    of these corrective actions as part of our 1997 financial audits.

    FDIC's comments also discuss the changing environment the Corporation
    faced during 1996 and continues to face today, the condition of
    FDIC-insured institutions and the deposit insurance funds, and
    progress made by the Corporation in addressing internal control
    weaknesses identified in our 1995 financial audits.

    The complete text of FDIC's response to our report is included in
    appendix I.

    Robert W.  Gramling
    Director, Corporate Audits
     and Standards

    May 20, 1997

    BANK INSURANCE FUND'S FINANCIAL
    STATEMENTS
    =========================================================== Appendix 0

       Statements of Financial
       Position

       (See figure in printed
       edition.)

       Statements of Income and the
       Fund Balance

       (See figure in printed
       edition.)

       Statements of Cash Flows

       (See figure in printed
       edition.)

       Notes to Financial Statements

       (See figure in printed
       edition.)

       (See figure in printed
       edition.)

       (See figure in printed
       edition.)

       (See figure in printed
       edition.)

       (See figure in printed
       edition.)

       (See figure in printed
       edition.)

       (See figure in printed
       edition.)

       (See figure in printed
       edition.)

       (See figure in printed
       edition.)

       (See figure in printed
       edition.)

       (See figure in printed
       edition.)

       (See figure in printed
       edition.)

       (See figure in printed
       edition.)

    SAVINGS ASSOCIATION INSURANCE
    FUND'S FINANCIAL STATEMENTS
    =========================================================== Appendix 1

       Statements of Financial
       Position

       (See figure in printed
       edition.)

       Statements of Income and the
       Fund Balance

       (See figure in printed
       edition.)

       Statements of Cash Flows

       (See figure in printed
       edition.)

       Notes to Financial Statements

       (See figure in printed
       edition.)

       (See figure in printed
       edition.)

       (See figure in printed
       edition.)

       (See figure in printed
       edition.)

       (See figure in printed
       edition.)

       (See figure in printed
       edition.)

       (See figure in printed
       edition.)

       (See figure in printed
       edition.)

       (See figure in printed
       edition.)

       (See figure in printed
       edition.)

       (See figure in printed
       edition.)

    FSLIC RESOLUTION FUND'S FINANCIAL
    STATEMENTS
    =========================================================== Appendix 2

       Statements of Financial
       Position

       (See figure in printed
       edition.)

       Statement of Income and
       Accumulated Deficit

       (See figure in printed
       edition.)

       Statement of Cash Flows

       (See figure in printed
       edition.)

       Notes to Financial Statements

       (See figure in printed
       edition.)

       (See figure in printed
       edition.)

       (See figure in printed
       edition.)

       (See figure in printed
       edition.)

       (See figure in printed
       edition.)

       (See figure in printed
       edition.)

       (See figure in printed
       edition.)

       (See figure in printed
       edition.)

       (See figure in printed
       edition.)

       (See figure in printed
       edition.)

       (See figure in printed
       edition.)

       (See figure in printed
       edition.)

    (See figure in printed edition.)Appendix I
    COMMENTS FROM THE FEDERAL DEPOSIT
    INSURANCE CORPORATION
    =========================================================== Appendix 2

    (See figure in printed edition.)

    (See figure in printed edition.)

    MAJOR CONTRIBUTORS TO THIS REPORT
    ========================================================== Appendix II

    ACCOUNTING AND INFORMATION
    MANAGEMENT DIVISION, WASHINGTON
    D.C.

    Steven J.  Sebastian, Assistant Director
    Jeanette M.  Franzel, Assistant Director
    Lynda Downing, Senior Auditor
    Michael C.  Hrapsky, Senior Auditor
    Gregory J.  Ziombra, Senior Auditor
    Gary P.  Chupka, Senior Auditor
    James V.Rinaldi, Senior Auditor
    Bonnie L.  Lane, Senior Auditor
    Dennis L.  Clarke, Auditor
    John C.  Craig, Auditor
    Diane B.  Davis, Auditor
    Douglas A.  Delacruz, Auditor
    Carol A.  Langelier, EDP Specialist
    Wilfred Holloway, Senior Computer Specialist
    Sharon O.  Byrd, Computer Specialist

    ATLANTA REGIONAL OFFICE

    Shawkat Ahmed, Senior Auditor
    Cynthia C.  Teddleton, Senior Auditor
    Fred Jimenez, Auditor
    Rhonda P.  Rose, Auditor
    Lisa M.  Warde, Auditor

    DALLAS REGIONAL OFFICE

    Norman C.  Poage, Senior Auditor
    Leonard E.  Zapata, Senior Auditor
    Miguel A.  Salas, Senior Auditor
    James B.  Smoak, Senior Auditor
    John E.  Clary, Auditor
    Syrene D.  Mitchell, Auditor
    Dale W.  Seeley, Auditor
    Pamela Y.  Valentine, Auditor

    FDIC OFFICE OF INSPECTOR GENERAL

    Robert Allmang, Auditor
    Amelia Laguilles, Auditor
    Foxhall Parker, Auditor
    Duane Rosenberg, Auditor
    Titus Simmons, Auditor
    Arlene Boateng, Auditor
    Mary Boyles, Auditor
    Lisa Conner, Auditor
    Ross Simms, Auditor
    Eric Eckstrum, Auditor
    John Crawford, Auditor
    Larry Jones, Auditor

    *** End of document. ***