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. ***