Financial Audit: Accounting and Internal Control Issues
Identified During GAO's 2000 FDIC Financial Statement Audits
(28-JUN-01, GAO-01-905R).
GAO issued its opinions on the calendar year 2000 financial
statements of the Bank Insurance Fund, Savings Association
Insurance Fund, and FSLIC Resolution Fund in May 2001. GAO also
issued its opinion on the effectiveness of the Federal Deposit
Insurance Corporation's (FDIC) internal control as of December
31, 2000, and its evaluation of FDIC's compliance with selected
provisions of laws and regulations for the three funds for the
year ended December 31, 2000. This report reviews the internal
control weaknesses identified during GAO's audits of the 2000
financial statements, and recommends improvements to address
those weaknesses. GAO found that FDIC has several internal
control weaknesses related to financial reporting, including the
execution of transactions. The weaknesses concern its asset
valuation process and its allocation and recovery expenses.
Specifically, GAO found that (1) errors in valuing receivership
assets caused both overstatements and understatements in
determining the allowance for loss related to receivables, (2) a
calculation error in valuing equity partnership assets caused an
overstatement in the allowance for loss related to other assets,
and (3) incorrect operating expense amounts were allocated and
recovered, which resulted in the incorrect distribution of
operating expense charges among FDIC's funds. FDIC has instituted
new control procedures to address these weaknesses.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-01-905R
ACCNO: A01391
TITLE: Financial Audit: Accounting and Internal Control Issues
Identified During GAO's 2000 FDIC Financial Statement Audits
DATE: 06/28/2001
SUBJECT: Accounting errors
Accounting procedures
Accounting standards
Financial statement audits
Fund audits
Internal controls
Reporting requirements
Bank Insurance Fund
FSLIC Resolution Fund
Savings Association Insurance Fund
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GAO-01-905R
GAO- 01- 905R FDIC Management Letter
United States General Accounting Office Washington, DC 20548
June 28, 2001 Ms. Chris Sale Deputy to the Chairman and Chief Financial
Officer Federal Deposit Insurance Corporation
Subject: Financial Audit: Accounting and Internal Control Issues Identified
During GAO?s 2000 FDIC Financial Statement Audits
Dear Ms. Sale: In May 2001, we issued our opinions on the calendar year 2000
financial statements of the Bank Insurance Fund (BIF), Savings Association
Insurance Fund (SAIF), and FSLIC Resolution Fund (FRF). We also issued our
opinion on the effectiveness of the Federal Deposit Insurance Corporation's
(FDIC) internal control as of December 31, 2000, and our evaluation of
FDIC?s compliance with selected provisions of laws and regulations for the
three funds for the year ended December 31, 2000. 1
The purpose of this letter is to advise you of internal control weaknesses
identified during our audits of the 2000 financial statements, and to
recommend improvements to address those weaknesses. Although these matters
were not material in relation to the financial statements, we believe that
they warrant the attention of management.
Results in Brief
FDIC has several internal control weaknesses related to financial reporting,
including the execution of transactions. The weaknesses concern its asset
valuation process and its allocation and recovery of operating expenses.
Specifically, we found the following, Errors in valuing receivership assets
caused both overstatements and understatements in determining the allowance
for loss related to receivables. FDIC has instituted new control procedures
to address our findings.
A calculation error in valuing equity partnership assets caused an
overstatement in the allowance for loss related to other assets. FDIC
changed its controls to correct this matter.
1 Financial Audit: Federal Deposit Insurance Corporation's 2000 and 1999
Financial Statements
(GAO- 01- 635, May 9, 2001).
GAO- 01- 905R FDIC Management Letter Page 2 Incorrect operating expense
amounts were allocated and recovered. This resulted
in the incorrect distribution of operating expense charges among FDIC's
funds. To help ensure correct distribution in the future, FDIC initiated new
control procedures.
A draft of this letter was provided to FDIC officials, who generally agreed
with our findings and recommendations. We will be following up on the
actions taken by FDIC during our audits of the 2001 financial statements.
Scope and Methodology
As part of our financial statement audits of FDIC, we obtained an
understanding of internal control related to financial reporting, including
the safeguarding of assets, by interviewing key FDIC staff and reviewing
applicable policies and procedures. We also tested relevant internal control
over financial reporting, including the safeguarding of assets.
We did not evaluate all internal controls relevant to operating objectives
as broadly defined under 31 U. S. C. 3512 (Federal Managers' Financial
Integrity Act), such as those controls relevant to preparing statistical
reports and ensuring efficient operations. Because of inherent limitations
in internal control, misstatements due to error or fraud, losses, or
noncompliance may nevertheless occur and not be detected. We also caution
that projecting our evaluation to future periods is subject to the risk that
controls may become inadequate because of changes in conditions or that the
degree of compliance with controls may deteriorate.
We 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 U. S. generally accepted government auditing standards. Our
work was performed from July 2000 through April 6, 2001. We obtained oral
comments on the draft of this letter and have incorporated FDIC's planned
actions to address the internal control issues in this letter.
Errors in the Asset Valuation Process
FDIC as part of its Asset Loss Reserve (ALR) process values assets using
standard corporatewide methodologies. These valuations are used to calculate
the allowance for loss for specified asset accounts.
Our Standards for Internal Control in the Federal Government 2 requires that
transactions and events be accurately, promptly, and completely recorded.
However, we found two types of errors related to FDIC's ALR projections and
calculations that occurred because FDIC did not adequately review changes
and calculations related to the recording of the asset valuations. One
concerned the projection of receivership assets' values and the other
concerned the valuing of Equity Partnership assets.
2 GAO/ AIMD- 00- 21.3.1, November 1999.
GAO- 01- 905R FDIC Management Letter Page 3 Error in Valuing Receivership
Assets
For 2000, as in recent years, a statistical sample was used as part of the
ALR process to value receivership assets. During 2000, because of a
significant decrease in the population of receivership assets, FDIC revised
the groupings of the receivership asset population that were used for
selecting the statistical sample.
However, we found that while FDIC's statistician used the revised 2000
groupings in selecting the sample, the individual responsible for modifying
the system (LOREN) that is used to calculate an estimated value rate for
each grouping was not notified of all the changes. As such, this system
projected the 2000 estimated sample values using 1999's groupings. This
resulted in BIF?s and FRF?s valued assets being understated by approximately
$2.7 million and $2 million, respectively, and an overstatement in SAIF of
approximately $1 million. The overstatement and understatements affected the
allowance for loss that is part of the Net Receivable line item in the
Statements of Financial Position for each fund.
We recommend that FDIC officials develop procedures for verifying that all
appropriate FDIC organizational components are informed of any changes in
the ALR process so that all appropriate changes can be incorporated into the
existing process or systems. FDIC has informed us that based on our
findings, new procedures have been instituted to ensure that all FDIC
organizational components related to the ALR process are aware of any
changes so that appropriate modifications can be made.
Calculation Error in Valuing Equity Partnership Assets The values for Equity
Partnership assets are also estimated as part of the ALR process. These
assets represent FDIC's equity interest in trusts and partnerships, most of
which have been transferred from the receiverships to FRF. For year- end,
FDIC uses these estimated values to calculate the changes to the allowance
for loss related to the Other Assets line item in FRF's Statements of
Financial Position. We found mathematical errors in the supporting
spreadsheet for this calculation that caused the allowance for loss to be
overstated by approximately $10 million.
We recommend that FDIC examine its current review controls, and revise them
or add new ones if necessary. In response to our finding, FDIC stated that
it changed its controls and added an additional level of review to ensure
that the spreadsheet calculations are complete and accurate.
Incorrect Amounts Allocated and Recovered in Operating Expenses
To properly account for each fund as a separate reporting entity, FDIC
allocates operating expenses among its funds and recovers the costs for
specified expenses from the receiverships. These recovered costs are for
expenses that FDIC incurs on behalf of the receiverships when liquidating
and managing receivership assets.
FDIC allocates its expenses among the funds and recovers its costs using
workloadbased percentages. These percentages are incorporated into tables
within FDIC's accounting system, and transactions are allocated among the
funds and recovered
GAO- 01- 905R FDIC Management Letter Page 4 from the receiverships based on
these percentages as they are processed. FDIC's
Division of Finance (DOF) is responsible for gathering and calculating these
percentages and entering and maintaining them in its accounting system.
We found an instance where DOF loaded incorrect allocation percentages into
its accounting system. DOF?s staff did not verify the updated percentages
before they were entered and used for allocating operating expenses. We also
found an error in DOF's calculation of the recovery percentages that was not
detected before being loaded into FDIC's accounting system. As a result,
transactions based on these erroneous percentages were incorrect. We
estimated that these two mistakes resulted in approximately $9 million of
total operating expenses being incorrectly distributed among the funds.
Our Standards for Internal Control in the Federal Government requires that
transactions and events be accurately, promptly, and completely recorded.
However, a lack of proper review of these events caused these errors.
To ensure that the allocation and recovery of operating expenses is proper,
we recommend that FDIC review its calculations, as well as the percentage
updates to its accounting system, prior to entering the updates to the
system. In acknowledging our findings, FDIC stated that all calculations of
percentages and any needed changes to the accounting system will be reviewed
and verified to ensure correctness.
- - - - We would appreciate receiving your comments as well as a description
and status of your corrective actions within 30 days of the date of this
letter. We appreciate the cooperation and assistance the FDIC management and
staff provided during our 2000 audits.
This letter is intended for use by FDIC management, members of the FDIC
Audit Committee, and the FDIC Inspector General. This letter is a matter of
public record, and its distribution is not limited. Consequently, copies are
available to others upon request. If you have any questions or need
assistance in addressing these matters, please contact Jeanette Franzel,
Acting Director, at (202) 512- 9471, or Lynda Downing, Assistant Director,
at (202) 512- 9168.
Sincerely yours, Jeffrey C. Steinhoff Managing Director Financial Management
and Assurance
(194048)
*** End of document. ***