Financial Audit: Federal Deposit Insurance Corporation Funds'	 
2001 and 2000 Financial Statements (21-MAY-02, GAO-02-633).	 
                                                                 
GAO audited the financial statements for the three funds	 
administered by the Federal Deposit Corporation for fiscal years 
2000 and 1999 and the related statements of activities and cash  
flows. GAO found that (1) the financial statements were presented
fairly in conformity with U.S. generally accepted accounting	 
principles, (2) the Foundation had effective internal control	 
over financial reporting and compliance with laws and		 
regulations, and (3) there was no reportable noncompliance with  
laws and regulations tested.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-633 					        
    ACCNO:   A03369						        
  TITLE:     Financial Audit: Federal Deposit Insurance Corporation   
Funds' 2001 and 2000 Financial Statements			 
     DATE:   05/21/2002 
  SUBJECT:   Internal controls					 
	     Financial statement audits 			 
	     Reporting requirements				 
	     Bank Insurance Fund				 
	     FSLIC Resolution Fund				 
	     Savings Association Insurance Fund 		 

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GAO-02-633
     
A

Report to the Congress

May 2002 FINANCIAL AUDIT Federal Deposit Insurance Corporation Funds? 2001
and 2000 Financial Statements

GAO- 02- 633

Letter 1 Auditor?s Report 3

Opinion on BIF?s Financial Statements 3 Opinion on SAIF?s Financial
Statements 4 Opinion on FRF?s Financial Statements 4 Opinion on Internal
Control 4 Compliance with Laws and Regulations 4 Objectives, Scope, and
Methodology 5 Reportable Condition 6 BIF?s Reserve Ratio 8 Future Activities
of FRF 10 FDIC Comments and Our Evaluation 13

Bank Insurance Fund?s 14

Financial Statements Statements of Financial Position 14

Statements of Income and Fund Balance 15 Statements of Cash Flows 16 Notes
to Financial Statements 17

Savings Association 31

Insurance Fund?s Statements of Financial Position 31 Statements of Income
and Fund Balance 32

Financial Statements Statements of Cash Flows 33

Notes to Financial Statements 34 FSLIC Resolution

47 Fund?s Financial

Statements of Financial Position 47 Statements of Income and Accumulated
Deficit 48 Statements

Statements of Cash Flows 49 Notes to Financial Statements 50

Appendixes

Appendix I: Comments from the Federal Deposit Insurance Corporation 63

Appendix II: GAO Contacts and Staff Acknowledgements 64

Tables Table 1: BIF?s Reserve Ratios from December 31, 1991, through
December 31, 2001 8

Table 2: FRF?s Assets and Liabilities as of January 1, 1996, and December
31, 2001 10

Letter

May 21, 2002 To the President of the Senate and the Speaker of the House of
Representatives This report presents our opinions on whether the financial
statements of the Bank Insurance Fund (BIF), the Savings Association
Insurance Fund, and the FSLIC Resolution Fund (FRF) are presented fairly for
the years

ended December 31, 2001 and 2000. These financial statements are the
responsibility of the Federal Deposit Insurance Corporation (FDIC), the
administrator of the three funds. This report also presents (1) our opinion
on the effectiveness of FDIC?s internal control as of December 31, 2001, (2)
our evaluation of FDIC?s compliance with laws and regulations during 2001,
and (3) a reportable weakness in information system controls

detected during our 2001 audits. In addition, it discusses BIF?s reserve
ratio and the future activities of FRF. 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.

We are sending copies of this report to the chairman and ranking minority
member of the Senate Committee on Banking, Housing and Urban Affairs; the
chairman and ranking minority member of the House Committee on Financial
Services; the 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 director of the
Office of Thrift Supervision; the secretary of the treasury; the director of
the Office of Management and Budget; and other interested parties.

David M. Walker Comptroller General of the United States

To the Board of Directors

Audi tor? Report s Federal Deposit Insurance Corporation We have audited the
statements of financial position as of December 31, 2001 and 2000, for the
three funds administered by the Federal Deposit Insurance Corporation
(FDIC), the related statements of income and fund balance (accumulated
deficit), and the statements of cash flows for the years then ended. In our
audits of the Bank Insurance Fund (BIF), the Savings Association Insurance
Fund (SAIF), and the FSLIC Resolution Fund (FRF), we found

 the financial statements of each fund are presented fairly, in all
material respects, in conformity with U. S. generally accepted accounting
principles;

 although certain internal controls should be improved, FDIC had effective
internal control over financial reporting (including safeguarding of assets)
and compliance with laws and regulations; and  no reportable noncompliance
with the laws and regulations that we

tested. The following sections discuss our conclusions in more detail. They
also present information on (1) the scope of our audits, (2) a reportable
condition 1 related to information system control weaknesses, (3) BIF?s
reserve ratio, (4) the future activities of FRF, and (5) our evaluation of
the FDIC?s comments on a draft of this report.

Opinion on BIF?s The financial statements including the accompanying notes
present fairly, Financial Statements

in all material respects, in conformity with U. S. generally accepted
accounting principles, BIF?s financial position as of December 31, 2001 and
2000, and the results of its operations and its cash flows for the years
then ended.

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

Opinion on SAIF?s The financial statements including the accompanying notes
present fairly, Financial Statements in all material respects, in conformity
with U. S. generally accepted

accounting principles, SAIF?s financial position as of December 31, 2001 and
2000, and the results of its operations and its cash flows for the years
then ended.

Opinion on FRF?s The financial statements including the accompanying notes
present fairly, Financial Statements

in all material respects, in conformity with U. S. generally accepted
accounting principles, FRF?s financial position as of December 31, 2001 and
2000, and the results of its operations and its cash flows for the years
then ended. Opinion on Internal

Although certain internal controls should be improved, FDIC management
Control

maintained, in all material respects, effective internal control over
financial reporting (including safeguarding assets) and compliance as of
December 31, 2001, that provided reasonable assurance that misstatements,
losses, or noncompliance, material in relation to the FDIC funds? financial
statements

would be prevented or detected on a timely basis. Our opinion is based on
criteria established under 31 U. S. C. 3512 [Federal Managers? Financial
Integrity Act (FMFIA)]. Our work identified weaknesses in FDIC?s information
system controls, which we describe as a reportable condition in a later
section of this report. The weakness in information system controls,
although not considered material, represents a significant deficiency in the
design or operations of

internal control that could adversely affect FDIC?s ability to meet its
internal control objectives. Although the weakness did not materially affect
the funds? 2001 financial statements, misstatements may nevertheless occur
in other FDIC- reported financial information as a result of the internal
control weakness.

Compliance with Laws Our tests for compliance with selected provisions of
laws and regulations

and Regulations disclosed no instances of noncompliance that would be
reportable under

U. S. 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 FDIC?s management is responsible for (1) preparing
the annual financial

Methodology statements in conformity with U. S. generally accepted
accounting

principles, (2) establishing, maintaining, and assessing internal control to
provide reasonable assurance that the broad control objectives of FMFIA are
met, and (3) complying with applicable laws and regulations. We are
responsible for obtaining reasonable assurance about whether (1) the
financial statements are presented fairly, in all material respects, in
conformity with U. S. generally accepted accounting principles, and (2)
management maintained effective internal control, the objectives of which
are

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

 compliance with laws and regulations- transactions are executed in
accordance with laws and regulations that could have a direct and material
effect on the financial statements. We are also responsible for testing
compliance with selected provisions of

laws and regulations that have a direct and material effect on the financial
statements.

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 internal control related to
financial

reporting (including safeguarding assets) and compliance with laws and
regulations;

 tested relevant internal controls over financial reporting and compliance,
and evaluated the design and operating effectiveness of internal control;

 considered FDIC?s process for evaluating and reporting on internal control
based on criteria established by FMFIA; and

 tested compliance with selected provisions of the Federal Deposit
Insurance Act, as amended and the Chief Financial Officers Act of 1990.

We did not evaluate all internal controls relevant to operating objectives
as broadly defined by FMFIA, such as those controls relevant to preparing
statistical reports and ensuring efficient operations. We limited our
internal control testing to controls over financial reporting and
compliance. Because of inherent limitations in internal control,
misstatements due to

error or fraud, losses, or noncompliance may nevertheless occur and not be
detected. We also caution that projecting our evaluation to future periods
is subject to the risk that controls may become inadequate because of
changes in conditions or that the degree of compliance with controls may
deteriorate.

We did not test compliance with all laws and regulations applicable to FDIC.
We limited our tests of compliance to those deemed applicable to the funds?
financial statements for the year ended December 31, 2001. We caution that
noncompliance may occur and not be detected by these tests

and that such testing may not be sufficient for other purposes. We performed
our work in accordance with U. S. generally accepted government auditing
standards.

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

Reportable Condition As part of the funds? financial statement audits, we
reviewed FDIC?s information system controls. The primary objectives of
information system controls are to safeguard data, protect computer
application programs, provide for the integrity of system software, and
ensure continued computer operations in case of unexpected interruption.
These

controls include the corporatewide security management program, access
controls, system software, application development and change control,
segregation of duties, and service continuity controls.

During 2001, we found that FDIC progressed in improving information system
control weaknesses we had previously identified and has taken other steps to
improve security. Nevertheless, we identified additional weaknesses in
FDIC?s corporatewide security management program, access controls, system
software, segregation of duties, and service continuity controls.
Specifically, FDIC did not adequately limit the scope of access granted to
authorized users or secure its network from unauthorized access. Further,
FDIC had not fully established a comprehensive program to routinely oversee
and monitor access to its computer facilities and data and to identify
unusual or suspicious access patterns that could indicate unauthorized
access. The effect of these weaknesses in information system controls places

FDIC?s financial information at risk of unauthorized disclosure or loss and
its critical financial operations at risk of disruption. It should also be
noted that because computer systems identified at risk contain other
sensitive information such as personnel data and bank examinations related
to financial institutions insured by FDIC, this information is at risk of
being

compromised. As we have previously reported to FDIC?s Board of Directors,
the primary reason for its information system control weaknesses has been
that FDIC had not fully developed and implemented a comprehensive
corporatewide security management program. An effective program would
include assessing risks, establishing appropriate policies and related
controls, raising awareness of prevailing risks and mitigating controls, and
evaluating the effectiveness of established controls. While FDIC has
implemented a security awareness program, updated its security policies and
guidance, and taken other actions to improve security management, it still
needs to take additional steps to fully implement a comprehensive
corporatewide security management program.

We determined that other management controls mitigated the effect of the
information system control weaknesses on the preparation of the funds?
financial statements. Because of their sensitive nature, the details
surrounding these weaknesses are being reported separately to FDIC
management, along with our recommendations for corrective actions.

BIF?s Reserve Ratio During 2001, as table 1 shows, BIF?s reserve ratio
decreased from 1.35 percent to 1. 26 percent. The Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA) requires FDIC to maintain the
BIF fund balance at a designated reserve ratio of at least 1. 25 percent of
estimated insured deposits. 2 BIF?s reserve ratio was significantly below
the designated reserve ratio in 1991 and did not reach the designated
reserve

ratio of 1.25 percent of estimated insured deposits until May 1995. 3 This
is the first time since 1995 that the BIF?s ratio has come so close to the
designated reserve ratio. Table 1 shows BIF?s reserve ratio, fund balance,
and estimated insured deposits from December 31, 1991 through 2001.

Table 1: BIF?s Reserve Ratios from December 31, 1991, through December 31,
2001

Dollars in millions

Estimated insured December 31, Reserve ratio (%) Fund balance deposits

1991 (. 36) $( 7, 028) $1,957, 722 1992 (. 01) (101) 1,945, 623 1993 .69 13,
122 1,906, 885 1994 1. 15 21, 848 1, 896, 060 1995 1. 30 25, 454 1, 952, 543
1996 1. 34 26, 854 2,007, 447 1997 1. 38 28, 293 2,055, 874 1998 1. 38 29,
612 2,141, 268 1999 1. 36 29, 414 2,157, 536 2000 1. 35 30, 975 2,301, 604
2001 1. 26 30, 439 2,408, 878

2 Section 302 of FDICIA amended section 7( b) of the Federal Deposit
Insurance Act. FDICIA requirements are the same for both BIF and SAIF. SAIF
reached the designated reserve ratio in 1996, and as of December 31, 2001,
SAIF?s reserve ratio was 1.36 percent.

3 If the reserve ratio falls below 1.25 percent of estimated insured
deposits, FDICIA requires FDIC?s Board of Directors to set semiannual
assessment rates for BIF members that are sufficient to increase the reserve
ratio to the designated reserve ratio not later than 1 year after such rates
are set, or in accordance with a recapitalization schedule of 15 years or
less.

Under FDIC?s required risk- based insurance system, as long as BIF?s reserve
ratio is at or above 1. 25 percent, FDIC does not charge premiums to most
institutions that are well- capitalized and highly rated by supervisors.
Currently over 90 percent of the industry does not pay for deposit

insurance. Most of BIF?s income comes from the interest earned on
investments with the U. S. Treasury. BIF?s fund balance and level of
estimated insured deposits are the factors used to calculate BIF?s reserve
ratio. Accordingly, changes in fund balance or insured deposits can cause
the reserve ratio to increase or decrease. Table 1 shows that during 2001
the estimated insured deposits increased by over $100 billion. To illustrate
the sensitivity of this reserve ratio calculation, if the amount of
estimated insured deposits had increased by an additional $26 billion during
2001, BIF?s reserve ratio would have declined to the designated reserve
ratio of 1.25 percent at December 31, 2001.

Regarding the other key variable in the calculation, BIF?s fund balance
declined about $500 million during 2001. This $500 million net loss for 2001
is largely attributable to recording $1.8 billion of estimated losses for
anticipated failures of insured institutions. Assuming the December 31,
2001, level of estimated insured deposits, if BIF had incurred an additional
$328 million of losses to the fund balance during 2001, its reserve ratio
would have declined to the designated reserve ratio of 1.25 percent at
December 31, 2001.

Currently, there is proposed legislation in Congress to reform the federal
deposit insurance system. Among other things, this legislation proposes
changes to the designated reserve ratio requirements.

Future Activities of FDIC, as administrator of FRF, is responsible for
completing the

FRF liquidation of the assets and liabilities of the former Federal Savings
and

Loan Insurance Corporation (FSLIC) and Resolution Trust Corporation (RTC). 4
Under current legislation, FRF will continue its operations until all of its
assets are sold or otherwise liquidated and all of its liabilities are
satisfied. As shown in table 2, FRF has made significant progress in
liquidating its assets and liabilities since 1996. FDIC expects continued
rapid decline in the remaining FRF assets during 2002. After providing for
all outstanding RTC liabilities, FDIC must also transfer the net proceeds
from the sale of RTC- related assets to the Resolution Funding Corporation
(REFCORP). 5 During 2001, FRF transferred $1.4 billion to REFCORP.

Table 2: FRF?s Assets and Liabilities as of January 1, 1996, and December
31, 2001

Dollars in billions

Percent January 1,

December 31, increase 1996 2001

(decrease)

Cash and cash equivalents $1.5 $3. 5 133 Assets not yet liquidated 13.9 1. 4
(90)

Total assets $15.4 $4.9 (68) Total liabilities $11.2 $0.02 (99)

4 On January 1, 1996, FRF assumed responsibility for all remaining assets
and liabilities of the former RTC. 5 The Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 established

REFCORP to provide part of the initial funds used by RTC for thrift
resolutions.

Two major components of the assets not yet liquidated are receivables from
thrift resolutions (about $0. 3 billion) and investments in securitization-
related assets (nearly $1. 1 billion). Most of the receivables from thrift
resolutions represent amounts advanced and/ or obligations incurred for
resolving troubled and failed insured thrifts. FDIC manages

and disposes of the assets from failed thrifts through receiverships. 6 Most
of the remaining assets in these receiverships are cash. FDIC is pursuing
the complete liquidation of these receiverships during the year 2002 with
the exception of those involved in goodwill litigation. 7 FDIC has conducted
an extensive review and cataloging of FRF?s residual

assets and liabilities and is beginning to explore approaches for concluding
FRF?s activities. The following are some of the issues and items remaining
in FRF:

 Over 900 criminal restitution orders in the amount of $548 million are
outstanding. These may remain open for up to 20 more years. The actual
amount that will ultimately be collected is unknown. 8 During 2001,

FDIC collected $6.6 million from these outstanding restitution orders. 
About 80 litigation claims and judgments- which were obtained against

officers and directors and other professionals responsible for causing
thrift losses- are outstanding. These items have an estimated recoverable
value of approximately $59 million. These judgments are renewable based on
individual state law. Generally, the renewals vary from 5 to 10 years and
are renewable more than once. 9 During 2001 FDIC recovered $19.2 million in
such claims.

6 The assets held by receiverships, and the claims against them, are
accounted for separately from FRF?s assets and liabilities to ensure that
liquidation proceeds are distributed in accordance with applicable laws and
regulations.

7 See note 7 of FRF?s financial statements for a description of goodwill
litigation and its impact. 8 U. S. generally accepted accounting principles
state that contingencies that may ultimately result in gains are usually not
reflected in the financial statements to avoid recognizing revenue prior to
its realization.

9 See footnote 8 of this report.

 Numerous assistance agreements entered into by the former FSLIC will
remain open for many years as those assisted institutions share with FRF
their tax savings that result from the tax- free nature of FSLIC assistance.
10 During 2001, FRF recovered over $163 million as its share of these tax
savings.

 Various litigation cases are outstanding. FRF remains involved in
approximately 760 cases. 11 The most numerous, and substantial in terms of
potential liability, involve goodwill litigation. 12 To date, approximately
120 lawsuits have been filed against the U. S. government. Because of
appeals and differences in awarding damages in the cases thus far, the final
outcome in the cases and the amount of any possible

damages remain uncertain. Also, there is litigation in which FRF is the
plaintiff for itself or is acting in a fiduciary manner on behalf of the
receiverships resulting from failed financial institutions. These pending
cases may take years to settle, and many of the goodwill cases are still
pending from the early 1990s.

 Numerous potential liabilities may exist due to representations and
warranties made to support the sale of assets including loans and servicing
rights. 13 These potential liabilities could be incurred over the

remaining life of the loans. Only when the remaining asset and liability
issues, some of which are highlighted above, are resolved can the FRF fund
be formally dissolved. FDIC is considering whether enabling legislation or
other measures may be

needed to liquidate the remaining FRF assets and liabilities. 10 See
footnote 8 of this report. 11 Whereas FRF is involved in over 700 cases,
FDIC records losses for only those cases where the loss is considered
probable and reasonably estimable. FDIC also discloses losses that are
reasonably possible. See note 7 of FRF?s financial statements.

12 See note 7 of FRF?s financial statements for a description of goodwill
litigation and its impact. 13 See note 7 of FRF?s financial statements for a
description of representations and warranties.

FDIC Comments and In commenting on a draft of this report, FDIC?s chief
financial officer

Our Evaluation (CFO) was pleased to receive unqualified opinions on BIF?s,
SAIF?s, and

FRF?s 2001 and 2000 financial statements. FDIC?s CFO also acknowledged the
information system weaknesses we identified and plans to continue with its
efforts to strengthen its information system program and to incorporate
GAO's recommendations into its security plans for 2002. We plan to evaluate
the effectiveness of the corrective actions as part of our

2002 audit of FDIC funds? financial statements and internal control. David
M. Walker Comptroller General of the United States

April 5, 2002

Bank Insurance Fund?s Financial Statements

Statements of Financial Position

Statements of Income and Fund Balance

Statements of Cash Flows

Notes to Financial Statements

Savings Association Insurance Fund?s Financial Statements

Statements of Financial Position

Statements of Income and Fund Balance

Statements of Cash Flows

Notes to Financial Statements

FSLIC Resolution Fund?s Financial Statements

Statements of Financial Position

Statements of Income and Accumulated Deficit

Statements of Cash Flows

Notes to Financial Statements

Appendi xes Comments from the Federal Deposit

Appendi x I Insurance Corporation

Appendi x II

GAO Contacts and Staff Acknowledgements GAO Contacts Jeanette M. Franzel
(202) 512- 9406 Lynda E. Downing (202) 512- 9168 Acknowledgements In
addition to those named above, the following staff made key

contributions to this report: Gary P. Chupka, Dennis L. Clarke, John C.
Craig, Bronwyn E. Hughes, and Timothy J. Murray.

The following staff from the FDIC Office of Inspector General also
contributed to this report: Robert W. Allmang, James J. Ballenger, Arlene S.
Boateng, Rhonda G. Bunte, W. Kevin Hainsworth, R. William Harrington, Paul
S. Johnston, Michael L. Rexrode, Duane H. Rosenberg, Titus S. Simmons, Dale
W. Seeley, Ross E. Simms, Charles E. Thompson, Joseph E.

Uricheck, and R. Leon Wellons.

(194018)

a

GAO United States General Accounting Office

Page i GAO- 02- 633 FDIC Funds' 2001 and 2000 Financial Statements

Contents

Contents

Page ii GAO- 02- 633 FDIC Funds' 2001 and 2000 Financial Statements

Page 1 GAO- 02- 633 FDIC Funds' 2001 and 2000 Financial Statements United
States General Accounting Office

Washington, D. C. 20548 Comptroller General

of the United States A

Page 2 GAO- 02- 633 FDIC Funds' 2001 and 2000 Financial Statements

Page 3 GAO- 02- 633 FDIC Funds' 2001 and 2000 Financial Statements United
States General Accounting Office

Washington, D. C. 20548 Comptroller General

of the United States A

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FSLIC Resolution Fund?s Financial Statements

Page 61 GAO- 02- 633 FDIC Funds' 2001 and 2000 Financial Statements

FSLIC Resolution Fund?s Financial Statements

Page 62 GAO- 02- 633 FDIC Funds' 2001 and 2000 Financial Statements

Page 63 GAO- 02- 633 FDIC Funds' 2001 and 2000 Financial Statements

Appendix I

Page 64 GAO- 02- 633 FDIC Funds' 2001 and 2000 Financial Statements

Appendix II

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