GAO: Opportunities for Improvements in FDIC's Internal Controls and Accounting Procedures
August 5, 2011 - from the GAO: In March 2011, we issued our report on the results of our audit of the financial statements of the Deposit Insurance Fund (DIF) and the Federal Savings and Loan Insurance Corporation Resolution Fund (FRF) as of, and for the years ending December 31, 2010, and 2009, and on the effectiveness of the Federal Deposit Insurance Corporation's (FDIC) internal control over financial reporting as of December 31, 2010.
We also reported our conclusions on FDIC's compliance with selected provisions of laws and regulations. The purpose of this report is to present information on certain internal control and accounting procedure issues we identified during our 2010 audit and to provide our recommended actions to address these issues.
During our audit of the DIF's and the FRF's 2010 and 2009 financial statements, we identified several internal control issues that, while not rising to the level of a significant deficiency or material weakness either individually or in the aggregate, nonetheless warrant management's attention and action. These issues involved the following: (1) FDIC did not have clear and comprehensive documentation of its process used to derive the nearly $39 billion year-end estimate of DIF's losses resulting from loss-share agreements. The lack of such documentation could impact FDIC's ability to ensure that the methodology for deriving one of the most significant estimates on DIF's financial statements is in conformity with management intent, results in a reasonable estimate of loss, and is consistently applied by staff in future periods. (2) FDIC's internal controls were not fully effective in identifying and correcting errors resulting from the highly manual, complex process used for deriving the allowance for losses on DIF's Receivables from resolutions, net financial statement line item. This resulted in increased risk of inaccurate or incomplete data used in the year-end financial reporting. (3) FDIC's internal controls were not fully effective in ensuring compliance with its methodology for valuing certain failed financial institution assets. As a result, FDIC did not prevent or detect numerous errors we identified during our 2010 audit. (4) FDIC's internal controls were not fully effective in identifying and correcting receivership disbursements applied to incorrect general ledger expense accounts. As a result, five receiverships reported misclassified expenses on their statements of operations. (5) FDIC did not document an analysis supporting its decision to not recognize additional amounts of the deferred revenue related to the Temporary Liquidity Guarantee Program (TLGP) as income to the DIF in 2010. As a result, FDIC lacked documentation supporting its decision to retain over $9 billion in deferred revenue on DIF's balance sheet. (6) FDIC's procedures over the monthly general ledger closing process were not sufficiently detailed to ensure staff understood and completed their responsibilities correctly. As a result, FDIC was at increased risk that general ledger closing procedures would not be performed completely and effectively, which could result in financial reporting errors. At the end of our discussion of each of these issues in the following sections, we provide our recommendations for strengthening FDIC's internal controls or accounting procedures.
These recommendations are intended to improve management's oversight and controls and minimize the risk of misstatements in DIF's and FRF's financial statements. At the beginning of our 2010 financial audit, we had 16 recommendations to improve FDIC's financial operations from prior year audits that remained open and therefore required corrective action by FDIC. FDIC has continued to work to address many of the internal control issues to which these open recommendations relate. In the course of performing our 2010 financial audit, we identified numerous actions FDIC took to address many of its internal control issues. On the basis of FDIC's actions, which we were able to substantiate through our audit, we are closing 12 of our prior years' recommendations. Consequently, a total of 10 financial management-related recommendations need to be addressed--4 from our prior years' audits and 6 new recommendations resulting from our 2010 financial audit. We are making six recommendations for strengthening FDIC's internal controls and accounting procedures. In addition, we are providing an update on the status of recommendations we made to address internal control issues identified in previous audits.
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