Page 1 GAO-05-553R FDIC 2004 Management Report

United States Government Accountability Office

Washington, D.C. 20548

A

June 10, 2005 Letr

Mr. Steven O. App

Deputy to the Chairman and Chief Financial Officer

Federal Deposit Insurance Corporation

Subject: Management Report: Opportunities for Improvements in FDIC’s 

Internal Controls and Accounting Procedures

Dear Mr. App:

In February 2005, we issued our opinions on the calendar year 2004 

financial statements of the Bank Insurance Fund (BIF), the Savings 

Association Insurance Fund (SAIF), and the FSLIC Resolution Fund (FRF). 

We also issued our opinion on the effectiveness of the Federal Deposit 

Insurance Corporation’s (FDIC) internal controls as of December 31, 2004, 

and our evaluation of FDIC’s compliance with significant provisions of 

selected laws and regulations for the three funds for the year ended 

December 31, 2004.1

The purpose of this report is to discuss issues identified during our audits 

of the 2004 financial statements regarding accounting procedures and 

internal controls that could be improved, and to recommend improvements 

to address these issues. Although these issues were not material in relation 

to the financial statements, we believe they warrant management’s 

attention. We are making three recommendations for strengthening FDIC’s 

accounting procedures and internal controls. We conducted our audits in 

accordance with U.S. generally accepted government auditing standards.

Results in Brief During 2004, we identified several internal control issues that affected 

FDIC’s accounting for the funds it administers. Although the amounts 

would not have been material to the financial statements taken as a whole, 

these issues would have resulted in reporting errors had they not been 

1

 GAO, Financial Audit: Federal Deposit Insurance Corporation Funds’ 2004 and 

2003 Financial Statements, GAO-05-281 (Washington, D.C.: Feb. 11, 2005).
Page 2 GAO-05-553R FDIC 2004 Management Report

detected by our audit and corrected by FDIC. Specifically, we found 

the following:

• FDIC made errors in calculations supporting its allowance for losses on 

receivables from thrift resolutions. These errors would have led to 

misstatements in SAIF’s and FRF’s financial statements.

• FDIC did not have effective compensating controls in place to ensure 

the accuracy of pay computations related to the National Finance 

Center’s (NFC) Thrift Savings Plan (TSP). Other payroll expenses could 

have been misstated in the funds’ financial statements.

• FDIC did not detect billing errors made by a contractor, resulting in 

overpayments to the contractor. The lack of effective invoice review 

procedures increases the risk of overcharges for goods and services and 

that they may not be detected and recovered.

We are making three recommendations regarding FDIC’s accounting 

procedures and internal controls. Implementation of these 

recommendations is intended to strengthen FDIC’s conformance with the 

internal control standards that federal agencies are required to follow.2

In its comments, FDIC agreed with our recommendations and described 

actions it has taken or plans to take to address the control weaknesses 

described in this report. At the end of our discussion of each of the issues 

in this report, we have summarized FDIC’s related comments and our 

evaluation.

Scope and 

Methodology

As part of our audits of the 2004 and 2003 financial statements of the three 

funds administered by FDIC, we evaluated the Corporation’s internal 

controls and its compliance with selected provisions of laws and 

regulations. We designed our audit procedures to test relevant controls, 

including those for proper authorization, execution, accounting, and 

reporting of transactions.

We requested comments on a draft of this report from the FDIC Deputy to 

the Chairman and Chief Financial Officer. We received written comments 

2

 GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1

(Washington, D.C.: November 1999).
Page 3 GAO-05-553R FDIC 2004 Management Report

and have reprinted the comments in enclosure I. Further details on our 

scope and methodology are included in our report on the results of our 

audits of the 2004 and 2003 financial statements and are reproduced in 

enclosure II.

Asset Valuation During our 2004 financial audit, we identified errors in certain calculations 

supporting the allowance for losses on receivables from thrift resolutions 

that were not identified during FDIC’s normal supervisory review process. 

These errors, while not material to SAIF’s and FRF’s financial statements, 

nonetheless would have led to misstatements in the financial statements 

had we not identified them through the audit process. GAO’s Standards for 

Internal Control in the Federal Government requires agencies to 

implement internal control procedures to ensure the accurate and timely 

recording of transactions and events. In addition, these standards require 

that qualified and continual supervision be provided to ensure that internal 

control objectives are achieved.

FDIC’s receivables from thrift resolutions are paid off through the sale of 

failed thrift assets of its receiverships. To determine the allowance for 

losses on its receivables from failed thrift resolutions, FDIC estimates 

values for the receivership assets to be disposed of through a Loan Loss 

Reserve process. To ensure that consistent methods for valuing assets are 

being applied, FDIC developed a uniform Standard Asset Valuation 

Estimation (SAVE) methodology, which is documented in an asset 

valuation policies and procedures manual (the SAVE manual). Cash flow 

analysis is one of the key methodologies that is standardized in the SAVE 

manual. As part of the cash flow analysis, future cash outflows and inflows 

are estimated and a discount rate from an assumption listed in the SAVE 

manual is to be applied. To further ensure both accuracy and consistency, 

the SAVE manual requires two levels of review after the valuation is 

prepared.

Despite these requirements, we found that three of five assets we reviewed 

were not valued in accordance with the SAVE methodology. In one case, 

the individual responsible for preparing the valuation failed to use all the 

current available information as described in the SAVE manual to calculate 

the asset valuation. In another case, the individual responsible for 

preparing the asset valuation used an incorrect net present value formula in 

the calculation. For the third case, the individual responsible for preparing 

the asset valuation applied an incorrect discount rate over an incorrect 

number of time periods (quarters) in the calculation. While FDIC had 
Page 4 GAO-05-553R FDIC 2004 Management Report

performed primary and secondary reviews of the asset valuations, both 

reviews failed to detect errors in the asset valuation calculations. FDIC 

corrected the errors after we brought them to its attention. In response to 

this matter, FDIC stated that the lack of detection of these errors in the first 

case was the result of a primary reviewer who was new to the asset 

valuation process. FDIC re-reviewed six of its asset valuations related to 

the other cases and advised us that they did not detect any further 

deviations from the SAVE methodology.

We identified similar reviewing errors during our 2003 financial audit.3

 At 

that time, FDIC stated that it had developed additional procedures to 

ensure that proper review was being effectively implemented. However, as 

our work during the 2004 audit indicates, these additional procedures have 

not been fully effective in preventing or detecting asset valuation errors in a 

timely manner.

Recommendation We recommend that FDIC issue a formal notice to all individuals who 

perform primary and secondary reviews of asset valuations reminding 

them of their responsibility to ensure that assets are valued in accordance 

with the SAVE methodology.

FDIC Comments and Our 

Evaluation

FDIC agreed with our recommendation. In response to our finding, FDIC 

management stated that by July 31, 2005, a formal notice will be issued to 

all individuals designated to perform primary and secondary reviews of 

asset valuations to remind them of their responsibility to ensure that assets 

are valued in accordance with the SAVE methodology, and to reemphasize 

the importance of an in-depth review of the asset valuations. We will 

evaluate the effectiveness of FDIC’s actions during our 2005 financial audit.

3

 GAO, Management Report: Opportunities for Improvements in FDIC’s Internal Controls 

and Accounting Procedures, GAO-04-677R (Washington, D.C.: June 16, 2004).
Page 5 GAO-05-553R FDIC 2004 Management Report

Thrift Savings Plan During our 2004 financial audit, we found that 11 FDIC employees were 

incorrectly excluded from receiving a 1 percent agency contribution to 

their TSP accounts. Although the total amount of these errors was not 

material to the financial statements of the three funds, FDIC is at risk that 

other payroll information processed by the NFC may contain errors. 

Consistent with GAO’s Standards for Internal Control in the Federal 

Government, FDIC’s internal control should provide reasonable assurance 

that its financial transactions, including those processed by NFC, are 

accurately recorded and that its staff are compensated properly.

The Federal Employees’ Retirement System (FERS) became effective 

January 1, 1987. Almost all new employees hired after December 31, 1983, 

are automatically covered by FERS. One of the components of the FERS 

retirement plan is the TSP. For all FERS employees, the employing agency 

is required to pay 1 percent of the basic pay every pay period into each 

employee’s TSP account whether or not the employee contributes to a TSP 

account.4

 NFC provides FDIC with centralized, automated, integrated 

systems and support services for payroll and personnel payments, 

including the 1 percent TSP agency contribution.

In October 2004, the U.S. Department of Agriculture’s Inspector General 

issued a report which contained a qualified opinion for the internal control 

structure at NFC because certain control policies and procedures at the 

center were not suitably designed or operating effectively.5

 The report 

described weaknesses in policies and procedures that may be relevant to 

the internal control structure of NFC’s customer agencies, such as FDIC. 

The report further warned customer agencies that the accuracy and 

reliability of any payroll-related data processed by NFC ultimately rests 

with the customer agencies and any accompanying compensating controls 

implemented by such agency. Given the seriousness of the control 

weaknesses at NFC and the critical nature and sensitivity of federal payroll, 

it is important that FDIC implement compensating controls to ensure the 

Corporation’s biweekly payroll is accurately processed by NFC.

4

 See 5 U.S.C. 8432 (c) (1).

5

 U.S. Department of Agriculture Office of Inspector General Audit Report, Fiscal Year 

2004—Review of the National Finance Center General Controls, Report No. 11401-20-FM 

(Washington, D.C.: Oct. 25, 2004).
Page 6 GAO-05-553R FDIC 2004 Management Report

Although FDIC has compensating controls to test payroll information 

processed by NFC at an aggregate level, these procedures do not include 

verifying NFC’s mathematical calculations related to FDIC’s payroll data at 

the individual employee level. In our testing, we found that an employee 

was incorrectly excluded from receiving the 1 percent contribution. Once 

we notified FDIC of this situation, the Corporation performed more 

detailed analyses and identified 10 additional employees who were also not 

receiving the 1 percent contribution. FDIC made NFC aware of this 

problem, and NFC subsequently corrected these employees’ TSP accounts. 

Additionally, NFC has informed FDIC that it is still trying to determine the 

cause of the error. For its part, FDIC has recently implemented an 

additional control by running a report every pay period to detect any 

employees not receiving the agency’s automatic 1 percent TSP 

contribution.

Recommendation In light of the errors we found in FDIC employees’ TSP accounts and 

continued serious internal controls deficiencies cited over NFC’s payroll 

processing functions, we recommend that FDIC review its existing 

compensating controls over NFC-processed payroll information to 

determine whether additional controls, such as periodically verifying NFC’s 

mathematical calculations related to FDIC’s payroll data at the individual 

employee level, are needed to ensure that other NFC mathematical 

calculations related to FDIC’s payroll data are correct.

FDIC Comments and Our 

Evaluation

FDIC agreed with our recommendation. The Division of Administration’s 

Human Resources Branch at FDIC has reviewed its existing compensating 

controls over NFC-processed payroll information and determined that 

additional controls are not warranted at this time. We will continue to 

review the effectiveness of FDIC’s compensating controls over NFCprocessed payroll information as part of our 2005 financial audit.
Page 7 GAO-05-553R FDIC 2004 Management Report

Contractor Payment During our 2004 financial audit, we found that FDIC approved and paid a 

monthly invoice to a contractor that contained an overcharge. After we 

brought this error to FDIC’s attention, the Corporation discovered 

additional overcharge errors from the same contractor in 13 other monthly 

invoices. GAO’s Standards for Internal Control in the Federal 

Government requires agencies to implement internal control procedures to 

ensure the accurate and timely recording of transactions and events. In 

addition, these standards require that qualified and continual supervision 

be provided to ensure that internal control objectives are achieved.

Specifically, we found that a contractor FDIC hired for computer-related 

services incorrectly charged the Corporation a mark-up fee for 

subcontractor costs in a January 2004 invoice. The terms of the contract 

between FDIC and the contractor called for FDIC to pay for any 

subcontractor costs based on the subcontractors’ hourly rates, with no 

surcharge or mark-up. FDIC’s subsequent analysis of the 14 invoices 

submitted by this contractor from August 2003 to September 2004 showed 

that in each case, the contractor added a mark-up fee to the costs 

associated with its use of subcontractors. FDIC ultimately determined the 

total amount of the overcharges to be $32,713.35, for which it was 

subsequently reimbursed by the contractor. Although all 14 monthly 

invoices had been reviewed and approved by either or both the contracting 

officer and oversight manager, the overcharges were not detected in the 

invoice reviewing process.

The amount of the total overcharges was not material to the financial 

statements of the three funds. Nonetheless, the lack of effective review 

procedures over contractor invoices increases the risk that FDIC would be 

overcharged for goods and services provided and that such overcharges 

may not be timely detected and recovered.

Recommendation We recommend that FDIC issue a formal notice to all individuals who 

review and approve invoices reminding them of their responsibility to 

compare each invoice to the terms of the contract prior to approving the 

invoice for payment.

FDIC Comments and Our 

Evaluation

FDIC agreed with our recommendation. In response to our finding, FDIC 

management issued a memorandum on May 10, 2005, reminding oversight 

managers of their critical responsibility for reviewing and approving 
Page 8 GAO-05-553R FDIC 2004 Management Report

contractor invoices. We will evaluate the effectiveness of FDIC’s actions 

during our 2005 financial audit.

This report contains recommendations to you. We would appreciate 

receiving a description and status of your corrective actions within 30 days 

of the date of this letter.

This report is intended for use by FDIC management, members of the FDIC 

Audit Committee, and the FDIC Inspector General. 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. In addition, 

this report will be available at no charge on GAO’s web site at 

http://www.gao.gov.

We acknowledge and appreciate the cooperation and assistance provided 

by FDIC management and staff during our audits of FDIC’s 2004 and 2003 

financial statements. If you have any questions about this report or need 

assistance in addressing these issues, please contact me on (202) 512-9521 

or sebastians@gao.gov.

Sincerely yours,

Steven J. Sebastian

Director

Financial Management and Assurance

Enclosures
Page 9 GAO-05-553R FDIC 2004 Management Report

Enclosure I

Comments from the Federal Deposit 

Insurance Corporation EncolsureI
Enclosure I

Comments from the Federal Deposit 

Insurance Corporation

Page 10 GAO-05-553R FDIC 2004 Management Report
Enclosure I

Comments from the Federal Deposit 

Insurance Corporation

Page 11 GAO-05-553R FDIC 2004 Management Report
Enclosure I

Comments from the Federal Deposit 

Insurance Corporation

Page 12 GAO-05-553R FDIC 2004 Management Report
Page 13 GAO-05-553R FDIC 2004 Management Report

Enclosure II

Details on Audit Methodology EncolsureI

To fulfill our responsibilities as auditor of the financial statements of the 

three funds administered by the FDIC, we did the following:

• 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 controls related to financial 

reporting (including safeguarding assets) and compliance with selected 

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 31 U.S.C. § 3512 (c), (d), 

(commonly referred to as the Federal Managers’ Financial Integrity 

Act); and

• tested compliance with applicable laws and regulations, including 

selected provisions of the Federal Deposit Insurance Act, as amended, 

and the Chief Financial Officers Act of 1990.
Page 14 GAO-05-553R FDIC 2004 Management Report

Enclosure III

GAO Contact and Staff Acknowledgments EnoclsureI

GAO Contact Steven J. Sebastian (202) 512-9521

Acknowledgments Staff who made key contributions to this report were Gary Chupka, Julia 

Duquette, Wing Lam and LaShawnda Wilson.

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