TABLE C

INSPECTOR GENERAL REPORTS
WITH QUESTIONED/UNSUPPORTED COSTS

DOLLAR VALUE

NUMBER QUESTIONED UNSUPPORTED
OF REPORTS COSTS COSTS
a. For which no management
decision has been made by
the commencement of the
reporting period.. 0 0 0
b. Which were issued during the
reporting period...............-0:sss0+ 0 0 0
Subtotals (a+b)... eee . 0 0 0

c. Forwhich a management decision
was made during the reporting
PebOd ccccccc cums 0 0 0

(i) dollar value of disallowed costs... 0 0 0

(ii) dollar value of costs not
CERNE enceeneneneeneneremn entrees” 0 0 0

d. For which no management decision
has been made by the end of the
reporting period..............::ccee 0 0 0

e. Report for which no management
decision was made within six
months of issuance.............c0sceee 0 0 0

Note: Boldface type entries reflect actual statutory language.

11

September 30, 2005 SEMIANNUAL REPORT TO CONGRESS


We continued to maintain positive working liaisons with: 1) Finance Board officials, in
efforts to identify and correct management problems and to clarify OIG authorities and
responsibilities; 2) the Congress, in order to keep them appropriately informed; 3) external
auditors, to facilitate timely and accurate reporting on Finance Board operations; and 4) the
Inspector General community, to keep apprised of evolving issues that affect the Finance
Board. Specifically, OIG continued to monitor and provide informal input, as appropriate, into
management efforts to enhance the agency's information technology function and efforts to
enhance agency security. We also continued to coordinate with other financial regulatory
agencies and the Government Accountability Office on audits and reviews impacting the
Finance Board. In addition, OIG participated in activities involving the entire Inspector General
community. As part of our affiliation with the ECIE, we continued to coordinate peer reviews of
ECIE members’ audit operations - a mechanism for assuring quality audits by Inspectors
General. We also responded to various inquiries involving the activities of the Inspector
General community.

EE hilly
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Edward Kelley
Inspector General

September 30, 2005 SEMIANNUAL REPORT TO CONGRESS


SUMMARY OF “SECTION 5” REPORTING REQUIREMENTS

1. Significant problems, abuses, deficiencies disclosed by management and IG’s
recommended corrective actions [5a(1) and (2)]

None

2. Previously reported significant recommendations with incomplete corrective actions

[5a(3)]

None

3. Prosecution, convictions, and referrals [5a(4)]
None

4. Reports on failure to provide information or assistance [5a(5))
None

5. List of issued audit reports [5a(6)]
See attached Table A.

6. Summary of significant reports [5a(7))
None

7. Statistical table - audits with questioned/unsupported costs [5a(8)]
See attached Table C.

8. Statistical table - audits recommending that funds
be put to better use [5a(9)]

See attached Table D.

September 30, 2005 SEMIANNUAL REPORT TO CONGRESS


The Finance Board has only indirect involvement — through the 12 FHLBanks — with
the FHLBank System's member institutions. Unlike its predecessor, the Federal Home Loan
Bank Board, the Finance Board neither monitors nor examines any of the individual members
of the FHLBank System. The actual monitoring, examination, and regulation of individual
member institutions is left to the Office of Thrift Supervision, a separate federal government
agency. The Finance Board is responsible for annually examining the 12 FHLBanks and the
Office of Finance.

Approximately 69 percent of the Finance Board's staff resources are dedicated, in
whole or in part, to: 1) examining the safety and soundness of the 12 FHLBanks and the Office
of Finance; 2) reviewing and evaluating the work of each FHLBank's internal audit staff; 3)
monitoring FHLBank System compliance with laws, regulations, policies, and procedures; 4)
assessing the FHLBank System's financial condition; 5) modeling and analyzing the
implementation of financial policies; 6) maintaining and promulgating membership policies; 7)
monitoring the election and appointment of FHLBank Directors; 8) collecting information on
individual FHLBank policies and marketing activities; and 9) monitoring and reviewing FHLBank
and members’ compliance with requirements of the Affordable Housing Program and the
Community Investment Program.

The Office of Inspector General (OIG) is responsible for the conduct of audits and
investigations at the Finance Board in accordance with generally accepted government auditing
Standards and investigative standards. OIG may also conduct audit or investigative activities at
the 12 FHLBanks and other related entities when: 1) requested to do so by the Chairman; 2)
Necessary to obtain information on the Finance Board's administration of its program; and 3)
aimed at detecting fraud or inefficiency in the administration or operation of Finance Board
programs.

September 30, 2005 SEMIANNUAL REPORT TO CONGRESS


BACKGROUND ON THE FHLBANK SYSTEM, THE FINANCE BOARD,
AND THE OFFICE OF INSPECTOR GENERAL

The Federal Home Loan Bank System (FHLBank System) was created in 1932 to
promote home ownership and a strong home finance industry. Its network of 12 district Federal
Home Loan Banks (FHLBanks) provides lending, deposit, and other services to member
institutions. Originally, the FHLBank System's membership was limited to thrift institutions,
whose membership was mandatory. Since the FHLBank System's inception, membership has
grown to include savings and loans, savings banks, cooperative banks, and a small number of
insurance companies. As of August 1989, membership was opened to commercial banks and
credit unions that meet a commitment to housing finance, as defined in law. As of May 13,
2000, membership for all financial institutions in the system became voluntary.

The 12 FHLBanks borrow funds in the nation’s credit markets to lend to the FHLBank
System member institutions, which numbered 8,083 as of June 30, 2004. These institutions, in
turn, use the funds for home mortgages, to meet savings withdrawal needs, and for other
authorized purposes. As of June 30, 2004, the FHLBanks had outstanding loans (Advances)
to member institutions totaling $558 billion for these purposes. In addition, through its
Affordable Housing Program (AHP), the FHLBank System provided approximately $2.4 billion
to active and completed projects to help house some of America’s neediest families. As of
June 30, 2005, a total of more than 437,100 housing units were approved. Under the
competitive application program, the AHP funded almost 390,000 units of which 70% were for
very-low income households. The AHP homeownership set-aside program has funded more
than 47,800 housing units. Concurrent with affordable housing efforts, the Federal Home Loan
Bank System has increased its efforts in overall community development through its
Community Investment Program (CIP). CIP lending for the life of the program is more than $35
billion as of December 31, 2003. The Office of Finance is the fiscal agent for the FHLBank
System. The Office of Finance's primary role is to manage the sale of the FHLBank System's
consolidated obligations to investors, and to service the FHLBank System's debt.‘

The Federal Housing Finance Board (Finance Board), with a fiscal year 2005 budget of
approximately $36.5 million and 130 employees, is the regulator of the FHLBank System. It is
an independent agency established by the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989. The Finance Board's function is to ensure that FHLBanks: 1)
operate in a safe and sound manner; 2) carry out their housing finance mission; and 3) remain
adequately capitalized and able to raise funds in the capital markets. The Finance Board
receives its operating funds from assessments levied against the 12 FHLBanks.

3

' All statistics presented in the preceding paragraph represent the most current statistics available at the
Federal Housing Finance Board.

September 30, 2005 SEMIANNUAL REPORT TO CONGRESS


INVESTIGATIVE ACTIVITY

—

The number of investigative matters processed by the Office of Inspector General
during this reporting period remained approximately the same. We had one investigative
matter in process at the beginning of the reporting period and we received two additional
allegations. Two of the allegations involved possible improper conduct by FHLBank Directors
and the third involved the propriety of a sole source contract award. By the end of the period,
two allegations were closed and the third was in the preliminary investigation stage.

Table B, on page 10, contains a numerical summary of investigations, allegations,
preliminary inquires, and referrals.

September 30, 2005 SEMIANNUAL REPORT TO CONGRESS


SEMIANNUAL REPORT

FOR THE PERIOD
April 1, 2005 -September 30, 2005


TABLE A

LISTING OF COMPLETED AUDITS, SURVEYS, LIMITED REVIEWS,

AND EVALUATIONS

REPORT NUMBER DATE COMPLETED TITLE OF

REPORT

05-A-03-CIO/OM September 28, 2005 Audit of the Finance
Board's Compliance
with the Federal
Information Security
Management Act

05-A-02-OM/OS July 26, 2005 Audit of the Finance

Board's Call Reporting
System

September 30, 2005 SEMIANNUAL REPORT TO CONGRESS


9. Summary of prior-period audits with no current management decisions _[5a(10)]

None

10. Reasons for revisions of significant management decisions [5a(11))
None

11. OIG disagreement with management decisions (5a(12)]
None

September 30, 2005 SEMIANNUAL REPORT TO CONGRESS


AUDIT ACTIVITY

On April 19, 2004, OIG issued its Strategic Plan for the period April 1, 2004 to
March 31, 2009. OIG’s annual audit plan for the period April 1, 2005 to March 31, 2006, is
included as an Exhibit to the five-year strategic plan. During the semiannual reporting period
April 1, 2005 through September 30, 2005, OIG completed two audits and suspended work on
one audit due to other priorities (Table A on page 9). At the conclusion of this period, OIG also
had four audits in process. OIG continued to coordinate with the Government Accountability
Office and the Inspector General community on audits that impact the Finance Board.
Specifically, OlG's audit activities included:

COMPLETED

An audit of the Finance Board’s compliance with the Federal Information Security Management
Act, and

An audit of the Finance Board’s Call Reporting System.

WORK-IN-PROCESS

A Limited Review of the Finance Board's implementation of OMB Circular A-123,
An audit of the Disposition of IT Equipment,
A survey of the Office of Supervision, and

An audit of the Finance Board's Fiscal Year 2005 Financial Statements.

September 30, 2005 SEMIANNUAL REPORT TO CONGRESS


EXECUTIVE SUMMARY

The mission of the Office of Inspector General (OIG) at the Federal Housing Finance
Board (Finance Board) is to support the agency's overall mission and goals established by the
President, the Congress, and the Finance Board, while helping to protect the agency from
fraud, waste, and abuse. Consistent with OIG’s strategic plan for the period, April 1, 2004 to
March 31, 2009, and in accordance with the Inspector General Act of 1978, as amended (IG
Act), we have relied on audits, investigations, and formal and informal technical assistance to
accomplish our mission. OIG’s strategic plan and annual audit plan are designed to support
the Finance Board's strategic plan. In that regard, we have undertaken work aimed at
evaluating the examination and supervision function and industry reporting requirements. We
remained an active member in the federal Inspector General community to facilitate our
statutory mandate to participate in government-wide efforts to prevent fraud, waste, and abuse
and to remain current on matters affecting the |G community as well as the Finance Board. We
continued to rely heavily on contracting for resources to accomplish required audits and
investigations.

We conducted audits and audit recommendation follow-up of agency program and
administrative functions. These audits were conducted in accordance with generally accepted
government auditing standards issued by the Government Accountability Office. Five audits were
in process at the beginning of the reporting period and two audits were initiated during the period.
By the end of this reporting period, OIG had completed: 1) an audit of the Finance Board's Call
Reporting System; and 2) an audit of the Finance Board's compliance with the Federal
Information Security Management Act. An audit of the Finance Board's records management
activities was suspended indefinitely due to higher OIG priorities. Four audits remained in
process by the end of the reporting period. They were: 1) a Limited Review of the Finance
Board's implementation of OMB Circular A-123, 2) a survey of the Office of supervision, 3) an
audit of the disposition of IT equipment, ), and 4) an audit of the Finance Board's Fiscal Year
2005 Financial Statements. In addition, we continued our process of automating our audit
working papers to improve process efficiency and security.

Our investigative activity was performed in accordance with Quality Standards for
Investigations issued by the President's Council on Integrity and Efficiency (PCIE) and the
Executive Council on Integrity and Efficiency (ECIE). Investigative matters were appropriately
coordinated with officials in the Department of Justice, the Federal Bureau of Investigations,
and other law enforcement entities. We continued to focus on resolving investigative matters
expeditiously and identifying control weaknesses that may contribute to possible fraud or
abuse. We began the period with one allegation of possible wrongdoing in process and no
investigation in process. During the reporting period, we received two allegations. One related
to the possible improper use of confidential information by officials at a FHLBank and the other
felated to the propriety of a sole source contract award. One allegation remained in process at
the end of the period.

September 30, 2005 SEMIANNUAL REPORT TO CONGRESS


TABLE D
INSPECTOR GENERAL REPORTS
RECOMMENDING THAT FUNDS BE PUT TO BETTER USE

NUMBER DOLLAR
OF REPORTS VALUE
a. For which no management decision
has been made by the commencement
of the reporting period.............:csssecssesssenenenes 0 0
b. Which were issued during the reporting period.. 0 0
Subtotals (€#D).............cccccceccssceecsecseceecnseneeee 0 0
c. For which a management decision was made
during the reporting period................:sesesereee 0 0
(i) dollar value of recommendations that was agreed
to by management séicciscteccccsiscssistinsseecss 0 0
- based upon proposed management action....... 0 0
- based upon proposed legislation action.......... 0 0
(ii) dollar value of recommendations that were
not agreed to by management. 0 0
d. For which no management decision has been made
by the end of the reporting period.................000 0 0
e. Reports for which no management decision was made
within six months of issuance............00cscscseeeeeeeees . 0 0

Note: Boldface entries reflect actual statutory language.

12

September 30, 2005 SEMIANNUAL REPORT TO CONGRESS


TABLE OF CONTENTS

EE CUNT SUMMA Y 55S SS a Saas 1

Background on the FHLBank System, the Finance Board,

And the Office of Inspector General..............cccccccseeeseseseesesesessesesersesesenscseneesenesesee 3
IAUGN ACHUV sescsazss costly caceissisiatesiatopestannesa te sas ciedttelscassstsosenes asbisecestitetessis onsit 5
Srnvenestigpeatlves ACHIVMY 222 2g 280s Sees en Seapets cate au eect ev esate ase tea aaar 6

Summary of “Section 5” Reporting Requirements...

Table A — Listing of Completed Audits, Surveys, Limited

Reviews, and Evaluations...........:.ccccsessssssssesersescsnensreneretsnseesscsessensees 9

Table B — Summary of Investigations..............:ccccccsesceeeseseeseseneeseseneeseeteesesenennees 10

Table C - 1G Reports with Questioned/Unsupported Costs... ......::s:sesessssessseseseseeees 1

Table D -— 1G Reports Recommending Better Use of FUNAS..........+..s:+scsssesssssseseessssees 12
i

September 30, 2005 SEMIANNUAL REPORT TO CONGRESS


OFFICE OF INSPECTOR GENERAL

SEMIANNUAL REPORT

FOR THE PERIOD

April 1, 2005 - September 30, 2005

EDWARD KELLEY
INSPECTOR GENERAL

September 30, 2005 SEMIANNUAL REPORT TO CONGRESS


TABLE B

SUMMARY OF INVESTIGATIONS

BEGINNING CASES NUMBERS

Cases Pending at the Beginning of Period:

At the Finance Board 0
At the Department of Justice |
At other agencies. 0
NEW CASES RECEIVED

Allegations Received During Current Period.............s:s:sssessssssesceesessereereseeseeeees 2

STATUS OF CASES (as of September 30, 2004)
Resulted in:

Allegations Pend. Completion of Prelim. Invest/Audit...
Preliminary Investigation Completed- (Cases Closed).
Cases Pending Completion of Full Investigation...
Full Investigation Completed- (Cases Closed).....
Cases Scheduled for Audit/Ltd. Rev. -(Cases Closed)
Cases Pending Decision by Finance Board manageme:
Cases Pending Decision by Dept. of Justice...
Cases Pending Decision by Other Agencies...
Cases Referred to FHFB Management- (Cases Closed). ,
Referred to Other Agencies- (Cases Closed)............ccsccsssesseseseesseseseensessseeseeenes

eocoocoCoOsA03-5

ISPOSITION

Criminal.
Administrative Sanctions.
Corrective Action Taken..
Other (Pending/Referrals, etc.)

ooooo

10

September 30, 2005 SEMIANNUAL REPORT TO CONGRESS