GAO-04-677R FDIC 2003 Management Report 

United States General Accounting Office

Washington, DC 20548 

June 16, 2004 

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 2004, we issued our opinions on the calendar year 2003 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, 2003, 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, 2003.1

The purpose of this report is to discuss issues identified during our audits of the 2003 

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 five 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 2003, we identified several internal control issues that affected FDIC’s 

accounting for the funds it administers. These weaknesses would have resulted in 

reporting errors had they not been detected and corrected. Specifically, we found the 

following: 

 

1

U.S. General Accounting Office, Financial Audit: Federal Deposit Insurance Corporation Funds’ 

2003 and 2002 Financial Statements, GAO-04-429 (Washington, D.C.: Feb. 13, 2004). 
Page 2 GAO-04-677R FDIC 2003 Management Report 

• FDIC erroneously accounted for funds it received related to securitizations 

that terminated in prior years, which would have caused the related FRF 

account balances to be misstated. 

• FDIC did not always follow its procedures relating to time and attendance 

reporting, which would have resulted in an improper allocation of operating 

expenses among the funds. 

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

receivables from thrift resolutions. These errors would have led to 

misstatements in FRF’s financial statements.

At the end of our discussion of each of these issues in the following sections, we 

make recommendations for strengthening FDIC’s internal controls. Implementation 

of these recommendations is intended to bring FDIC into 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 2003 and 2002 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 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 2003 and 

2002 financial statements and are reproduced in enclosure II. 

Accounting for Terminated Securitizations 

During our 2003 financial audit, we found that FDIC did not always properly account 

for the funds it received related to terminated securitization deals. This resulted in 

certain account balances for FRF being misstated. GAO’s Standards for Internal 

Control in the Federal Government3requires that transactions be accurately 

recorded. 

 

2

 U.S. General Accounting Office, Standards for Internal Control in the Federal Government, 

GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999). 

3

 GAO/AIMD-00-21.3.1 
Page 3 GAO-04-677R FDIC 2003 Management Report 

The former Resolution Trust Corporation (RTC)4 engaged in numerous securitization 

transactions as a means of recovering the value of assets from failed financial 

institutions. These transactions involved selling receivership loans to trusts that in 

turn issued bonds, known as mortgage-backed securities, to investors. Two types of 

assets resulted from these transactions: credit enhancement reserves and residual 

certificates. A portion of the proceeds from the sale of the bonds was placed in credit 

enhancement reserves to protect the bondholders from losses. Residual certificates 

entitle the holder to excess cash that results when the proceeds from the sale of the 

underlying loans is greater than the funds needed to pay off the bonds. FDIC, as the 

owner of the credit enhancement reserves and residual certificates, receives the 

remaining funds when a securitization deal terminates. When a deal terminates, the 

credit enhancement reserve account for the particular deal is adjusted to zero, and 

either a realized gain or loss is recorded. In a given year, FDIC may receive funds 

related to securitization deals that terminated in prior years. 

During our audit, we found that FDIC erroneously accounted for four of the five 

instances in which it received funds related to securitization deals that terminated in 

prior years.5 While FDIC correctly determined that funds it received in 2003 

pertained to the credit enhancement reserves on the terminated deals, it improperly 

recorded journal entries that erroneously decreased (credited) the credit 

enhancement reserve account instead of adjusting the realized gain or loss account. 

This resulted in the related FRF account balances being understated. FDIC recorded 

entries to correct these errors after we brought this matter to its attention. 

FDIC’s policy requires that accounting entries for cash collections related to the RTC 

securitization deals not be made by staff responsible for administering the deals. The 

accounting entries are required to be made by staff from another business unit, but 

are to be made at the direction of staff responsible for administering the deals. The 

journal entries we reviewed were approved and recorded in FDIC’s general ledger by 

staff other than those responsible for administering the securitization deals. 

However, there was no evidence on the journal entries that staff preparing the entries 

had received the required input and direction from staff responsible for administering 

the securitization deals. In addition, training of new staff responsible for 

administering securitization-related transactions did not cover activity related to 

previously terminated deals. These factors contributed to the errors we identified 

during our testing of securitization transactions. 

Recommendation

We recommend that FDIC management formally remind staff responsible for 

recording activity associated with securitization transactions of the need to obtain 

input and approval from the individual responsible for administering the 

securitization deals prior to recording the activity in FDIC’s accounting records. 

 

4

 FDIC is charged with the responsibility for the sale of the remaining assets and satisfaction of the 

liabilities associated with the RTC. 

5

 When these particular deals terminated, the trustees held back funds owed to FDIC because of 

unresolved issues with one or more of the parties to the deals. 
Page 4 GAO-04-677R FDIC 2003 Management Report 

FDIC Comments and Our Evaluation

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

management stated that they have reiterated to staff responsible for recording cash 

transactions, including securitization activity, the procedures relating to proper 

preparation, documentation, and review of journal vouchers. We will evaluate the 

effectiveness of FDIC’s actions during our 2004 financial audit. 

Time and Attendance Reporting 

During our 2003 financial audit, we found that FDIC’s controls over time and 

attendance reporting did not always ensure that such information was properly 

recorded, resulting in incorrect reporting. GAO’s Standards for Internal Control in 

the Federal Government6 requires that all transactions be recorded accurately and 

timely, all transactions and other significant events be clearly documented, and the 

documentation should be readily available for examination. 

FDIC’s payroll processing procedures call for employees to complete a Corporate 

Time and Attendance Worksheet (CTAW) and submit it to a timekeeper. The 

timekeeper reviews the CTAW and the supporting documents and enters the data into 

the corporation’s Biweekly Time and Attendance System. The timekeeper prints a 

Time and Attendance Report for Certification (Report for Certification) for each 

employee, and compares the report to each employee’s CTAW to ensure data was 

entered completely and correctly. Supervisors are required to compare the Report 

for Certification, the CTAW, and all other supporting documents for consistency and 

accuracy. Additionally, supervisors verify the accuracy of the employee’s hours 

worked and leave taken, and ensure that hours are charged to the correct fund, 

organization, program, location, and project codes. The supervisor signs and dates 

each employee's Report for Certification, certifying the accuracy of the data. 

Timekeepers are required to receive all approved time and attendance related 

documents and reports from the supervisor, and file all original documents in a 

locked file cabinet. 

In testing a sample of operating expenses, we found three cases where the CTAW and 

Report for Certification entries did not match. These errors were not discovered by 

either the timekeeper or the supervisor, resulting in the incorrect recording of these 

transactions. In two cases, the organization/program coding was incorrect, which 

would have resulted in an improper allocation of operating expense among the funds 

had FDIC not corrected the errors when we brought them to its attention. In the 

third case, direct expense charges to BIF were incorrect. We also noted that, in a 

fourth case, the Report for Certification was not signed and it took FDIC 2 months to 

locate the related CTAW. 

 

6

 GAO/AIMD-00-21.3.1 
Page 5 GAO-04-677R FDIC 2003 Management Report 

Recommendation

We recommend that FDIC management formally remind 

• timekeepers of their responsibility to compare the Report for Certification to 

each employee’s CTAW to ensure data was entered completely and correctly, 

• supervisors of their responsibility to verify the accuracy of the employee’s 

time and attendance data by signing and dating each employee's Report for 

Certification, and 

• timekeepers of their responsibility to receive all approved time and attendance 

documents and reports from supervisors and to file all original documents in a 

locked file cabinet. 

FDIC Comments and Our Evaluation

FDIC agreed with our recommendations. In response to our findings, FDIC stated 

that it had sent notices to its timekeepers and supervisors reminding them of their 

responsibilities and has held refresher timekeeper training courses. FDIC also stated 

that it would review its policy on time and attendance reporting to identify any 

needed improvements in the policy. We will evaluate the effectiveness of FDIC’s 

actions during our 2004 financial audit. 

Asset Valuation 

During our 2003 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 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 Government7

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 bank/thrift resolutions are paid off through the sale of failed 

bank/thrift assets of its receiverships. To determine the allowance for losses on its 

receivables from failed bank/thrift resolutions, FDIC estimates values for the 

receivership assets to be disposed of through a Loan Loss Reserve (LLR) 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). Per the SAVE manual, equity in subsidiaries’ assets are valued using the 

Subsidiary Cash Recovery Analysis Worksheets and Cash Flow Worksheets to 

determine the estimated present values of the assets’ estimated recovery. As part of 

the cash flow analysis, future cash outflows and inflows are estimated and a discount 

 

7

 GAO/AIMD-00-21.3.1 
Page 6 GAO-04-677R FDIC 2003 Management Report 

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 two of six assets we reviewed were not 

valued in accordance with the SAVE methodology. In both cases, the individual 

responsible for preparing the valuation failed to use the prescribed standard yield 

comparison rate as part of calculating the overall discount rate for equity in 

subsidiary assets. Additionally, in one of these cases, the preparer also made errors 

in the calculation of future cash flows, which contributed to the overall error found in 

the valuation of the asset. While FDIC had 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. While 

the errors, totaling over $570,000, were not material to the financial statements, they 

indicate that the review procedures are not fully effective in preventing or timely 

detecting errors in the asset valuation process. 

Recommendation

We recommend that FDIC management examine its current review procedures and 

controls related to its loan loss reserve estimation process and revise them if 

necessary to ensure the review guidelines are properly implemented. 

FDIC Comments and Our Evaluation

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

it had developed additional procedures to ensure proper review is being 

implemented. 

We will evaluate the effectiveness of FDIC’s actions during our 2004 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. 
Page 7 GAO-04-677R FDIC 2003 Management Report 

We acknowledge and appreciate the cooperation and assistance provided by FDIC 

management and staff during our audits of FDIC’s 2003 and 2002 financial statements. 

If you have any questions about this report or need assistance in addressing these 

issues, please contact Julia Duquette, Assistant Director, at (202) 512-5131 or 

duquettej@gao.gov. 

Sincerely yours, 

Steven J. Sebastian 

Director 

Financial Management and Assurance 

Enclosures - 3 
Page 8 GAO-04-677R FDIC 2003 Management Report 

Enclosure I 

Comments from the Federal Deposit Insurance Corporation 
Page 9 GAO-04-677R FDIC 2003 Management Report 
Page 10 GAO-04-677R FDIC 2003 Management Report 

Enclosure II 

Details on Audit Scope and Methodology 

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 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 selected provisions of the Federal Deposit Insurance Act, 

as amended, and the Chief Financial Officers Act of 1990. 
Page 11 GAO-04-677R FDIC 2003 Management Report 

Enclosure III 

GAO Contacts and Staff Acknowledgments 

GAO Contacts 

Julia Duquette, (202) 512-5131 

Gary Chupka, (202) 512-9314 

Acknowledgments 

Staff who made key contributions to this report were Ronald Bergman, John Craig, 

and Timothy Murray. 

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