Management Report:

Opportunities for Improvements in FDIC's Internal Controls and Accounting Procedures

GAO-11-687R: Published: Aug 5, 2011. Publicly Released: Aug 5, 2011.

Additional Materials:

Contact:

Steven J. Sebastian
(202) 512-3406
sebastians@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

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.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: FDIC documented its analysis of deferred revenue recognition in 2011, recognizing Deposit Insurance Fund (DIF) revenue of $2.6 billion for fees related to debt guarantees that had expired. In recognizing this revenue FDIC transferred funds from restricted systemic risk cash and investments to the DIF's cash and investments accounts.

    Recommendation: The Deputy to the Chairman and Chief Financial Officer should direct appropriate FDIC officials to document FDIC's analysis and conclusions regarding the amount of systemic risk revenue to recognize at December 31, 2011.

    Agency Affected: Federal Deposit Insurance Corporation

  2. Status: Closed - Implemented

    Comments: FDIC agreed with our recommendation and stated that it would (1) provide job aids for users to explain general ledger account selection, (2) review and revise expense account definitions to consolidate or enhance clarity, and (3) enhance existing training for the voucher approver community. In February 2012, FDIC posted to their intranet the job aid that provides a list of commonly used general ledger expense accounts with abbreviated descriptions and examples for reference. An updated version was posted in July 2012. In January and February 2012, FDIC implemented the training related to selecting the correct NFE expense account, and made improvements to the coding on contracting templates. It also developed guidance for property management companies regarding the coding of expenses. FDIC's actions to address our recommendation should provide for better accuracy in recording expenses to the proper accounts. Specifically, The Job Aid facilitates the selection of the proper General Ledger expense account and the material covered in the training sessions should assist the approvers and oversight managers in selecting the correct expense accounts. Additionally, the improvements made to the coding on contracting templates should provide for better accuracy and consistency in recording expenses to the proper accounts.

    Recommendation: The Deputy to the Chairman and Chief Financial Officer should take steps to reinforce the policy that voucher approvers ensure the accuracy and validity of general ledger expense coding and hold preparers accountable for coding expenses correctly.

    Agency Affected: Federal Deposit Insurance Corporation

  3. Status: Closed - Implemented

    Comments: To eliminate the issues identified with the Standard Asset Valuation Estimation (SAVE) methodology, FDIC developed an alternative strategy for valuing In House Other Assets (IHOA). The new methodology does not involve using the sometimes complex calculations required by SAVE. The new methodology uses historical sales to estimate the value of current assets. As a result, FDIC addressed the weaknesses we identified in the calculations needed under the SAVE methodology.

    Recommendation: The Deputy to the Chairman and Chief Financial Officer should establish a mechanism to better ensure FDIC officials comply with the Standard Asset Valuation Estimation (SAVE) methodology's review procedures for asset valuations, including correctly tracing the numbers used in the calculations back to the source documents and verifying that asset valuations are fully substantiated, logical, and reasonable.

    Agency Affected: Federal Deposit Insurance Corporation

  4. Status: Closed - Implemented

    Comments: To make the process more automated and less prone to error, FDIC's Division of Finance (DOF) changed its process for generating the Loan Loss Reserve (LLR) templates used to perform the overall allowance for loss calculation. FDIC implemented the use of a software program to upload files and automatically run programmed mathematical calculations, which helps to ensure the consistency and accuracy of the estimates produced by the LLR templates. We tested the effectiveness of the program and found it to be producing a reliable overall allowance for loss estimate. FDIC developed a WebFocus-based loan loss reserve template which automatically runs the programmed mathematical calculations for all failed banks independent of manual spreadsheet-based calculations. FDIC's additional automated procedure should help assure accuracy in the underlying data and its calculation of its allowance for losses for receivables from bank failures.

    Recommendation: The Deputy to the Chairman and Chief Financial Officer should direct the appropriate FDIC officials to consider and adopt, as appropriate, additional cost-effective automated tools and procedures for DOF officials to enhance the review and monitoring activities related to the Loan Loss Reserve (LLR) templates to gain additional assurance that the underlying data and calculations are complete and accurate.

    Agency Affected: Federal Deposit Insurance Corporation

  5. Status: Closed - Implemented

    Comments: FDIC developed a business logic requirements document that identifies terms, components, and assumptions that impact the estimation of the shared loss liability. This change by FDIC will help reviewing officials ensure that shared loss estimates (that represent a significant portion of the overall Deposit Insurance Fund's allowance for loss) is verifiable and accurately calculated.

    Recommendation: The Deputy to the Chairman and Chief Financial Officer should direct the appropriate FDIC officials to develop comprehensive loss-share process documentation to include detailing the loss-share loss estimation process steps to be followed from the inception of the agreement to the reporting on the financial statements, including details regarding assumptions, databases, computer programs, and any other related materials used to estimate losses resulting from loss-share agreements.

    Agency Affected: Federal Deposit Insurance Corporation

  6. Status: Closed - Implemented

    Comments: FDIC staff completed revisions to the Accounting Operations Branch procedures regarding the preparation and review of depreciation expenses and fringe benefits and leave allocations. The revisions include detailed steps that allow staff and reviewers to perform their general ledger closing responsibilities completely and effectively.

    Recommendation: The Deputy to the Chairman and Chief Financial Officer of FDIC should direct appropriate staff to complete revisions to the Accounting Operations Branch procedures regarding the preparation and review of depreciation expenses and fringe benefits and leave allocations to include providing sufficiently detailed steps staff and reviewers are to follow to perform their general ledger closing responsibilities completely and effectively.

    Agency Affected: Federal Deposit Insurance Corporation

 

Explore the full database of GAO's Open Recommendations »

Nov 20, 2014

Nov 17, 2014

Nov 12, 2014

Nov 10, 2014

Nov 7, 2014

Nov 6, 2014

Sep 22, 2014

Looking for more? Browse all our products here