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GAO-10-587R: 

United States Government Accountability Office: 
Washington, DC 20548: 

June 3, 2010: 

Mr. Edward J. DeMarco: 
Acting Director: 
Federal Housing Finance Agency: 

Subject: Management Report: Opportunities for Improvements in FHFA's 
Internal Controls and Accounting Procedures: 

Dear Mr. DeMarco: 

In November 2009, we issued our opinion on the fiscal year 2009 
financial statements of the Federal Housing Finance Agency (FHFA). Our 
report also included our opinion on the effectiveness of FHFA's 
internal control over financial reporting as of September 30, 2009, 
and our evaluation of FHFA's compliance with provisions of selected 
laws and regulations for the fiscal year ended September 30, 2009. 
[Footnote 1] 

The Housing and Economic Recovery Act of 2008 (HERA) created FHFA and 
gave it responsibility for, among other things, the supervision and 
oversight of the Federal National Mortgage Association (Fannie Mae), 
the Federal Home Loan Mortgage Corporation (Freddie Mac), and the 12 
federal home loan banks. Specifically, FHFA was assigned 
responsibility for ensuring that the regulated entities operate in a 
fiscally safe and sound manner, including maintenance of adequate 
capital and internal controls, in carrying out their housing and 
community development finance mission. HERA requires FHFA to annually 
prepare financial statements, and requires GAO to audit these 
statements. 

HERA established FHFA as an independent agency on July 30, 2008. HERA 
also abolished, effective within 1 year of the act's enactment, the 
Office of Federal Housing Enterprise Oversight (OFHEO)[Footnote 2]and 
the Federal Housing Finance Board (FHFB).[Footnote 3] During fiscal 
year 2009, OFHEO's and FHFB's personnel, property, and mission 
responsibilities were transferred to FHFA,[Footnote 4] and the assets, 
liabilities, and financial transactions of OFHEO and FHFB became 
FHFA's responsibility. While FHFA was in existence prior to the start 
of fiscal year 2009, this was its first full year of operations and 
the first year for which it prepared financial statements. Prior to 
July 1, 2009, FHFA processed transactions using the separate 
accounting systems of FHFB and OFHEO. On July 1, 2009, FHFA began 
using its own accounting system. 

The purpose of this report is to present issues identified during our 
audit of FHFA's fiscal year 2009 financial statements regarding 
certain internal controls and accounting procedures and to recommend 
actions to address those issues.[Footnote 5] We are making six 
recommendations for strengthening FHFA's internal controls and 
accounting procedures. 

Results in Brief: 

During our audit of FHFA's fiscal year 2009 financial statements, we 
identified four internal control issues that could adversely affect 
FHFA's ability to meet its internal control objectives. We do not 
consider them to be material weaknesses or significant 
deficiencies[Footnote 6] in relation to FHFA's financial statements. 
Nonetheless, we believe that they warrant management's attention and 
action. These issues concerned necessary controls to ensure: 

* undelivered orders balances were calculated accurately, 

* receipt and acceptance of services provided or goods delivered was 
completed and documented prior to payment, 

* amounts were accurately recorded for goods received or services 
rendered but not yet paid at the end of an accounting period, and: 

* costs were properly classified and recorded. 

These issues increase the risk of FHFA not preventing or promptly 
detecting and correcting (1) misstatements in asset, liability, 
expense, and undelivered orders accounts, (2) misappropriation of 
assets as a consequence of improper expenditures, and (3) 
misstatements in the financial statements. 

At the end of our discussion of each of these issues in the following 
sections, we present our recommendations for strengthening FHFA's 
internal controls and accounting procedures. These recommendations are 
intended to improve management's oversight and controls and minimize 
the risk of misappropriation of assets and misstatements in FHFA's 
accounts and financial statements. 

In its comments, FHFA agreed with our recommendations and described 
actions it had taken to address the control issues described in this 
report. At the end of our discussion of each issue in this report, we 
have summarized FHFA's related comments and provide our evaluation. We 
have reprinted FHFA's comments in enclosure II. 

Scope and Methodology: 

As part of our audit of FHFA's fiscal year 2009 financial statements, 
we evaluated FHFA's internal controls and tested its compliance with 
selected provisions of laws and regulations. We designed our audit 
procedures to test relevant controls over financial reporting, 
including those designed to provide reasonable assurance that 
transactions are properly recorded, processed, and summarized to 
permit the preparation of FHFA's financial statements in conformity 
with U.S. generally accepted accounting principles. 

We conducted our audit in accordance with U.S. generally accepted 
government auditing standards. Further details on our scope and 
methodology are included in our November 2009 report on the results of 
our audit of the fiscal year 2009 financial statements and are 
summarized in enclosure I. 

Undelivered Orders: 

During our fiscal year 2009 testing of FHFA's undelivered orders 
[Footnote 7] balances shown in its fiscal year 2009 financial 
statements, we found that such balances included erroneous fund 
obligation[Footnote 8] and deobligation[Footnote 9] transactions. 

For example, during our testing of the fiscal year 2009 beginning 
balances for undelivered orders,[Footnote 10]we determined that a 
lease term for office space had expired in September 2008, but FHFA's 
records erroneously continued to reflect an obligation for the lease 
in the amount of about $220,000 at the beginning of fiscal year 2009. 
This resulted in an undelivered order remaining in the accounting 
records for this amount at the end of fiscal year 2008 that should 
have been deobligated. Additionally, we found that FHFA did not record 
the full amount for the lease obligation in the next lease year. This 
resulted in insufficient funding for the lease obligation in fiscal 
year 2009. Using this approach resulted in obligation activity being 
recorded in an improper period. In another instance, we found that the 
entire amount for a purchase order for laptop batteries was shown as 
undelivered, yet an estimated $1,200 of the goods covered under the 
order were received as of September 30, 2008. The amount received on 
this purchase order should have been deobligated on September 30, 
2008. We found that these errors were attributed to the lack of 
sufficiently detailed guidance on the proper methods for obligating 
and deobligating contract amounts in OFHEO's Administrative Accounting 
Manual, the accounting manual in effect during the time these 
transactions were processed. 

Standards for Internal Control in the Federal Government[Footnote 11] 
provide that agencies are to ensure accurate and timely recording of 
transactions and events. FHFA's new Administrative Accounting Manual, 
which was provided to us in October 2009, requires that the status of 
undelivered orders be reviewed. Through discussions with FHFA, we were 
informed that, on a quarterly basis, the Bureau of Public Debt (BPD), 
FHFA's accounting services provider,[Footnote 12] provides FHFA with 
an open obligations report. FHFA's Contracting Officer Technical 
Representatives (COTR)[Footnote 13] review all open obligations and 
determine the current status of each obligation. However, FHFA's 
Administrative Accounting Manual did not identify specific steps to be 
performed as part of the COTR's review of undelivered orders and, in 
particular, the use of the open obligations report to ensure proper 
accounting for obligation and deobligation transactions. 

Deficiencies with respect to timely and accurate recording of 
contract/obligation activity can lead to misstatements in undelivered 
orders balances reflected in FHFA's financial statements. 

Recommendations: 

We recommend that you direct the Chief Financial Officer to enhance 
FHFA's Administrative Accounting Manual by: 

* incorporating specific, detailed steps for the COTR review of 
contract balances, including the use of the open obligations report 
provided by BPD in the COTR review process and: 

* including specific, detailed steps on when and how to properly 
account for obligating and deobligating contract amounts. 

FHFA Comments and Our Evaluation: 

FHFA agreed with the recommendations. FHFA stated that the agency has 
updated its Administrative Accounting Manual to incorporate specific, 
detailed steps for the COTR review of contract balances, including the 
use of the open obligations report provided by BPD in the COTR review 
process, and included specific, detailed steps on when and how to 
properly account for obligating and deobligating contract amounts. 
Additionally, FHFA stated that it had developed and presented training 
covering accrual processing, and created invoice and payment 
procedures. We will evaluate the effectiveness of FHFA's corrective 
actions during our fiscal year 2010 financial audit. 

Documentation and Review Process for Receipt and Acceptance of Goods 
and Services: 

Receipt and acceptance generally occurs when an entity officially 
receives goods or services. During this process, the entity should 
verify, before payment is made, that the goods or services were 
actually received and that what was received is what was agreed to. 

During our testing of non-payroll[Footnote 14] expense transactions 
conducted as part of our fiscal year 2009 audit, we found that for two 
procurement transactions, receipt and acceptance supporting 
documentation was missing or incomplete. Specifically, FHFA could not 
provide documentation to show evidence of receipt and acceptance 
related to a $21,000 payment to the Government Printing Office and a 
$2,800 payment to Bloomberg Finance. We also found that FHFA paid for 
six laptop batteries that were never received, resulting in an 
overpayment of over $600. OFHEO's Administrative Accounting Manual, 
which was the accounting manual in effect during the time these 
transactions were processed, did not specify the documentation that 
needed to be maintained to evidence the receipt and acceptance of 
goods or services. 

Standards for Internal Control in the Federal Government provides that 
agencies are to maintain appropriate documentation of transactions and 
that agencies are to ensure proper execution of transactions. While 
OFHEO's previous Administrative Accounting Manual required that the 
employee paying the invoice ensure that the agency had received the 
goods and services before making the payment,[Footnote 15] it did not 
provide specific steps on how to apply this policy to ensure it was 
properly and consistently followed. Consequently, we found this policy 
was not always adhered to during fiscal year 2009. FHFA's new 
Administrative Accounting Manual requires the COTR to review 
supporting documentation, including the invoice or Intra-Governmental 
Payment and Collections (IPAC) Approval Form,[Footnote 16]to ensure 
billing is accurate for the goods received or services provided. In 
addition, the manual requires this validation process be documented. 
However, the manual does not specify the documentation that needs to 
be obtained and maintained as evidence of the receipt and acceptance 
of goods and services. 

Deficiencies with respect to verification or documentation of receipt 
and acceptance for goods and services invoiced can lead to improper 
payments for goods or services never received or accepted by the 
agency. 

Recommendation: 

We recommend that you direct the Chief Financial Officer to revise 
FHFA's Administrative Accounting Manual to provide for specific, 
detailed steps for obtaining and maintaining documentation as evidence 
of receipt and acceptance. 

FHFA Comments and Our Evaluation: 

FHFA agreed with this recommendation. FHFA stated that the agency has 
updated its Administrative Accounting Manual, created purchase card 
procedures, and developed invoice and payment procedures. FHFA stated 
that this guidance includes specific, detailed steps for obtaining and 
maintaining documentation as evidence of receipt and acceptance. We 
will evaluate the effectiveness of FHFA's corrective actions during 
our fiscal year 2010 financial audit. 

Expense Accruals: 

During our testing of accounts payable conducted as part of our fiscal 
year 2009 audit, we found that expenses and the related accounts 
payable were not correctly accrued and recorded at both September 30, 
2008, and September 30, 2009. For both OFHEO's and FHFB's accounts 
payable balances at September 30, 2008, which formed the basis for 
FHFA's beginning balance of accounts payable in fiscal year 2009, we 
tested disbursements made in the first quarter of fiscal year 2009 to 
determine whether they were for goods or services received during 
fiscal year 2008 and whether they had been appropriately recognized as 
expenses and amounts accrued as of September 30, 2008. We found that 
agency personnel did not always accurately calculate and record the 
amounts owed. Specifically, in testing a sample of 70 disbursement 
transactions in the first quarter of fiscal year 2009, we found that 
FHFA did not accurately record the accounts payable for 27 OFHEO 
disbursements, resulting in a net understatement of nearly $393,000. 
[Footnote 17]Additionally, in testing a sample of 46 disbursement 
transactions in the first quarter of fiscal year 2009, we found that 
FHFA did not accurately record the accounts payable for 2 FHFB 
disbursements, resulting in an understatement of nearly $77,000. 
[Footnote 18] After we shared our audit findings with FHFA management, 
they took steps to correct this issue. Specifically, FHFA provided 
training in July 2009 to its COTRs on its policy for developing 
estimates for goods and services received that have not been billed or 
paid. In addition, FHFA issued a new policy to require the maintenance 
of supporting documentation for accrual estimates. 

Our fiscal year 2009 testing showed that, while improved over fiscal 
year 2008, FHFA's actions were not fully effective in ensuring 
accruals for expenses and the related accounts payable were accurately 
determined and recorded. Specifically, in our testing of FHFA's 
balance of accounts payable as of September 30, 2009, we found that 
for 8 of 59 transactions we tested, FHFA over-accrued expenses and the 
related accounts payable. We found that the COTRs incorrectly accrued 
the entire open obligation when only part, or in some cases none, of 
the obligation should have been accrued. These incorrect accruals 
related to contracts with periods of performance in fiscal year 2010, 
amounts that should have been deobligated, and amounts accrued for 
goods not yet ordered. These, in turn, resulted in an over-accrual in 
FHFA's fiscal year 2009 draft financial statements, and required FHFA 
to record an adjusting entry of over $180,000 to correct the over-
accrual and avoid overstating its expenses on its final fiscal year 
2009 financial statements. 

Standards for Internal Control in the Federal Government provides that 
agencies are to ensure accurate and timely recording of transactions 
and events. According to FHFA's Administrative Accounting Manual, the 
COTR and the accounting specialist are responsible for ensuring that 
accounts payable are recorded accurately. While FHFA took steps to 
address problems we identified early on in its accrual process, the 
steps taken were not fully effective. For example, FHFA provided its 
COTRs with training on the accrual process; however, the training 
materials did not include examples of expenses that should and should 
not be accrued. Also, FHFA's new policy with respect to maintaining 
supporting documentation for accrual estimates did not become 
effective until fiscal year 2010. 

These deficiencies with respect to fully effective controls over its 
expense and accounts payable accrual process increase FHFA's risk of 
misstating its liabilities and expenses on its financial statements. 

Recommendation: 

We recommend that you direct the Chief Financial Officer to enhance 
FHFA's training materials related to accruals to include examples of 
expenses that should and should not be accrued at the end of an 
accounting period. 

FHFA Comments and Our Evaluation: 

FHFA agreed with this recommendation. FHFA stated that the agency has 
developed and presented training materials that include examples of 
expenses that should and should not be accrued at the end of an 
accounting period. We will evaluate the effectiveness of FHFA's 
corrective actions during our fiscal year 2010 financial audit. 

Classification and Recording of Costs: 

During our testing of property and equipment acquisition transactions 
conducted as part of our fiscal year 2009 audit, we found that FHFA 
did not always properly classify and record capitalized costs and 
expenses. In testing 55 transactions that FHFA capitalized, our 
analysis of supporting documentation showed that 6 should have been 
expensed. Specifically, expenses related to Helpdesk contractors' 
services provided in fiscal year 2009 totaling over $16,000 were 
incorrectly capitalized, and fiscal year 2009 maintenance expenses 
related to five examiner workstations totaling nearly $88,000 were 
incorrectly capitalized. 

FHFA management told us that these errors in capitalization of these 
expenses resulted from incorrect general ledger account coding. 
Standards for Internal Control in the Federal Government provides that 
agencies are to ensure accurate recording of transactions and events. 
OFHEO's Administrative Accounting Manual, which was the manual in 
effect at the time these transactions were processed, provided that 
the senior accounting specialist was responsible for ensuring that 
property and equipment transactions were properly classified. However, 
the manual did not specify steps to be followed to ensure proper 
classification. Additionally, the property management guideline for 
OFHEO, issued in July 2007, similarly did not provide steps necessary 
to properly account for maintenance costs. 

FHFA issued a capitalization policy in May 2009, which provides that 
maintenance costs should be expensed. Additionally, under FHFA's new 
Administrative Accounting Manual, the accounting specialist was 
designated to be responsible for coordinating with BPD to ensure that 
FHFA property and equipment transactions are properly classified. We 
were also told, while not explicitly required by the Administrative 
Accounting Manual, that the Manager of Financial Management Operations 
also reviews the coding of capitalized assets to ensure accuracy and 
that FHFA has decided that capitalized transactions should receive a 
secondary review. However, the roles of the Manager of Financial 
Management Operations and the secondary reviewer are not discussed in 
the new accounting manual. 

Deficiencies in accurately classifying and recording costs can lead to 
the misstatement of assets and expenses in the financial statements. 

Recommendations: 

We recommend that you direct the Chief Financial Officer to: 

* issue a memorandum reiterating policies surrounding the accurate 
recording and review of transactions to all staff involved in the 
process and: 

* update FHFA's Administrative Accounting Manual to include the roles 
and responsibilities of the Manager of Financial Management Operations 
and secondary reviewers regarding the identifying and recording of 
capitalized transactions. 

FHFA Comments and Our Evaluation: 

FHFA agreed with this recommendation. FHFA stated that it has 
developed oversight procedures for the identification of capital 
assets, noting that these procedures reiterate policies surrounding 
the accurate recording and review of transactions to all staff 
involved in the process. In addition, FHFA stated that it has updated 
its Administrative Accounting Manual to include the roles and 
responsibilities regarding the identification and recording of 
capitalized transactions. We will evaluate the effectiveness of FHFA's 
corrective actions during our fiscal year 2010 financial audit. 

This report contains recommendations to you. The head of a federal 
agency is required by 31 U.S.C. § 720 to submit a written statement on 
actions taken on these recommendations. You should submit your 
statement to the Senate Committee on Homeland Security and 
Governmental Affairs and the House Committee on Oversight and 
Government Reform within 60 days of the date of this report. A written 
statement must also be sent to the House and Senate Committees on 
Appropriations with the agency's first request for appropriations made 
more than 60 days after the date of the report. 

This report is intended for use by FHFA management. We are sending 
copies of this report to the Chairman and Ranking Member of the Senate 
Committee on Banking, Housing, and Urban Affairs; the Chairman and 
Ranking Member of the House Committee on Financial Services; the 
Chairman of the Federal Housing Finance Oversight Board; the Secretary 
of the Treasury; the Secretary of Housing and Urban Development; the 
Chairman of the Securities and Exchange Commission; 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 [hyperlink, http://www.gao.gov]. 

We acknowledge and appreciate the cooperation and assistance provided 
by FHFA management and staff during our audit of FHFA's fiscal year 
2009 financial statements. If you have any questions about this report 
or need assistance in addressing these issues, please contact me at 
(202) 512-3406 or sebastians@gao.gov. Contact points for our Offices 
of Congressional Relations and Public Affairs may be found on the last 
page of this report. GAO staff who made major contributions to this 
report are Peggy Smith, Assistant Director, and Megan McGehrin, 
Auditor. 

Sincerely yours, 

Signed by: 

Steven J. Sebastian: 
Director Financial Management and Assurance: 

Enclosures - 2: 

[End of section] 

Enclosure I: Summary of Audit Scope and Methodology: 

While our full scope and methodology used in carrying out our fiscal 
year 2009 audit are detailed in our November 2009 report, in summary, 
to fulfill our responsibilities as auditor of the financial statements 
of the Federal Housing Finance Agency (FHFA), 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 FHFA management; 

* evaluated the overall presentation of the financial statements; 

* obtained an understanding of the entity and its operations, 
including its internal control over financial reporting; 

* considered FHFA's process for evaluating and reporting on internal 
control over financial reporting that FHFA is required to perform by 
FMFIA; 

* assessed the risk that a material misstatement exists in the 
financial statements and the risk that a material weakness exists in 
internal control over financial reporting; 

* evaluated the design and operating effectiveness of internal control 
over financial reporting based on the assessed risk; 

* tested relevant internal control over financial reporting; and: 

* tested compliance with selected provisions of the following laws and 
their related regulations: 31 U.S.C. § 3902 (a), (b), (f)--Interest 
Penalties Under the Prompt Payment Act; 31 U.S.C. § 3904--Limitations 
on Discount Payments Under the Prompt Payment Act; 5 U.S.C. § 5332 and 
5343, and 29 U.S.C. § 206--Pay and Allowance System for Civilian 
Employees; Federal Employees' Retirement System Act of 1986, as 
amended; Social Security Act of 1935, as amended; Federal Employees 
Health Benefits Act of 1959, as amended; and Housing and Economic 
Recovery Act of 2008. 

[End of Enclosure I] 

Enclosure II: Comments from the Federal Housing Finance Agency: 

Federal Housing Finance Agency: 
1700 G Street, N.W. 
Washington, D.C. 20552-0003: 
Telephone: (202) 414-3800: 
Facsimile: (202) 414-3823: 
[hyperlink, http://www.fhfa.gov] 

May 19, 2010: 

Mr. Steven J. Sebastian: 
Director: 
Financial Management and Assurance: 
Government Accountability Office: 
441 G Street, NW: 
Washington, DC 20548: 

Dear Mr. Sebastian: 

Thank you for the opportunity to review and comment on the Management 
Report: Opportunities for Improvement in FHFA's Internal Controls and 
Accounting Procedures. We appreciate GAO's efforts in completing this 
first year review of the Federal Housing Finance Agency's internal 
controls and accounting procedures. I am pleased that GAO found FHFA's 
FY 2009 financial statements were fairly presented in all material 
respects and that FHFA had effective internal control over financial 
reporting. 

During the course of the FY 2009 financial statement audit, GAO 
identified opportunities for improvements related to FHFA's internal 
controls and accounting operations. FHFA agrees that GAO's 
recommendations will strengthen our internal controls and accounting 
operations. To that end, FHFA has complied with all of GAO's 
recommendations contained in the Management Report as discussed below. 

Undelivered Orders: 

GAO Recommendations: The Chief Financial Officer should enhance FHFA's 
Administrative Accounting Manual by: 

* incorporating specific, detailed steps for the Contracting Officer's 
Technical Representative (COTR) review of contract balances, including 
the use of the open obligations report provided by Bureau of the 
Public Debt (BPD) in the COTR review process; and; 

* including specific, detailed steps on when and how to properly 
account for obligating and de-obligating contract amounts. 

FHFA Response: FHFA agrees with the recommendations. FHFA updated its 
Administrative Accounting Manual, developed and presented accrual 
training, and created Invoice and Payment Procedures. These tools 
incorporate specific, detailed steps for the COTR review of contract 
balances, including the use of the open obligations report provided by 
BPD in the COTR review process; and included specific, detailed steps 
on when and how to properly account for obligating and de-obligating 
contract amounts. 

Status: 

Completed updates to Administrative Accounting Manual (see Chapter 10) 
on May 13, 2010. 

Completed accrual training materials and presentations (see tab 15 of 
the Administrative Accounting Manual) to the COTRs on December 4, 2009 
and March 10, 2010. 

Completed the Invoice and Payment Procedures (see tab 19 of the 
Administrative Accounting Manual) on April 27, 2010. 

Documentation and Review Process for Receipt and Acceptance of Goods 
and Services: 

GAO Audit Recommendation: The Chief Financial Officer should revise 
FHFA's Administrative Accounting Manual to provide for specific, 
detailed steps for obtaining and maintaining documentation as evidence 
of receipt and acceptance. 

FHFA Response: FHFA agrees with the recommendation. FHFA updated its 
Administrative Accounting Manual, created Purchase Card Procedures, 
and developed Invoice and Payment Procedures. This guidance includes 
specific, detailed steps for obtaining and maintaining documentation 
as evidence of receipt and acceptance. 

Status: 

Completed updates to Administrative Accounting Manual (Chapter 11) on 
May 13, 2010. 

Completed the Purchase Card Procedures (tab 19 of the Administrative 
Accounting Manual) on April 21, 2010. 

Completed the Invoice and Payment Procedures (tab 19 of the 
Administrative Accounting Manual) on April 27, 2010. 

Expense Accruals: 

GAO Audit Recommendation: The Chief Financial Officer should enhance 
training materials related to accruals to include examples of expenses 
that should and should not be accrued at the end of an accounting 
period. 

FHFA Response: FHFA agrees with the recommendation. FHFA developed and 
presented training materials. These tools include examples of expenses 
that should and should not be accrued at the end of an accounting 
period. 

Status: 

Completed accrual training materials and presentations (see tab 15 of 
the Administrative Accounting Manual) to the COTRs on December 4, 2009 
and March 10, 2010. 

Classification and Recording of Costs: 

GAO Audit Recommendations: The Chief Financial Officer should: 

* issue a memorandum reiterating policies surrounding the accurate 
recording and review of transaction to all staff involved in the 
process; and; 

* update FHFA's Administrative Accounting Manual to include the roles 
and responsibilities of the Manager, Financial Management Operations 
and secondary reviewers regarding the identifying and recording of 
capitalized transactions. 

FHFA Response: FHFA developed an Oversight Procedures for the 
Identification of Capital Assets which reiterates policies surrounding 
the accurate recording and review of transaction to all staff involved 
in the process. In addition, FHFA updated the Administrative 
Accounting Manual to include the roles and responsibilities regarding 
the identification and recording of capitalized transactions. 

Status: 

Completed the Oversight Procedures for the Identification of Capital 
Assets (tab 19 of the Administrative Accounting Manual) on May 13, 2010.
Completed updates to Administrative Accounting Manual (Chapter 7) on 
May 13, 2010. 

If you have any questions, please contact Michele Horowitz, Deputy 
Chief Financial Officer at (202) 414-3816 or Debbie Olejnik, Manager 
Financial Management Operations and Systems at (202) 414-3817. 

Sincerely, 

Signed by: 

Mark Kinsey: 
Chief Financial Officer: 

[End of section] 

Footnotes: 

[1] GAO, Financial Audit: Federal Housing Finance Agency's Fiscal Year 
2009 Financial Statements, GAO-10-218 (Washington, D.C.: Nov. 16, 
2009). 

[2] The former OFHEO's mission was to promote housing and a strong 
national housing finance system by ensuring the safety and soundness 
of Fannie Mae and Freddie Mac. 

[3] The former FHFB's mission was to ensure that the federal home loan 
banks were safe and sound so they served as a reliable source of 
liquidity and funding for the nation's housing finance and community 
investment needs. 

[4] Certain employees and activities of the Department of Housing and 
Urban Development's Government Sponsored Enterprises (GSE) Oversight 
Team, related to the regulation of the mission of Fannie Mae and 
Freddie Mac, were also transferred to FHFA. 

[5] We will issue a separate report on issues we identified concerning 
FHFA's information security controls, including details on information 
security deficiencies in the agency's system of internal control over 
financial reporting. 

[6] A significant deficiency is a control deficiency, or combination 
of deficiencies, in internal control that is less severe than a 
material weakness, yet important enough to merit attention by those 
charged with governance. A material weakness is a deficiency, or a 
combination of deficiencies, in internal control such that there is a 
reasonable possibility that a material misstatement of the entity's 
financial statements will not be prevented, or detected and corrected 
on a timely basis. 

[7] Undelivered orders are the value of goods and services ordered and 
obligated that have not been received. This amount includes any orders 
for which advance payment has been made but for which delivery or 
performance has not yet occurred. 

[8] An obligation is a definite commitment that creates a legal 
liability of the government for the payment of goods and services 
ordered or received. A commitment is an administrative reservation of 
allotted funds, or of other funds, in anticipation of their obligation. 

[9] Deobligation refers to an agency's cancellation or downward 
adjustment of previously incurred obligations. 

[10] FHFA's beginning balances for undelivered orders consisted of the 
fiscal year 2008 ending balances of OFHEO and FHFB. Because FHFA's 
fiscal year 2009 opening balances were rolled forward from OFHEO's and 
FHFB's fiscal year 2008 ending balances, it was important that we 
obtain sufficient evidence regarding the accuracy of OFHEO's and 
FHFB's fiscal year 2008 ending balances. As a result, we applied 
additional audit procedures on these balances. 

[11] GAO, Standards for Internal Control in the Federal Government, 
GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999). 

[12] On July 1, 2009, FHFA officially merged its accounting operations 
into one accounting system, which involved outsourcing most of its 
accounting services to BPD, who serves as FHFA's accounting services 
provider. As such, FHFA utilizes BPD's Financial Management System 
(FMS), which includes (1) Oracle Federal Financials (core accounting 
system); (2) PRISM (procurement), GovTrip (travel), and Citidirect 
(charge card) feeder systems; (3) Discoverer reporting system; and (4) 
a manual property and equipment inventory tracking system. FHFA is 
ultimately responsible for overseeing all work performed by the BPD. 

[13] The COTR performs critical acquisition and technical functions 
and contracting officers rely on them to ensure that contracts are 
managed properly. 

[14] Non-payroll expense transactions consist of program expenses 
other than payroll, such as rent, travel, consulting, and other 
contracted services, postage, printing, and non-capitalized equipment. 

[15] This policy was carried forward and included in FHFA's new 
Administrative Accounting Manual. 

[16] FHFA used the IPAC system whenever possible for intragovernmental 
disbursements and collections. The IPAC Approval Form is used by the 
COTR to ensure that billing is accurate. 

[17] The 27 transactions for which exceptions were noted in the OFHEO 
sample included both under-accruals and over-accruals. The absolute 
value of the audit difference was $417,597. 

[18] We selected all disbursements for the first quarter of fiscal 
year 2009 over $10,000, which resulted in our testing 91 percent of 
OFHEO's disbursements and 86 percent of FHFB's disbursements. 

[End of section] 

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