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Control Over Financial Reporting for the Troubled Asset Relief 
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GAO-10-743R: 

United States Government Accountability Office: 
Washington, DC 20548: 

June 30, 2010: 

The Honorable Herbert M. Allison, Jr.
Assistant Secretary for Financial Stability:
Office of Financial Stability:
Department of the Treasury: 

Subject: Management Report: Improvements Are Needed in Internal 
Control Over Financial Reporting for the Troubled Asset Relief Program: 

Dear Mr. Allison: 

The Emergency Economic Stabilization Act of 2008 (EESA)[Footnote 1] 
requires that we annually audit the financial statements[Footnote 2] 
of the Troubled Asset Relief Program (TARP) which is implemented by 
the Office of Financial Stability (OFS).[Footnote 3] On December 9, 
2009, we issued our audit report[Footnote 4] including (1) an 
unqualified opinion on OFS's financial statements for TARP as of and 
for the period ended September 30, 2009, and (2) an opinion that OFS 
maintained effective internal control over financial reporting as of 
September 30, 2009. We also reported that our tests of OFS's 
compliance with selected provisions of laws and regulations for the 
period ended September 30, 2009, disclosed no instances of 
noncompliance. 

Our December 9, 2009, audit report concluded that although certain 
internal controls could be improved, OFS maintained, in all material 
respects, effective internal control over financial reporting as of 
September 30, 2009, that provided reasonable assurance that 
misstatements, losses, or noncompliance material in relation to the 
financial statements would be prevented or detected and corrected on a 
timely basis. Our audit report also identified two significant 
deficiencies in OFS's internal control over financial reporting. 
[Footnote 5] 

This report presents (1) more details concerning underlying specific 
control deficiencies that contributed to the two significant 
deficiencies identified in our audit report, (2) other less 
significant control deficiencies that we identified during our audit, 
and (3) related recommendations for corrective actions. While the 
deficiencies we identified are not considered material weaknesses, 
they warrant management's attention and action. The recommendations 
presented in this report are in addition to those we have made as part 
of the series of reports issued on our ongoing oversight of TARP. 
[Footnote 6] 

Results in Brief: 

We identified two significant deficiencies in OFS's internal control 
over financial reporting concerning (1) accounting and financial 
reporting processes and (2) verification procedures over the data used 
for asset valuations. 

The significant deficiency concerning accounting and financial 
reporting processes was the combination of several underlying specific 
control deficiencies. Specifically, (1) OFS did not effectively 
implement its review and approval process for preparing its fiscal 
year 2009 financial statements and related disclosures for TARP; (2) 
OFS had not finalized[Footnote 7] its written procedures related to 
its processes for accounting for certain program transactions, 
preparing its September 30, 2009, financial statements, and its 
oversight and monitoring of financial-related services provided to OFS 
by asset managers and certain financial agents; and (3) OFS did not 
have proper segregation of duties over a significant accounting 
database it uses in valuing its assets in that the same individual was 
responsible for performing both the data entry and the reconciliation 
of the data output. However, OFS had developed and implemented other 
controls over TARP transactions and activities that reduced the risk 
of material misstatements resulting from these deficiencies. 

With regard to the second significant deficiency, OFS did not 
effectively implement its verification procedures for certain 
assumptions and data that were input into the economic and financial 
credit subsidy models used for the valuation of TARP direct loans, 
equity investments, and asset guarantees. OFS reduced the risk of 
misstatements resulting from this data verification deficiency by 
performing procedures to assess the reasonableness of the model 
outputs, including comparison of the asset valuations calculated by 
the model with independently performed valuations. 

In addition to the two significant deficiencies, we identified other 
less significant control deficiencies related to (1) tracking executed 
agreements, (2) recording warrant transactions, and (3) 
reconciliations of disbursements to and refunds from the TARP 
custodian. 

We are making 17 recommendations related to OFS's significant 
deficiencies and 3 recommendations related to the other less 
significant control deficiencies. 

In commenting on a draft of this report, the Assistant Secretary for 
Financial Stability stated that OFS concurred with the recommendations 
in our draft report. The Assistant Secretary also stated that OFS 
began taking actions related to these recommendations in January 2010 
following the release of our audit report and expects to have 
implemented corrective actions for all recommendations by September 
30, 2010. 

Scope and Methodology: 

As part of our audit of OFS's fiscal year 2009 financial statements 
for TARP, we evaluated the design and operating effectiveness of OFS's 
internal control over financial reporting. We tested relevant internal 
controls over financial reporting, including those designed to provide 
reasonable assurance that (1) transactions are properly recorded, 
processed, and summarized to permit the preparation of the financial 
statements in conformity with U.S. generally accepted accounting 
principles (GAAP), and assets are safeguarded against loss from 
unauthorized acquisition, use, or disposition; and (2) transactions 
are executed in accordance with the laws governing the use of budget 
authority and other laws and regulations that could have a direct and 
material effect on the financial statements. 

We did not evaluate all internal controls relevant to operating 
objectives as broadly established under 31 U.S.C. § 3512(c), (d), 
commonly known as the Federal Managers' Financial Integrity Act, such 
as those controls relevant to preparing statistical reports and 
ensuring efficient operations. We limited our internal control testing 
to controls over financial reporting. Because of inherent limitations, 
internal control may not prevent or detect and correct misstatements 
due to error or fraud, losses, or noncompliance. Additional details on 
our audit methodology can be found in our December 2009 audit report. 
[Footnote 8] 

We performed our audit of OFS's fiscal year 2009 financial statements 
for TARP in accordance with U.S. generally accepted government 
auditing standards. We believe that our audit provided a reasonable 
basis for our conclusions in this report. 

We requested comments on a draft of this report from the Assistant 
Secretary for Financial Stability. In a letter dated June 17, 2010, 
OFS commented on our draft report. OFS's comments are reprinted in 
enclosure I. 

Background: 

Since its inception on October 3, 2008, OFS has implemented numerous 
initiatives under TARP that were designed to help ensure overall 
stability and liquidity of the financial system and help preserve 
homeownership. During fiscal year 2009, OFS primarily made equity 
investments in and direct loans to hundreds of entities, including 
financial institutions and automotive companies; however, most of the 
value of its investments and loans was concentrated in a limited 
number of high-dollar transactions. Specifically, during fiscal year 
2009, OFS disbursed about $364 billion, of which $318 billion (or 87 
percent) was disbursed to 20 TARP participants, such as American 
International Group, Inc.; General Motors; Bank of America; and 
Citigroup. In addition, while OFS had started to implement its Home 
Affordable Modification Program (HAMP) during fiscal year 2009, the 
amounts disbursed were less than $1 million through September 30, 2009. 

During fiscal year 2009, OFS made significant progress in building a 
financial reporting structure for TARP, including developing an 
internal control system over TARP activities and transactions and 
addressing key accounting and financial reporting issues necessary to 
enable it to prepare financial statements for TARP and to receive an 
audit opinion on those statements, for the period ended September 30, 
2009. However, OFS's financial reporting structure continued to evolve 
throughout the year as new TARP programs were implemented,[Footnote 9] 
which posed a challenge to OFS's ability to establish a comprehensive 
system of internal control while simultaneously reacting to market 
events and evolving TARP initiatives and responsibilities. 

Significant Deficiencies: 

The following sections present additional information concerning the 
specific underlying control deficiencies that contributed to the two 
significant deficiencies we identified related to (1) accounting and 
financial reporting processes and (2) verification procedures over the 
data used for asset valuations,[Footnote 10] along with our related 
recommendations for corrective actions. 

Accounting and Financial Reporting Processes: 

While OFS had developed and implemented controls over TARP 
transactions and activities, we identified several specific control 
deficiencies that collectively represented a significant deficiency in 
OFS's internal control over its accounting and financial reporting 
processes. Specifically, OFS did not effectively implement its review 
and approval process for preparing its financial statements and 
related disclosures for TARP. In addition, OFS did not finalize its 
written procedures for accounting for certain program transactions, 
preparing its September 30, 2009, financial statements, and overseeing 
and monitoring financial-related services asset managers and financial 
agents provided to OFS. Further, OFS did not have proper segregation 
of duties over a significant accounting database it used in valuing 
its assets in that the same individual was responsible for performing 
both the data entry and the reconciliation of the data output. 
However, OFS had developed and implemented other controls over TARP 
transactions and activities that reduced the risk of material 
misstatements resulting from these deficiencies. 

Financial Statements Review and Approval Process: 

OFS did not effectively implement its review and approval process for 
preparing its fiscal year 2009 financial statements and related 
disclosures for TARP. While OFS had draft procedures for the 
preparation of year-end financial statements and performed year-end 
review and approval processes, we identified incorrect amounts and 
inaccurate, inconsistent, and incomplete disclosures in OFS's draft 
financial statements, footnotes, and Management's Discussion and 
Analysis (MD&A) for TARP that were significant, but not material, and 
that were not detected by OFS. Office of Management and Budget (OMB) 
Circular No. A-136, Financial Reporting Requirements,[Footnote 11] 
requires agencies to ensure that information in the financial 
statements is presented in accordance with GAAP for federal entities. 
Without an effectively implemented review and approval process for 
preparing financial statements and related disclosures, an agency is 
at risk of presenting information that is inaccurate, incomplete, or 
not in conformity with GAAP. 

Recommendation for Executive Action: 

We recommend that the Assistant Secretary for Financial Stability 
direct the Chief Financial Officer (CFO) to establish a mechanism for 
the effective implementation of the review and approval process for 
preparing the year-end financial statements and related disclosures, 
including MD&A, for TARP. 

Procedures for Accounting and Financial Reporting: 

OFS had developed and implemented written procedures related to many 
of its accounting and financial reporting processes, such as 
disbursement and receipt processing and asset valuation. However, OFS 
had not finalized other procedures related to its processes for 
accounting for certain program transactions, preparing its September 
30, 2009, financial statements, and its oversight and monitoring of 
financial-related services provided to OFS by asset managers and 
certain financial agents. As detailed below, procedures were not 
finalized either because they were in draft form, did not address 
certain specific issues, or had not yet been developed. 

Standards for Internal Control in the Federal Government[Footnote 12] 
provides that agencies should establish internal controls for all 
transactions and other significant events and that these transactions 
should be clearly documented, and the documentation should be readily 
available for examination. It further provides that documentation 
should appear in management directives, administrative policies, or 
operating manuals. The 10 accounting and financial reporting areas in 
which OFS did not fully comply with these provisions, along with 
certain other applicable guidance, relate to: 

* modifications of direct loans, equity investments, and asset 
guarantees; 

* subsequent events; 

* contractor's economic and financial model review findings; 

* economic and financial model error and warning messages; 

* economic and financial model assumptions derived from informed 
opinion; 

* interest, dividends, and distributions receivable; 

* preparing financial statements; 

* asset manager data used in the asset valuation process; 

* oversight of HAMP financial agents; and, 

* estimating the HAMP liability. 

* Modifications of direct loans, equity investments, and asset 
guarantees. Although OFS performed steps to identify and evaluate 
modifications (government actions, such as a change in contract terms, 
that alter the cost of a program),[Footnote 13] OFS did not have 
specific written procedures necessary to help ensure complete, 
accurate, and consistent identification and evaluation of 
modifications of direct loans, equity investments, and asset 
guarantees. Personnel from OFS's Office of Credit Modeling and 
Analysis (OCMA) conducted informal discussions with personnel from 
OFS's Office of the Chief Investment Officer (OCIO) to obtain 
information on asset-related events that could be modifications, such 
as amendments to contracts. While OCMA relied on OCIO to help identify 
potential modifications, OFS lacked specific written procedures to 
define OCIO and OCMA roles and responsibilities and criteria for OCIO 
and OCMA to use to help ensure comprehensive, accurate, and consistent 
identification and evaluation of such events. In addition, OFS lacked 
specific written procedures requiring documentation of management 
review and approval, and OMB approval, of the modification subsidy 
cost estimate. However, OFS did maintain documentation of the nature 
of the modifications, the cost of the modifications, and OMB's 
approval. 

The Federal Accounting Standards Advisory Board's (FASAB), Federal 
Financial Accounting and Auditing Technical Release 6 (Technical 
Release 6),[Footnote 14] calls for management to ensure that 
documentation is available for modifications, including the review and 
approval process of the modification subsidy cost estimate and the 
sign-off procedure within the agency. The lack of written procedures 
for the identification and evaluation of modifications increases the 
risk that all modifications are not timely identified, evaluated, and 
described in the financial statements and related disclosures. 

Recommendation for Executive Action: 

We recommend that the Assistant Secretary for Financial Stability 
direct the CFO to develop and implement written procedures for 
identifying and evaluating modifications of direct loans, equity 
investments, and asset guarantees, to include: specific roles and 
responsibilities, criteria to identify modifications, documentation of 
management review and approval, and: 

documentation of OMB approval of the modification subsidy cost 
estimate. 

* Subsequent events. OFS did not have written procedures to identify 
and evaluate subsequent events[Footnote 15] that could require 
revisions to its asset valuations or additional disclosures in the 
notes to its financial statements. After OFS's year-end, but before 
OFS issued its financial statements, we identified certain subsequent 
events that could have affected asset valuations and financial 
statement disclosures. At our request, OFS developed and implemented 
draft procedures to identify and evaluate the effect on OFS's asset 
valuation of the failure, such as a bankruptcy, of a TARP participant 
subsequent to year-end. As a result of implementing these procedures, 
OFS revised certain asset valuations and added additional disclosures 
to its financial statements.[Footnote 16] However, a lack of finalized 
procedures for consideration of subsequent events in the asset 
valuation process increases OFS's risk of not consistently following 
procedures from period to period and risk of misstatements and 
insufficient disclosures. 

Recommendation for Executive Action: 

We recommend that the Assistant Secretary for Financial Stability 
direct the CFO to finalize and implement OFS's draft written 
procedures for identifying and evaluating any subsequent events that 
could have an effect on asset valuations and related disclosures. 

* Contractor's economic and financial model review findings. OFS did 
not have written procedures for formally tracking the resolution of 
findings from independent verification and validation reviews of its 
economic and financial models used for valuing TARP direct loans, 
equity investments, and asset guarantees. OFS hired a contractor to 
perform an independent verification and validation of the technical 
accuracy of OFS's economic and financial models. The contractor 
provided OFS reports that summarized its review procedures and 
findings, including potential errors that could affect the models' 
calculations. Although OFS provided information on actions taken to 
address the contractor's findings, OFS did not have documentation 
linking the actions to the findings and showing the resolution of each 
of the contractor's findings. Consequently, OFS faces an increased 
risk that model errors were not appropriately resolved. Unresolved 
errors in the economic and financial models increase the risk that the 
direct loans, equity investments, and asset guarantees may be 
misstated in the financial statements. 

Recommendation for Executive Action: 

We recommend that the Assistant Secretary for Financial Stability 
direct the CFO to develop and implement written procedures for 
tracking the resolution of independent verification and validation 
findings related to OFS's economic and financial models used for 
valuing TARP direct loans, equity investments, and asset guarantees. 

* Economic and financial model error and warning messages. OFS's 
written asset valuation procedures did not include specific steps for 
the identification, resolution, and documentation of error and warning 
messages produced by the economic and financial models used for 
valuing TARP direct loans, equity investments, and asset guarantees. 
The error and warning messages produced by the economic and financial 
models alert OFS personnel of potential issues with the model 
calculations or data. While OFS provided reasonable explanations 
concerning the resolution of the economic and financial model error 
and warning messages, OFS did not document these resolutions. Any 
unresolved errors in the economic and financial models increase the 
risk that the valuation of direct loans, equity investments, and asset 
guarantees may be misstated in the financial statements. 

Recommendation for Executive Action: 

We recommend that the Assistant Secretary for Financial Stability 
direct the CFO to update existing procedures to include procedures for 
identifying and resolving economic and financial model error and 
warning messages, including requirements to maintain appropriate 
supporting documentation regarding the resolution of such instances. 

* Economic and financial model assumptions derived from informed 
opinion. OFS's written asset valuation procedures did not include 
requirements for documenting the use of assumptions derived from 
informed opinion[Footnote 17] and OFS did not sufficiently document 
its basis for certain assumptions derived from informed opinion. As 
part of OFS's valuation of TARP direct loans, equity investments, and 
asset guarantees and consistent with FASAB guidance, OFS used informed 
opinion to make certain assumptions for use in its economic and 
financial models. Although OFS's asset valuation procedures provided 
that documentation must discuss all significant assumptions and why 
assumptions were selected, OFS's asset valuation procedures did not 
specifically require documentation for the use of assumptions derived 
from informed opinion. In addition, although OFS documented the 
assumptions it used in its economic and financial models and met with 
senior officials to review the assumptions and obtain the officials' 
approval, OFS did not sufficiently document the basis for certain 
assumptions derived from informed opinion. For example, in its 
valuation of direct loans, OFS used informed opinion as a basis for 
its assumptions of recoveries on defaulted loans. Although OFS 
documented its recovery assumption values, it did not sufficiently 
document the basis for the opinion on the assumption values. In 
another instance, OFS used informed opinion as a basis for its 
assumption related to expected prepayments from TARP participants. 
However, OFS did not adequately document the basis for the informed 
opinion. In both cases, while the opinions were not adequately 
documented, OFS was able to sufficiently explain the basis for its 
opinions. 

FASAB Technical Release 6 states that documentation be provided to 
support the assumptions used by the agency in the subsidy calculations 
to facilitate the agency's review of the assumptions. The 
documentation should be complete such that a knowledgeable independent 
person could perform the same steps and replicate the same results 
with little or no outside explanation or assistance. In addition, 
FASAB Technical Release 6 calls for the basis of the stated opinion to 
be articulated and documented in detail when informed opinion is used. 
The absence of sufficient supporting documentation of the basis for 
certain economic and financial model assumptions derived from informed 
opinion may impair management's ability to effectively oversee and 
approve assumptions, which increases the risk of misstatements due to 
valuation errors. 

Recommendation for Executive Action: 

We recommend that the Assistant Secretary for Financial Stability 
direct the CFO to update OFS's asset valuation procedures to include 
specific requirements for documenting the basis of economic and 
financial model assumption values derived from informed opinion 
consistent with FASAB Technical Release 6. 

* Interest, dividends, and distributions receivable. OFS did not have 
written procedures on how income from direct loans and trust preferred 
securities should be presented on the Statement of Net Cost, and on 
how accrued interest receivable, dividends declared but unpaid, and 
distributions receivable should be disclosed in notes to OFS's 
financial statements for TARP.[Footnote 18] OFS also did not have 
written procedures for the identification of dividends declared but 
unpaid as of September 30, 2009. 

As of September 30, 2009, OFS had interest receivable relating to 
certain direct loans and considered the future cash flows relating to 
expected interest payments in valuing its direct loans.[Footnote 19] 
OFS evaluated how to present and disclose certain interest-related 
accounts. However, OFS did not have written procedures on how to 
present interest income on direct loans in the Statement of Net Cost 
and disclose any accrued interest receivable in the notes to its 
financial statements. According to OMB Circular A-136, management's 
method for accruing interest revenue and recording interest receivable 
should be disclosed. Also, this circular calls for interest receivable 
to be reported as a component of direct loans in the notes to the 
financial statements. OFS did not disclose any accrued interest 
because it determined that the accrued interest receivable as of 
September 30, 2009, was not significant. 

Similarly, OFS considered future cash flows relating to expected 
dividends from equity securities and expected distributions receivable 
from trust preferred securities in valuing such investments. FASAB 
standards for credit reform accounting do not contain guidance as to 
the presentation in the Statement of Net Cost and disclosure in the 
notes to the financial statements of dividends declared but unpaid and 
distributions receivable from trust preferred securities. In the 
absence of any federal guidance, OFS disclosed in the notes to its 
financial statements that it presents in its Statement of Net Cost 
dividend revenue when dividends are declared. OFS had not, however, 
developed written procedures regarding presentation of income from 
trust preferred securities in the Statement of Net Cost. Further, 
although OFS took specific steps to determine whether there were any 
dividends declared but unpaid as of September 30, 2009, OFS had not 
developed written procedures for (1) determining whether such items 
existed as of September 30, 2009, or (2) disclosing in the notes to 
the financial statements dividends declared but unpaid and, if 
applicable, distributions receivable.[Footnote 20] 

Without written procedures regarding presentation and disclosure of 
the activity and balances discussed above, OFS faces an increased risk 
that the financial statements will contain misstatements or will lack 
adequate disclosures. 

Recommendations for Executive Action: 

We recommend that the Assistant Secretary for Financial Stability 
direct the CFO to develop and implement written procedures for: 

* presenting income from direct loans and trust preferred securities 
in the Statement of Net Cost, 

* identifying any year-end dividends declared but unpaid to OFS from 
TARP participants, and: 

* disclosing accrued interest receivable, dividends declared but 
unpaid, and, if applicable, distributions receivable from trust 
preferred securities in OFS's financial statements for TARP. 

* Preparing financial statements. OFS had not finalized its draft 
procedures for the preparation of the year-end financial statements or 
included in its draft procedures all key processes used in the 
preparation of the year-end financial statements. While OFS performed 
year-end financial statement processes, OFS's written procedures 
governing those processes were in varying states of completion. For 
example, the processes OFS used in preparing its financial statements, 
recording adjusting journal entries after the close of the general 
ledger, reconciling general ledger balances, and identifying any 
commitments and contingencies were not included in OFS's draft 
procedures for financial reporting. OMB Circular No. A-136 provides 
that each agency CFO should establish procedures guiding agency fiscal 
and management personnel on how to prepare annual financial 
statements. Without finalized financial reporting processes, OFS faces 
increased risk that the financial statements will contain 
misstatements or inadequate disclosures. 

Recommendation for Executive Action: 

We recommend that the Assistant Secretary for Financial Stability 
direct the CFO to finalize and implement procedures for the 
preparation of the year-end financial statements to include all key 
preparation processes. 

* Asset manager data used in the asset valuation process. While OFS 
carried out oversight and monitoring activities, OFS did not have 
written procedures detailing how it is to oversee and determine the 
reasonableness of the data provided by asset managers and used for 
OFS's internally developed TARP asset valuations. OFS contracted 
external asset managers to provide, among other things, independently 
performed asset valuations and credit scores[Footnote 21] for each 
institution. OFS performed specific steps to help ensure consistency 
in the methodology applied by the asset managers in preparing their 
asset valuations. OFS also analyzed the aggregate valuations and 
credit score data provided by the asset managers and explained how 
information was used by the asset managers. However, OFS did not 
provide documentation of oversight steps performed to determine that 
the information provided by the asset managers was reasonable before 
using the data in its valuation process. In addition, in connection 
with OFS's use of the asset manager valuations to assess the 
reasonableness of its internal asset valuations of preferred share 
equity investments, OFS investigated differences between OFS's 
valuations and those of the asset managers that exceeded a certain 
threshold. However, OFS did not document the rationale for the 
threshold selected. Without written procedures for overseeing and 
assuring the reasonableness of asset manager-provided data, the risk 
that misstatements due to valuation errors may not be prevented or 
detected and corrected on a timely basis is increased. 

Recommendations for Executive Action: 

We recommend that the Assistant Secretary for Financial Stability 
direct the CFO: 

* in coordination with the Chief Investment Officer, to develop and 
implement, as part of OFS's oversight and monitoring activities, 
written procedures detailing steps to effectively oversee and 
determine the reasonableness of data provided by external asset 
managers, prior to the use of such data, and: 

* to develop and implement written procedures to document the 
rationale for established thresholds used in determining whether to 
investigate differences between the asset manager valuations and OFS's 
internally developed asset valuations. 

* Oversight of HAMP financial agents. OFS did not have written 
procedures for the oversight and monitoring of its financial agents'-- 
Federal National Mortgage Association (Fannie Mae) and Federal Home 
Loan Mortgage Corporation (Freddie Mac)--administrative and compliance 
activities, including internal controls over existence and 
completeness of loan data used in determining the HAMP liability. OFS 
contracted with Fannie Mae to act as the program administrator and 
record keeper of loan data for HAMP and with Freddie Mac to perform 
compliance activities related to HAMP servicers.[Footnote 22]Without 
clearly documented guidance regarding the specific procedures OFS 
should follow to effectively oversee and monitor Fannie Mae and 
Freddie Mac, OFS faces an increased risk that the financial 
information related to HAMP may not be complete or correct, and OFS 
management's ability to identify key risks in this area may also be 
impaired. While OFS disbursed less than $1 million during fiscal year 
2009 for HAMP, the importance of having written procedures in these 
areas will become more significant as HAMP activity increases. 

Recommendation for Executive Action: 

We recommend that the Assistant Secretary for Financial Stability 
direct the CFO to develop and implement written procedures detailing 
steps to be performed in overseeing and monitoring OFS's financial 
agents, Fannie Mae and Freddie Mac, including internal controls over 
the existence and completeness of loan data used in the determination 
of the HAMP liability. 

* Estimating the HAMP liability. OFS did not have written procedures 
for estimating the HAMP liability. The HAMP liability represents the 
liability for payments to servicers and investors and principal 
balance reduction payments for the benefit of borrowers under HAMP. 
OFS developed a position paper setting out an approach for estimating 
the HAMP liability in accordance with SFFAS No. 5, Accounting for 
Liabilities in the Federal Government. However, OFS did not document 
the specific procedures it used in estimating the HAMP liability. 
Without such written procedures, there is an increased risk that 
liability amounts will be calculated incorrectly. As of September 30, 
2009, the HAMP liability was less than $2 million; however, the 
importance of having written procedures in this area will become more 
significant as HAMP activity increases. 

Recommendation for Executive Action: 

We recommend that the Assistant Secretary for Financial Stability 
direct the CFO to develop written procedures for periodically 
estimating the HAMP liability. 

Segregation of Duties: 

OFS did not have proper segregation of duties over a significant 
accounting database it uses in valuing certain of its assets. OFS 
maintained an accounting database of information that it used for 
multiple purposes, including as a source for certain data that were 
input into economic and financial models used for the valuation of 
TARP direct loans, equity investments, and asset guarantees. OFS 
recorded in the accounting database certain institution and 
transaction-specific information, such as the name of the institution, 
the dollar value of a transaction, and the type of financial 
instrument[Footnote 23] involved in the transaction. However, the same 
individual was responsible for performing both the data entry and the 
reconciliation of the data output. 

Specifically, the same OFS staff member performed the incompatible 
duties of recording information into the accounting database, 
comparing information between the accounting database and reports from 
the TARP custodian,[Footnote 24] recording changes in the accounting 
database, and reconciling information between the accounting database 
and the OFS general ledger. 

Consistent with Standards for Internal Control in the Federal 
Government, key duties and responsibilities are to be divided or 
segregated among different individuals to reduce the risk of error or 
fraud. This should include separating the responsibilities for 
authorizing transactions, processing and recording them, and reviewing 
the transactions. No one individual should control all key aspects of 
a transaction or event. Without adequate segregation of duties over 
the accounting database, OFS faces an increased risk that error or 
fraud related to asset valuation information may occur and not be 
detected and corrected on a timely basis. 

Recommendation for Executive Action: 

We recommend that the Assistant Secretary for Financial Stability 
direct the CFO to develop and implement procedures to segregate the 
responsibilities for recording, approving, and reconciling of 
information maintained in the accounting database used by OFS in the 
asset valuation process. 

Verification Procedures over the Data Used for Asset Valuations: 

OFS did not effectively implement verification procedures for certain 
assumptions and data that were input into the economic and financial 
credit subsidy models used for the valuation of TARP direct loans, 
equity investments,and asset guarantees. OFS accounts for TARP direct 
loans, equity investments, and asset guarantees consistent with the 
concepts in SFFAS No. 2, Accounting for Direct Loans and Loan 
Guarantees. SFFAS No. 2 requires agencies to value certain assets at 
the net present value of estimated future cash flows. Further, 
Standards for Internal Control in the Federal Government provides that 
control activities help to ensure that all transactions are completely 
and accurately recorded. To estimate cash flows for TARP, OFS 
developed economic and financial models that use data files, which 
include information related to the actual terms of the instruments and 
the financial condition of the institutions, as well as assumptions 
about future performance. OFS used automated data inputs and a 
significant number of manual inputs to create these data files. The 
use of manual inputs poses an increased inherent risk of error, and 
therefore effective review procedures are needed to reduce such risk. 

OFS's established verification procedures related to the valuation of 
TARP direct loans, equity investments, and asset guarantees called for 
OFS analysts to verify and document that the data files accurately 
reflect the data used in the valuation process. However, these 
procedures lacked specificity with respect to the steps to follow in 
the review of manual inputs that are used in the economic and 
financial credit subsidy models. In our audit, we identified data 
input errors to the estimation models related to interest and dividend 
rates, maturity dates, other instrument-specific terms, and 
assumptions related to future performance. Many of the significant 
errors we identified related to manual inputs. Significant errors that 
we identified were corrected and amounts were properly reflected in 
the September 30, 2009, financial statements. OFS did perform 
procedures to assess the reasonableness of the model outputs, 
including comparison of the asset valuations calculated by the model 
with independently performed valuations. These procedures reduced the 
risk that management would not detect misstatements resulting from the 
data input errors. 

However, the lack of effective verification of data inputs used in the 
economic and financial credit subsidy models increases the risk that 
the asset valuations and related subsidy cost are not completely and 
accurately recorded and reliably reported in the financial statements. 

Recommendations for Executive Action: 

We recommend that the Assistant Secretary for Financial Stability 
direct the CFO to: 

* enhance and implement specific written procedures to verify data 
inputs, including manual inputs, used in the economic and financial 
models for the valuation of TARP direct loans, equity investments, and 
asset guarantees, and help ensure that such verification is clearly 
documented, and: 

* assess manual inputs used in the economic and financial models for 
the valuation of TARP direct loans, equity investments, and asset 
guarantees to determine the feasibility of reducing the number of 
manual inputs. 

Other Control Deficiencies: 

In addition to the two significant deficiencies, we identified other 
control deficiencies that were not considered material weaknesses or 
significant deficiencies, but nevertheless warrant OFS management's 
attention and action. Specifically, as discussed in the following 
sections, we identified deficiencies concerning OFS controls over: 

* tracking executed agreements, 

* recording warrant transactions, and: 

* reconciliations of disbursements to and refunds from the TARP 
custodian. 

Tracking Executed Agreements: 

OFS lacked a mechanism for tracking the location of TARP executed 
agreements including securities purchase agreements for TARP 
investments. OFS's contract with the Bank of New York Mellon (BNYM) 
established that BNYM is to retain executed agreements and related 
legal documentation at a secure facility. According to OFS officials, 
after agreements were executed, OFS's legal agents sent executed 
agreements and related legal documentation to the BNYM repository, and 
BNYM was then responsible for reviewing, sorting, and securely storing 
the documents. However, OFS did not have a mechanism for tracking the 
location of TARP executed agreements. Our tests revealed that OFS 
could not readily locate three agreements. However, in following up on 
our tests, OFS ultimately found that the agreements in question were 
held by OFS's legal agents. 

Standards for Internal Control in the Federal Government provides that 
an agency is to establish physical control to secure and safeguard 
vulnerable assets. In addition, access to resources and records should 
be limited to authorized individuals, and accountability for their 
custody and use should be assigned and maintained. Without a mechanism 
for reliably tracking the location of TARP executed agreements and 
related legal documentation, the records are at risk of loss. 

Recommendation for Executive Action: 

We recommend that the Assistant Secretary for Financial Stability 
direct the appropriate personnel to develop, document, and implement a 
mechanism to track the location of executed agreements. 

Recording Warrant Transactions: 

OFS did not have written procedures for recording warrant adjustments 
[Footnote 25] and did not properly record certain warrant transactions 
in the accounting database used for valuing TARP assets. 

The warrant terms stipulate that if a TARP participant declares and 
pays a stock dividend,[Footnote 26] the number of shares underlying 
the warrant and the price per share is to be adjusted so that Treasury 
is entitled to purchase the number of shares of common stock that it 
would have been entitled to receive at the exercise price had Treasury 
exercised the warrant immediately prior to the effective date[Footnote 
27] of the adjustment. However, for the purpose of recording warrant 
adjustments related to stock dividends in the accounting database, OFS 
incorrectly used the date the shares were distributed to common 
shareholders, rather than the effective date of the warrant 
adjustment. We also found that OFS did not properly record in the 
accounting database certain other warrant adjustments resulting from 
events that occurred prior to September 30, 2009. Generally, if a TARP 
participant in the Capital Purchase Program issued qualified stock 
prior to December 31, 2009, the number of shares underlying the 
warrant was to be reduced by half. However, we found that OFS did not 
always properly record in the accounting database the transactions to 
reduce these warrants by half. These errors in OFS's warrant records, 
although not significant, nonetheless resulted in misstatements in 
OFS's financial statements for TARP. 

Standards for Internal Control in the Federal Government provides that 
agencies should have controls in place to provide reasonable assurance 
that financial transactions are recorded completely and accurately and 
that internal control be clearly documented in management directives, 
administrative policies, or operating manuals. Without effective 
procedures to reasonably ensure that warrant adjustments are properly 
recorded, OFS faces an increased risk of undetected misstatements of 
the related TARP assets. 

Recommendation for Executive Action: 

We recommend that the Assistant Secretary for Financial Stability 
direct the CFO to develop and implement written procedures specifying 
detailed steps to be followed to reasonably ensure that warrant 
adjustments are properly recorded in the accounting database OFS uses 
for valuing TARP assets. 

Reconciliations of Disbursements to and Refunds from the TARP 
Custodian: 

OFS did not always document reconciliations of key documents for 
disbursements to and refunds from BNYM, the TARP custodian, and did 
not have an effective monitoring process to identify instances where 
such reconciliations were not documented. As part of OFS's 
disbursement process, BNYM disbursed funds received from OFS to 
individual TARP participants. OFS's written procedures require OFS 
personnel to reconcile the resulting key documents, such as the 
disbursement authorization, payment system voucher, and the BNYM 
confirmation notice of funds received. Although OFS documented its 
reconciliations in certain instances and maintained records of the key 
documents used in the disbursement process, OFS did not always 
document such reconciliations as required. OFS disburses funds to BNYM 
based on its expectation of the transactions with TARP participants 
scheduled to occur on a particular day. However, in some instances, 
certain transactions are not completed on the scheduled day and BNYM 
refunds the corresponding amounts to OFS. OFS also did not always 
document reconciliations related to refunds from BNYM as required. 

Standards for Internal Control in the Federal Government specifies 
that control activities include approvals, authorizations, 
verifications, reconciliations, and the creation and maintenance of 
related records that provide evidence of the execution of these 
activities as well as appropriate documentation. Although our tests 
did not identify any errors in amounts disbursed or refunded, by not 
always following established procedures for the documentation of 
disbursement-and refund-related reconciliations, OFS faces an 
increased risk that it will not timely detect any incorrect 
disbursements to or refunds from BNYM. 

Recommendation for Executive Action: 

We recommend that the Assistant Secretary for Financial Stability 
direct the CFO to establish procedures to effectively monitor the 
documentation of reconciliations of key documents related to 
disbursements to and refunds from BNYM as prescribed in OFS's written 
procedures. 

Agency Comments: 

In commenting on a draft of this report, the Assistant Secretary for 
Financial Stability stated that OFS concurred with the recommendations 
in our draft report. The Assistant Secretary also stated that OFS 
began taking actions related to these recommendations in January 2010 
following the release of our audit report and expects to have 
implemented corrective actions for all recommendations by September 
30, 2010. We plan to follow up to determine the status of corrective 
actions taken for these matters during our fiscal year 2010 audit. 

This report is intended for use by OFS management. We are sending 
copies of this report to interested congressional committees and 
members, the Secretary of the Treasury, Inspector General of the 
Department of the Treasury, Special Inspector General for TARP, 
Congressional Oversight Panel, Financial Stability Oversight Board, 
Director of the Office of Management and Budget, and others. In 
addition, this report is 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 OFS management and staff during our audit of OFS's fiscal year 2009 
financial statements for TARP. If you have questions about this 
report, please contact me at (202) 512-3406 or engelg@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 listed in enclosure II. 

Sincerely yours, 

Signed by: 

Gary T. Engel:
Director:
Financial Management and Assurance: 

Enclosures - 2: 

[End of section] 

Enclosure I: Comments from the Office of Financial Stability: 

Department Of The Treasury: 
Assistant Secretary: 
Washington, D.C. 20220: 

June 17, 2010: 

Mr. Gary T. Engel: 
Director, Financial Management and Assurance: 
U.S. Government Accountability Office: 

Dear Mr. Engel: 

We have received a copy of your draft report entitled Management 
Report: Improvements Are Needed in Internal Control Over Financial 
Reporting for the Troubled Asset Relief Program (GAO-10-743R). 

We are pleased that you noted in your report that the Office of 
Financial Stability received unqualified opinions on both the OFS FY 
2009 financial statements and internal control over financial 
reporting and had no identified instances of noncompliance with 
selected provisions of laws and regulations. 

We have reviewed the detailed recommendations that you have provided 
regarding the two significant deficiencies you identified during your 
FY 2009 audit and regarding the other less significant control 
deficiencies. We concur with your draft recommendations. 

Through coordination with your staff and our understanding of the 
Matters for Further Consideration that we responded to during the FY 
2009 audit, we began taking action on the recommendations in January 
2010 immediately after your final audit report was released. We have 
made the necessary improvements to our processes and procedures. We 
expect to implement the majority of other necessary changes by June 
30, 2010 and any remaining changes by September 30, 2010. 

Sincerely, 

Signed by: 
Herbert M. Allison, Jr. 
Assistant Secretary: 
Office of Financial Stability: 

[End of section] 

Enclosure II: Staff Acknowledgments: 

The following individuals made major contributions to this report: 
Marcia L. Carlsen, Lynda E. Downing, and Joseph P. O’Neill, Assistant 
Directors; Janaya D. Davis-Lewis, Vincent Gomes, Diane M. Koch, Steven 
M. Koons, Mary V. Osorno, Grant L. Simmons, Anne Y. Sit-Williams, and 
Chris G. Yfantis. 

[End of section] 

Footnotes: 

[1] Pub. L. No. 110-343, Div. A, 122 Stat. 3765 (Oct. 3, 2008), 
codified in part, as amended, at 12 U.S.C. §§ 5201-5261. 

[2] Section 116(b) of EESA, 12 U.S.C. § 5226(b), requires that the 
Department of the Treasury (Treasury) annually prepare and submit to 
Congress and the public audited fiscal year financial statements for 
TARP that are prepared in accordance with generally accepted 
accounting principles. Section 116(b) further requires that GAO audit 
TARP's financial statements annually in accordance with generally 
accepted auditing standards. 

[3] Section 101 of EESA, 12 U.S.C. § 5211, established OFS within 
Treasury to implement TARP. 

[4] GAO, Financial Audit: Office of Financial Stability (Troubled 
Asset Relief Program) Fiscal Year 2009 Financial Statements, 
[hyperlink, http://www.gao.gov/products/GAO-10-301] (Washington, D.C.: 
Dec. 9, 2009). 

[5] A significant deficiency is a 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 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. A deficiency in internal control exists when the design 
or operation of a control does not allow management or employees, in 
the normal course of performing their assigned functions, to prevent, 
or detect and correct misstatements on a timely basis. 

[6] Section 116(a) of EESA, 12 U.S.C. § 5226(a), requires GAO to 
report at least every 60 days on TARP activities and performance. 
Products and recommendations related to GAO's oversight of TARP are 
available on GAO's Web site at [hyperlink, http://www.gao.gov]. 

[7] Procedures that had not been finalized were either in draft form, 
did not address certain specific issues, or had not yet been developed. 

[8] [hyperlink, http://www.gao.gov/products/GAO-10-301]. 

[9] For example, in October 2008, OFS established the Capital Purchase 
Program and purchased $115 billion in preferred stock and warrants; in 
December 2008, Treasury announced and began implementing the 
Automotive Industry Financing Program; in March 2009, Treasury and the 
Federal Reserve announced the launch of the Term Asset-backed 
Securities Loan Facility; in August 2009, OFS began to make 
disbursements for the Home Affordable Modification Program; and, also 
in September 2009, OFS signed commitments to invest in limited 
partnerships under the Public-Private Investment Program. 

[10] OFS accounts for its equity investments at fair value, defined as 
the estimated amount of proceeds OFS would receive if the equity 
investments were sold to a market participant. OFS derives fair value 
measurements by applying the provisions of Statement of Federal 
Financial Accounting Standards (SFFAS) No. 2, Accounting for Direct 
Loans and Loan Guarantees, to account for TARP direct loans, equity 
investments, and asset guarantees. SFFAS No. 2 requires the 
measurement of certain assets at the net present value of the 
estimated future cash flows. OFS used economic and financial models to 
estimate future cash flows for TARP. The economic and financial models 
reflect specific terms and conditions of the program and financial 
instruments, technical assumptions regarding the underlying assets, 
risk of loss, and other factors, as appropriate. 

[11] OMB Circular No. A-136, Financial Reporting Requirements (Revised 
June 2009), establishes a central point of reference for federal 
financial reporting guidance for executive branch agencies required to 
submit audited financial statements. 

[12] GAO, Standards for Internal Control in the Federal Government, 
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1] 
(Washington, D.C.: November 1999), contains the internal control 
standards to be followed by executive agencies in establishing and 
maintaining systems of internal control as required by 31 U.S.C. § 
3512 (c), (d) (commonly referred to as the Federal Managers' Financial 
Integrity Act of 1982). 

[13] According to OMB Circular No. A-11 §185, Preparation, Submission, 
and Execution of the Budget, (Revised November 2009), the term 
"modification" means a federal government action, including new 
legislation or administrative action that directly or indirectly 
alters the estimated subsidy cost and the present value of the asset. 
There are situations where it is not clear whether a government action 
constitutes a modification. These situations should be judged on a 
case-by-case basis by OMB in consultation with the agency involved. 
Agencies must have budget authority available to cover the cost of a 
modification that increases the subsidy cost before the modification 
takes place. 

[14] Federal Accounting Standards Advisory Board, Federal Financial 
Accounting and Auditing Technical Release 6: Preparing Estimates for 
Direct Loan and Loan Guarantee Subsidies under the Federal Credit 
Reform Act - Amendments to Technical Release No. 3 Preparing and 
Auditing Direct Loan and Loan Guarantee Subsidies under the Federal 
Credit Reform Act (January 2004). 

[15] According to SFFAS No. 5, Accounting for Liabilities of the 
Federal Government, subsequent events are events or transactions that 
occur subsequent to the balance sheet date but prior to the issuance 
of the financial statements and auditor's report that have a material 
effect on the financial statements and therefore require adjustment or 
disclosure in the statements. 

[16] According to AU Section 560.07, Subsequent Events (American 
Institute of Certified Public Accountants Professional Standards), 
subsequent events affecting the realization of assets such as 
receivables and inventories or the settlement of estimated liabilities 
ordinarily will require adjustment of the financial statements because 
such events typically represent the culmination of conditions that 
existed over a relatively long period of time. 

[17] Informed opinion refers to the judgment of agency staff or others 
who make subsidy estimates based on their programmatic knowledge, 
experience, or both. Informed opinion is considered an acceptable 
approach under Technical Release 6 when adequate historical data does 
not exist. 

[18] Under multiple TARP programs, OFS held direct loans, equity 
investments, and trust preferred securities. Direct loans accrue 
interest and equity securities generally entitle OFS to receive 
periodic dividends if and when dividends are declared by the 
corresponding issuer of the securities. Trust preferred securities 
generally entitle OFS to receive certain distributions consistent with 
the terms of the financial instruments held by the corresponding trust. 

[19] OFS applies the provisions of Statement of Federal Financial 
Accounting Standards (SFFAS) No. 2, Accounting for Direct Loans and 
Loan Guarantees, to account for TARP direct loans, equity investments, 
and asset guarantees. SFFAS No. 2 requires the measurement of certain 
assets at the net present value of the estimated future cash flows. 
OFS includes future dividends and interest in its cash flow estimates. 

[20] OFS performed procedures and concluded that there were no 
significant dividends declared but unpaid as of September 30, 2009. 

[21] The asset managers' credit scores are based on assessments of the 
capital adequacy, asset quality, earnings, and liquidity of each 
financial institution and represent a forward-looking risk of failure, 
which correlates to the likelihood of repayment of TARP funds. 

[22] Under HAMP, Treasury enters into contracts with servicers-- 
financial institutions that commit to modify mortgages and to receive 
and make payments in accordance with specified criteria. 

[23] Financial instruments include preferred stock, common stock, 
warrants for the purchase of common stock, and subordinated debentures. 

[24] Bank of New York Mellon (BNYM) functions as the TARP custodian 
by, among other things, taking possession of stock certificates, 
storing agreements, and generating reports related to TARP 
transactions. 

[25] A warrant is an option to buy shares of common stock or preferred 
stock at a predetermined price (i.e., exercise price) on or before a 
specified date. A warrant adjustment is a change to the exercise 
price, the number of shares underlying the warrant, or both because of 
various events such as stock splits and stock dividends. 

[26] A stock dividend is the payment of a dividend on an entity's 
shares of common stock in the form of additional shares of common 
stock rather than in cash. 

[27] The effective date would be the ex-dividend date, which is the 
date on which a transaction, such as a stock dividend, is effective 
for the party holding the security on that date. 

[End of section] 

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