Federal Asset Disposition Association:
No Economic Basis for Reported Fee Income Under 1988 Letter Agreement
AFMD-91-15, Jul 29, 1991
GAO reviewed a 1988 letter agreement for asset management services between the Federal Asset Disposition Association (FADA) and the Federal Savings and Loan Insurance Corporation (FSLIC), focusing on: (1) the justification for FSLIC paying FADA for services performed under the letter agreement; and (2) whether FADA fairly presented the FSLIC payments in its December 31, 1988, financial statements.
GAO found that: (1) except for advisory services, the services FADA performed did not justify FSLIC paying any additional asset management fee under the letter agreement; (2) the letter agreement served primarily as a means for FSLIC to transfer $13.2 million to FADA to make up for losses FADA incurred, rather than to provide payment for additional services; (3) FADA accounted for substantially all of the additional fees it received under the letter agreement as income in its financial statements for the year ended December 31, 1988; (4) although its accounting procedure followed the legal requirements of the letter agreement, the FADA financial statement of $3.3-million net income did not fairly present its actual $9.9-million loss; (5) an independent auditor failed to follow general accounting principles that require the evaluation of the economic substance of related party transactions; and (6) FADA 1988 financial statements were misleading and did not reflect the economic substance of all of the funds FADA received under the 1988 letter agreement.