Financial Audit:

Federal Deposit Insurance Corporation's 1993 and 1992 Financial Statements

AIMD-94-135: Published: Jun 24, 1994. Publicly Released: Jun 24, 1994.

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GAO reviewed the financial statements of the Bank Insurance Fund, the Savings Association Insurance Fund, and the Federal Savings and Loan Insurance Corporation (FSLIC) Resolution Fund for the years ended December 31, 1993 and 1992.

GAO found that: (1) the financial statements of the Bank Insurance Fund, FSLIC Resolution Fund, and the Savings Association Insurance Fund presented fairly their financial position and their results of operations and cash flows for the years ended December 31, 1993 and 1992; (2) the Federal Deposit Insurance Corporation's (FDIC) internal controls provided reasonable assurance that assets were safeguarded against loss from unauthorized use, transactions were executed in accordance with management authority, and transactions were properly recorded, processed, and summarized in accordance with generally accepted accounting principles; (3) FDIC internal controls were effective in ensuring compliance with selected laws and regulations; (4) although material weaknesses existed in the FDIC asset valuation process, these weaknesses did not have a material effect on the funds' 1993 financial statements; and (5) there were no instances of noncompliance with laws and regulations.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: During 1994, DOF and DAS developed a comprehensive program to correct the internal control weaknesses GAO identified with regard to this contracted servicing entity. As part of this program, DOF and DAS worked with the servicer to strengthen procedures over cash receipts to ensure greater control and timely processing of collections. While GAO's 1994 audit continued to find similar weaknesses, GAO's 1995 audit found that receipt processing controls had been effectively strengthened.

    Recommendation: To address the weaknesses identified during 1993 in the internal controls of one contracted servicer, the Acting Chairman, FDIC, should direct the heads of the Division of Depositor and Asset Services and the Division of Finance to require the servicer to reconcile checks received to checks deposited each day, and reconcile the final month-end balances in the FDIC unapplied collections account to the servicer's subsidiary records and clear these amounts within 30 days after month-end.

    Agency Affected: Federal Deposit Insurance Corporation

  2. Status: Closed - Implemented

    Comments: During 1994, DOF and DAS developed a comprehensive program to correct the internal control weaknesses GAO identified with regard to this contracted servicing entity. As part of this program, DOF and DAS worked with the servicer to convert the servicer's accounting system and records to the receivership basis of accounting.

    Recommendation: To address the weaknesses identified during 1993 in the internal controls of one contracted servicer, the Acting Chairman, FDIC, should direct the heads of the Division of Depositor and Asset Services and the Division of Finance to require the servicer to maintain a general ledger and subsidiary records consistent with receivership accounting, and require FDIC oversight personnel to verify the accuracy of the activity and balances on these systems.

    Agency Affected: Federal Deposit Insurance Corporation

  3. Status: Closed - Implemented

    Comments: During 1994, the Division of Finance (DOF) and the Division of Depositor and Asset Services (DAS) developed a comprehensive program to correct the internal control weaknesses GAO identified with regard to this contracted servicing entity. Specifically, DOF and DAS required the servicer to implement an accounting system to allow reconciliation of servicer asset balances with FDIC's system. Also, the servicer's internal auditors and FDIC verified the accuracy of the asset pool balances and activity reported by this servicer.

    Recommendation: To address the weaknesses identified during 1993 in the internal controls of one contracted servicer, the Acting Chairman, FDIC, should direct the heads of the Division of Depositor and Asset Services and the Division of Finance to promptly reconcile servicer asset balances each month and resolve and document reconciling items within 30 days of the reconciliation date.

    Agency Affected: Federal Deposit Insurance Corporation

  4. Status: Closed - Implemented

    Comments: During 1993, FDIC's Division of Finance (DOF) hired additional personnel and developed procedures to address these reconciliation weaknesses and has successfully reconciled serviced asset pool records with FDIC's system. Additionally, in 1995, FDIC effectively implemented procedures to routinely verify asset servicers' activity reports back to the servicers' detail accounting records.

    Recommendation: To address the weaknesses a identified during 1993 in the oversight of asset servicing entities, the Acting Chairman, FDIC, should direct the heads of the Division of Depositor and Assets Services and Division of Finance to verify and document the accuracy and completeness of the balances and activity reported to FDIC by contracted asset servicers back to the servicers' detail records.

    Agency Affected: Federal Deposit Insurance Corporation

  5. Status: Closed - Implemented

    Comments: During 1995, FDIC completed its development of updated recovery percentages for assets whose Gross Cash Recovery (GCR) estimates are derived by formulas. These revised recovery percentages were developed for each asset type as defined in FDIC's Liquidation Asset Management Information System (LAMIS) using historical results, and are updated quarterly. GAO's 1995 audit found that these recovery percentages are well-supported and accurately applied.

    Recommendation: To address the weaknesses identified during 1993 regarding inconsistent and unsupported asset recovery estimation methodologies, the Acting Chairman, FDIC, should direct the heads of the Division of Depositor and Asset Services and the Division of Finance to analyze and document the basis for the formulas used to calculate recoveries for assets with book values less than $250,000. In analyzing these formulas, FDIC should consider the use of appraised values to calculate recovery estimates for collateralized assets even if the asset's book value is under $250,000.

    Agency Affected: Federal Deposit Insurance Corporation

  6. Status: Closed - Not Implemented

    Comments: FDIC revised the Division of Depositor and Asset Services (DAS) Credit Manual (now Asset Disposition Manual) in August 1995. While the revised Manual provided clearer guidance for estimating asset recovery values, GAO's 1995 audit found that the revised manual was not consistently adhered to by FDIC field office personnel in estimating recoveries on assets in liquidation. During 1996, FDIC significantly altered its process for estimating asset recoveries. The new process employs a modeling approach for valuing a statistical sample of assets and uses the results to project recovery rates to the entire population of assets. Consequently, FDIC has abandoned its use of the Credit Manual and, given the drastic alteration to the asset valuation methodology, the recommendation is no longer applicable.

    Recommendation: To address the weaknesses identified during 1993 regarding inconsistent and unsupported asset recovery estimation methodologies, the Acting Chairman, FDIC, should direct the heads of the Division of Depositor and Asset Services and the Division of Finance to revise the Credit Manual to provide more detailed guidance on recovery estimation methods to be used, and ensure that this expanded guidance is strictly adhered to by both consolidated offices and contracted asset services' personnel.

    Agency Affected: Federal Deposit Insurance Corporation

  7. Status: Closed - Implemented

    Comments: FDIC implemented new time and attendance reporting procedures in 1996. During GAO's 1996 financial statement audits it found that these new procedures effectively addressed the long-standing internal control problems that GAO had been reporting regarding FDIC's time and attendance process. Because time and attendance reporting is FDIC's primary means for allocating expenses between the Bank Insurance Fund, the Savings Association Insurance Fund, and the FSLIC Resolution Fund, FDIC's actions have reduced the risk that payroll and other expenditures could be charged to the wrong fund. FDIC's actions in addressing this weakness should help ensure accurate expense allocation and accounting for the three funds administered by FDIC.

    Recommendation: To address weaknesses identified in the FDIC time and attendance reporting process, the Acting Chairman, FDIC, should direct the FDIC division and office heads to enforce the revised policies and procedures in FDIC Time and Attendance Reporting Directive and related guidance to ensure that employee time charges are valid, payroll expenses are charged to the correct fund, and timekeeping and data input functions are separated.

    Agency Affected: Federal Deposit Insurance Corporation

 

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