Credit Reform:

Review of OMB's Credit Subsidy Model

AIMD-97-145: Published: Aug 29, 1997. Publicly Released: Aug 29, 1997.

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Pursuant to a legislative requirement, GAO reviewed the Office of Management and Budget's (OMB) Credit Management Subsidy Model (CSM), focusing on whether the CSM: (1) conforms with relevant provisions of applicable legislation and accounting standards; (2) provides reliable results; and (3) is maintained and operated under a system of adequate controls. An additional objective was to identify supplemental audit steps that auditors should perform to ensure that federal credit agencies are using the CSM properly. GAO contracted with the independent public accounting firm of Ernst & Young LLP to evaluate OMB's written representations (assertions) about the CSM's capabilities and opine on whether they are fairly stated in all material respects.

GAO noted that: (1) OMB's assertions on the CSM thoroughly explain the CSM's capabilities, limitations, and user agency responsibilities; (2) Ernst & Young concluded that OMB's assertions on the CSM are fairly stated in all material aspects and recommended several steps OMB should take to improve the reliability of CSM results and controls surrounding it; (3) based on GAO's review of Ernst & Young's work, GAO generally concurs with its conclusion and recommendations; (4) the Federal Credit Reform Act of 1990 and related federal accounting standards define the cost (subsidy) of a direct loan or loan guarantee as the estimated long-term cost to the government on a net present value basis at the time when a loan is disbursed; (5) the operation of the CSM conforms with this definition in that the model computes a subsidy cost by calculating the estimated net present value, at the time of loan disbursement, of agency-generated cash flows over the life of the loan; (6) OMB's assertions state that because of several limitations in the CSM's design, the subsidy cost calculated by the CSM may differ from a theoretically precise result; (7) for all but one of the limitations, credit agencies and their auditors can take steps to minimize or eliminate the impact of the limitations on the subsidy cost calculation; (8) the impact on the subsidy cost calculation of the limitation involving the use of nonstandard equations for discounting certain projected cash flows, however, is more difficult to evaluate and cannot be minimized by credit agencies and their auditors; (9) several weaknesses were identified relating to controls surrounding the development, maintenance, and use of the CSM; (10) GAO believes that if OMB implements a validation, verification, and testing approach (VV&T) or similar process, improves documentation, and provides guidance to credit agencies on controlling access to the CSM, the basic control weaknesses identified by Ernst & Young will be addressed; (11) OMB's assertions also state that user agencies are responsible for properly using the CSM; (12) consequently, when obtaining assurance that CSM subsidy cost calculations are correct, auditors will need to ensure that agencies are properly using the CSM; and (13) to help auditors obtain this assurance, GAO identified, with assistance from OMB staff, a series of supplemental audit procedures for auditors to follow when auditing federal credit agencies' financial statements and subsidy cost calculations.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: OMB has acted on this recommendation. In its "Management Assertions" covering the methods used by the revised model to calculate subsidy cost, OMB includes information on the responsibilities of federal agencies using the credit subsidy model. The responsibilities specifically include ensuring that access is appropriately controlled, ensuring that the model has not been corrupted, and providing an appropriate level of computer security. OMB's "Management Assertions" have been attested to by an independent public accounting firm. OMB's "Management Assertions" and the related attestation opinion has been made available to federal agencies using the revised credit subsidy model.

    Recommendation: Based on GAO's review of OMB's assertions and Ernst & Young's report, the Director, OMB, should ensure that guidance is provided to user agencies to establish logical access controls surrounding use of the CSM.

    Agency Affected: Executive Office of the President: Office of Management and Budget

  2. Status: Closed - Implemented

    Comments: OMB has revised its credit subsidy model and implemented the recommendations.

    Recommendation: The Director, OMB, should ensure that the following steps are taken in developing the next revision to the CSM: (1) revise the discounting equations in the CSM to follow standard finance theory; (2) strengthen controls over the CSM by implementing a VV&T process; (3) improve the CSM documentation to correct for the mistakes and omissions noted in OMB's assertions and Ernst & Young's report; and (4) enhance the CSM printout with additional data so that users and auditors are able to specifically identify which data were used by the CSM in the subsidy calculations.

    Agency Affected: Executive Office of the President: Office of Management and Budget

 

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