B-242762, Sep 12, 1991, Office of General Counsel

B-242762: Sep 12, 1991

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Requested that we review a list of laws that you believe could have a material impact on the FSLIC Resolution Fund's (FRF) 1990 financial statements or contain specific reporting requirements. You also asked us to provide additional laws or regulations that could have a material impact on the financial statements or that merit your attention. Government Auditing Standards at G-8 (1988 Revision). previously expressed the view that GAO's obligation to Congress and others to report instances of noncompliance should not be governed solely by the quantitative relationship of the noncompliance to an agency's financial statements because Congress and the agencies have an interest in compliance with laws and regulations that goes beyond the amount of dollars involved. /1/ Therefore.

B-242762, Sep 12, 1991, Office of General Counsel

DIGEST: Memorandum to AFMD discusses criteria for determining materiality for financial statement audits and identifies laws and regulations material to financial statements of FSLIC Resolution Fund.

Laws and Regulations Impacting the FSLIC Resolution Fund's Financial Condition (Job Code 917240; B-242762):

Your memorandum of January 15, 1991, requested that we review a list of laws that you believe could have a material impact on the FSLIC Resolution Fund's (FRF) 1990 financial statements or contain specific reporting requirements. You also asked us to provide additional laws or regulations that could have a material impact on the financial statements or that merit your attention. Finally, you asked that we indicate the sections of FIRREA that amended provisions of the Competitive Equality Banking Act of 1987 (CEBA) concerning FSLIC capital stock and capital certificates purchased by the Financing Corporation (FICO).

Questions of materiality must be resolved in light of surrounding circumstances and involve both quantitative and qualitative considerations. Government Auditing Standards at G-8 (1988 Revision). previously expressed the view that GAO's obligation to Congress and others to report instances of noncompliance should not be governed solely by the quantitative relationship of the noncompliance to an agency's financial statements because Congress and the agencies have an interest in compliance with laws and regulations that goes beyond the amount of dollars involved. /1/ Therefore, a qualitative judgment also should be made as to whether certain laws and regulations are of sufficient importance to Congress that GAO should test for and report instances of noncompliance. Qualitative factors include the possible cumulative effect of individually immaterial instances of noncompliance, the objective of the items involved, the use of the information being reported, and the public perception and political sensitivity of the areas under audit. /2/ Making these qualitative judgments helps to ensure that we fulfill our obligation to Congress, which extends beyond reporting violations of laws and regulations that merely affect dollar amounts.

You cite several provisions of law, including sections 215, 217(1) and (4), 220(a)-(d), 501(b)(6), and 512 of FIRREA, that you believe to be material to FRF's financial statements. With the exception of those provisions discussed below, we agree that the listed provisions are material, some from a quantitative perspective and others from a qualitative perspective. However, your references to FIRREA and your question regarding the pertinence of the Federal Home Loan Bank Act and the Federal Deposit Insurance Act to FRF present us with the opportunity to first discuss the importance of distinguishing between an amending statute and an amended statute.

When a statute amends existing law either by changing provisions or by adding new provisions, the amended statute rather than the amending statute represents the relevant law to the entity under audit. In many cases, the amending statute alone will reveal little about the law's requirements. In other cases, a new requirement imposed by the amending statute must be considered together with a preexisting requirement in the amended statute that survived intact. It is therefore important to recognize the distinction between FIRREA and statutes amended by FIRREA since cites to FIRREA alone, or to any other amending statute, may be misleading or of little use. The provisions of FIRREA included in your list amended the Federal Deposit Insurance Act or the Federal Home Loan Bank Act. Therefore, provisions of these statutes, as amended by FIRREA, are the laws material to FRF.

We recognize that certain amending statutes gain prominence which makes them convenient to use in conversation and, to a lesser extent, in general report discussion. However, in developing an inventory for compliance testing and certainly in discussing a legal issue in a report, proper and meaningful legal citations should be used. The attachment to this memorandum provides the proper citations for the provisions on your list, including citations to FIRREA, the amended statute, and the United States Code.

Citations to FIRREA

You cite sections 220(a), (b), (c) and (d) of FIRREA. However, section 220 contains only two subsections, (a) and (b). Section 220(a) amended section 17 of the Federal Deposit Insurance Act by adding new sections 17(a)-(d) (12 U.S.C. Sec. 1827(a)-(d) (1989 Supp.)) which contain specific reporting requirements concerning FRF. We presume you intended to refer to sections 17(a)-(d) of the Federal Deposit Insurance Act, as added by section 220(a) of FIRREA. /3/ New sections 17(a), (b), and (c) of the Federal Deposit Insurance Act require FDIC to submit reports to Congress, Treasury, and OMB respectively and are not material since FDIC's failure to comply would impact neither the financial statements nor financial condition of FRF. Further, given the lapse of time between the due dates for section 17 reports and our report that would disclose FDIC's noncompliance, and the unlikelihood that Congress would be unaware of FDIC's failure to issue a required report, we doubt that these provisions could be material, even from a qualitative perspective. In the past, we have not insisted that similar reporting requirements applicable to entities under audit be included on lists of laws and regulations for compliance testing. See, e.g., B-240108.8, July 12, 1991. Nevertheless, you have included these reporting requirements on your list, and we of course do not object to your testing compliance and reporting instances of noncompliance in the Report on Compliance with Laws and Regulations. For reporting purposes, any instances of noncompliance with these requirements could be labeled as compliance matters that "merit attention" rather than those "that could have materially affected the financial statements." See B-242241, May 16, 1991; B-235577.3, Oct. 23, 1989.

New section 17(d) of the Federal Deposit Insurance Act requires that the Comptroller General annually audit FRF's financial transactions in accordance with generally accepted government auditing standards. Like new sections 17(a)-(c), new section 17(d) is not material to FRF's financial statements. In addition, it imposes no legal requirement with which FDIC could comply. Accordingly, it should be deleted from your list. See B-237840.3, supra.

Your list also includes section 512 of FIRREA. This citation illustrates our point about the usefulness of citing an amending law only. Section 512 is comprised of 17 paragraphs which amend different portions of section 21 of the Federal Home Loan Bank Act (12 U.S.C. Sec. 1441). Other than sections 21(e)(2) and 21(f)(3), which we discuss at the end of this memo, none of the provisions of section 21, as amended by section 512 of FIRREA, appear relevant to a financial audit of FRF.

Other Laws Cited

You cite Public Law 100-496, which you refer to as the "Prompt Pay Act." /4/ We agree with FDIC's position that the Prompt Payment Act should have no material impact upon FRF. /5/ However, a decision by FDIC management to consider controls over compliance with the Prompt Payment Act an indication of the agency's overall financial management controls would provide a basis for considering it material from a qualitative perspective and testing compliance during the course of an audit. /6/ In any event, even if you do not test compliance during the audit, you should bring to our attention any suspected violations of the Prompt Payment Act that you detect.

You also cite Public Law 101-507, the Department of Veterans Affairs, Housing and Urban Development and Independent Agencies Appropriation for fiscal year 1991. Title IV of Public Law 101-507, 104 Stat. 1351, 1383 (1990), appropriates $22,000,000,000 for FRF for fiscal year 1991 to permit the payment of basic obligations. We agree with you that this provision is material to FRF's financial statements for 1990 since the last three months of that period were in fiscal year 1991. However, we point out that the funds appropriated by Public Law 101-507 are only available for obligations of FRF to the extent that other funds available for that purpose are insufficient. Therefore, the funds appropriated by this provision may not have affected FRF activities during 1990.

Other Matters

Regarding your specific question about provisions relating to FICO, provisions of the Federal Home Loan Bank Act were amended by section 512 of FIRREA to address the funding of FRF through FICO borrowings. /7/ We are aware of no other provisions of FIRREA explicitly addressing the redeemability or availability of capital stock or capital certificates purchased by FICO.

Section 512 amended section 21(e)(2)(A) of the Federal Home Loan Bank Act (12 U.S.C. Sec. 1441(e)(2)(A)) to require FICO, after August 9, 1989, to transfer to FRF the net proceeds of any FICO obligations used to purchase FSLIC capital certificates or capital stock and to use the net proceeds from FICO obligations issued after August 9, 1989, to purchase FRF capital certificates. See also 12 U.S.C. Sec. 1441(g)(1). In addition, as amended by section 512, section 21(f)(3) (12 U.S.C. Sec. 1441(f)(3)) provides that if funds available from FICO assessments on insured thrifts are insufficient to cover interest payments, issuance costs and custodial fees on FICO obligations, the remaining amounts needed must be transferred by FDIC from receivership proceeds of FRF that are not required by the Funding Corporation Principle Fund of the Resolution Funding Corporation.

/1/ B-242241, May 16, 1991 (memo to Greg Holloway, AFMD, on the financial statement audit of the Office of Thrift Supervision).

/2/ Government Auditing Standards at pp. 3-13 to 3-14. See also B-237840.3, May 10, 1991 (memo to Charles Fox, AFMD, on the financial statement audit of the Bank Insurance Fund).

/3/ Your reference illustrates the importance ofdistinguishing between FIRREA and the amended law and the inaccuracy resulting from references to FIRREA alone. Your reference to section 501(b)(6) of FIRREA presents a similar illustration. The reference actually should be to that portion of section 501(a) of FIRREA which added new section 21A(b)(6) to the Federal Home Loan Bank Act (12 U.S.C. Sec. 1441a(b)(6)).

/4/ The Prompt Payment Act, 31 U.S.C. Sec. 3901-3906 (1988), was originally enacted as Pub.L. No. 97-177, 96 Stat. 85 (1982), and was amended by the Prompt Payment Act Amendments of 1988, Pub.L. No. 100 496, 102 Stat. 2455 (1988).

/5/ See Memo to Cheryl Eberhart, AFMD, from Saul Schwartz, FDIC, dated February 21, 1991.

/6/ Section 9106(a) of title 31, United States Code, amended by section 306(a) of the Chief Financial Officers Act of 1990, Pub.L. No. 101-576, 104 Stat. 2838, 2854 (1990), requires FDIC to submit an annual management report to the Congress. The report is to include a statement on FDIC's internal accounting and administrative control systems and other information as necessary to inform the Congress about its operations and financial condition. The internal control evaluation FDIC conducts to support the required report would provide you with an indication of the importance FDIC attaches to controls over compliance with the Prompt Payment Act.

/7/ FICO was originally established under Title III of the Competitive Equality Banking Act of 1987 (CEBA), Pub.L. No. 100-86, 101 Stat. 552, 585 -604 (1987), as a mixed-ownership government corporation whose sole purpose was to function as a financing vehicle for FSLIC, which, under FIRREA, was succeeded by FRF.