Management Report:

Improvements Are Needed in Internal Control Over Financial Reporting for the Troubled Asset Relief Program

GAO-11-434R: Published: Apr 18, 2011. Publicly Released: Apr 18, 2011.

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The Emergency Economic Stabilization Act of 2008 (EESA) requires that we annually audit the financial statements of the Troubled Asset Relief Program (TARP), which is implemented by the Office of Financial Stability (OFS). On November 15, 2010, we issued our audit report including (1) an unqualified opinion on OFS's financial statements for TARP as of and for the fiscal years ended September 30, 2010, and 2009, and (2) an opinion that OFS maintained effective internal control over financial reporting as of September 30, 2010. We also reported that our tests of OFS's compliance with selected provisions of laws and regulations for the fiscal year ended September 30, 2010, disclosed no instances of noncompliance. Our November 2010 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, 2010, 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 a significant deficiency in OFS's internal control over its accounting and financial processes. This report presents (1) more detailed information concerning underlying specific control deficiencies that contributed to the significant deficiency identified in our audit report, along with related recommendations for corrective actions; (2) other less significant control deficiencies that we identified during our audit, along with related recommendations for corrective actions; and (3) the status, as of November 5, 2010, of corrective actions taken by OFS to address the 20 recommendations that were detailed in our June 2010 management report. While the deficiencies we identified are not considered material weaknesses, they nonetheless warrant management's attention and action. The 9 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.

During fiscal year 2010, OFS addressed one of the two significant deficiencies that we reported in December 2009 on the results of our audit for fiscal year 2009, and made progress in addressing the other. Specifically, OFS sufficiently addressed the issues regarding OFS's verification procedures over the data used for asset valuations such that we no longer consider this area to be a significant deficiency as of September 30, 2010. OFS completed corrective action on both of the related recommendations during fiscal year 2010. In addition, OFS addressed many of the issues related to the other significant deficiency we reported for fiscal year 2009 concerning its accounting and financial reporting processes. OFS completed corrective action on 12 of the 15 recommendations regarding this significant deficiency during fiscal year 2010. However, the remaining 3 uncorrected control deficiencies along with other control deficiencies that we identified in this area in fiscal year 2010 collectively represented a continuing significant deficiency in OFS's internal control over its accounting and financial reporting processes. Specifically, we found: (1) While improvements were noted in OFS's review and approval process for preparing its financial statements, notes, and management's discussion and analysis (MD&A) for TARP from what we had found for fiscal year 2009, we continued to identify incorrect amounts and inconsistent disclosures in OFS's draft financial statements, notes, and MD&A that were significant, but not material, and that were not detected by OFS. (2) For fiscal year 2009, we reported that OFS had not finalized its procedures related to its process 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. During fiscal year 2010, we found that most of these procedures were finalized. However, we identified instances where OFS's procedures were not always followed or effectively implemented. (3) OFS's documentation was incomplete for certain areas of its asset valuation process. Specifically, some valuation methodology changes and the basis for certain assumptions derived from informed opinion that were used in valuing TARP's assets were not included in its written documentation. After we notified OFS that the documentation was incomplete, it was able to provide adequate additional information about its asset valuation process. (4) OFS did not have adequate procedures to determine whether the tool and related guidance it used properly calculated valuations for certain TARP assets with projected future disbursements. OFS's use of the tool and related guidance resulted in errors in the valuation of such assets. OFS had other controls over TARP transactions and activities that reduced the risk of misstatements in its financial statements resulting from these deficiencies. For significant errors and issues that were identified, OFS revised the financial statements, notes, and MD&A, as appropriate. In addition to the significant deficiency, we identified other less significant control deficiencies related to (1) documenting and communicating financial-related housing program issues, and (2) calculating the housing program accrual. During fiscal year 2010, OFS addressed two of the three less significant control deficiencies that we reported in our June 2010 management report. We are making 7 new recommendations related to OFS's significant deficiency and 2 related to the other less significant control deficiencies.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: The Acting Assistant Secretary for Financial Stability should direct the Chief Financial Officer (CFO) to establish a mechanism for ensuring that OFS personnel follow prescribed policies and procedures for (1) documenting execution of its A-123 process and thereby ensuring consistency among its A-123 documentation, existing policies and procedures, and actual practices executed by OFS personnel; and (2) performing testing on the operating effectiveness of OFS's key internal controls in accordance with its A-123-related policies and procedures.

    Agency Affected: Department of the Treasury: Office of Financial Stability

    Status: Closed - Implemented

    Comments: In connection with our audit of the fiscal year 2011 financial statements of the Troubled Asset Relief Program (TARP) we noted the Office of Financial Stability's (OFS) established a mechanism for ensuring that OFS personnel follow prescribed policies and procedures for (1) documenting execution of its A-123 process and thereby ensuring consistency among its A-123 documentation, existing policies and procedures, and actual practices executed by OFS personnel; and (2) performing testing on the operating effectiveness of OFS's key internal controls in accordance with its A-123-related policies and procedures.

    Recommendation: The Acting Assistant Secretary for Financial Stability should direct the CFO to establish a mechanism for ensuring (1) that only those individuals specifically designated in OFS's policies and procedures to review and approve period-end reconciliations conduct such procedures and (2) effective review of period-end reconciliations by the designated official.

    Agency Affected: Department of the Treasury: Office of Financial Stability

    Status: Closed - Implemented

    Comments: In connection with our audit of the fiscal year 2011 financial statements of the Troubled Asset Relief Program, we found that the Office of Financial Stability (OFS) established a mechanism to ensure that only those individuals specifically designated in OFS's policies and procedures to review and approve period-end reconciliations conduct such procedures. However, we continued to identify errors in certain reconciliations that were undetected during the review. During our testing of key reconciliations in fiscal year 2012, we found that OFS improved its process related to the review of key reconciliations by the designated officials.

    Recommendation: The Acting Assistant Secretary for Financial Stability should direct the CFO to establish a mechanism for ensuring effective reviews of documentation attached to journal entries, including ensuring such reviews assess whether the supporting documentation is sufficient and consistent with the journal entry before such entries are recorded in the general ledger.

    Agency Affected: Department of the Treasury: Office of Financial Stability

    Status: Closed - Implemented

    Comments: The Office of Financial Stability (OFS) concurred with our recommendation. During the fiscal year 2013 financial statements audit of the Troubled Asset Relief Program, OFS developed a mechanism to ensure effective reviews of documentation attached to journal entries by updating its financial reporting policies and procedures to require that all types of journal entries are to have sufficient and consistent supporting documentation and have sufficient reviews of the journal entry. In addition, our testing of journal entry reviews and supporting documentation in fiscal year 2013 revealed that all journal entries tested had sufficient supporting documentation and were adequately reviewed.

    Recommendation: The Acting Assistant Secretary for Financial Stability should direct the CFO to establish a mechanism for ensuring that changes to the assumptions used in the economic and financial models, and to data used in the models are properly documented in accordance with OFS policies and procedures.

    Agency Affected: Department of the Treasury: Office of Financial Stability

    Status: Closed - Implemented

    Comments: In connection with our audit of the fiscal year 2011 financial statements of the Troubled Asset Relief Program, we noted the Office of Financial Stability updated its procedures to ensure changes to data and assumptions used in the economic and financial models were properly documented. We also confirmed that OFS appropriately documented changes to assumptions and data sources in its models.

    Recommendation: The Acting Assistant Secretary for Financial Stability should direct the CFO to establish a mechanism for ensuring that the economic and financial models are accurately updated to reflect any changes made to the data and/or assumptions used in the models in accordance with OFS policies and procedures.

    Agency Affected: Department of the Treasury: Office of Financial Stability

    Status: Closed - Implemented

    Comments: In connection with our audit of the fiscal year 2011 financial statements of the Troubled Asset Relief Program, we noted the Office of Financial Stability revised its policies and procedures to assure that the economic and financial models are accurately updated. Specifically, the revised procedures require OFS modelers to confirm through an internal control worksheet that the latest available and approved assumptions and data inputs are used in the model.

    Recommendation: The Acting Assistant Secretary for Financial Stability should direct the CFO to establish a mechanism for ensuring that changes in OFS's Automotive Industry Financing Program (AIFP) valuation methodology, including the rationale for the changes, are documented in accordance with OFS policies and procedures.

    Agency Affected: Department of the Treasury: Office of Financial Stability

    Status: Closed - Implemented

    Comments: In connection with our audit of the fiscal year 2011 financial statements of the Troubled Asset Relief Program, we noted the Office of Financial Stability updated and implemented procedures that require members of the Assumption Panel to provide written approval and documentation that notes the reasons for any changes to the Automotive Industry Financing Program (AIFP) valuation methodology.

    Recommendation: The Assistant Secretary for Financial Stability should direct the CFO to establish a mechanism for ensuring that asset valuations for certain direct loan and equity investment programs only reflect amounts outstanding as of fiscal year end in accordance with SFFAS No. 2.

    Agency Affected: Department of the Treasury: Office of Financial Stability

    Status: Closed - Implemented

    Comments: In connection with our audit of the fiscal year 2011 financial statements of the Troubled Asset Relief Program, we noted the Office of Financial Stability updated and implemented its procedures to reflect that projected disbursements will not be used in asset valuations for certain direct loans and equity investment programs, and that such asset valuations only reflect amounts outstanding as of fiscal year end in accordance with SFFAS No. 2.

    Recommendation: The Acting Assistant Secretary for Financial Stability should direct the OIR to establish a mechanism for ensuring that any housing program issues discussed at the OFS Compliance Committee meetings, which could have a financial statement impact, are sufficiently communicated to all applicable officials in OFS within 2 days as specified in the Home Affordable Modification Program (HAMP) Compliance Committee charter.

    Agency Affected: Department of the Treasury: Office of Financial Stability

    Status: Closed - Implemented

    Comments: In connection with our audit of the fiscal year 2011 financial statements of the Troubled Asset Relief Program, we noted the Office of Financial Stability (OFS) amended its Compliance Committee charter to include a mechanism for ensuring that housing program issues discussed at the OFS Compliance Committee meeting, which could have a financial statement impact, are communicated to applicable OFS officials within time to take any necessary corrective actions for financial statement preparation following the meeting. In addition, we noted that the Compliance Committee meetings minutes were at a level of detail specified by the Compliance Committee charter and were distributed within a timely manner as specified in the Compliance Committee charter.

    Recommendation: The Acting Assistant Secretary for Financial Stability should direct the CFO to verify that the accrual calculated by IR2 appropriately accounts for mortgages which have reached their maximum incentive payment amounts.

    Agency Affected: Department of the Treasury: Office of Financial Stability

    Status: Closed - Implemented

    Comments: In connection with our audit of the fiscal year 2011 financial statements of the Troubled Asset Relief Program, we noted the Office of Financial Stability (OFS)verified that IR2 was correctly calculating the accrual for mortgages which have reached their maximum incentive payment amounts for the MHA housing programs.

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