Management Report:

Opportunities for Improvement in FHFA's Evaluation of Internal Control over Financial Reporting

GAO-17-552R: Published: Jun 14, 2017. Publicly Released: Jun 14, 2017.

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J. Lawrence Malenich
(202) 512-3406
malenichj@gao.gov

 

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What GAO Found

During its audit of the Federal Housing Finance Agency's (FHFA) fiscal years 2016 and 2015 financial statements, GAO identified deficiencies in FHFA's evaluation of internal control over financial reporting. This includes the FHFA Office of the Inspector General's (FHFA-OIG) evaluation of its own internal control over financial reporting as FHFA-OIG's reported amounts constitute a material portion of the consolidated FHFA financial statements. Specifically, GAO found that during FHFA's internal control evaluation, FHFA and the FHFA-OIG did not (1) adequately document their consideration of materiality thresholds and risk assessments, (2) adequately document their consideration of all internal control components and related principles, and (3) adequately identify and document financial reporting control activities. In addition, FHFA did not maintain independent roles in the implementation and monitoring of control activities. GAO did not consider these deficiencies to be material weaknesses or significant deficiencies, either individually or collectively, but nonetheless they warrant FHFA management's attention. GAO is making nine recommendations to FHFA to address the deficiencies identified related to FHFA's evaluation of internal control over financial reporting that were identified by GAO during the fiscal year 2016 FHFA audit. FHFA stated that it agreed with the nine recommendations GAO made in the report and described actions it is taking or plans to take to address each recommendation. GAO will evaluate FHFA's actions for addressing the deficiencies identified in the report as part of GAO's audit of FHFA's fiscal year 2017 financial statements.

Why GAO Did This Study

The purpose of this report is to present internal control deficiencies identified during GAO's audit of FHFA's fiscal years 2016 and 2015 financial statements. There were no prior recommendations outstanding for FHFA related to past financial statement audits.

What GAO Recommends 

GAO is making nine recommendations to FHFA to address the deficiencies identified related to FHFA's evaluation of internal control over financial reporting that were identified by GAO during the fiscal year 2016 FHFA audit. FHFA stated that it agreed with the nine recommendations GAO made in the report and described actions it is taking or plans to take to address each recommendation. GAO will evaluate FHFA's actions for addressing the deficiencies identified in the report as part of GAO's audit of FHFA's fiscal year 2017 financial statements.

For more information, contact J. Lawrence Malenich at (202) 512-3406 or malenichj@gao.gov.

Recommendations for Executive Action

  1. Status: Open

    Comments: FHFA agreed with this recommendation. FHFA is in the process of developing a mechanism that captures key factors, including risk and materiality, when designing the evaluation of internal control over financial reporting. This mechanism will be documented for the FY 2017 evaluation of internal control over financial reporting. FHFA and FHFA OIG are collaborating in these efforts.

    Recommendation: The Director of the Federal Housing Finance Agency should direct the Chief Financial Officer to develop a mechanism that captures all of the key factors to be considered, such as materiality and risk, when designing the evaluation of internal control over financial reporting and collaborate, as appropriate, with the Inspector General to develop a similar mechanism for use by FHFA-OIG.

    Agency Affected: Federal Housing Finance Agency

  2. Status: Open

    Comments: FHFA agreed with this recommendation. During the FY 2017 evaluation of internal control over financial reporting, FHFA will coordinate with the FHFA OIG when calculating materiality thresholds to reasonably assure that materiality determinations are appropriate for the Agency as a whole and the rationale is adequately documented.

    Recommendation: The Director of the Federal Housing Finance Agency should direct the Chief Financial Officer to coordinate with the Inspector General, as appropriate, when calculating materiality thresholds to reasonably assure that materiality determinations are appropriate for the agency as a whole and rationale is adequately documented.

    Agency Affected: Federal Housing Finance Agency

  3. Status: Open

    Comments: FHFA agreed with this recommendation. FHFA will coordinate with the FHFA OIG during the FY 2017 evaluation of internal control over financial reporting to assess and document the aggregate effect of all deficiencies identified at the Agency-wide level.

    Recommendation: The Director of the Federal Housing Finance Agency should direct the Chief Financial Officer to coordinate with the Inspector General, as appropriate, to assess and document the aggregate effect of all deficiencies identified at the agency-wide level during the evaluation of internal control over financial reporting.

    Agency Affected: Federal Housing Finance Agency

  4. Status: Open

    Comments: FHFA agreed with this recommendation. During the FY 2017 evaluation of internal control over financial reporting, FHFA will summarize by internal control principle those activities from the program offices that have an effect on internal control over financial reporting to reasonably assure the consideration of all internal control components and related principles. FHFA will also document how information is used to conclude on the internal control components and related principles for financial reporting activities that are evaluated. FHFA will collaborate with FHFA OIG in these efforts.

    Recommendation: The Director of the Federal Housing Finance Agency should direct the Chief Financial Officer to (1) summarize in sufficient detail by internal control principle those activities from the program offices that have an effect on internal control over financial reporting to reasonably assure the consideration of all internal control components and related principles; (2) collaborate, as appropriate, with the Inspector General to implement corresponding actions at FHFA-OIG; and (3) document how that information is used to conclude on the internal control components and related principles for financial reporting.

    Agency Affected: Federal Housing Finance Agency

  5. Status: Open

    Comments: FHFA agreed with this recommendation. FHFA will enhance the FY 2017 evaluation of internal control over financial reporting by identifying and testing all key control activities, including those related to the preparation of the financial statements.

    Recommendation: The Director of the Federal Housing Finance Agency should direct the Chief Financial Officer to enhance the evaluation of internal control over financial reporting by identifying and testing all key control activities, including those related to the preparation of the financial statements.

    Agency Affected: Federal Housing Finance Agency

  6. Status: Open

    Comments: FHFA agreed with this recommendation. During the FY 2017 evaluation of internal control over financial reporting, FHFA will thoroughly document FHFA's review of SSAE No. 16 reports issued for the period under evaluation by reasonably assuring that all applicable control objectives and related control activities are clearly identified and described and the evaluation of user entity controls is adequately explained. FHFA will collaborate with the FHFA OIG during these efforts.

    Recommendation: The Director of the Federal Housing Finance Agency should direct the Chief Financial Officer to (1) thoroughly document FHFA's review of SSAE No. 16 reports issued for the period under evaluation by reasonably assuring that all applicable control objectives and related control activities are clearly identified and described and the evaluation of user entity controls is adequately explained and (2) collaborate, as appropriate, with the Inspector General to implement corresponding actions at FHFA-OIG.

    Agency Affected: Federal Housing Finance Agency

  7. Status: Open

    Comments: FHFA agreed with this recommendation. During the FY 2017 evaluation of internal control over financial reporting, FHFA will clearly define and document an approach that identifies the information systems that are key to financial reporting, the process areas these information systems support, the key control activities for each information system, and how the key control activities are evaluated. FHFA will collaborate with the FHFA OIG in these efforts.

    Recommendation: The Director of the Federal Housing Finance Agency should direct the Chief Financial Officer to (1) clearly define and document an approach that identifies the information systems that are key to financial reporting, the process areas these information systems support, the key control activities for each information system, and how the key control activities are evaluated and (2) collaborate, as appropriate, with the Inspector General to implement corresponding actions at FHFA-OIG.

    Agency Affected: Federal Housing Finance Agency

  8. Status: Open

    Comments: FHFA agreed with this recommendation. FHFA will collaborate with the FHFA OIG to develop a complete list of the specific provisions of laws and regulations that may have an effect on material amounts and related disclosures in the financial statements that are applicable to the FHFA OIG and prepare documentation that clearly links each applicable provision of law or regulation to the key control activities tested.

    Recommendation: The Director of the Federal Housing Finance Agency should direct the Chief Financial Officer to collaborate, as appropriate, with the Inspector General to (1) develop a complete list of the specific provisions of laws and regulations that may have an effect on material amounts and related disclosures in the financial statements that are applicable to FHFA-OIG and (2) prepare documentation that clearly links each applicable provision of law or regulation to the key control activities tested.

    Agency Affected: Federal Housing Finance Agency

  9. Status: Open

    Comments: FHFA agreed with this recommendation. FHFA is designing an evaluation process that reasonably assures assignment of independent roles between implementation and monitoring of control activities that are significant to the evaluation of internal control over financial reporting. To this end, FHFA has hired an independent contractor to aid in the evaluation process for FY 2017, and has involved staff from FHFA's Office of Quality Assurance in the FY 2017 evaluation process to reasonably assure independent roles between monitoring and implementation going forward.

    Recommendation: The Director of the Federal Housing Finance Agency should direct the Chief Financial Officer to design an evaluation process that reasonably assures assignment of independent roles between the implementation and monitoring of control activities that are significant to the evaluation of internal control over financial reporting.

    Agency Affected: Federal Housing Finance Agency

 

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