Management Report:

Opportunities for Improvements in FDIC's Internal Controls and Accounting Procedures

GAO-09-943R: Published: Sep 15, 2009. Publicly Released: Sep 15, 2009.

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James R. Dalkin
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In May 2009, we issued our opinions on the calendar year 2008 financial statements of the Deposit Insurance Fund (DIF) and the FSLIC Resolution Fund (FRF). We also issued our opinion on the effectiveness of the Federal Deposit Insurance Corporation's (FDIC) internal control over financial reporting (including safeguarding assets) as of December 31, 2008, and our evaluation of FDIC's compliance with provisions of selected laws and regulations for the two funds for the year ended December 31, 2008. The purpose of this report is to present issues identified during our audit of the 2008 financial statements regarding certain internal controls and accounting procedures and to recommend actions to address these issues.

During our audits of the 2008 financial statements, we identified four internal control issues that affected FDIC's accounting for the funds it administers. Although we do not consider them to be material weaknesses or significant deficiencies,3 and thus do not consider them to be material in relation to DIF's and FRF's financial statements, we believe that they warrant management's attention and action. These issues concern the following: (1) Written policies and procedures were not updated to document FDIC's new methodology used to determine the estimated cash recovery of receivership assets. (2) Controls did not ensure that correct amounts were paid for services provided by contractors and that operating expenses were appropriately allocated among the funds FDIC administers. (3) Oversight of contracted lockbox operations did not provide adequate assurance that controls were effectively designed to minimize the risk of loss, theft, and misreporting of receivership receipts. (4) Controls over the processing of receivership receipt transactions did not result in transactions being timely applied to the appropriate receivership accounts.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: The FDIC Division of Finance (DOF), with input from Division of Resolutions & Receiverships (DRR), updated their guidance that related to the Asset Loss Reserve (Loan Loss Reserve or LLR). These policies and procedures were disseminated to FDIC staff on October 9, 2009. Specifically, the FDIC provided the following guidance: (1) the FDIC Asset Loss Review Project, which documents the official approval of recovery rates used for Fiscal Year 2009; (2) the FDIC Recovery Rate used for fiscal year 2009, which documents a description of the different recovery rate methodologies used during fiscal year 2009; (3) the FDIC Loan Loss Reserve Process memorandum, which describes the process of using the Loan Loss Reserve Templates to calculate an Allowance for Loss for each of the receiverships; (4) the FDIC Desktop Procedures for completing the Loan Loss Reserve Template, which provides detailed instructions on how to complete the LLR templates.

    Recommendation: The Chief Financial Officer should (1) document procedural guidance for estimating failed financial institution receivership asset recoveries to derive the allowance for losses on the DIF's receivables from resolutions, (2) disseminate the guidance to appropriate staff, and (3) effectively implement the guidance.

    Agency Affected: Federal Deposit Insurance Corporation

  2. Status: Closed - Implemented

    Comments: In response to our recommendation, FDIC documented and implemented procedures for preparing its fund distribution schedule to ensure that the correct amounts were entered.

    Recommendation: The Chief Financial Officer should document and implement the procedures to be followed for entering data into the fund distribution schedule.

    Agency Affected: Federal Deposit Insurance Corporation

  3. Status: Closed - Implemented

    Comments: FDIC's lockbox service provider does not engage a SAS 70 audit. However, to address this recommendation FDIC conducted an internal control site visit of the lockbox facility and implemented check deposit tests to verify that the lockbox accurately deposited checks into FDIC's account.

    Recommendation: The Chief Financial Officer should revise procedures to obtain assurance--through such means as SAS 70 reports, internal audit reports, and other monitoring processes--that internal controls over receivership receipts are in place and functioning properly at the Dallas lockbox facility.

    Agency Affected: Federal Deposit Insurance Corporation

  4. Status: Closed - Implemented

    Comments: To address this recommendation, FDIC issued and implemented a policy entitled "Accounting Policy for the Timely Application of Unapplied Funds." This policy sets a time frame for applying receivership receipts to the appropriate account.

    Recommendation: The Chief Financial Officer should document and implement a policy regarding a time frame, such as the current target of 90 days, by which receivership receipts are to be applied to the appropriate receivership accounts.

    Agency Affected: Federal Deposit Insurance Corporation


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