oversight

Financial Audit: Federal Deposit Insurance Corporation's 1996 and 1995 Financial Statements

Published by the Government Accountability Office on 1997-06-30.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                  United States General Accounting Office

GAO               Report to the Congress




June 1997
                  FINANCIAL AUDIT
                  Federal Deposit
                  Insurance
                  Corporation’s 1996 and
                  1995 Financial
                  Statements




GAO/AIMD-97-111
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Comptroller General
      of the United States

      B-275155

      June 30, 1997

      To the President of the Senate and the
      Speaker of the House of Representatives

      This report presents our opinions on the financial statements of the Bank
      Insurance Fund and the Savings Association Insurance Fund for the years
      ended December 31, 1996 and 1995, and our opinion on the financial
      statements of the FSLIC Resolution Fund for the year ended December 31,
      1996. These financial statements are the responsibility of the Federal
      Deposit Insurance Corporation (FDIC), the administrator of the three funds.
      This report also presents (1) our opinion on FDIC management’s assertions
      regarding the effectiveness of its internal control as of December 31, 1996,
      and (2) our evaluation of FDIC’s compliance with laws and regulations
      during 1996. In addition, it discusses FDIC’s progress in correcting internal
      control weaknesses and presents our recommendations for further
      improvement. The report also highlights the impact of legislation in 1996
      on the capitalization of the Savings Association Insurance Fund and the
      status of the FSLIC Resolution Fund’s liquidation activities and funding.

      We conducted our audits pursuant to the provisions of section 17(d) of the
      Federal Deposit Insurance Act, as amended (12 U.S.C. 1827(d)), and in
      accordance with generally accepted government auditing standards.

      We are sending copies of this report to the Acting Chairman of the Board
      of Directors of the Federal Deposit Insurance Corporation; the Chairman
      of the Board of Governors of the Federal Reserve System; the Comptroller
      of the Currency; the Acting Director of the Office of Thrift Supervision; the
      Chairmen and Ranking Minority Members of the Senate Committee on
      Banking, Housing and Urban Affairs and the House Committee on Banking
      and Financial Services; the Secretary of the Treasury; the Director of the
      Office of Management and Budget; and other interested parties.

      This report was prepared under the direction of Robert W. Gramling,
      Director, Corporate Audits and Standards. Other major contributors to this
      report are listed in appendix II.




      James F. Hinchman
      Acting Comptroller General
      of the United States

      Page 1                   GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
Contents



Letter                                                                                                1


Opinion Letter                                                                                        4


Bank Insurance                                                                                       18
                        Statements of Financial Position                                             18
Fund’s Financial        Statements of Income and the Fund Balance                                    19
Statements              Statements of Cash Flows                                                     20
                        Notes to Financial Statements                                                21

Savings Association                                                                                  34
                        Statements of Financial Position                                             34
Insurance Fund’s        Statements of Income and the Fund Balance                                    35
Financial Statements    Statements of Cash Flows                                                     36
                        Notes to Financial Statements                                                37

FSLIC Resolution                                                                                     48
                        Statements of Financial Position                                             48
Fund’s Financial        Statement of Income and Accumulated Deficit                                  49
Statements              Statement of Cash Flows                                                      50
                        Notes to Financial Statements                                                51

Appendix I                                                                                           63

Comments From the
Federal Deposit
Insurance
Corporation
Appendix II                                                                                          66

Major Contributors to
This Report
Tables                  Table 1: FRF’s Realized and Unrealized Losses as of                          10
                          December 31, 1996
                        Table 2: Estimated Unused Funds After Completion of FRF’s                    11
                          Liquidation Activities




                        Page 2                 GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
Contents




Abbreviations

BIF        Bank Insurance Fund
DIFA       Deposit Insurance Funds Act of 1996
DOF        Division of Finance
DRR        Division of Resolutions and Receiverships
FDIC       Federal Deposit Insurance Corporation
FDICIA     Federal Deposit Insurance Corporation Improvement Act
FICO       Financing Corporation
FIRREA     Financial Institutions Reform, Recovery, and Enforcement
                Act
FMFIA      Federal Managers’ Financial Integrity Act
FRF        FSLIC Resolution Fund
FSLIC      Federal Savings and Loan Insurance Corporation
RTC        Resolution Trust Corporation
SAIF       Savings Association Insurance Fund


Page 3                 GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
          United States
GAO       General Accounting Office
          Washington, D.C. 20548

          Accounting and Information
          Management Division

          B-275155

          To the Board of Directors
          Federal Deposit Insurance Corporation

          We have audited the statements of financial position as of December 31,
          1996 and 1995, of the two deposit insurance funds administered by the
          Federal Deposit Insurance Corporation (FDIC), the related statements of
          income and fund balance, and the statements of cash flows for the years
          then ended. We have also audited the statements of financial position as of
          December 31, 1996, and January 1, 1996, of the FSLIC Resolution Fund,
          which is also administered by FDIC, and the related statement of income
          and accumulated deficit and the statement of cash flows for the year
          ended December 31, 1996.

          In our audits of the Bank Insurance Fund (BIF), the Savings Association
          Insurance Fund (SAIF), and the FSLIC Resolution Fund (FRF), we found

      •   the financial statements of each fund were reliable in all material respects;
      •   although certain internal controls should be improved, FDIC management
          fairly stated that internal controls in place on December 31, 1996, were
          effective in safeguarding assets from material loss, assuring material
          compliance with relevant laws and regulations, and assuring that there
          were no material misstatements in the financial statements of the three
          funds administered by FDIC; and
      •   no reportable noncompliance with laws and regulations we tested.

          The following sections discuss our conclusions in more detail. They also
          discuss (1) the scope of our audits, (2) additional information including
          recent legislation affecting SAIF and an update on the current status of FRF
          liquidation activities and funding, (3) FDIC’s progress in addressing
          reportable conditions1 identified during our 1995 audits, and reportable
          conditions identified during our 1996 audits, (4) recommendations from
          our 1996 audits, and (5) the Corporation’s comments on a draft of this
          report and our evaluation.



          1
           Reportable conditions involve matters coming to the auditor’s attention relating to significant
          deficiencies in the design or operation of internal controls that, in the auditor’s judgment, could
          adversely affect an entity’s ability to (1) safeguard assets against loss from unauthorized acquisition,
          use, or disposition, (2) ensure the execution of transactions in accordance with management’s
          authority and in accordance with laws and regulations, and (3) properly record, process, and
          summarize transactions to permit the preparation of financial statements and to maintain
          accountability for assets. A material weakness is a reportable condition in which the design or
          operation of the internal controls does not reduce to a relatively low level the risk that losses,
          noncompliance, or misstatements in amounts that would be material in relation to the financial
          statements may occur and not be detected within a timely period by employees in the normal course of
          their assigned duties.



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                        B-275155




                        The financial statements and accompanying notes present fairly, in all
Opinion on Bank         material respects, in conformity with generally accepted accounting
Insurance Fund’s        principles, the Bank Insurance Fund’s financial position as of
Financial Statements    December 31, 1996 and 1995, and the results of its operations and its cash
                        flows for the years then ended.


                        The financial statements and accompanying notes present fairly, in all
Opinion on Savings      material respects, in conformity with generally accepted accounting
Association Insurance   principles, the Savings Association Insurance Fund’s financial position as
Fund’s Financial        of December 31, 1996 and 1995, and the results of its operations and its
                        cash flows for the years then ended.
Statements
                        The financial statements and accompanying notes present fairly, in all
Opinion on FSLIC        material respects, in conformity with generally accepted accounting
Resolution Fund’s       principles, the FSLIC Resolution Fund’s financial position as of
Financial Statements    December 31, 1996, and January 1, 1996, and the results of its operations
                        and its cash flows for the year ended December 31, 1996.

                        As discussed in notes 1 and 2 of FRF’s financial statements, on January 1,
                        1996, FRF assumed responsibility for liquidating the assets and satisfying
                        the obligations of the Resolution Trust Corporation (RTC).2 This
                        statutorily-mandated merger resulted in a significant one-time transfer of
                        assets and liabilities into FRF on January 1, 1996. For this reason, FDIC
                        concluded that providing year-end 1995 comparative information on FRF
                        would not be practical on a fully consistent basis of accounting, and
                        therefore only presented FRF’s financial statements for 1996. Additionally,
                        the transfer of RTC’s assets and liabilities into FRF required FDIC to make
                        certain adjustments and reclassifications to 1996 opening balances on
                        FRF’s statement of financial position to ensure consistent treatment in
                        presentation. For this reason, certain amounts on FRF’s January 1, 1996,
                        statement of financial position will not be readily traceable to the



                        2
                         The Resolution Trust Corporation was created by the Financial Institutions Reform, Recovery, and
                        Enforcement Act of 1989 (FIRREA) to manage and resolve all troubled savings associations that were
                        previously insured by FSLIC and for which a conservator or receiver was appointed during the period
                        January 1, 1989, through August 8, 1992. This period was extended to September 30, 1993, by the
                        Resolution Trust Corporation Refinancing, Restructuring, and Improvement Act of 1991 and was
                        further extended on December 17, 1993, to a date not earlier than January 1, 1995, nor later than July 1,
                        1995, by the Resolution Trust Corporation Completion Act of 1993 (RTC Completion Act). The RTC
                        Completion Act stated that the final date would be determined by the Chairperson of the Thrift
                        Depositor Protection Oversight Board. On December 5, 1994, the Chairperson made the determination
                        that RTC would continue to resolve failed thrift institutions through June 30, 1995. Finally, the RTC
                        Completion Act required RTC to terminate its operations no later than December 31, 1995.



                        Page 5                            GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
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combined year-end 1995 balances reported on FRF’s and RTC’s statements
of financial position.

As discussed in note 8 of FRF’s financial statements, there are
approximately 120 pending lawsuits which stem from legislation that
resulted in the elimination of supervisory goodwill and other forbearances
from regulatory capital. These lawsuits assert various legal claims
including breach of contract or an uncompensated taking of property
resulting from the FIRREA provisions regarding minimum capital
requirements for thrifts and limitations as to the use of supervisory
goodwill to meet minimum capital requirements. One case has resulted in
a final judgment of $6 million against FDIC, which was paid by FRF, and
another case to which FDIC is a party defendant and where a judgment of
$26.9 million (plus post judgment interest) has been entered is currently
on appeal. FDIC has established a reserve on FRF’s financial statements for
this second judgment. The remainder of these cases are pending in the
Court of Federal Claims with the United States as the named defendant.

On July 1, 1996, the United States Supreme Court concluded that the
government is liable for damages in three other cases, consolidated for
appeal to the Supreme Court, in which the changes in regulatory treatment
required by FIRREA led the government to not honor its contractual
obligations. However, because the lower courts had not determined the
appropriate measure or amount of damages, the Supreme Court returned
the cases to the Court of Federal Claims for further proceedings. As of
May 20, 1997 — the end of our fieldwork — only one of these three cases
had gone to trial, and the trial was still ongoing. Until the amount of
damages are determined by the court the amount of additional costs from
these three cases is uncertain. Further, with respect to the other pending
cases, the outcome of each case and the amount of any possible damages
will depend on the facts and circumstances, including the wording of
agreements between thrift regulators and acquirers of troubled savings
and loan institutions.

As discussed in note 8 of FRF’s financial statements, FDIC believes that
judgments in such cases are properly paid from the Judgment Fund.3 The
extent to which FRF will be the source for paying other judgments in such
cases is uncertain.




3
 The Judgment Fund is a permanent, indefinite appropriation established by 31 U.S.C. Sec. 1304, and is
administered by the Department of the Treasury.



Page 6                           GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
                           B-275155




                           For the three funds administered by FDIC, we evaluated FDIC management’s
Opinion on FDIC            assertions about the effectiveness of its internal controls designed to
Management’s
Assertions About the   •   safeguard assets against loss from unauthorized acquisition, use, or
                           disposition;
Effectiveness of       •   assure the execution of transactions in accordance with provisions of
Internal Controls          selected laws and regulations that have a direct and material effect on the
                           financial statements of the three funds; and
                       •   properly record, process, and summarize transactions to permit the
                           preparation of reliable financial statements and to maintain accountability
                           for assets.

                           FDIC management fairly stated that those controls in place on
                           December 31, 1996, provided reasonable assurance that losses,
                           noncompliance, or misstatements material in relation to the financial
                           statements would be prevented or detected on a timely basis. FDIC
                           management made this assertion based on criteria established under the
                           Federal Managers’ Financial Integrity Act of 1982 (FMFIA). FDIC
                           management, in making its assertion, also fairly stated the need to improve
                           certain internal controls.

                           Our work also identified the need to improve certain internal controls, as
                           described in a later section of this report. These weaknesses in internal
                           controls, although not considered material weaknesses, represent
                           significant deficiencies in the design or operation of internal controls
                           which could have adversely affected FDIC’s ability to fully meet the internal
                           control objectives listed above. While these weaknesses did not
                           significantly affect the financial statements of the three funds,
                           misstatements may nevertheless occur in other FDIC-reported financial
                           information as a result of these internal control weaknesses. These
                           weaknesses are discussed in detail in a later section of this report.


                           Our tests for compliance with selected provisions of laws and regulations
Compliance With            disclosed no instances of noncompliance that would be reportable under
Laws and Regulations       generally accepted government auditing standards. However, the objective
                           of our audits was not to provide an opinion on overall compliance with
                           laws and regulations. Accordingly, we do not express such an opinion.


                           FDIC’s   management is responsible for
Objectives, Scope,
and Methodology

                           Page 7                    GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
    B-275155




•   preparing the annual financial statements in conformity with generally
    accepted accounting principles;
•   establishing, maintaining, and evaluating the internal control to provide
    reasonable assurance that the broad control objectives of FMFIA are met;
    and
•   complying with applicable laws and regulations.

    We are responsible for obtaining reasonable assurance about whether
    (1) the financial statements are free of material misstatement and
    presented fairly, in all material respects, in conformity with generally
    accepted accounting principles and (2) FDIC management’s assertion about
    the effectiveness of internal controls is fairly stated, in all material
    respects, based upon the criteria established under FMFIA. We are also
    responsible for testing compliance with selected provisions of laws and
    regulations and for performing limited procedures with respect to certain
    other information in FDIC’s annual financial report.

    In order to fulfill these responsibilities, we

•   examined, on a test basis, evidence supporting the amounts and
    disclosures in the financial statements;
•   assessed the accounting principles used and significant estimates made by
    management;
•   evaluated the overall presentation of the financial statements;
•   obtained an understanding of the internal control related to safeguarding
    assets, compliance with laws and regulations, including the execution of
    transactions in accordance with management’s authority, and financial
    reporting;
•   tested relevant internal controls over safeguarding, compliance, and
    financial reporting and evaluated management’s assertion about the
    effectiveness of internal controls; and
•   tested compliance with selected provisions of the Federal Deposit
    Insurance Act, as amended; the Chief Financial Officers Act of 1990; and
    the Federal Home Loan Bank Act, as amended.

    We did not evaluate all internal controls relevant to operating objectives as
    broadly defined by FMFIA, such as those controls relevant to preparing
    statistical reports and ensuring efficient operations. We limited our
    internal control testing to those controls necessary to achieve the
    objectives outlined in our opinion on management’s assertion about the
    effectiveness of internal controls. Because of inherent limitations in any
    internal control, losses, noncompliance, or misstatements may



    Page 8                    GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
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                            nevertheless occur and not be detected. We also caution that projecting
                            our evaluation to future periods is subject to the risk that controls may
                            become inadequate because of changes in conditions or that the degree of
                            compliance with controls may deteriorate.

                            We conducted our audits between July 1996 and May 1997. Our audits
                            were conducted in accordance with generally accepted government
                            auditing standards.

                            FDICprovided comments on a draft of this report. FDIC’s comments are
                            discussed and evaluated in a later section of this report and are included in
                            appendix I.


                            The following sections discuss (1) the affect of 1996 legislation on SAIF’s
Additional                  capitalization and (2) FRF’s liquidation activities and status of funding at
Information on SAIF’s       year-end 1996.
Capitalization and
FRF’s Liquidation
Activities
1996 Legislation Resulted   In our 1995 audit report, we noted that a significant differential in
in SAIF’s Capitalization    premium rates charged by BIF and SAIF developed in 1995 after BIF achieved
                            its designated capitalization level and FDIC lowered premium rates charged
                            to BIF-insured institutions.4 We reported that, absent a legislative solution,
                            this premium rate differential would likely remain for many years. We
                            noted that, while SAIF’s reserves continued to increase during 1995, its ratio
                            of reserves to insured deposits was still substantially below its designated
                            capitalization level. We also noted that such a differential in premium rates
                            could result in further decreases to SAIF’s assessment base beyond those
                            already being experienced. We reported that this could jeopardize the
                            stability of the Fund and increase the risk of a default on the thrift
                            industry’s obligation to pay the annual interest on 30-year bonds issued by




                            4
                             We had previously reported on the potential for a significant differential in premium rates to develop
                            between BIF and SAIF in 1995, as well as the potential consequences of such a differential, in Deposit
                            Insurance Funds: Analysis of Insurance Premium Disparity Between Banks and Thrifts
                            (GAO/AIMD-95-84, March 3, 1995).



                            Page 9                            GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
                                         B-275155




                                         the Financing Corporation (FICO) in an earlier attempt to resolve the thrift
                                         crisis of the 1980s.5

                                         As discussed in notes 1 and 7 of SAIF’s financial statements, on
                                         September 30, 1996, the Congress enacted the Deposit Insurance Funds
                                         Act of 1996 (DIFA). DIFA included provisions to capitalize SAIF to its
                                         designated ratio of reserves to insured deposits. SAIF was fully capitalized
                                         through a special assessment totaling $4.5 billion against SAIF-assessable
                                         deposits. The special assessment was sufficient to increase SAIF’s reserves
                                         to the Fund’s designated reserve ratio of $1.25 for each $100 of insured
                                         deposits effective as of October 1, 1996. DIFA also provided that banks bear
                                         part of the cost of the future annual FICO bond interest, which previously
                                         had been paid from SAIF-member assessments. The DIFA provisions
                                         resulting in the capitalization of SAIF and the spreading of the annual FICO
                                         bond interest between banks and thrifts effectively addressed the
                                         insurance premium disparity between BIF and SAIF. The legislation also
                                         provides for the merger of BIF and SAIF on January 1, 1999, if no thrift
                                         institution exists on that date.6


Status of FRF’s Liquidation              As discussed earlier, on January 1, 1996, FRF assumed responsibility for the
Activities and Funding                   assets and liabilities of the former RTC. During 1996, FDIC continued its
                                         liquidation activities for FSLIC-related assets and liabilities, as well as those
                                         of the former RTC. As shown in table 1, the majority of FRF’s losses from
                                         liquidation activities have been realized as of December 31, 1996.

Table 1: FRF’s Realized and Unrealized
Losses as of December 31, 1996           Dollars in billions
                                                                                                       FRF-RTC FRF-FSLIC              Total FRF
                                         Realized losses                                                    $82.5           $41.5          $124.0
                                         Unrealized losses                                                     3.9             1.0             4.9
                                         Total realized and unrealized losses                               $86.4           $42.5          $128.9




                                         5
                                          FICO was established in 1987 to recapitalize the Federal Savings and Loan Insurance Fund, the former
                                         insurance fund for thrifts. FICO was funded mainly through the issuance of public debt offerings
                                         which were initially limited to $10.8 billion but were later effectively capped at $8.2 billion by the RTC
                                         Refinancing, Restructuring, and Improvement Act of 1991. Neither FICO’s bond obligations or the
                                         interest on these obligations are obligations of the United States nor are they guaranteed by the United
                                         States. The annual FICO interest obligation, on average, equals approximately $780 million.
                                         6
                                          The Deposit Insurance Funds Act directs the Secretary of the Treasury to conduct a study of issues
                                         relevant to developing a common charter for all insured depository institutions and the abolition of
                                         separate and distinct charters between banks and savings associations, and to make recommendations
                                         with respect to establishing a common charter.



                                         Page 10                           GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
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                                        Losses are realized when failed financial institution assets at receiverships
                                        are disposed of and the proceeds from the asset dispositions are not
                                        sufficient to repay amounts disbursed by FRF to receiverships and are
                                        recorded on FRF’s financial statements as receivables from thrift
                                        resolutions. Losses are also realized when assets FRF purchases from
                                        terminating receiverships (investments in corporate-owned assets) are
                                        later disposed of for less than the price FRF paid when it purchased the
                                        assets from the receiverships. Uncertainties still exist with regard to the
                                        unrealized losses, as the amount will not be known with certainty until all
                                        remaining assets and liabilities are liquidated.

                                        In total, the Congress made available $149.2 billion in funding to cover
                                        liabilities and losses associated with the former FSLIC and RTC resolution
                                        activities, of which $105 billion was made available to the former RTC.7 Of
                                        the $105 billion in funding available, $91.3 billion was received by RTC
                                        through December 31, 1995, the date of RTC’s termination, to cover losses
                                        and expenses associated with failed institutions from its caseload. FRF
                                        received $44.2 billion to cover the liabilities and losses associated with the
                                        former FSLIC activities. In total, $135.5 billion was received to cover
                                        liabilities and losses associated with the former FSLIC and RTC resolution
                                        activities.

                                        As shown in table 2, after reducing the total amount of funding received by
                                        the amount of estimated funds needed, $6.6 billion in available funds will
                                        remain.

Table 2: Estimated Unused Funds
After Completion of FRF’s Liquidation   Dollars in billions
Activities                                                                                         FRF-RTC FRF-FSLIC             Total FRF
                                        Total funds received                                            $91.3          $44.2         $135.5
                                        Less: estimated funds needed                                     86.4           42.5          128.9
                                        Estimated unused funds                                           $ 4.9          $ 1.7          $ 6.6

                                        The final amount of unused funds will not be known with certainty until all
                                        of FRF’s remaining assets and liabilities are liquidated. Further, $13.7 billion
                                        in loss funds not received by RTC prior to RTC’s termination are available
                                        until December 31, 1997, for losses incurred by the SAIF, if the conditions


                                        7
                                         FIRREA provided an initial $50 billion to RTC. The Resolution Trust Corporation Funding Act of 1991
                                        provided an additional $30 billion. The Resolution Trust Corporation Refinancing, Restructuring, and
                                        Improvement Act of 1991 provided $25 billion in December 1991, which was only available for
                                        obligation until April 1, 1992. In December 1993, the RTC Completion Act removed the April 1, 1992,
                                        deadline, thus making the balance of the $25 billion that was not obligated prior to April 1, 1992,
                                        $18.3 billion, available to RTC for resolution activities.



                                        Page 11                          GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
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                         set forth in the Resolution Trust Corporation Completion Act are met.8
                         Also, according to the act, unused loss funds will be returned to the
                         general fund of the Treasury.


                         The following sections discuss (1) FDIC’s progress in addressing reportable
Reportable Conditions    conditions identified during our 1995 audits and (2) reportable conditions
                         found during our 1996 audits.


Progress on Weaknesses   In our 1995 audit report on the three funds administered by FDIC, we
Identified in Previous   identified reportable conditions which affected FDIC’s ability to ensure that
Audits                   internal control objectives were achieved.9 These weaknesses related to
                         FDIC’s internal controls designed to ensure that (1) estimated recoveries
                         for failed institution assets were determined in accordance with FDIC’s
                         estimation methodology, were supported by asset file information, and
                         incorporated the impact of events through year-end, (2) time and
                         attendance reporting procedures were effective, and (3) electronic data
                         processing controls were effective. During 1996, FDIC’s actions addressed
                         the weaknesses we identified in our 1995 audit report.

                         For example, during our 1995 audits, we identified weaknesses in FDIC’s
                         controls to ensure that recovery estimates for assets acquired from failed
                         financial institutions complied with FDIC’s revised asset recovery
                         estimation methodology, including being supported by asset file
                         documentation, and weaknesses in the cut-off date for asset recovery
                         information used by FDIC in its year-end allowance for loss estimation
                         process. FDIC’s implementation of the Standard Asset Valuation Estimation
                         methodology and related Asset Loss Reserve project in 1996 have
                         addressed our previously identified weaknesses surrounding FDIC’s use of
                         noncurrent asset recovery values and the lack of adherence to its asset
                         recovery estimation methodology. Additionally, although we continued to
                         find instances where relevant file documentation was not always used in
                         estimating asset recovery values during our 1996 audits, these problems
                         did not affect the financial statements, and appear to be a result of


                         8
                          The RTC Completion Act makes available to SAIF, during the 2-year period beginning on the date of
                         RTC’s termination, any of the $18.3 billion in appropriated funds made available by the RTC
                         Completion Act and not needed by RTC. However, prior to receiving such funds, FDIC must first
                         certify, among other things, that SAIF cannot fund insurance losses through industry premium
                         assessments or Treasury borrowings without adversely affecting the health of its member institutions
                         and causing the government to incur greater losses.
                         9
                          Financial Audit: Federal Deposit Insurance Corporation’s 1995 and 1994 Financial Statements
                         (GAO/AIMD-96-89, July 15, 1996).



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                        first-year implementation issues. We will continue to review individual
                        asset recovery estimates during 1997.

                        During our 1995 audits, we also continued to identify weaknesses in FDIC’s
                        time and attendance reporting process. We reported that we had
                        continued to identify deficiencies in adherence to required procedures in
                        preparing time and attendance reports, separation of duties between
                        timekeeping and data entry functions, and reconciliation of payroll reports
                        to time cards. During 1996, FDIC implemented new time and attendance
                        reporting procedures to address these deficiencies. The new procedures
                        were intended to streamline and improve the time and attendance
                        reporting process by focusing accountability for verifying the accuracy of
                        time reports with supervisors, segregating the timekeeping and data entry
                        functions, and redefining post-audit responsibilities for time and
                        attendance reporting. We found that the implementation of these new
                        procedures effectively addressed the internal control issues we identified
                        in the time and attendance reporting process in our prior year audits.

                        During our 1995 audits, we also identified a weakness related to FDIC’s
                        electronic data processing general controls. This weakness, because of its
                        sensitive nature, was communicated in a separate correspondence to FDIC
                        management, along with our recommendations for corrective action.
                        During 1996, FDIC took action which effectively addressed the issue we
                        raised in this separate correspondence. Additionally, in our final audit of
                        the Resolution Trust Corporation’s (RTC) 1995 financial statements,10 we
                        identified weaknesses related to general controls over RTC’s computerized
                        information systems which required corrective actions. During our 1996
                        audits, we found that FDIC took action to address a number of these
                        general control weaknesses. Several other general control related issues
                        had not been fully addressed by FDIC at the time of completion of our 1996
                        audits. However, we believe the issues are not significant enough to be
                        considered a reportable condition.


Reportable Conditions   The following reportable conditions represent significant deficiencies in
Identified in 1996      FDIC’s internal controls and should be corrected by FDIC management.


                        1. Controls over the integrity of information used to calculate the
                        allowance for losses on receivables from resolution activities and
                        investment in corporate-owned assets need to be improved. Specifically,

                        10
                         Financial Audit: Resolution Trust Corporation’s 1995 and 1994 Financial Statements
                        (GAO/AIMD-96-123, July 2, 1996).



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FDIC did not have effective procedures in place to ensure that data used in
the calculation of the year-end allowance for losses was adequately
reviewed for accuracy prior to inclusion in the year-end calculation.

FDIC estimates recoveries on assets acquired from failed financial
institutions and uses these estimates to calculate the allowance for losses
on receivables from resolution activities and investment in
corporate-owned assets. FDIC uses multiple data sources to calculate the
estimated recoveries from these assets. Much of the data are gathered
from decentralized sources and some of the operations performed on the
data are handled in a decentralized manner. Consequently, it is critical that
procedures be in place to ensure the accuracy and quality of the data and
that such procedures clearly require review for accuracy and quality of the
data used in the year-end allowance for losses calculation. However,
during our 1996 audits, we found deficiencies in FDIC’s procedures for
reviewing the compiled data and the related calculations. As a result, FDIC
management did not consistently have assurance that the estimated
recoveries were properly recorded, processed, and reliable.

For example, FDIC personnel made errors in calculating the estimated
recoveries for a portfolio of equity investments. The resulting error of
about $97 million was not detected by FDIC. In addition, FDIC made a
number of errors in the process of updating the June 30, 1996, estimated
recoveries for assets maintained at failed institution receiverships. The
estimated recoveries for many of these assets were erroneously changed
and some were inadvertently deleted. In addition, FDIC did not always
follow its procedures for discounting recovery estimates during its update
process, resulting in improper discount rates being used to derive the
updated values for a number of assets. Finally, we also found instances
where FDIC personnel did not review the integrity of the estimated
recoveries on securities assets prior to including these recoveries in the
allowance for losses calculations.

The nature of these errors was such that, had an effective process been in
place for reviewing the compiled data and related calculations, FDIC could
have identified and corrected the errors. The errors we identified generally
caused estimated asset recoveries to be understated and the related
allowance for losses to be overstated at December 31, 1996. While the
effect of these misstatements was not material, misstatements in future
financial statements could occur if corrective action is not taken.




Page 14                  GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
B-275155




FDIC has proposed enhanced review procedures for 1997 which, if properly
implemented, should reduce the risk of future errors or misstatements. We
will assess the effectiveness of these review procedures during our 1997
audits.

2. FDIC’s oversight of asset servicers contracted to manage and dispose of
failed financial institution assets needs to be strengthened. During our
1996 audits, we found that FDIC had limited assurance that contracted asset
servicers properly safeguarded failed institution assets and accurately
reported financial information to FDIC because of deficiencies in FDIC’s
contractor oversight program. Specifically, FDIC’s contractor oversight
personnel did not always ensure that (1) contracted asset servicers have
adequate controls over daily collections and bank reconciliations,
(2) servicers’ fees and reimbursable expenses are valid, accurate and
complete, and (3) servicers’ loan system calculations relating to the
allocation of principal and interest are accurate.

As of December 31, 1996, approximately $4.8 billion of the $8.7 billion
(about 55 percent) in FDIC’s inventory of failed financial institution assets
was serviced by contracted asset servicers. These servicers accounted for
over $3.7 billion of the $5.9 billion (about 63 percent) in FDIC’s collections
during 1996 related to asset management and disposition activities.
Consequently, it is critical that FDIC maintain an effective contractor
oversight program.

FDIC attributes some of the problems noted above to reorganizations and
realignments of responsibilities as a result of the merging of RTC activities
into FDIC during 1996 coupled with the continued downsizing of the
Corporation. Division of Finance (DOF) officials informed us that they
intend to implement a full visitation program which will include oversight
procedures addressing each of the deficiencies noted above. DOF
anticipates having its revised visitation program begin operation in
July 1997. Additionally, DOF and the Division of Resolutions and
Receiverships (DRR) have established a task force to develop
Memorandums of Understanding to more clearly define their oversight
roles, with concurrence from the Division of Administration. We will
assess the adequacy of FDIC’s corrective actions during our 1997 audits.

In addition to the weaknesses discussed above, we noted other less
significant matters involving FDIC’s system of internal accounting controls
and its operations which we will be reporting separately to FDIC.




Page 15                  GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
                       B-275155




                       To address weaknesses identified in this year’s audits in the process for
Recommendations        calculating the allowance for losses on receivables from resolution
                       activities and investment in corporate-owned assets, we recommend that
                       the Chairman of the Federal Deposit Insurance Corporation direct the
                       heads of the Division of Resolutions and Receiverships and the Division of
                       Finance to implement formal procedures for reviewing data used in the
                       allowance for losses calculations. Such procedures should provide for

                   •   a thorough review of all data elements used in the allowance for loss
                       calculations to ensure that the data are accurate, current, and reliable; and
                   •   a clear designation and assignment of review responsibilities to ensure
                       that all major sources of data used in the calculations are reviewed and
                       verified.

                       To address weaknesses identified in this year’s audits in contracted asset
                       servicer oversight, we recommend that the Chairman of the Federal
                       Deposit Insurance Corporation direct the heads of the Division of
                       Resolutions and Receiverships and Division of Finance to enhance their
                       contractor oversight program to ensure that their procedures for
                       overseeing contracted asset servicers are followed. Such procedures
                       should ensure

                   •   routine monitoring of contracted asset servicers’ controls over daily
                       collections, such as opening mail containing monetary items under dual
                       control, the preparation and maintenance of control totals, and the
                       reconciliation of collections processed and deposited to the control totals;
                   •   routine review of contracted asset servicers’ bank reconciliations to
                       ensure no unresolved differences exist between the servicers’ reported
                       cash balances and those reflected on the servicers’ bank statements, and
                       to ensure that funds collected are remitted to FDIC in accordance with
                       contractual requirements;
                   •   routine verification of the validity, accuracy, and completeness of
                       contracted asset servicers’ fees and reimbursable expenses; and
                   •   verification that contracted asset servicers are accurately applying loan
                       payments between principal and interest.


                       In commenting on a draft of this report, FDIC acknowledged the internal
Corporation            control weaknesses cited in the report and commented on initiatives it has
Comments and Our       underway to address the issues raised regarding the allowance for losses
Evaluation             calculation and oversight of contracted asset servicers. We plan to




                       Page 16                  GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
B-275155




evaluate the adequacy and effectiveness of these corrective actions as part
of our 1997 financial audits.

FDIC’s comments also discuss the changing environment the Corporation
faced during 1996 and continues to face today, the condition of
FDIC-insured institutions and the deposit insurance funds, and progress
made by the Corporation in addressing internal control weaknesses
identified in our 1995 financial audits.

The complete text of FDIC’s response to our report is included in
appendix I.




Robert W. Gramling
Director, Corporate Audits
  and Standards


May 20, 1997




Page 17                  GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
Bank Insurance Fund’s Financial Statements


Statements of Financial Position




                                   Page 18   GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
                                        Bank Insurance Fund’s Financial Statements




Statements of Income and the Fund Balance




                                        Page 19                     GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
                           Bank Insurance Fund’s Financial Statements




Statements of Cash Flows




                           Page 20                     GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
                                Bank Insurance Fund’s Financial Statements




Notes to Financial Statements




                                Page 21                     GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
Bank Insurance Fund’s Financial Statements




Page 22                     GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
Bank Insurance Fund’s Financial Statements




Page 23                     GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
Bank Insurance Fund’s Financial Statements




Page 24                     GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
Bank Insurance Fund’s Financial Statements




Page 25                     GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
Bank Insurance Fund’s Financial Statements




Page 26                     GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
Bank Insurance Fund’s Financial Statements




Page 27                     GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
Bank Insurance Fund’s Financial Statements




Page 28                     GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
Bank Insurance Fund’s Financial Statements




Page 29                     GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
Bank Insurance Fund’s Financial Statements




Page 30                     GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
Bank Insurance Fund’s Financial Statements




Page 31                     GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
Bank Insurance Fund’s Financial Statements




Page 32                     GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
Bank Insurance Fund’s Financial Statements




Page 33                     GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
Savings Association Insurance Fund’s
Financial Statements

Statements of Financial Position




                                   Page 34   GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
                                        Savings Association Insurance Fund’s
                                        Financial Statements




Statements of Income and the Fund Balance




                                        Page 35                      GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
                           Savings Association Insurance Fund’s
                           Financial Statements




Statements of Cash Flows




                           Page 36                      GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
                                Savings Association Insurance Fund’s
                                Financial Statements




Notes to Financial Statements




                                Page 37                      GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
Savings Association Insurance Fund’s
Financial Statements




Page 38                      GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
Savings Association Insurance Fund’s
Financial Statements




Page 39                      GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
Savings Association Insurance Fund’s
Financial Statements




Page 40                      GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
Savings Association Insurance Fund’s
Financial Statements




Page 41                      GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
Savings Association Insurance Fund’s
Financial Statements




Page 42                      GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
Savings Association Insurance Fund’s
Financial Statements




Page 43                      GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
Savings Association Insurance Fund’s
Financial Statements




Page 44                      GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
Savings Association Insurance Fund’s
Financial Statements




Page 45                      GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
Savings Association Insurance Fund’s
Financial Statements




Page 46                      GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
Savings Association Insurance Fund’s
Financial Statements




Page 47                      GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
FSLIC Resolution Fund’s Financial
Statements

Statements of Financial Position




                                   Page 48   GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
                                        FSLIC Resolution Fund’s Financial
                                        Statements




Statement of Income and Accumulated Deficit




                                        Page 49                     GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
                          FSLIC Resolution Fund’s Financial
                          Statements




Statement of Cash Flows




                          Page 50                     GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
                                FSLIC Resolution Fund’s Financial
                                Statements




Notes to Financial Statements




                                Page 51                     GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
FSLIC Resolution Fund’s Financial
Statements




Page 52                     GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
FSLIC Resolution Fund’s Financial
Statements




Page 53                     GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
FSLIC Resolution Fund’s Financial
Statements




Page 54                     GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
FSLIC Resolution Fund’s Financial
Statements




Page 55                     GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
FSLIC Resolution Fund’s Financial
Statements




Page 56                     GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
FSLIC Resolution Fund’s Financial
Statements




Page 57                     GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
FSLIC Resolution Fund’s Financial
Statements




Page 58                     GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
FSLIC Resolution Fund’s Financial
Statements




Page 59                     GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
FSLIC Resolution Fund’s Financial
Statements




Page 60                     GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
FSLIC Resolution Fund’s Financial
Statements




Page 61                     GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
FSLIC Resolution Fund’s Financial
Statements




Page 62                     GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
Appendix I

Comments From the Federal Deposit
Insurance Corporation




              Page 63   GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
Appendix I
Comments From the Federal Deposit
Insurance Corporation




Page 64                    GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
Appendix I
Comments From the Federal Deposit
Insurance Corporation




Page 65                    GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
Appendix II

Major Contributors to This Report


                         Steven J. Sebastian, Assistant Director
Accounting and           Jeanette M. Franzel, Assistant Director
Information              Lynda Downing, Senior Auditor
Management Division,     Michael C. Hrapsky, Senior Auditor
                         Gregory J. Ziombra, Senior Auditor
Washington D.C.          Gary P. Chupka, Senior Auditor
                         James V.Rinaldi, Senior Auditor
                         Bonnie L. Lane, Senior Auditor
                         Dennis L. Clarke, Auditor
                         John C. Craig, Auditor
                         Diane B. Davis, Auditor
                         Douglas A. Delacruz, Auditor
                         Carol A. Langelier, EDP Specialist
                         Wilfred Holloway, Senior Computer Specialist
                         Sharon O. Byrd, Computer Specialist


                         Shawkat Ahmed, Senior Auditor
Atlanta Regional         Cynthia C. Teddleton, Senior Auditor
Office                   Fred Jimenez, Auditor
                         Rhonda P. Rose, Auditor
                         Lisa M. Warde, Auditor


                         Norman C. Poage, Senior Auditor
Dallas Regional Office   Leonard E. Zapata, Senior Auditor
                         Miguel A. Salas, Senior Auditor
                         James B. Smoak, Senior Auditor
                         John E. Clary, Auditor
                         Syrene D. Mitchell, Auditor
                         Dale W. Seeley, Auditor
                         Pamela Y. Valentine, Auditor


                         Robert Allmang, Auditor
FDIC Office of           Amelia Laguilles, Auditor
Inspector General        Foxhall Parker, Auditor
                         Duane Rosenberg, Auditor
                         Titus Simmons, Auditor
                         Arlene Boateng, Auditor
                         Mary Boyles, Auditor
                         Lisa Conner, Auditor



                         Page 66                GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
           Appendix II
           Major Contributors to This Report




           Ross Simms, Auditor
           Eric Eckstrum, Auditor
           John Crawford, Auditor
           Larry Jones, Auditor




(917706)   Page 67                     GAO/AIMD-97-111 FDIC’s 1996 and 1995 Financial Statements
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