oversight

Management Report: Improvements Are Needed in Internal Control over Financial Reporting for the Troubled Asset Relief Program

Published by the Government Accountability Office on 2012-02-13.

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

United States Government Accountability Office
Washington, DC 20548




           February 13, 2012

           Mr. Timothy G. Massad
           Assistant Secretary for Financial Stability
           Office of Financial Stability
           Department of the Treasury

           Subject: Management Report: Improvements Are Needed in Internal Control over Financial
           Reporting for the Troubled Asset Relief Program

           Dear Mr. Massad:

           The Emergency Economic Stabilization Act of 2008 (EESA) 1 requires that we annually audit
           the financial statements 2 of the Troubled Asset Relief Program (TARP), which are prepared
           by the Department of the Treasury’s (Treasury) Office of Financial Stability (OFS). 3 On
           November 10, 2011, we issued our audit report 4 including (1) an unqualified opinion on
           OFS’s financial statements for TARP as of and for the fiscal years ended
           September 30, 2011 and 2010, and (2) an opinion that OFS maintained effective internal
           control over financial reporting as of September 30, 2011. We also reported that our tests of
           OFS’s compliance with selected provisions of laws and regulations for the fiscal year ended
           September 30, 2011, disclosed no instances of noncompliance.

           Our November 2011 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, 2011, that provided reasonable assurance that
           misstatements, losses, or noncompliance material in relation to the financial statements




           1
            Pub. L. No. 110-343, Div. A, 122 Stat. 3765 (Oct. 3, 2008), codified in part, as amended, at 12 U.S.C.
           §§ 5201-5261.
           2
            Section 116(b) of EESA, 12 U.S.C. § 5226(b), requires that the Department of the Treasury (Treasury) annually
           prepare and submit to Congress and the public audited fiscal year financial statements for TARP that are
           prepared in accordance with generally accepted accounting principles. Section 116(b) further requires that GAO
           audit TARP’s financial statements annually in accordance with generally accepted auditing standards.
           3
               Section 101 of EESA, 12 U.S.C. § 5211, established OFS within Treasury to implement TARP.
           4
            GAO, Financial Audit: Office of Financial Stability (Troubled Asset Relief Program) Fiscal Years 2011 and 2010
           Financial Statements, GAO-12-169 (Washington, D.C.: Nov. 10, 2011).


                                                                           GAO-12-415R TARP Management Report
would be prevented or detected and corrected on a timely basis. Our audit report also
identified a continuing significant deficiency 5 in OFS’s internal control over its accounting
and financial reporting processes.

This report presents (1) detailed information concerning underlying new control deficiencies
that contributed to the continuing significant deficiency identified in our audit report, along
with related recommendations for corrective actions; (2) a less-significant control deficiency
that we identified during our audit, along with a related recommendation for corrective
action; and (3) the status, as of November 4, 2011, of corrective actions taken by OFS to
address the 13 recommendations that remained open at the end of the fiscal year 2010
audit and were detailed in our April 2011 management report. 6 While the deficiencies we
identified are not considered material weaknesses, they nonetheless warrant management’s
attention and action. The four new 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. 7

Results in Brief

During fiscal year 2011, OFS addressed several of the internal control issues related to the
significant deficiency we reported for fiscal year 2010 concerning its accounting and
financial reporting processes. However, remaining uncorrected control deficiencies along
with other control deficiencies that we identified in this area in fiscal year 2011 collectively
represented a continuing significant deficiency in OFS’s internal control over its accounting
and financial reporting processes. Specifically, while OFS improved its review and approval
process for preparing its financial statements, notes, and Management Discussion and
Analysis (MD&A) for TARP for fiscal year 2011, 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. For fiscal year 2011, we
also identified deficiencies in other OFS accounting and financial reporting procedures
related to: (1) recording of noncash transactions, (2) recording of warrant adjustments, and
(3) accounting for Public-Private Investment Fund (PPIF) equity distributions.

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.




5
 A significant deficiency is a deficiency, or combination of deficiencies, in internal control that is less severe than
a material weakness, yet important enough to merit attention by those charged with governance. A material
weakness is a deficiency, or combination of deficiencies, in internal control such that there is a reasonable
possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and
corrected, on a timely basis. A deficiency in internal control exists when the design or operation of a control does
not allow management or employees, in the normal course of performing their assigned functions, to prevent, or
detect and correct, misstatements on a timely basis.
6
 GAO, Management Report: Improvements Are Needed in Internal Control Over Financial Reporting for the
Troubled Asset Relief Program, GAO-11-434R (Washington, D.C.: Apr. 18, 2011).
7
 Section 116(a) of EESA, 12 U.S.C. § 5226(a), requires GAO to report at least every 60 days on TARP activities
and performance. Products and recommendations related to GAO’s oversight of TARP are available on GAO’s
website at http://www.gao.gov.




Page 2                                                              GAO-12-415R TARP Management Report
In addition to the significant deficiency, we identified a less-significant control deficiency
relating to key patches 8 that were not in place for the server 9 supporting OFS’s subsidiary
ledger. During fiscal year 2011, OFS addressed the three less-significant control
deficiencies that existed as of September 30, 2010, and that we reported in our April 2011
management report. 10

We are making three new recommendations related to OFS’s continuing significant
deficiency and one related to the less-significant control deficiency. Further, our work
showed that OFS had completed corrective action on 10 of the 13 recommendations that
remained open at the end of the fiscal year 2010 audit, and corrective actions were in
progress on the three remaining recommendations. Enclosure I of this report summarizes
the status of actions taken as of November 4, 2011, on the recommendations that remained
open at the end of the fiscal year 2010 audit. We plan to follow up to determine the status of
corrective actions taken for the seven open recommendations during our fiscal year 2012
audit of OFS’s financial statements for TARP.

In commenting on a draft of this report, the Assistant Secretary for Financial Stability stated
that OFS concurred with the recommendations in our draft report. The Assistant Secretary
also stated that OFS began taking actions related to these recommendations in December
2011 following the release of our audit report and expects to have implemented the
corrective actions for all recommendations by September 30, 2012.

Scope and Methodology

As part of our audit of OFS’s fiscal years 2011 and 2010 financial statements for TARP, we
evaluated the design and operating effectiveness of OFS’s internal control over financial
reporting. We tested relevant internal controls over financial reporting, including those
designed to provide reasonable assurance that (1) transactions are properly recorded,
processed, and summarized to permit the preparation of the financial statements in
conformity with U.S. generally accepted accounting principles (GAAP), and assets are
safeguarded against loss from unauthorized acquisition, use, or disposition; and
(2) transactions are executed in accordance with the laws governing the use of budget
authority and other laws and regulations that could have a direct and material effect on the
financial statements.

We did not evaluate all internal controls relevant to operating objectives as broadly
established under 31 U.S.C. § 3512(c), (d), commonly known as the Federal Managers’
Financial Integrity Act, such as those controls relevant to preparing statistical reports and
ensuring efficient operations. We limited our internal control testing to controls over financial
reporting. Our internal control testing was for the purpose of expressing an opinion on the
effectiveness of internal control over financial reporting and may not be sufficient for other
purposes. Consequently, our audit may not identify all deficiencies in internal control over
financial reporting that are less severe than a material weakness. Because of inherent
limitations, internal control may not prevent or detect and correct misstatements due to error

8
 Patches are additional pieces of code that have been developed to address specific problems or flaws in
existing software. Vulnerabilities are flaws that can be exploited, enabling unauthorized access to information
technology systems or enabling users to have access to greater privileges than authorized.
9
 A server represents a computer running administrative software that controls access to all or part of the network
and its resources, such as disk drives or printers. A computer acting as a server makes resources available to
computers acting as workstations on the network.
10
     GAO-11-434R.


Page 3                                                           GAO-12-415R TARP Management Report
or fraud, losses, or noncompliance. Additional details on our audit methodology can be
found in our November 2011 audit report. 11

We performed our audit of OFS’s fiscal years 2011 and 2010 financial statements for TARP
in accordance with U.S. generally accepted government auditing standards. We believe that
our audit provided a reasonable basis for our conclusions in this report.

We requested comments on a draft of this report from the Assistant Secretary for Financial
Stability. In a letter dated February 6, 2012, OFS commented on our draft report. OFS’s
comments are reprinted in enclosure II.

Continuing Significant Deficiency in Accounting and Financial Reporting

During fiscal year 2011, OFS addressed several of the internal control issues related to the
significant deficiency we reported in November 2010 on the results of our fiscal year 2010
audit related to its accounting and financial reporting processes. 12 Three control deficiencies
remaining from our 2010 audit combined with other control deficiencies in this area that we
identified in fiscal year 2011, however, collectively represent a continuing significant
deficiency in OFS’s internal control over its accounting and financial reporting processes.
Specifically, the significant deficiency is composed of control deficiencies in the following
areas: (1) financial statement review and approval process and (2) completion or effective
implementation of procedures for other key accounting and financial reporting processes.
The following sections present additional information concerning these control deficiencies,
along with our related recommendations for corrective actions.

Financial Statement Review and Approval Process

While OFS improved its review and approval process for preparing its financial statements,
notes, and MD&A for TARP for fiscal year 2011, 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. Office of Management and
Budget (OMB) Circular No. A-136, Financial Reporting Requirements, 13 provides that
agencies are to ensure that information in the financial statements is presented in
accordance with GAAP for federal entities. Without an effectively implemented review and
approval process for preparing financial statements and related disclosures, an agency is at
risk of presenting information that is inaccurate, inconsistent, or not in conformity with
GAAP.

While we are not making any new recommendations in this area, we reaffirm our
recommendation from our June 2010 management report that the Assistant Secretary for
Financial Stability direct the Chief Financial Officer (CFO) to establish a mechanism for the
effective implementation of the review and approval process for preparing the year-end
financial statements and related disclosures, including MD&A, for TARP. 14


11
     GAO-12-169.
12
  GAO, Financial Audit: Office of Financial Stability (Troubled Asset Relief Program) Fiscal Years 2010 and 2009
Financial Statements, GAO-11-174 (Washington, D.C.: Nov. 15, 2010).
13
 OMB Circular No. A-136, Financial Reporting Requirements (Revised September 2010), establishes a central
point of reference for federal financial reporting guidance for executive-branch agencies required to submit
audited financial statements.
14
 GAO, Management Report: Improvements Are Needed in Internal Control Over Financial Reporting for the
Troubled Asset Relief Program, GAO-10-743R (Washington, D.C.: June 30, 2010).


Page 4                                                          GAO-12-415R TARP Management Report
Procedures for Other Key Accounting and Financial Reporting Processes

For fiscal year 2010, we reported instances where OFS accounting and financial reporting
procedures were not always followed or effectively implemented. Standards for Internal
Control in the Federal Government provides that federal entities should have control
activities that enforce management’s directives and help ensure that actions are taken to
address risks. 15 The standards further provide that control activities should be an integral
part of an entity’s planning, implementing, reviewing, and accountability for stewardship of
government resources and achieving effective results. While we found improvements in this
area during fiscal year 2011, we also identified instances in the following areas where OFS’s
accounting and financial reporting procedures were not complete or effectively implemented.

•    Recording of Noncash Transactions.
Most of OFS’s TARP financial transactions are automatically recorded in the general ledger
directly from OFS’s accounting subsidiary ledger. However, TARP noncash transactions and
investment and loan-related events that do not affect TARP cash flows (e.g., exchange of
preferred stock for common stock with no change in the total investment value) are not
automatically processed into the general ledger.

To determine whether all necessary noncash transactions are properly recorded in the
general ledger, OFS performs manual procedures. OFS’s procedures for recording these
transactions require a quarterly analysis of OFS’s Noncash Transaction Report to identify
any and all transactions that require recording in the general ledger and a review of the
findings from the quarterly analysis prior to recording the transactions. During fiscal year
2011, we found OFS’s procedures for recording noncash transactions were not
appropriately designed to provide reasonable assurance that the review of the analysis and
Noncash Transaction Report was completed effectively. Specifically, information
accompanying the analysis of the Noncash Transaction Report only provided the findings
from the analysis and an excerpt of the Noncash Transaction Report. Consequently, the
review did not include the entire analysis along with the entire Noncash Transaction Report
to confirm that all relevant transactions were identified for recording in the general ledger.
Based on our review of the findings from the fourth quarter analysis and the excerpt of the
Noncash Transaction Report, we were unable to readily assess the completeness of the
noncash transactions recorded in the general ledger. However, we were able to perform
other procedures to determine the general ledger’s completeness for fiscal year 2011.
Standards for Internal Control in the Federal Government provides that agencies should
appropriately design internal controls and clearly document internal controls, all
transactions, and other significant events. Without an appropriately designed control to
obtain reasonable assurance of the completeness and accuracy of the general ledger, there
is an increased risk that the financial statements could be misstated.

Recommendation for Executive Action
We recommend that the Assistant Secretary for Financial Stability direct the CFO to revise
OFS’s procedures related to recording and review of noncash transactions, to include
requirements for the individual performing the quarterly noncash transactions analysis to
provide adequate supporting documentation for the entire analysis and for the reviewer to
review this information along with the entire Noncash Transaction Report to ensure that all
necessary noncash transactions are identified and properly recorded in the general ledger.

15
 GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.:
November 1999), contains the internal control standards to be followed by executive agencies in establishing
and maintaining systems of internal control as required by 31 U.S.C. § 3512 (c), (d) (commonly referred to as the
Federal Managers’ Financial Integrity Act).


Page 5                                                          GAO-12-415R TARP Management Report
•    Recording of Warrant Adjustments in the Subsidiary Ledger.
As part of TARP’s Capital Purchase Program (CPP), OFS purchased senior preferred stock
from qualifying U.S. financial institutions. In addition to the senior preferred stock, OFS
received warrants, 16 as required by section 113(d) of EESA, from qualifying institutions to
purchase a number of shares of common stock. OFS’s written policies and procedures
provide that OFS is to record the value of such warrants and any subsequent warrant
adjustments 17 in its subsidiary ledger. Our testing for fiscal year 2011 identified that OFS did
not properly record a warrant adjustment transaction that occurred during the year in its
subsidiary ledger. Specifically, we noted that a CPP institution implemented a 1-for-15
reverse stock split of all outstanding shares of its common stock effective in January 2011.
OFS decided to delay the recording of this adjustment in its subsidiary ledger, as OFS had
other related pending adjustments and intended to record all adjustments at one time.
However, as of September 30, 2011, OFS had not recorded the related warrant adjustment
in its subsidiary ledger. OFS’s review process did not detect this error. Upon analysis, we
determined that, in this particular instance, the financial statements were misstated by
$12 million, which OFS and we deemed immaterial. As a result, OFS did not revise the
financial statements, but did subsequently correct the related warrant records in its
subsidiary ledger. Without effective implementation of procedures designed to reasonably
ensure that warrant adjustments are properly recorded, OFS faces an increased risk of
undetected material misstatements in the financial statements.

Standards for Internal Control in the Federal Government provides that agencies should
establish internal controls for all transactions and other significant events to provide
reasonable assurance that financial transactions are recorded completely and accurately
and that these transactions should be clearly documented and readily available for
examination. It further provides that documentation should appear in management
directives, administrative policies, or operating manuals.

Recommendation for Executive Action
We recommend that the Assistant Secretary for Financial Stability direct the CFO to
establish a mechanism for the effective implementation of the review process for recording
warrant adjustments.

•    Accounting for Public-Private Investment Program Distributions.
Under TARP’s Public-Private Investment Program (PPIP), OFS made equity investments in
and direct loans to nine Public-Private Investment Funds established by private-sector fund
managers for the purpose of purchasing eligible assets. 18 During fiscal year 2011, OFS
received interest on loans, loan principal repayments, and equity distributions from the
PPIFs. As part of our evaluation of OFS’s receipts of PPIF equity distributions, we found that
OFS had not established an accounting methodology and specific written procedures for
recording PPIF equity distributions. OFS was recording all equity distributions from these
PPIFs as investment income. We held discussions with OFS officials regarding OFS’s
accounting methodology for recording PPIF equity distributions entirely as investment

16
  A warrant is an option to buy shares of common stock or preferred stock at a predetermined price (i.e., exercise
price) on or before a specified date.
17
 A warrant adjustment is a change to the exercise price, the number of shares underlying the warrant, or both
because of various events such as stock splits and stock dividends.
18
 Eligible assets are the legacy Residential Mortgage-Backed Securities and Commercial Mortgage-Backed
Securities issued prior to January 1, 2009, that were originally rated AAA or an equivalent rating by two or more
nationally recognized statistical rating organizations (without external credit enhancement) and secured directly
by the actual mortgage loans, leases, or other assets.


Page 6                                                           GAO-12-415R TARP Management Report
income versus recording a portion of the PPIF equity distributions as net proceeds in excess
of cost or as repayments of the equity investment outstanding, or both. Subsequent to our
discussion, in September 2011, OFS adopted an accounting methodology for recording
PPIF equity distributions to determine portions of the equity distributions that should be
recorded as net proceeds in excess of cost or as repayments of the equity investment
outstanding, or both. Accordingly, OFS made a correcting entry in the general ledger to
record the applicable portions of PPIF equity distributions that were shown as investment
income in the OFS draft financial statements as net proceeds in excess of cost or as
repayments of the equity investment outstanding, or both. However, as of September 30,
2011, OFS lacked specific written procedures to determine that its recently adopted
accounting methodology for recording PPIF equity distributions is properly implemented for
any such future transactions.

As previously noted above, Standards for Internal Control in the Federal Government
provides that agencies should establish and document internal controls for all transactions
and other significant events. Without clearly documented procedures to reasonably assure
that PPIP distributions are properly recorded, OFS faces an increased risk of undetected
misstatements in the financial statements.

Recommendation for Executive Action
We recommend that the Assistant Secretary for Financial Stability direct the CFO to develop
and implement written procedures to provide reasonable assurance that PPIF equity
distributions are properly recorded in the general ledger in accordance with OFS’s adopted
accounting methodology.

Other Control Deficiency—Key Patches on the Server Supporting OFS’s Subsidiary
Ledger

In addition to the significant deficiency, we identified an additional control deficiency that we
consider not to be a material weakness or significant deficiency, but nevertheless warrants
OFS management’s attention and action. We identified a deficiency concerning OFS’s
controls over key patches on the server supporting OFS’s subsidiary ledger. Specifically,
Treasury did not have numerous key patches in place for the server supporting OFS’s
subsidiary ledger (the Core Information Transaction Flow [CITF] system). 19 Patch
management is a critical process to securing computing systems 20 and data processed in
those systems. National Institute of Standards and Technology Special Publication 800-53
provides that organizations should promptly install security-relevant software updates (such
as patches). However, during our testing, we noted that Treasury did not apply key
operating system and application patches on the server supporting OFS’s subsidiary ledger
in a timely manner. At the time of our testing, 36 “critical” or “important” (as defined by the
vendor) patches had not been installed, and were over 90 days old. Missing patches provide
paths for an attacker to compromise the integrity of the server and the processed data,
increasing the risk that known vulnerabilities could be exploited.




19
     The server that supports CITF is maintained by Treasury.
20
 See GAO, Information Security: Continued Action Needed to Improve Software Patch Management,
GAO-04-706 (Washington, D.C.: June 2, 2004).


Page 7                                                          GAO-12-415R TARP Management Report
Recommendation for Executive Action
We recommend that the Assistant Secretary for Financial Stability establish procedures for
coordinating with the Treasury Chief Information Officer to ensure the timely installation of
patches to the CITF.

Agency Comments

In commenting on a draft of this report, the Assistant Secretary for Financial Stability stated
that OFS concurred with the recommendations in our draft report. The Assistant Secretary
also stated that OFS began taking actions related to these recommendations in December
2011 following the release of our audit report and expects to have implemented corrective
actions for all recommendations by September 30, 2012. We plan to follow up to determine
the status of corrective actions taken for these matters during our fiscal year 2012 audit.

                                             ----

This report is intended for use by OFS management. We are sending copies of this report to
interested congressional committees and members, the Secretary of the Treasury, Inspector
General of the Department of the Treasury, Deputy Special Inspector General for TARP,
Financial Stability Oversight Board, Acting Director of the Office of Management and
Budget, and others. In addition, this report is available at no charge on the GAO website at
http://www.gao.gov.

We acknowledge and appreciate the cooperation and assistance provided by OFS
management and staff during our audits of OFS’s fiscal years 2011 and 2010 financial
statements for TARP. If you have questions about this report, please contact me at (202)
512-3406 or engelg@gao.gov. Contact points for our Offices of Congressional Relations
and Public Affairs may be found on the last page of this report.

Sincerely yours,




Gary T. Engel
Director
Financial Management and Assurance

Enclosures - 2




Page 8                                                 GAO-12-415R TARP Management Report
Enclosure I: Status of Open Recommendations from Our Prior Year Management Report


Our fiscal year 2011 audit included a review of the status of the Office of Financial Stability’s (OFS)
corrective actions to address the open recommendations from our April 2011 management report. 1
Table 1 summarizes the open recommendations included in that report, including the status of the
recommendations according to OFS, as well as our own assessment as of November 4, 2011. In all
instances, we agreed with OFS’s assessment of the status of the recommendation. In summary, 10
of the 13 recommendations have been closed, and 3 remain open. We will continue to monitor
OFS’s progress in addressing the open recommendations as part of our fiscal year 2012 financial
statement audit.

Table 1: Status of Open Recommendations from Our Prior Year Management Report
(as of November 4, 2011, the date of our audit report)
                                                             Status of recommendation
 Count Number Recommendation                 Per OFS                       Per GAO
 GAO-10-743R (TARP Fiscal Year 2009 Management Report)
 1        09-1      Establish a              Open. Draft fiscal year       Open. While OFS
                    mechanism for the        2011 year-end financial       improved its review and
                    effective                statements, notes, and        approval process for
                    implementation of the Management Discussion            preparing its financial
                    review and approval      and Analysis (MD&A) were statements, notes, and
                    process for preparing provided to GAO early in         MD&A for TARP, we
                    the year-end financial OFS’s Agency Financial          identified incorrect
                    statements and           Report production process amounts and inconsistent
                    related disclosures,     at the request of the         disclosures in OFS’s draft
                    including                auditors. OFS has a robust fiscal year 2011 financial
                    management               process to identify           statements, notes, and
                    discussion and           incorrect amounts and         MD&A that were not
                    analysis, for TARP.      inconsistent disclosures in detected by OFS. During
                                             the draft financial           our fiscal year 2012 audit
                                             statements, notes, and        of OFS’s financial
                                             MD&A. OFS plans to            statements for TARP, we
                                             develop a master template will consider and assess
                                             of financial statement,       any changes OFS makes
                                             footnote, and MD&A            to its policies and
                                             information to separate the procedures in fiscal year
                                             data gathering from the       2012.
                                             assembly of the Agency
                                             Financial Report. Also,
                                             OFS will consider utilizing
                                             contractors for referencing
                                             the financial statements,
                                             footnotes, and MD&A.




   1
    GAO, Management Report: Improvements Are Needed in Internal Control Over Financial Reporting for the Troubled
   Asset Relief Program, GAO-11-434R (Washington, D.C.: Apr. 18, 2011).




   Page 9                                                          GAO-12-415R TARP Management Report
Enclosure I: Status of Open Recommendations from Our Prior Year Management Report


                                                    Status of recommendation
Count     Number   Recommendation         Per OFS                 Per GAO
2         09-6     Update OFS’s asset     Closed.                 Closed.
                   valuation procedures
                   to include specific
                   requirements for
                   documenting the
                   basis of economic
                   and financial model
                   assumption values
                   derived from
                   informed opinion
                   consistent with
                   FASAB Technical
                   Release 6.
3         09-12    Develop and            Closed.                Closed.
                   implement written
                   procedures to
                   document the
                   rationale for
                   established
                   thresholds used in
                   determining whether
                   to investigate
                   differences between
                   the asset manager
                   valuations and OFS’s
                   internally developed
                   asset valuations.
4         09-18    Develop, document,     Closed.                Closed.
                   and implement a
                   mechanism to track
                   the location of
                   executed
                   agreements.




    Page 10                                         GAO-12-415R TARP Management Report
Enclosure I: Status of Open Recommendations from Our Prior Year Management Report



                                                Status of recommendation
Count Number Recommendation            Per OFS                Per GAO
GAO-11-434R (TARP Fiscal Year 2010 Management Report)
5      10-1     Establish a            Closed.                Closed.
                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.




   Page 11                                        GAO-12-415R TARP Management Report
Enclosure I: Status of Open Recommendations from Our Prior Year Management Report


                                                           Status of recommendation
Count     Number   Recommendation           Per OFS                      Per GAO
6         10-2     Establish a              Open. In addition to         Open. During fiscal year
                   mechanism for            period-end reconciliation    2011, we found that OFS
                   ensuring (1) that only   review and approval          established a mechanism
                   those individuals        procedures, OFS has          to ensure that only those
                   specifically             multiple compensating        individuals specifically
                   designated in OFS’s      processes to ensure that     designated in OFS’s
                   policies and             material errors are          policies and procedures to
                   procedures to review     discovered and corrected     review and approve
                   and approve period-      in a timely manner.          period-end reconciliations
                   end reconciliations      Therefore, OFS plans to      conduct such procedures.
                   conduct such             update its policies and      However, we continued to
                   procedures and (2)       procedures to broaden the identify errors in certain
                   effective review of      population of acceptable     reconciliations that were
                   period-end               technical and responsibility undetected during the
                   reconciliations by the   reviewers and to clarify     review. During our fiscal
                   designated official.     certain expectations about year 2012 audit of OFS’s
                                            what each review will        financial statements for
                                            accomplish.                  TARP, we will consider
                                                                         and assess any changes
                                                                         OFS makes to its policies
                                                                         and procedures in fiscal
                                                                         year 2012.
7         10-3     Establish a              Open. In addition to journal Open. During fiscal year
                   mechanism for            entry review and approval    2011, we continued to
                   ensuring effective       procedures, OFS has          identify ineffective
                   reviews of               multiple compensating        implementation of OFS’s
                   documentation            processes to ensure that     policies and procedures
                   attached to journal      material errors are          related to the review and
                   entries, including       discovered and corrected     approval of journal entries.
                   ensuring such            in a timely manner.          During our fiscal year 2012
                   reviews assess           Therefore, OFS plans to      audit of OFS’s financial
                   whether the              update its policies and      statements for TARP, we
                   supporting               procedures to broaden the will consider and assess
                   documentation is         population of acceptable     any changes OFS makes
                   sufficient and           technical and responsibility to its policies and
                   consistent with the      reviewers and to clarify     procedures in fiscal year
                   journal entry before     certain expectations about 2012.
                   such entries are         what journal voucher
                   recorded in the          review will accomplish.
                   general ledger.




    Page 12                                               GAO-12-415R TARP Management Report
Enclosure I: Status of Open Recommendations from Our Prior Year Management Report


                                                      Status of recommendation
Count      Number   Recommendation          Per OFS                 Per GAO
8          10-4     Establish a             Closed.                 Closed.
                    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.
9          10-5     Establish a             Closed.                Closed.
                    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.
10         10-6     Establish a             Closed.                Closed.
                    mechanism for
                    ensuring that
                    changes in OFS’s
                    Automotive Industry
                    Financing Program
                    valuation
                    methodology,
                    including the
                    rationale for the
                    changes, are
                    documented in
                    accordance with OFS
                    policies and
                    procedures.




     Page 13                                          GAO-12-415R TARP Management Report
Enclosure I: Status of Open Recommendations from Our Prior Year Management Report


                                                                Status of recommendation
Count       Number          Recommendation            Per OFS                 Per GAO
11          10-7            Establish a               Closed.                 Closed.
                            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 the
                            Statement of Federal
                            Financial Accounting
                            Standards No. 2.
12          10-8            Establish a               Closed.                Closed.
                            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
                            Compliance
                            Committee charter.
13          10-9            Verify that the           Closed.                Closed.
                            accrual calculated by
                            IR2, the housing
                            program system that
                            is maintained by a
                            third-party
                            administrator,
                            appropriately
                            accounts for
                            mortgages which
                            have reached their
                            maximum incentive
                            payment amounts.
     Source: GAO and OFS.




     Page 14                                                    GAO-12-415R TARP Management Report
Enclosure II: Comments from the Office of Financial Stability




(198701)


Page 15                                    GAO-12-415R TARP Management Report
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