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2000 Annual Report


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Comptroller General
of the United States


United States General Accounting Office
Washington D.C.  20548



To the Board of Directors
Federal Deposit Insurance Corporation


We have audited the statements of financial position as of December 31, 2000 and 1999, for the three funds administered by the Federal Deposit Insurance Corporation (FDIC), the related statements of income and fund balance (accumulated deficit), and the statements of cash flows for the years then ended. 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 are presented fairly in conformity with U.S. generally accepted accounting principles;
  • although certain internal controls should be improved, FDIC had effective internal control over financial reporting (including safeguarding of assets) and compliance with laws and regulations; and
  • no reportable noncompliance with the laws and regulations that we tested.

The following sections discuss our conclusions in more detail. They also present information on (1) the scope of our audits, (2) a reportable condition 1 related to information system general control weaknesses noted during our 2000 audits, (3) the future of FRF, and (4) our evaluation of FDIC’s comments on a draft of this report.

Opinion on Bank Insurance Fund’s Financial Statements
The financial statements including the accompanying notes present fairly, in all material respects, in conformity with U.S. generally accepted accounting principles, the Bank Insurance Fund’s financial position as of December 31, 2000 and 1999, and the results of its operations and its cash flows for the years then ended.

Opinion on Savings Association Insurance Fund’s Financial Statements
The financial statements including the accompanying notes present fairly, in all material respects, in conformity with U.S. generally accepted accounting principles, the Savings Association Insurance Fund’s financial position as of December 31, 2000 and 1999, and the results of its operations and its cash flows for the years then ended.

Opinion on FSLIC Resolution Fund’s Financial Statements
The financial statements including the accompanying notes present fairly, in all material respects, in conformity with U.S. generally accepted accounting principles, the FSLIC Resolution Fund’s financial position as of December 31, 2000 and 1999, and the results of its operations and its cash flows for the years then ended.

As discussed in note 8 of FRF’s financial statements, a contingency exists from approximately 120 lawsuits filed in the United States Court of Federal Claims concerning the counting of goodwill assets as part of regulatory capital. FDIC has concluded that it is probable that FRF will be required to pay possibly substantial amounts as a result of future judgments and settlements. FDIC is currently unable to estimate a range of loss to FRF, or determine whether any such loss would have a material effect on the financial condition of FRF. However, funds to pay such judgments or compromise settlements from these goodwill litigation cases are made available to the FRF by an indefinite, permanent appropriation as provided by Section 110 of the Department of Justice Appropriations Act, 2000.

Opinion on Internal Control
Although certain internal controls should be improved, FDIC management maintained, in all material respects, effective internal control over financial reporting (including safeguarding assets) and compliance as of December 31, 2000, that provided reasonable assurance that misstatements, losses, or noncompliance, material in relation to the FDIC’s financial statements would be prevented or detected on a timely basis. FDIC management asserted that its internal control was effective based on criteria established under 31 U.S.C. 3512 (Federal Managers’ Financial Integrity Act —FMFIA). In making its assertion, FDIC management also fairly stated the need to improve ertain internal controls.

Our work identified weaknesses in FDIC’s information system general controls, as described as a reportable condition in a later section of this report. The weakness in information system general controls, although not considered material, represents a significant deficiency in the design or operations of internal control that could adversely affect FDIC’s ability to meet its internal control objectives. Although the weakness did not materially affect the 2000 financial statements, misstatements may nevertheless occur in other FDIC-reported financial information as a result of the internal control weakness.

Compliance With Laws and Regulations
Our tests for compliance with selected provisions of laws and regulations disclosed no instances of noncompliance that would be reportable under U.S. 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.

Objectives, Scope, and Methodology
FDIC’s management is responsible for (1) preparing the annual financial statements in conformity with U.S. generally accepted accounting principles, (2) establishing, maintaining, and assessing internal control to provide reasonable assurance that the broad control objectives of FMFIA are met, and (3) complying with applicable laws and regulations.

We are responsible for obtaining reasonable assurance about whether (1) the financial statements are presented fairly, in all material respects, in conformity with U.S. generally accepted accounting principles, and (2) management maintained effective internal control, the objectives of which are

  • financial reporting – transactions are properly recorded, processed, and summarized to permit the preparation of financial statements in conformity with U.S. generally accepted accounting principles, and assets are safeguarded against loss from unauthorized acquisition, use, or disposition, and
  • compliance with laws and regulations – transactions are executed in accordance with laws and regulations that could have a direct and material effect on the financial statements.

We are also responsible for testing compliance with selected provisions of laws and regulations that have a direct and material effect on the financial statements.

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 internal control related to financial reporting, including safeguarding assets, and compliance with laws and regulations, including the execution of transactions in accordance with management’s authority;
  • tested relevant internal control over financial reporting, including safeguarding assets, and compliance, and evaluated the design and operating effectiveness of internal control;
  • considered FDIC’s process for evaluating and reporting on internal control based on criteria established by FMFIA; and
  • tested compliance with selected provisions of the Federal Deposit Insurance Act, as amended and the Chief Financial Officers Act of 1990.

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 controls over financial reporting and compliance. Because of inherent limitations in internal control, misstatements due to error or fraud, losses, or noncompliance may 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 did not test compliance with all laws and regulations applicable to FDIC. We limited our tests of compliance to those deemed applicable to the financial statements for the year ended December 31, 2000. We caution that noncompliance may occur and not be detected by these tests and that such testing may not be sufficient for other purposes.

We conducted our audits from July 2000 through April 6, 2001. We performed our work in accordance with U.S. generally accepted government auditing standards.

FDIC provided comments on a draft of this report. They are discussed and evaluated in a later section of this report.

Reportable Condition
As part of the financial statement audits, we reviewed FDIC’s information systems general controls. The primary objectives of information system general controls are to safeguard data, protect computer application programs, prevent system software from unauthorized access, and ensure continued computer operations in case of unexpected interruption. Information system general controls include corporatewide security program planning and management, access controls, system software, application software development and change controls, segregation of duties, and service continuity controls. The effectiveness of application controls 2 depends on the effectiveness of general controls. Both information system general controls and application controls must be effective to help ensure the reliability, appropriate confidentiality, and availability of critical automated information.

In performing our tests, we identified weaknesses in FDIC’s corporatewide security program, access controls, segregation of duties, system software, and service continuity. As we have reported to FDIC in 1998 and 1999 3 the underlying cause of many of these general control weaknesses is rooted in the lack of a fully implemented and effective corporatewide security program. This critical area is generally the foundation of an entity’s security control, and reflects the entity’s commitment to addressing security risks over the long term. In our 1999 report, we provided FDIC with recommended corrective actions and acknowledged that it takes a significant and sustained effort by FDIC management to establish an effective corporatewide security program. In response, FDIC management stated its commitment to implement a strong information system environment. During 2000, we found that FDIC developed plans for correcting many of the weaknesses we identified, however, implementation of these plans had not occurred as of December 31, 2000.

The weaknesses in information system general controls can significantly impair the effectiveness of all FDIC’s application controls, including financial systems. We considered the effect of the information system general control weaknesses and determined that other management controls mitigated their effect on the financial statements. Because of their sensitive nature, the details surrounding these weaknesses are being communicated to FDIC management, along with our recommendations for corrective actions, through separate correspondence.

In addition to these weaknesses, we identified less significant matters involving FDIC’s system of internal accounting control that we will be reporting in separate correspondence to FDIC management.

Future of FRF
FDIC, as administrator of FRF, is responsible for completing the liquidation of the assets and liabilities of the former Federal Savings and Loan Insurance Corporation (FSLIC) and Resolution Trust Corporation (RTC). 4 FRF will continue operations until all of its assets are sold or otherwise liquidated and all of its liabilities are satisfied. As shown in table 1, since 1996 FRF has had a significant decline in total assets and liabilities and, in particular, in the assets not yet liquidated. FDIC expects continued rapid decline in FRF assets. Through December 31, 2000, FRF has returned $4.6 billion to the U.S. Treasury and has made $1.4 billion of payments to the Resolution Funding Corporation (REFCORP). 5

Table 1:  FRF’s Assets and Liabilities as of January 1,1996 and December 31, 2000
(Dollars in billions)
  Jan 1, 1996 Dec. 31, 2000 Percent Increase/(Decrease)
Cash and cash equivalents $1.5 $5.5 133
Assets not yet liquidated 13.9 2.3 ( 83)
Total Assets 15.4 5.8 (62)
Total Liabilities $11.2 $0.1 (99)

As described in notes 3 and 4 of FRF’s financial statements, two major components of the assets not yet liquidated are receivables from thrift resolutions (about $0.5 billion) and investments in securitization related assets (about $1.8 billion). Most of the receivables from thrift resolutions represent amounts advanced and/or obligations incurred for resolving troubled and failed insured thrifts. FDIC manages and disposes the assets from failed thrifts through receiverships. 6 Most of the remaining assets in these receiverships are cash. FDIC is pursuing the complete liquidation of these receiverships during the year 2001 except for those receiverships involved in goodwill litigation. 7 The securitization related assets had a weighted-average remaining life of less than 1 year on December 31, 2000.

The operations of FRF will eventually meet a point where maintaining a separate liquidation entity may not be cost-effective. At that time, there may be some assets that are not fully liquidated; pending legal liabilities that may take years to settle; and certain assets the disposal of which may not be in the best interest of the United States government. FDIC has a research and evaluation effort underway to identify the remaining issues that need to be resolved, along with possible disposition strategies, in order to dissolve FRF as contemplated by the Federal Deposit Insurance Act. Also, due to the unique nature of several of these assets and liabilities, FDIC anticipates that its effort will include the development of new disposal plans for its remaining assets and liabilities.

Following are some of the issues and items remaining in FRF:

  • Over 900 criminal restitution orders are outstanding, in the amount of approximately $600 million, which will remain open for nearly 20 years. The actual amount that will ultimately be collected is unknown. 8 During 2000, FDIC collected $3.2 million from these outstanding restitution orders.

  • Over 90 outstanding items, which include litigation claims and judgments, were obtained against officers and directors and other professionals responsible for causing thrift losses with an estimated recoverable value of approximately $80 million. These judgments are renewable based on individual state law. Generally, the renewals vary from 5 to 10 years and are renewable more than once. 9 FDIC recovered $31.9 million in claims during 2000.
  • Numerous assistance agreements entered into by the former FSLIC will remain open for many years as those assisted institutions share with FRF their tax savingsthat result from the tax free nature of FSLIC assistance. 10 In 2000, FRF collected over $80 million as its share of these tax savings.
  • Various litigation cases are outstanding. FRF is involved in approximately 700 cases. 11 The most numerous, and substantial in terms of liability involve goodwill litigation. 12  To date, approximately 120 lawsuits have been filed against the United States government. Because of appeals and differences in awarding damages in the cases thus far, the final outcome in the cases and the amount of any possible damages remain uncertain. There are also litigation cases in which FRF is the plaintiff for itself, or is acting in a fiduciary manner on behalf of the receivershipsresulting from failed financial institutions. These pending cases may take years to settle, and many of the goodwill cases are still pending from the early 1990s.
  • Potential liabilities may exist due to representations and warranties made to support the sale of loans and servicing rights. 13 These liabilities could be incurred over the remaining life of the loans, which could be as long as 20 years.

Only when the remaining asset and liability issues, some of which are highlighted above, are resolved can FRF be formally dissolved. FDIC is considering whether seeking enabling legislation or other measures may be needed to dissolve the remaining FRF assets and liabilities.

FDIC Comments and Our Evaluation
In commenting on a draft of this report, FDIC acknowledged the information system weakness, and stated a commitment to continue its efforts to strengthen its information security program and to incorporate GAO’s recommendations into its security plans for 2001. We plan to evaluate the effectiveness on FDIC’s corrective actions in information security as part of our 2001 audit of FDIC’s financial statements and internal control.

FDIC also stated that it will continue to monitor the other matters discussed in our report, including goodwill litigation cases.

Signature:  David Walker

David M. Walker
Comptroller General
of the United States

April 6, 2001


Footnotes

1 Reportable conditions involve matters coming to the auditor’s attention that, in the auditor’s judgment, should be communicated because they represent significant deficiencies in the design or operation of internal control, and could adversely affect FDIC’s ability to meet the control objectives described in this report.

2 Application controls consist of the structure, policies, and procedures that apply to separate, individual systems, such as accounts payable and general ledger systems.

3 Because of their sensitive nature, in 1998 and 1999 we communicated to FDIC management the details surrounding the weaknesses and vulnerabilities we identified, along with our recommendations for corrective action, through separate correspondence.

4 On January 1, 1996, FRF assumed responsibility for all remaining assets and liabilities of the former RTC.

5 The RTC Completion Act required FDIC to return to the U.S. Treasury any funds that were transferred to RTC pursuant to the RTC Completion Act but not needed by RTC. The RTC Completion Act made available $18.3 billion of additional funding. Prior to RTC’s termination on December 31, 1995, RTC drew down $4.6 billion of the $18.3 billion made available by the RTC Completion Act. The full amount of the appropriation transferred to RTC has been fully repaid. After providing for all outstanding RTC liabilities, FDIC must also transfer the net proceeds from the sale of RTC-related assets to the REFCORP. Any funds transferred to REFCORP are used to pay the interest on REFCORP bonds issued to provide funding for the early RTC resolutions.

6 The assets held by receiverships, and the claims against them, are accounted for separately from FRF’s assets and liabilities to ensure that liquidation proceeds are distributed in accordance with applicable laws and regulations.

7 See note 8 of FRF’s financial statements for a description of goodwill litigation and its impact.

8 U.S. generally accepted accounting principles state that contingencies that result in gains are usually not reflected in the financial statements to avoid recognizing revenue prior to its realization.

9 See footnote 8 of this report.

10 See footnote 8 of this report.

11 Whereas FRF is involved in approximately 700 cases, FDIC records losses for only those cases where the contingent loss is considered probable and reasonably estimable. FDIC also discloses contingent losses that are reasonably possible. See note 8 of FRF’s financial statements.

12 See footnote 7 of this report.

13 See note 3 of FRF’s financial statements for a description of representations and warranties.



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