Management Report
Improvements Are Needed in Internal Control Over Financial Reporting for the Troubled Asset Relief Program Gao ID: GAO-11-434R April 18, 2011The Emergency Economic Stabilization Act of 2008 (EESA) requires that we annually audit the financial statements of the Troubled Asset Relief Program (TARP), which is implemented by the Office of Financial Stability (OFS). On November 15, 2010, we issued our audit report including (1) an unqualified opinion on OFS's financial statements for TARP as of and for the fiscal years ended September 30, 2010, and 2009, and (2) an opinion that OFS maintained effective internal control over financial reporting as of September 30, 2010. We also reported that our tests of OFS's compliance with selected provisions of laws and regulations for the fiscal year ended September 30, 2010, disclosed no instances of noncompliance. Our November 2010 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, 2010, that provided reasonable assurance that misstatements, losses, or noncompliance material in relation to the financial statements would be prevented or detected and corrected on a timely basis. Our audit report also identified a significant deficiency5 in OFS's internal control over its accounting and financial processes. This report presents (1) more detailed information concerning underlying specific control deficiencies that contributed to the significant deficiency identified in our audit report, along with related recommendations for corrective actions; (2) other less significant control deficiencies that we identified during our audit, along with related recommendations for corrective actions; and (3) the status, as of November 5, 2010, of corrective actions taken by OFS to address the 20 recommendations that were detailed in our June 2010 management report. While the deficiencies we identified are not considered material weaknesses, they nonetheless warrant management's attention and action. The 9 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.
During fiscal year 2010, OFS addressed one of the two significant deficiencies that we reported in December 2009 on the results of our audit for fiscal year 2009, and made progress in addressing the other. Specifically, OFS sufficiently addressed the issues regarding OFS's verification procedures over the data used for asset valuations such that we no longer consider this area to be a significant deficiency as of September 30, 2010. OFS completed corrective action on both of the related recommendations during fiscal year 2010. In addition, OFS addressed many of the issues related to the other significant deficiency we reported for fiscal year 2009 concerning its accounting and financial reporting processes. OFS completed corrective action on 12 of the 15 recommendations regarding this significant deficiency during fiscal year 2010. However, the remaining 3 uncorrected control deficiencies along with other control deficiencies that we identified in this area in fiscal year 2010 collectively represented a continuing significant deficiency in OFS's internal control over its accounting and financial reporting processes. Specifically, we found: (1) While improvements were noted in OFS's review and approval process for preparing its financial statements, notes, and management's discussion and analysis (MD&A) for TARP from what we had found for fiscal year 2009, 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. (2) For fiscal year 2009, we reported that OFS had not finalized its procedures related to its process for accounting for certain program transactions, preparing its September 30, 2009, financial statements, and its oversight and monitoring of financial-related services provided to OFS by asset managers and certain financial agents. During fiscal year 2010, we found that most of these procedures were finalized. However, we identified instances where OFS's procedures were not always followed or effectively implemented. (3) OFS's documentation was incomplete for certain areas of its asset valuation process. Specifically, some valuation methodology changes and the basis for certain assumptions derived from informed opinion that were used in valuing TARP's assets were not included in its written documentation. After we notified OFS that the documentation was incomplete, it was able to provide adequate additional information about its asset valuation process. (4) OFS did not have adequate procedures to determine whether the tool and related guidance it used properly calculated valuations for certain TARP assets with projected future disbursements. OFS's use of the tool and related guidance resulted in errors in the valuation of such assets. 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. 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. In addition to the significant deficiency, we identified other less significant control deficiencies related to (1) documenting and communicating financial-related housing program issues, and (2) calculating the housing program accrual. During fiscal year 2010, OFS addressed two of the three less significant control deficiencies that we reported in our June 2010 management report. We are making 7 new recommendations related to OFS's significant deficiency and 2 related to the other less significant control deficiencies.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Gary T. Engel Team: Government Accountability Office: Financial Management and Assurance Phone: (202) 512-8815GAO-11-434R, Management Report: Improvements Are Needed in Internal Control Over Financial Reporting for the Troubled Asset Relief Program
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GAO-11-434R:
United States Government Accountability Office:
Washington, DC 20548:
April 18, 2011:
Mr. Timothy G. Massad:
Acting 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)[Footnote 1]
requires that we annually audit the financial statements[Footnote 2]
of the Troubled Asset Relief Program (TARP), which is implemented by
the Office of Financial Stability (OFS).[Footnote 3] On November 15,
2010, we issued our audit report[Footnote 4] including (1) an
unqualified opinion on OFS's financial statements for TARP as of and
for the fiscal years ended September 30, 2010, and 2009, and (2) an
opinion that OFS maintained effective internal control over financial
reporting as of September 30, 2010. We also reported that our tests of
OFS's compliance with selected provisions of laws and regulations for
the fiscal year ended September 30, 2010, disclosed no instances of
noncompliance.
Our November 2010 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, 2010, that provided reasonable assurance that
misstatements, losses, or noncompliance material in relation to the
financial statements would be prevented or detected and corrected on a
timely basis. Our audit report also identified a significant
deficiency[Footnote 5] in OFS's internal control over its accounting
and financial processes.
This report presents (1) more detailed information concerning
underlying specific control deficiencies that contributed to the
significant deficiency identified in our audit report, along with
related recommendations for corrective actions; (2) other less
significant control deficiencies that we identified during our audit,
along with related recommendations for corrective actions; and (3) the
status, as of November 5, 2010, of corrective actions taken by OFS to
address the 20 recommendations that were detailed in our June 2010
management report.[Footnote 6] While the deficiencies we identified
are not considered material weaknesses, they nonetheless warrant
management's attention and action. The 9 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.[Footnote 7]
Results in Brief:
During fiscal year 2010, OFS addressed one of the two significant
deficiencies that we reported in December 2009 on the results of our
audit for fiscal year 2009,[Footnote 8] and made progress in
addressing the other. Specifically, OFS sufficiently addressed the
issues regarding OFS's verification procedures over the data used for
asset valuations such that we no longer consider this area to be a
significant deficiency as of September 30, 2010. OFS completed
corrective action on both of the related recommendations during fiscal
year 2010. In addition, OFS addressed many of the issues related to
the other significant deficiency we reported for fiscal year 2009
concerning its accounting and financial reporting processes. OFS
completed corrective action on 12 of the 15 recommendations regarding
this significant deficiency during fiscal year 2010. However, the
remaining 3 uncorrected control deficiencies along with other control
deficiencies that we identified in this area in fiscal year 2010
collectively represented a continuing significant deficiency in OFS's
internal control over its accounting and financial reporting
processes. Specifically, we found:
* While improvements were noted in OFS's review and approval process
for preparing its financial statements, notes, and management's
discussion and analysis (MD&A) for TARP from what we had found for
fiscal year 2009, 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 2009, we reported that OFS had not finalized its
procedures related to its process for accounting for certain program
transactions, preparing its September 30, 2009, financial statements,
and its oversight and monitoring of financial-related services
provided to OFS by asset managers and certain financial agents. During
fiscal year 2010, we found that most of these procedures were
finalized. However, we identified instances where OFS's procedures
were not always followed or effectively implemented.
* OFS's documentation was incomplete for certain areas of its asset
valuation process. Specifically, some valuation methodology changes
and the basis for certain assumptions derived from informed opinion
that were used in valuing TARP's assets were not included in its
written documentation.[Footnote 9] After we notified OFS that the
documentation was incomplete, it was able to provide adequate
additional information about its asset valuation process.
* OFS did not have adequate procedures to determine whether the tool
and related guidance it used properly calculated valuations for
certain TARP assets with projected future disbursements.[Footnote 10]
OFS's use of the tool and related guidance resulted in errors in the
valuation of such assets.
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.
In addition to the significant deficiency, we identified other less
significant control deficiencies related to (1) documenting and
communicating financial-related housing program issues, and (2)
calculating the housing program accrual. During fiscal year 2010, OFS
addressed two of the three less significant control deficiencies that
we reported in our June 2010 management report.[Footnote 11]
We are making 7 new recommendations related to OFS's significant
deficiency and 2 related to the other less significant control
deficiencies. Further, our work showed that OFS had completed
corrective action on 16 of the 20 recommendations and corrective
actions were in progress on the 4 remaining recommendations from our
fiscal year 2009 TARP financial statements audit work. Enclosure I of
this report summarizes the status of actions taken as of November 5,
2010, on the recommendations from our fiscal year 2009 TARP financial
statements audit work. We plan to follow up to determine the status of
corrective actions taken for the open recommendations during our
fiscal year 2011 audit of OFS's financial statements for TARP.
In commenting on a draft of this report, the Acting Assistant
Secretary for Financial Stability stated that OFS concurred with the
recommendations in our draft report. The Acting Assistant Secretary
also stated that OFS began taking actions related to these
recommendations in January 2011 following the release of our audit
report and expects to have implemented the corrective actions for all
recommendations by September 30, 2011.
Scope and Methodology:
As part of our audit of OFS's fiscal years 2010 and 2009 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 or fraud, losses, or noncompliance. Additional details on
our audit methodology can be found in our November 2010 audit report.
[Footnote 12]
We performed our audit of OFS's fiscal years 2010 and 2009 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 Acting
Assistant Secretary for Financial Stability. In a letter dated April
13, 2011, OFS commented on our draft report. OFS's comments are
reprinted in enclosure II.
Significant Deficiency:
During fiscal year 2010, OFS addressed many of the issues related to
the significant deficiency we reported in December 2009 on the results
of our fiscal year 2009 audit related to its accounting and financial
reporting processes.[Footnote 13] However, three control deficiencies
remained as of September 30, 2010. Those remaining deficiencies
combined with other control deficiencies in this area that we
identified in fiscal year 2010, collectively represent a significant
deficiency in OFS's controls 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 (2) implementation of required
procedures for certain key accounting and financial reporting
processes (3) documentation for certain areas of OFS's asset valuation
processes and (4) evaluating the results from calculations of certain
asset valuations. The following sections present additional
information concerning these control deficiencies that collectively
represented the significant deficiency we identified, along with our
related recommendations for corrective actions.
Financial Statement Review and Approval Process:
While we found improvements in OFS's review and approval process for
preparing its financial statements, notes, and MD&A for TARP from what
we had found for fiscal year 2009, we continued to identify
significant, but not material, errors in reported amounts and
inconsistent disclosures in OFS's 2010 draft financial statements,
notes, and MD&A that were not detected by OFS. The Office of
Management and Budget (OMB) Circular No. A-136, Financial Reporting
Requirements,[Footnote 14] 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.
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.[Footnote 15]
Implementation of Required Procedures for Certain Key Accounting and
Financial Reporting Processes:
For fiscal year 2009, we reported that OFS had not finalized its
procedures for accounting for certain program transactions, preparing
its September 30, 2009, financial statements, and its oversight and
monitoring of financial-related services that asset managers and
certain financial agents provided to OFS.[Footnote 16] During fiscal
year 2010, we found that most of these procedures were finalized.
However, we identified instances where OFS's procedures were not
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.[Footnote 17] 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. We found the following areas where OFS's procedures
were not always followed or effectively implemented:
* Implementation of internal control process. OFS adopted a framework
for organizing the development and implementation of its systems of
internal control using GAO's standards for internal control and the
guidance in OMB Circular No. A-123, Management's Responsibility for
Internal Control (A-123). OFS has A-123-related policies and
procedures that require it to measure compliance with internal control
standards as well as compliance with its own policies. This is a
significant component of OFS's required procedures for evaluating and
reporting on internal control over financial reporting. As part of
forming an opinion on the effectiveness of OFS's internal control, we
evaluated OFS's A-123 process. We found that OFS had designed an
extensive A-123 process, which included OFS identifying its key
internal controls, evaluating the design of the internal controls, and
testing the operating effectiveness of its internal controls based on
its own policies and procedures. However, as part of OFS's execution
of its A-123 process, we found OFS did not always ensure consistency
between its A-123 documentation and its policies and procedures. For
example, within OFS's A-123 documentation, OFS identified that a
certain form was required to be completed as part of a specific
accounting function, whereas the related accounting policies and
procedures did not require completion of such a form. In addition, in
some cases we found inconsistencies between the actual practices
carried out by OFS personnel and the related accounting policies and
procedures.
Furthermore, we found that OFS's A-123 testing of the operating
effectiveness of key internal controls was not always effective.
During fiscal year 2010, we tested these same key internal controls
over financial reporting that OFS tested as part of its A-123 process
and found that in some instances our results differed from OFS's. For
example, we noted several exceptions in operating effectiveness when
we tested OFS's journal entry review and approval controls, whereas
the OFS review did not identify any exceptions based on its own
testing of these controls. As such, we concluded the testing performed
by OFS was not always properly executed in accordance with its
policies and procedures.
Without adequate assurance that its A-123 documentation, policies and
procedures, and practices employed by OFS personnel are consistent and
effectively implemented, OFS may not appropriately identify
deficiencies in design or operating effectiveness of internal controls
over financial reporting, which could increase the risk of
misstatements in OFS's financial statements for TARP.
* Period-end reconciliations. OFS procedures require performing
several general ledger reconciliations as part of its period-end
financial statement close process. However, we found several key
required reconciliations were reviewed and approved by individuals who
were not designated to perform the reviews according to OFS's policies
and procedures. We also found some reconciliations that, although
reviewed and approved by the designated official, contained undetected
errors. While these errors caused misstatements to the draft financial
statements, OFS corrected the errors in its final financial statements
for TARP. To the extent OFS's reconciliation process does not result
in effectively identifying, and, where necessary, resolving
reconciling items, it could increase the risk of misstatements in
OFS's financial statements for TARP.
* Journal entry review and approval. OFS's policies and procedures
prescribe documentation and reviews required for proposed journal
entries. However, we found instances in which reviewed and approved
journal entries included supporting documentation that did not agree
with the proposed journal entries' amounts. Upon further inquiry and
investigation, OFS was able to provide the documentation supporting
the journal entry amounts. Ineffective implementation of OFS's
policies and procedures related to the review and approval of journal
entries increases the risk that erroneous journal entries may be
recorded in the general ledger.
Recommendations for Executive Action:
We recommend that the Acting Assistant Secretary for Financial
Stability direct the CFO to:
* Establish a 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.
* Establish a mechanism for ensuring (1) that only those individuals
specifically designated in OFS's policies and procedures to review and
approve period-end reconciliations conduct such procedures and (2)
effective review of period-end reconciliations by the designated
official.
* Establish a mechanism for ensuring effective reviews of
documentation attached to journal entries, including ensuring such
reviews assess whether the supporting documentation is sufficient and
consistent with the journal entry before such entries are recorded in
the general ledger.
Documentation for Certain Areas of OFS's Asset Valuation Processes:
During our audit of OFS's fiscal year 2009 financial statements for
TARP, we found OFS's documentation was incomplete for certain areas of
its asset valuation process, including documenting its basis for
certain assumptions derived from informed opinion that were used in
valuing TARP assets. We made two recommendations in our related June
2010 management report regarding this issue.[Footnote 18] OFS took
action in fiscal year 2010 related to these previous recommendations,
but neither of these prior recommendations was fully addressed during
fiscal year 2010 (see recommendations 09-6 and 09-12 in table 1 of
enclosure I of this report for further information). We also
identified two new control deficiencies related to OFS's documentation
of its asset valuation process in fiscal year 2010. Specifically, as
discussed in the following sections, the new control deficiencies in
this area concerned (1) changes in OFS's model assumptions and data
sources that were not fully documented or reflected in OFS's economic
and financial model, and (2) changes in asset valuation methodology
that were not adequately documented.
Changes in OFS's Model Assumptions and Data Sources Not Fully
Documented or Reflected in OFS's Economic and Financial Model:
OFS uses economic and financial models to value TARP's equity
investments and the models incorporate various assumptions in
determining valuations. OFS's policies and procedures include
requirements for documenting the economic and financial models used,
including data sources used to develop the assumptions incorporated
into the models. During fiscal year 2010, OFS changed its data source
for dividend yields used in the warrant valuation calculations, which
also changed the basis of the dividend yield assumption from a
quarterly yield to an annualized yield. However, OFS did not update
all of its initial model documentation to accurately reflect the new
data source and the new basis for the assumption. In addition, OFS did
not update the formulas in the model to reflect the change to the use
of an annualized yield in the warrant value calculation. The continued
use of a quarterly yield in the model formulas resulted in an error in
the draft warrant valuation. Standards for Internal Control in the
Federal Government states that all transactions and other significant
events are to be clearly documented, and the documentation should be
readily available for examination and that events should be accurately
recorded. We brought this matter to the attention of OFS management
and they took action to correct these errors in the final economic and
financial model formulas and the related documentation. To the extent
that changes in any aspect of the model and data are not properly
documented, reviewed, and approved, the risk to OFS that undetected
financial reporting misstatements could occur is increased.
Recommendation for Executive Action:
We recommend that the Acting Assistant Secretary for Financial
Stability direct the CFO to:
* Establish a 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.
* Establish a 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.
Change in Automotive Industry Financing Program Asset Valuation
Methodology Not Adequately Documented:
During fiscal year 2010, OFS changed its valuation methodology for
certain investments under the Automotive Industry Financing Program
(AIFP). However, OFS did not document the change or the reason for the
change in accordance with OFS's policies and procedures. The initial
AIFP valuation assumption documentation provided that certain
investments were to be valued using the OFS economic and financial
model used to value equity investments. However, in a later update in
fiscal year 2010, OFS changed the AIFP valuation to be based on an
external asset manager valuation. However, OFS did not document the
rationale for the change in valuation methodology as required.
Specifically, OFS's Office of Credit Modeling and Analysis's policies
and procedures relating to changes in the model valuation provides
that, "Documentation will include the reason for the change, a
description of the change, how the change was implemented, and the
resulting impact to subsidy rates." After we notified OFS that the
documentation was incomplete, it was able to provide adequate
additional information about its asset valuation process, including
the rationale for the change, in accordance with its policies and
procedures. The absence of supporting documentation could result in
incorrect assumptions and estimates, leading to incorrect valuations
and inaccurate AIFP information in OFS's financial statements.
Recommendation for Executive Action:
We recommend that the Acting Assistant Secretary for Financial
Stability direct the CFO to establish a mechanism for ensuring that
changes in OFS's AIFP valuation methodology, including the rationale
for the changes, are documented in accordance with OFS policies and
procedures.
Evaluating the Results from Calculations of Certain Asset Valuations:
The economic and financial models that OFS uses to value TARP assets
result in estimated cash flows over the life of the asset. OFS values
these assets under Statement of Federal Financial Accounting Standards
(SFFAS) No. 2, Accounting for Direct Loans and Loan Guarantees. Under
SFFAS No. 2, assets should include only amounts disbursed and
outstanding. In addition, OFS is required to use the OMB Credit
Subsidy Calculator 2 (CSC2)[Footnote 19] to calculate the present
value of the estimated cash flows and use that calculation as the
basis for the asset valuation recorded in its financial statements.
However, including future disbursements in its estimated cash flows
based on OMB's CSC2 guidance resulted in significant valuation errors
for certain OFS direct loan and equity investment programs in OFS's
draft reporting at the end of the fiscal year. OFS did not have a
mechanism for ensuring that asset valuations only considered amounts
outstanding as of fiscal year end in accordance with SFFAS No. 2. In
its final fiscal year 2010 financial reporting, OFS corrected the
significant errors we had identified.
Recommendation for Executive Action:
We recommend that the Assistant Secretary for Financial Stability
direct the CFO to establish a 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
SFFAS No. 2.
Other Control Deficiencies:
In addition to the significant deficiency, we identified other control
deficiencies that were not considered material weaknesses or
significant deficiencies, but nevertheless warrant OFS management's
attention and action. Specifically, as discussed in the following
sections, we identified deficiencies concerning OFS controls over (1)
documenting and communicating financial-related housing program
issues, and (2) calculating the housing program accrual.
Documenting and Communicating Financial-Related Housing Program Issues:
OFS's Home Affordable Modification Program (HAMP) Compliance Committee
is to meet every week to discuss issues related to TARP's housing
programs, including issues that could have a financial statement
impact. The HAMP Compliance Committee charter provides that the
committee is responsible for capturing the notes of committee meetings
with special emphasis on the rationale behind any decisions that were
made as well as any follow-up assignments, and that notes will be
distributed within 2 days of the meeting. However, we found that OFS's
Compliance Committee meeting minutes were not presented at the level
of detail specified in the HAMP Compliance Committee charter, and were
often distributed at least 2 months after the date of the meeting.
Furthermore, we identified a housing-related issue with a direct
financial statement impact that was not documented in the meeting
minutes. We did, however, learn that this issue was discussed between
the Office of the Chief Financial Officer and the Office of Internal
Review's (OIR) Director of Compliance, the Chair of the Compliance
Committee, separate from the Compliance Committee meetings and the
financial statement impact was considered.
According to the Standards for Internal Control in the Federal
Government, information should be recorded and communicated to
management and to others within the entity who need it, and the
information should be in a form and within a time frame that enables
them to carry out their internal control and other responsibilities
efficiently.
To the extent OFS does not document and communicate relevant housing-
related financial statement information to the appropriate parties in
a timely manner, management may be impaired in its ability to perform
its responsibilities efficiently and effectively. Furthermore, as
issues in the housing program area are revisited during the course of
the fiscal year, or as personnel changes occur, thorough and
consistent documentation will help to ensure that housing-related
decisions are adequately considered, implemented appropriately, and
reflected as appropriate in OFS's financial statements.
Recommendation for Executive Action:
We recommend that the Acting Assistant Secretary for Financial
Stability direct the OIR to establish a 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 HAMP Compliance Committee charter.
Calculating the Housing Program Accrual:
OFS's financial statements are to include an accrued liability for
unpaid amounts due as part of TARP's housing programs. The liability
should reflect periodic housing program incentive payments which
generally have specified time frames as outlined in housing program
guidelines. During fiscal year 2010, OFS calculated the monthly
accrual for the TARP housing programs and compared its calculation to
the monthly accrual calculated by the housing program system, IR2
(maintained by a third-party administrator). OFS performed these
procedures for approximately 9 months of fiscal year 2010, and
calculation errors noted by OFS were corrected in IR2. After OFS
determined that IR2 was calculating the accrual amounts correctly, OFS
relied on IR2 and indicated that it did not have plans to continue the
recalculations and comparisons for future periods. However, OFS did
not verify through its comparison procedures whether the accrual
calculated by IR2 would appropriately account for mortgages with
incentive payments that reach the maximum incentive payment amounts.
For example, one particular housing program incentive is paid annually
for a period of up to 2 years from the date the mortgage enters the
housing program. OFS procedures did not provide for verifying whether
or not IR2 would cease accruing for this incentive amounts once the 2-
year period had elapsed.
Standards for Internal Control in the Federal Government states that
management needs to comprehensively identify risks and should consider
all significant interactions between the entity and other parties as
well as internal factors at both the entitywide and activity level.
Once risks have been identified, they should be analyzed for their
possible effect.
For fiscal year 2010, no housing program incentive payments had
reached the maximum incentive payment amount, thus there was no
financial statement risk associated with the related fiscal year 2010
accrual. However, if OFS does not address this risk in the near
future, the housing accrual amounts reported in the financial
statements for subsequent years may be overstated.
Recommendation for Executive Action:
We recommend that the Acting Assistant Secretary for Financial
Stability direct the CFO to verify that the accrual calculated by IR2
appropriately accounts for mortgages which have reached their maximum
incentive payment amounts.
Agency Comments:
In commenting on a draft of this report, the Acting Assistant
Secretary for Financial Stability stated that OFS concurred with the
recommendations in our draft report. The Acting Assistant Secretary
also stated that OFS began taking actions related to these
recommendations in January 2011 following the release of our audit
report and expects to have implemented corrective actions for all
recommendations by September 30, 2011. We plan to follow up to
determine the status of corrective actions taken for these matters
during our fiscal year 2011 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, Acting Special Inspector General for TARP,
Congressional Oversight Panel, Financial Stability Oversight Board,
Director of the Office of Management and Budget, and others. In
addition, this report is available at no charge on GAO's Web site at
[hyperlink, 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
2010 and 2009 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. GAO staff who made major contributions to this report are
listed in enclosure III.
Sincerely yours,
Signed by:
Gary T. Engel:
Director Financial Management and Assurance:
Enclosures - 3:
[End of section]
Enclosure I - Status of Recommendations from Our Prior Year Management
Report:
Our fiscal year 2010 audit included a review to update the status of
the Office of Financial Stability's (OFS) corrective actions to
address the recommendations from our June 2010 management report.
[Footnote 20] Table 1 summarizes the recommendations included in that
report, including the status of the recommendations according to OFS,
as well as our own assessment. In all instances, we agreed with OFS's
assessment of the status of the recommendation. In summary, 16 of the
20 recommendations have been closed, and 4 remain open. We will
continue to monitor OFS's progress in addressing the open
recommendations as part of our fiscal year 2011 financial statements
audit.
Table 1: Status of Recommendations from Our Prior Year Management
Report: (as of November 5, 2010, the date of our audit report):
GAO-10-743R (TARP Fiscal Year 2009 Management Report):
Count: 1;
Number: 09-1;
Recommendation: Establish a mechanism for the effective implementation
of the review and approval process for preparing the year-end
financial statements and related disclosures, including management
discussion and analysis, for TARP;
Status of recommendation: Per OFS: Open. During fiscal year 2011, OFS
will define all review tasks and develop checklists for the review and
assembly of necessary documentation supporting the review and approval
of year-end financial statements;
Status of recommendation: Per GAO: Open.
Count: 2;
Number: 09-2;
Recommendation: Develop and implement written procedures for
identifying and evaluating modifications of direct loans, equity
investments, and asset guarantees, to include: specific roles and
responsibilities, criteria to identify modifications, documentation of
management review and approval, and documentation of Office of
Management and Budget approval of the modification subsidy cost
estimate;
Status of recommendation: Per OFS: Closed;
Status of recommendation: Per GAO: Closed.
Count: 3;
Number: 09-3;
Recommendation: Finalize and implement OFS's draft written procedures
for identifying and evaluating any subsequent events that could have
an effect on asset valuations and related disclosures;
Status of recommendation: Per OFS: Closed;
Status of recommendation: Per GAO: Closed.
Count: 4;
Number: 09-4;
Recommendation: Develop and implement written procedures for tracking
the resolution of independent verification and validation findings
related to OFS's economic and financial models used for valuing TARP
direct loans, equity investments, and asset guarantees;
Status of recommendation: Per OFS: Closed;
Status of recommendation: Per GAO: Closed.
Count: 5;
Number: 09-5;
Recommendation: Update existing procedures to include procedures for
identifying and resolving economic and financial model error and
warning messages, including requirements to maintain appropriate
supporting documentation regarding the resolution of such instances;
Status of recommendation: Per OFS: Closed;
Status of recommendation: Per GAO: Closed.
Count: 6;
Number: 09-6;
Recommendation: Update OFS's asset 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;
Status of recommendation: Per OFS: Open. During fiscal year 2011, OFS
will update its procedures to include a requirement to document the
sources of informed opinion and the basis for the assumptions used and
will summarize the basis used on the assumption tables;
Status of recommendation: Per GAO: Open.
Count: 7;
Number: 09-7;
Recommendation: Develop and implement written procedures for
presenting income from direct loans and trust preferred securities in
the Statement of Net Cost;
Status of recommendation: Per OFS: Closed;
Status of recommendation: Per GAO: Closed.
Count: 8;
Number: 09-8;
Recommendation: Develop and implement written procedures for
identifying any year-end dividends declared but unpaid to OFS from
TARP participants;
Status of recommendation: Per OFS: Closed;
Status of recommendation: Per GAO: Closed.
Count: 9;
Number: 09-9;
Recommendation: Develop and implement written procedures for
disclosing accrued interest receivable, dividends declared but unpaid,
and, if applicable, distributions receivable from trust preferred
securities in OFS's financial statements for TARP;
Status of recommendation: Per OFS: Closed;
Status of recommendation: Per GAO: Closed.
Count: 10;
Number: 09-10;
Recommendation: Finalize and implement procedures for the preparation
of the year-end financial statements to include all key preparation
processes;
Status of recommendation: Per OFS: Closed;
Status of recommendation: Per GAO: Closed.
Count: 11;
Number: 09-11;
Recommendation: Develop and implement, as part of OFS's oversight and
monitoring activities, written procedures detailing steps to
effectively oversee and determine the reasonableness of data provided
by external asset managers, prior to the use of such data;
Status of recommendation: Per OFS: Closed;
Status of recommendation: Per GAO: Closed.
Count: 12;
Number: 09-12;
Recommendation: Develop and 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;
Status of recommendation: Per OFS: Open. During fiscal year 2011, OFS
will consider lowering the established threshold used in determining
whether to investigate differences between the asset manager
valuations and OFS's internally developed asset valuations and
implement written procedures to document the rationale for the
established threshold;
Status of recommendation: Per GAO: Open.
Count: 13;
Number: 09-13;
Recommendation: Develop and implement written procedures detailing
steps to be performed in overseeing and monitoring OFS's financial
agents, Federal National Mortgage Association (Fannie Mae) and Federal
Home Loan Mortgage Corporation (Freddie Mac), including internal
controls over the existence and completeness of loan data used in the
determination of the HAMP liability;
Status of recommendation: Per OFS: Closed;
Status of recommendation: Per GAO: Closed.
Count: 14;
Number: 09-14;
Recommendation: Develop written procedures for periodically estimating
the HAMP liability;
Status of recommendation: Per OFS: Closed;
Status of recommendation: Per GAO: Closed.
Count: 15;
Number: 09-15;
Recommendation: Develop and implement procedures to segregate the
responsibilities for recording, approving, and reconciling of
information maintained in the accounting database used by OFS in the
asset valuation process;
Status of recommendation: Per OFS: Closed;
Status of recommendation: Per GAO: Closed.
Count: 16;
Number: 09-16;
Recommendation: Enhance and implement specific written procedures to
verify data inputs, including manual inputs, used in the economic and
financial models for the valuation of TARP direct loans, equity
investments, and asset guarantees, and help ensure that such
verification is clearly documented;
Status of recommendation: Per OFS: Closed;
Status of recommendation: Per GAO: Closed.
Count: 17;
Number: 09-17;
Recommendation: Assess manual inputs used in the economic and
financial models for the valuation of TARP direct loans, equity
investments, and asset guarantees to determine the feasibility of
reducing the number of manual inputs;
Status of recommendation: Per OFS: Closed;
Status of recommendation: Per GAO: Closed.
Count: 18;
Number: 09-18;
Recommendation: Develop, document, and implement a mechanism to track
the location of executed agreements;
Status of recommendation: Per OFS: Open. During fiscal year 2011, OFS
will finalize a procedure to address the tracking of executed
agreements. Additionally, the Office of the Chief Counsel has
developed depositary forms to assist with document tracking and Bank
of New York Mellon will hire a contractor to perform enhanced
monitoring;
Status of recommendation: Per GAO: Open.
Count: 19;
Number: 09-19;
Recommendation: Develop and implement written procedures specifying
detailed steps to be followed to reasonably ensure that warrant
adjustments are properly recorded in the accounting database OFS uses
for valuing TARP assets;
Status of recommendation: Per OFS: Closed;
Status of recommendation: Per GAO: Closed.
Count: 20;
Number: 09-20;
Recommendation: Establish procedures to effectively monitor the
documentation of reconciliations of key documents related to
disbursements to and refunds from The Bank of New York Mellon as
prescribed in OFS's written procedures;
Status of recommendation: Per OFS: Closed;
Status of recommendation: Per GAO: Closed.
Source: GAO.
[End of table]
[End of enclosure]
Enclosure II - Comments from the Office of Financial Stability:
Department Of The Treasury:
Assistant Secretary:
Washington, D.C. 20220:
April 13, 2011:
Mr. Gary T. Engel:
Director, Financial Management and Assurance:
U.S. Government Accountability Office:
Dear Mr. Engel:
We have received a copy of your draft report entitled Management
Report: Improvements Are Needed in Internal Control Over Financial
Reporting for the Troubled Asset Relief Program (GAO-11-434R).
We are pleased that you noted in your report that the Office of
Financial Stability (OFS) received unqualified opinions on both the
OFS FY 2010 financial statements and internal controls over financial
reporting and no identified instances of noncompliance with selected
provisions of laws and regulations.
We have reviewed the detailed recommendations that you have provided
regarding the one significant deficiency you identified during your FY
2010 audit and regarding other less significant control deficiencies.
We concur with your draft recommendations.
Through coordination with your staff and our understanding of the
Matters for Further Consideration that we responded to during the FY
2010 audit, we began taking actions on the recommendations in January
2011 immediately after your final report was released. We have made
necessary improvements to our processes and procedures. We expect to
implement the majority of other necessary changes by June 30, 2011 and
any remaining changes by September 30, 2011.
Sincerely,
Signed by:
Timothy G. Massad:
Acting Assistant Secretary:
Office of Financial Stability:
[End of enclosure]
Enclosure III - Staff Acknowledgments:
The following individuals made major contributions to this report:
Marcia L. Carlsen, and Lynda E. Downing (Assistant Directors), as well
as Tony J. Eason, Aaron M. Livernois, Mary O. Osorno, Rebecca A.
Riklin, and Anne Y. Sit-Williams.
[End of enclosure]
Footnotes:
[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 2010 and 2009 Financial Statements,
[hyperlink, http://www.gao.gov/products/GAO-11-174] (Washington, D.C.:
Nov. 15, 2010).
[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, [hyperlink, http://www.gao.gov/products/GAO-10-743R]
(Washington, D.C.: June 30, 2010).
[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 Web site at [hyperlink, http://www.gao.gov].
[8] GAO, Financial Audit: Office of Financial Stability (Troubled
Asset Relief Program) Fiscal Year 2009 Financial Statements,
[hyperlink, http://www.gao.gov/products/GAO-10-301 (Washington, D.C.:
Dec. 9, 2009).
[9] Informed opinion refers to the judgment of agency staff or others
who make subsidy estimates based on their programmatic knowledge,
experience, or both. Informed opinion is considered an acceptable
approach under Federal Accounting Standards Advisory Board Technical
Release 6 when adequate historical data do not exist.
[10] The tool and related guidance used by OFS in its TARP asset
valuation process is provided to federal agencies for performing
valuations under the Federal Credit Reform Act of 1990, 2 U.S.C. §§
661-661f.
[11] [hyperlink, http://www.gao.gov/products/GAO-10-743R].
[12] [hyperlink, http://www.gao.gov/products/GAO-11-174].
[13] [hyperlink, http://www.gao.gov/products/GAO-10-301].
[14] 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.
[15] [hyperlink, http://www.gao.gov/products/GAO-10-743R].
[16] [hyperlink, http://www.gao.gov/products/GAO-10-301].
[17] GAO, Standards for Internal Control in the Federal Government,
[hyperlink, http://www.gao.gov/products/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 of 1982).
[18] [hyperlink, http://www.gao.gov/products/GAO-10-743R].
[19] OMB Circular No. A-11, Preparation, Submission, and Execution of
the Budget, Section 185.2, states that under the Federal Credit Reform
Act of 1990, "Present values must be calculated using the OMB Credit
Subsidy Calculator 2."
[20] GAO, Management Report: Improvements Are Needed in Internal
Control Over Financial Reporting for the Troubled Asset Relief
Program, [hyperlink, http://www.gao.gov/products/GAO-10-743R]
(Washington, D.C.: June 30, 2010).
[End of section]
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