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2007 Annual Report

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IV. Financial Statements and Notes

GAO's Audit Opinion

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Comptroller General
of the United States

United States Government Accountability Office
Washington, D.C. 20548

To the Board of Directors
The Federal Deposit Insurance Corporation

In accordance with Section 17 of the Federal Deposit Insurance Act, as amended, we are responsible for conducting audits of the financial statements of the two funds administered by the Federal Deposit Insurance Corporation (FDIC). In our audits of the Deposit Insurance Fund's (DIF) and the FSLIC Resolution Fund's (FRF) financial statements for 2007 and 2006, we found

  • the financial statements as of and for the years ended December 31, 2007, and 2006, are presented fairly, in all material respects, in conformity with U.S. generally accepted accounting principles;
  • FDIC had effective internal control over financial reporting (including safeguarding assets) and compliance with laws and regulations for each fund; and
  • no reportable noncompliance with laws and regulations we tested.

The following sections discuss in more detail (1) these conclusions; (2) our audit objectives, scope, and methodology; and (3) agency comments and our evaluation.

Opinion on DIF'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, DIF’s assets, liabilities, and fund balance as of December 31, 2007, and 2006, and its income and fund balance and its cash flows for the years then ended.

As discussed in note 6 to DIF's financial statements, FDIC's insured financial institutions faced increased challenges in 2007. The downturn in housing markets led to asset-quality problems and volatility in financial markets, which hurt banking industry performance and threatened the viability of some institutions that had significant exposure to higher-risk residential mortgages. It is uncertain how long the effects of this downturn will last. In addition to a recorded estimated liability of $124 million as of December 31, 2007, for the anticipated failure of some DIF insured institutions, FDIC has identified additional risk that could result in a further estimated loss to the DIF of $1.7 billion should potentially vulnerable insured institutions ultimately fail. FDIC continues to evaluate the risks to affected institutions in light of evolving economic conditions, but the impact of such risks on the DIF cannot be reasonably estimated at this time. Actual losses, if any, will largely depend on future economic and market conditions and could differ materially from FDIC's estimates.

Opinion on FRF'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, FRF's assets, liabilities, and resolution equity as of December 31, 2007, and 2006, and its income and accumulated deficit and its cash flows for the years then ended.

Opinion on Internal Control
FDIC management maintained, in all material respects, effective internal control over financial reporting (including safeguarding assets) and compliance as of December 31, 2007, that provided reasonable assurance that misstatements, losses, or noncompliance material in relation to the financial statements for each fund would be prevented or detected on a timely basis. Our opinion is based on criteria established under 31 U.S.C. 3512 (c), (d), commonly known as the Federal Managers' Financial Integrity Act (FMFIA).

We did identify certain control deficiencies during our 2007 audits. However, we do not consider these control deficiencies to be significant deficiencies.1 We will be reporting separately to FDIC management on these matters.

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 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 the following:

  1. 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
  2. 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 could 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;
  • tested relevant internal controls over financial reporting 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 certain laws and regulations, including selected provisions of the Federal Deposit Insurance Act, as amended, the Federal Deposit Insurance Reform Act of 2005.

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 laws and regulations that could have a direct and material effect on the financial statements for the year ended December 31, 2007. 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 performed our work in accordance with U.S. generally accepted government auditing standards.

FDIC Comments and Our Evaluation
In commenting on a draft of this report, FDIC's Chief Financial Officer (CFO) reported the agency was pleased to receive unqualified opinions on the DIF and FRF financial statements and that GAO did not identify any material weaknesses or significant deficiencies during the 2007 audits. FDIC's CFO also expressed appreciation for GAO’s recognition of FDIC's accomplishments during the 2007 audit year. The CFO added that FDIC is dedicated to promoting the highest standard of financial management and that FDIC will work diligently to sustain that focus. Furthermore, the CFO added that continued improvements in operations remain a priority for FDIC.

The complete text of FDIC's comments is reprinted in appendix I.

David M. Walker

David M. Walker
Comptroller General
of the United States

February 4, 2008



1 A significant deficiency is a control deficiency, or combination of deficiencies, that adversely affects the entity’s ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the entity’s financial statements that is more than inconsequential will not be prevented or detected.


Last Updated 04/25/2008 communications@fdic.gov