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2001 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, 2001 and 2000, 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 all material respects, 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, (3) BIF's reserve ratio, (4) the future activities of FRF, and (5) our evaluation of the FDIC’s comments on a draft of this report.


Opinion on BIF’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, BIF’s financial position as of December 31, 2001 and 2000, and the results of its operations and its cash flows for the years then ended.


Opinion on SAIF’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, SAIF’s financial position as of December 31, 2001 and 2000, and the results of its operations and its cash flows for the years then ended.


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 financial position as of December 31, 2001 and 2000, and the results of its operations and its cash flows for the years then ended.


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, 2001, that provided reasonable assurance that misstatements, losses, or noncompliance, material in relation to the FDIC fund’s financial statements would be prevented or detected on a timely basis. Our opinion is based on criteria established under 31 U.S.C. 3512 [Federal Managers’ Financial Integrity Act (FMFIA)].

Our work identified weaknesses in FDIC’s information system controls, whic we 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 funds' 2001 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;
  • 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 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 funds' financial statements for the year ended December 31, 2001. 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 provided comments on a draft of this report. They are discussed and evaluated in a later section of this report and are reprinted in appendix I.


Reportable Condition

As part of the funds' financial statement audits, we reviewed FDIC’s information systems controls. The primary objectives of information system controls are to safeguard data, protect computer application programs, provide for the integrity of system software, and ensure continued computer operations in case of unexpected interruption. These controls include the corporatewide security management program, access controls, system software, application development and change control, segregation of duties, and service continuity controls.

During 2001, we found that FDIC progressed in improving information system control weaknesses we had previously identified and has taken other steps to improve security. Nevertheless, we identified additional weaknesses in FDIC's corporatewide security management program, access controls, system software, segregation of duties, and service continuity controls. Specifically, FDIC did not adequately limit the scope of access granted to authorized users or secure its network from unauthorized access. Further, FDIC had not fully established a comprehensive program to routinely oversee and monitor access to its computer facilities and data to identify unusual or suspicious access patterns that could indicate unauthorized access.

The effect of these weaknesses in information system controls places FDIC's financial information at risk of unauthorized disclosure or loss and its critical financial operations at risk of disruption. It should also be noted that because computer systems identified at risk contain other sensitive information such as personnel data and bank examinations related to financial institutions insured by FDIC, this information is at risk of being compromised.

As we have previously reported to FDIC's Board of Directors, the primary reason for its information system control weaknesses has been that FDIC had not fully developed and implemented a comprehensive corporatewide security management program. An effective program would include assessing risks, establishing appropriate policies and related controls, raising awareness of prevailing risks and mitigating controls, and evaluating the effectiveness of established controls. While FDIC has implemented a security awareness program, updated its security policies and guidance, and taken other actions to improve security management, it still needs to take additional steps to fully implement a comprehensive corporatewide security management program.

We determined that other management controls mitigated the effect of the information system control weaknesses on the preparation of the funds' financial statements. Because of their sensitive nature, the details surrounding these weaknesses are being reported separately to FDIC management, along with our recommendations for corrective actions.


BIF's Reserve Ratio

During 2001, as table 1 shows, BIF's reserve ratio decreased from 1.35 percent to 1.26 percent. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) requires FDIC to maintain the BIF fund balance at a designated reserve ratio of at least 1.25 percent of estimated insured deposits. 2 BIF's reserve ratio was significantly below the designated reserve ratio in 1991 and did not reach the designated reserve ratio of 1.25 percent of estimated insured deposits until May 1995. 3 This is the first time since 1995 that the BIF's ratio has come so close to the designated reserve ratio.

Table 1 shows BIF's reserve ratio, fund balance, and estimated insured deposits from December 31, 1991 through 2001.

Table 1:  BIF's Reserve Ratios from December 31, 1991, through December 31, 2001
Dollars in millions
December 31, Reserve ratio (%) Fund Balance Estimated insured
deposits
1991 (.36) $(7,028) $1,957,722
1992 (.01) (101) 1,945, 623
1993 .69 13,122 1,906,885
1994 1.15 21,848 1,896,060
1995 1.30 25,454 1,952,543
1996 1.34 26,854 2,007,447
1997 1.38 28,293 2,055,874
1998 1.38 29,612 2,141,268
1999 1.36 29,414 2,157,536
2000 1.35 30,975 2,301,604
2001 1.26 30,439 2,408,878

Under FDIC's required risk-based insurance system, as long as BIF's reserve ratio is at or above 1.25 percent, FDIC does not charge premiums to most institutions that are well-capitalized and highly rated by supervisors. Currently over 90 percent of the industry does not pay for deposit insurance. Most of BIF's income comes from the interest earned on investments with the U.S. Treasury.

BIF's fund balance and level of estimated insured deposits are the factors used to calculate BIF's reserve ratio. Accordingly, changes in fund balance or insured deposits can cause the reserve ratio to increase or decrease. Table 1 shows that during 2001 the estimated insured deposits increased by over $100 billion. To illustrate the sensitivity of this reserve ratio calculation, if the amount of estimated insured deposits had increased by an additional $26 billion during 2001, BIF's reserve ratio of 1.25 percent at December 31, 2001.

Regarding the other key variable in the calculation, BIF's fund balance declined about $500 million during 2001. This $500 million net loss for 2001 is largely attributable to recording $1.8 billion of estimated losses for anticipated failures of insured institutions. Assuming the December 31, 2001, level of estimated insured deposits, if BIF had i

ncurred an additional $328 million of losses to the fund balance during 2001, its reserve ratio would have declined to the designated reserve ratio of 1.25 perecent at December 31, 2001.

Currently, there is proposed legislation in Congress to reform the federal deposit insurance system. Among other things, this legislation proposes changes to the designated reserve ratio requirements.


Future Activities 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 Under current legislation, FRF will continue its operations until all of its assets are sold or otherwise liquidated and all of its liabilities are satisfied. As shown in table 2, FRF has made significant progress in liquidating its assets and liabilities since 1996. FDIC expects continued rapid decline in the remaining FRF assets during 2002. After providing for all outstanding RTC liabilities, FDIC must also transfer the net proceeds from the sale of RTC-related assets to the Resolution Funding Corporation (REFCORP). 5 During 2001, FRF transferred $1.4 billion to REFCORP.

Table 2:  FRF’s Assets and Liabilities as of January 1,1996 and December 31, 2001
Dollars in billions
  Jan 1, 1996 Dec. 31, 2000 Percent Increase/(Decrease)
Cash and cash equivalents $1.5 $3.5 133
Assets not yet liquidated 13.9 1.4 (90)
Total Assets $15.4 $4.9 (68)
Total Liabilities $11.2 $0.02 (99)

Two major components of the assets not yet liquidated are receivables from thrift resolutions (about $0.3 billion) and investments in securitization-related assets (nearly $1.1 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 of 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 2002 with the exception of those involved in goodwill litigation. 7

FDIC has conducted an extensive review and cataloging of FRF's residual assets and liabilities and is beginning to explore approaches for concluding FRF's activities. The following are some of the issues and items remaining in FRF:

  • Over 900 criminal restitution orders in the amount of $548 million are outstanding. These may remain open for up to 20 more years. The actual amount that will ultimately be collected is unknown. 8 During 2001, FDIC collected $6.6 million from these outstanding restitution orders.

  • About 80 litigation claims and judgments—which were obtained against officers and directors and other professionals responsible for causing thrift losses—are outstanding. These items have an estimated recoverable value of approximately $59 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 During 2001 FDIC recovered $19.2 million in such claims.
  • Numerous assistance agreements entered into by the former FSLIC will remain open for many years as those assisted institutions share with FRF their tax savings that result from the tax free nature of FSLIC assistance. 10 During 2001, FRF recovered over $163 million as its share of these tax savings.
  • Various litigation cases are outstanding. FRF remains involved in approximately 760 cases. 11 The most numerous, and substantial in terms of potential liability, involve goodwill litigation. 12  To date, approximately 120 lawsuits have been filed against the U.S. 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. Also, there is litigation in which FRF is the plaintiff for itself or is acting in a fiduciary manner on behalf of the receiverships resulting 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.
  • Numerous potential liabilities may exist due to representations and warranties made to support the sale of assets including loans and servicing rights. 13 These potential liabilities could be incurred over the remaining life of the loans.

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 enabling legislation or other measures may be needed to liquidate the remaining FRF assets and liabilities.


FDIC Comments and Our Evaluation

In commenting on a draft of this report, FDIC's chief financial officer (CFO) was pleased to receive unqualified opinions on BIF's, SAIF's, and FRF's 2001 and 2000 financial statements. FDIC's CFO also acknowledged the information system weaknesses we identified and plans to continue with its efforts to strengthen its information system program and to incorporate GAO's recommendations into its security plans for 2002. We plan to evaluate the effectiveness of the corrective actions as part of our 2002 audit of FDIC funds' financial statements and internal control.

Signature:  David Walker

David M. Walker
Comptroller General
of the United States

April 5, 2002


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 Section 302 of FDICIA amended section 7 (b) of the Federal Deposit Insurance Act. FDICIA requirements are the same for both BIF and SAIF. SAIF reached the designated reserve ratio in 1996, and as of December 31, 2001, SAIF's reserve ratio was 1.36 percent.

3 If the reserve ratio falls below 1.25 percent of estimated insured deposits, FDICIA requires FDIC's Board of Directors to set semiannual assessment rates for BIF members that are sufficient to increase teh reserve ratio to the designated reserve ratio not later than 1 year after such rates are set, or in accordance with a recapitalization schedule of 15 years or less.

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

5 The Financial Institutions Reform Recovery and Enforcement Act of 1989 established REFCORP to provide part of the initial funds used by RTC for thrift 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 7 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 may ultimately 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 over 700 cases, FDIC records losses for only those cases where the loss is considered probable and reasonably estimable. FDIC also discloses losses that are reasonably possible. See note 7 of FRF’s financial statements.

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

13 See note 7 of FRF’s financial statements for a description of representations and warranties.



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