Summary
The 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 December 9, 2009, we issued our audit report including (1) an unqualified opinion on OFS's financial statements for TARP as of and for the period ended September 30, 2009, and (2) an opinion that OFS maintained effective internal control over financial reporting as of September 30, 2009. We also reported that our tests of OFS's compliance with selected provisions of laws and regulations for the period ended September 30, 2009, disclosed no instances of noncompliance. Our December 9, 2009, 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, 2009, 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 two significant deficiencies in OFS's internal control over financial reporting. This report presents (1) more details concerning underlying specific control deficiencies that contributed to the two significant deficiencies identified in our audit report, (2) other less significant control deficiencies that we identified during our audit, and (3) related recommendations for corrective actions. While the deficiencies we identified are not considered material weaknesses, they warrant management's attention and action. The 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.
We identified two significant deficiencies in OFS's internal control over financial reporting concerning (1) accounting and financial reporting processes and (2) verification procedures over the data used for asset valuations. The significant deficiency concerning accounting and financial reporting processes was the combination of several underlying specific control deficiencies. Specifically, (1) OFS did not effectively implement its review and approval process for preparing its fiscal year 2009 financial statements and related disclosures for TARP; (2) OFS had not finalized its written procedures related to its processes 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; and (3) OFS did not have proper segregation of duties over a significant accounting database it uses in valuing its assets in that the same individual was responsible for performing both the data entry and the reconciliation of the data output. However, OFS had developed and implemented other controls over TARP transactions and activities that reduced the risk of material misstatements resulting from these deficiencies. With regard to the second significant deficiency, OFS did not effectively implement its verification procedures for certain assumptions and data that were input into the economic and financial credit subsidy models used for the valuation of TARP direct loans, equity investments, and asset guarantees. OFS reduced the risk of misstatements resulting from this data verification deficiency by performing procedures to assess the reasonableness of the model outputs, including comparison of the asset valuations calculated by the model with independently performed valuations. In addition to the two significant deficiencies, we identified other less significant control deficiencies related to (1) tracking executed agreements, (2) recording warrant transactions, and (3) reconciliations of disbursements to and refunds from the TARP custodian. We are making 17 recommendations related to OFS's significant deficiencies and 3 recommendations related to the other less significant control deficiencies. In commenting on a draft of this report, the Assistant Secretary for Financial Stability stated that OFS concurred with the recommendations in our draft report.
Recommendations
Our 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) 512-8815 |
Recommendations for Executive Action
Recommendation: The Assistant Secretary for Financial Stability should 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 Management's Discussion and Analysis (MD&A), for TARP.
Agency Affected: Department of the Treasury: Office of Financial Stability
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: The Assistant Secretary for Financial Stability should direct the CFO to 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 (OMB) approval of the modification subsidy cost estimate.
Agency Affected: Department of the Treasury: Office of Financial Stability
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: The Assistant Secretary for Financial Stability should direct the CFO to 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.
Agency Affected: Department of the Treasury: Office of Financial Stability
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: The Assistant Secretary for Financial Stability should direct the CFO to 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.
Agency Affected: Department of the Treasury: Office of Financial Stability
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: The Assistant Secretary for Financial Stability should direct the CFO to 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.
Agency Affected: Department of the Treasury: Office of Financial Stability
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: The Assistant Secretary for Financial Stability should direct the CFO to 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.
Agency Affected: Department of the Treasury: Office of Financial Stability
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: The Assistant Secretary for Financial Stability should direct the CFO to develop and implement written procedures for presenting income from direct loans and trust preferred securities in the Statement of Net Cost.
Agency Affected: Department of the Treasury: Office of Financial Stability
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: The Assistant Secretary for Financial Stability should direct the CFO to finalize and implement procedures for the preparation of the year-end financial statements to include all key preparation processes.
Agency Affected: Department of the Treasury: Office of Financial Stability
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: The Assistant Secretary for Financial Stability should direct the CFO to develop and implement written procedures detailing steps to be performed in overseeing and monitoring OFS's financial agents, Fannie Mae and Freddie Mac, including internal controls over the existence and completeness of loan data used in the determination of the Home Affordable Modification Program (HAMP) liability.
Agency Affected: Department of the Treasury: Office of Financial Stability
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: The Assistant Secretary for Financial Stability should direct the CFO to develop written procedures for periodically estimating the HAMP liability.
Agency Affected: Department of the Treasury: Office of Financial Stability
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: The Assistant Secretary for Financial Stability should direct the CFO to 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.
Agency Affected: Department of the Treasury: Office of Financial Stability
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: The Assistant Secretary for Financial Stability should direct the appropriate personnel to develop, document, and implement a mechanism to track the location of executed agreements.
Agency Affected: Department of the Treasury: Office of Financial Stability
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: The Assistant Secretary for Financial Stability should direct the CFO to 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.
Agency Affected: Department of the Treasury: Office of Financial Stability
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: The Assistant Secretary for Financial Stability should direct the CFO to establish procedures to effectively monitor the documentation of reconciliations of key documents related to disbursements to and refunds from BNYM as prescribed in OFS's written procedures.
Agency Affected: Department of the Treasury: Office of Financial Stability
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: The Assistant Secretary for Financial Stability should direct the CFO to develop and implement written procedures for identifying any year-end dividends declared but unpaid to OFS from TARP participants.
Agency Affected: Department of the Treasury: Office of Financial Stability
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: The Assistant Secretary for Financial Stability should direct the CFO to 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.
Agency Affected: Department of the Treasury: Office of Financial Stability
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: The Assistant Secretary for Financial Stability should direct the CFO, in coordination with the Chief Investment Officer, to 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.
Agency Affected: Department of the Treasury: Office of Financial Stability
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: The Assistant Secretary for Financial Stability should direct the CFO to 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.
Agency Affected: Department of the Treasury: Office of Financial Stability
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: The Assistant Secretary for Financial Stability should direct the CFO to 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.
Agency Affected: Department of the Treasury: Office of Financial Stability
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: The Assistant Secretary for Financial Stability direct the CFO to 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.
Agency Affected: Department of the Treasury: Office of Financial Stability
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
