february 2015 financial audit › assets › 670 › 668496.pdf · 2015-02-12 · february 2015...

FINANCIAL AUDIT

Federal Deposit Insurance Corporation Funds’ 2014 and 2013 Financial Statements

Report to Congressional Committees

February 2015

GAO-15-289

United States Government Accountability Office

United States Government Accountability Office

Highlights of GAO-15-289, a report to congressional committees

February 2015

FINANCIAL AUDIT Federal Deposit Insurance Corporation Funds’ 2014 and 2013 Financial Statements

Why GAO Did This Study Created in 1933 to insure bank deposits and promote sound banking practices, FDIC plays an important role in maintaining public confidence in the nation’s financial system. FDIC administers the DIF, which protects bank and savings deposits, and the FRF, which was created to close out the business of the former Federal Savings and Loan Insurance Corporation (FSLIC).

GAO annually audits the financial statements of the DIF and of the FRF pursuant to Section 17 of the Federal Deposit Insurance Act, as amended, and the Government Corporation Control Act. GAO is responsible for obtaining reasonable assurance about whether (1) FDIC’s financial statements for the DIF and for the FRF are presented fairly, in all material respects, in accordance with U.S. generally accepted accounting principles; (2) FDIC maintained effective internal control over financial reporting; and (3) there are any reportable instances of FDIC noncompliance with tested provisions of applicable laws, regulations, contracts, and grant agreements.

What GAO Recommends GAO is not making recommendations in this report. In commenting on a draft of this report, FDIC stated that it recognizes the important role a strong internal control program plays in achieving the agency’s mission, and its dedication to establishing sound financial management has been and will remain a top priority.

What GAO Found In GAO’s opinion, the Federal Deposit Insurance Corporation (FDIC) fairly presented, in all material respects, the 2014 and 2013 financial statements for the two funds it administers—the Deposit Insurance Fund (DIF) and the FSLIC Resolution Fund (FRF). Also, in GAO’s opinion, FDIC maintained, in all material respects, effective internal control over financial reporting relevant to the DIF and to the FRF as of December 31, 2014. Further, GAO did not find any reportable instances of noncompliance with provisions of applicable laws, regulations, contracts, and grant agreements it tested.

The banking industry continued to improve in 2014 as discussed in note 7 to the DIF’s financial statements. During 2014, 18 insured institutions with combined assets of $2.9 billion failed. The losses to the DIF from failures that occurred in 2014 were lower than the amount accrued at the end of 2013, as the aggregate number and size of institution failures in 2014—and their estimated cost to the DIF—were less than anticipated. However, the DIF’s contingent liability for anticipated failures increased from $1.2 billion at December 31, 2013, to $1.8 billion at December 31, 2014, due to the increase in the exposure to loss from certain troubled institutions. As discussed in note 17 to the DIF’s financial statements, through February 5, 2015, 2 institutions have failed thus far during 2015.

The financial condition of the DIF also improved in 2014. As of December 31, 2014, the DIF had a fund balance of $62.8 billion, compared to a fund balance of $47.2 billion at December 31, 2013. The DIF’s ratio of reserves to estimated insured deposits as of September 30, 2014, was 0.89 percent, compared to 0.79 percent at December 31, 2013. This improvement was primarily attributable to revenue earned in 2014 and, as noted above, lower losses from failed institutions than estimated at December 31, 2013, and lower estimated losses for institutions that failed in prior years. FDIC’s long-range plan is to maintain the reserve ratio at a minimum 2 percent.

View GAO-15-289. For more information, contact James R. Dalkin at (202) 512-3133 or [email protected].

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Page i GAO-15-289 FDIC Funds' 2014 and 2013 Financial Statements

Letter 1

Independent Auditor’s Report 3

Report on the Financial Statements and on Internal Control over Financial Reporting 4

Report on Compliance with Laws, Regulations, Contracts, and Grant Agreements 8

Agency Comments 9

Deposit Insurance Fund’s Financial Statements 10

FSLIC Resolution Fund’s Financial Statements 33

Appendix I Management’s Report on Internal Control Over Financial Reporting 44

Appendix II Comments from the Federal Deposit Insurance Corporation 45

Contents

Page ii GAO-15-289 FDIC Funds' 2014 and 2013 Financial Statements

Abbreviations DIF Deposit Insurance Fund FDIC Federal Deposit Insurance Corporation FMFIA Federal Managers' Financial Integrity Act of 1982 FRF FSLIC Resolution Fund FSLIC Federal Savings and Loan Insurance Corporation

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GAO-15-289 FDIC Funds' 2014 and 2013 Financial Statements

441 G St. N.W. Washington, DC 20548

February 12, 2015

The Honorable Richard Shelby Chairman The Honorable Sherrod Brown Ranking Member Committee on Banking, Housing, and Urban Affairs United States Senate

The Honorable Jeb Hensarling Chairman The Honorable Maxine Waters Ranking Member Committee on Financial Services House of Representatives

This report presents the results of our audits of the financial statements of the Deposit Insurance Fund (DIF) and of the FSLIC Resolution Fund (FRF) as of, and for the years ended December 31, 2014, and 2013. These financial statements are the responsibility of the Federal Deposit Insurance Corporation (FDIC), the administrator of the two funds.

This report contains our (1) opinions that the financial statements of the DIF and of the FRF are fairly presented, in all material respects; (2) opinions that FDIC maintained, in all material respects, effective internal control over financial reporting relevant to the DIF and to the FRF as of December 31, 2014; and (3) conclusion that we found no reportable instances of noncompliance with provisions of applicable laws, regulations, contracts, and grant agreements we tested.

We are sending copies of this report to the Chairman of the Board of Directors of FDIC, the Chairman of the FDIC Audit Committee, the Chairman of the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, the Secretary of the Treasury, the Director of the Office of Management and Budget, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov.

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If you or your staffs have any questions concerning this report, please contact me at (202) 512-3133 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report.

James R. Dalkin Director Financial Management and Assurance

mailto:[email protected]


441 G St. N.W. Washington, DC 20548

To the Board of Directors The Federal Deposit Insurance Corporation

In our audits of the 2014 and 2013 financial statements of the Deposit Insurance Fund (DIF) and of the FSLIC Resolution Fund (FRF), both of which are administered by the Federal Deposit Insurance Corporation (FDIC),1

• the financial statements of the DIF and of the FRF as of and for the years ended December 31, 2014, and 2013, are presented fairly, in all material respects, in accordance with U.S. generally accepted accounting principles;

we found

• FDIC maintained, in all material respects, effective internal control over financial reporting relevant to the DIF and to the FRF as of December 31, 2014; and

• no reportable noncompliance for 2014 with provisions of applicable laws, regulations, contracts, and grant agreements we tested.

The following sections discuss in more detail (1) our report on the financial statements and on internal control over financial reporting, including an emphasis of matter related to improvements in the banking industry’s and the DIF’s financial condition; (2) our report on compliance with laws, regulations, contracts, and grant agreements; and (3) agency comments.

1A third fund managed by FDIC, the Orderly Liquidation Fund, established by Section 210 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376, 1506 (July 21, 2010), is unfunded and did not have any transactions from its inception in 2010 through 2014.

Independent Auditor’s Report


In accordance with Section 17 of the Federal Deposit Insurance Act, as amended, and the Government Corporation Control Act, we have audited the financial statements of the DIF and of the FRF, both of which are administered by FDIC. The financial statements for the DIF comprise the balance sheets as of December 31, 2014, and 2013; the related statements of income and fund balance and cash flows for the years then ended; and the related notes to the financial statements. The financial statements for the FRF comprise the balance sheets as of December 31, 2014, and 2013; the related statements of income and accumulated deficit and cash flows for the years then ended; and the related notes to the financial statements. We also have audited FDIC’s internal control over financial reporting relevant to the DIF and to the FRF as of December 31, 2014, based on criteria established under 31 U.S.C. § 3512(c), (d), commonly known as the Federal Managers’ Financial Integrity Act (FMFIA).

We conducted our audits in accordance with U.S. generally accepted government auditing standards. We believe that the audit evidence we obtained is sufficient and appropriate to provide a basis for our audit opinions.

FDIC management is responsible for (1) the preparation and fair presentation of these financial statements in accordance with U.S. generally accepted accounting principles; (2) maintaining effective internal control over financial reporting, including the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; (3) evaluating the effectiveness of internal control over financial reporting based on the criteria established under FMFIA; and (4) providing its assertion about the effectiveness of internal control over financial reporting as of December 31, 2014, based on its evaluation, included in the accompanying Management’s Report on Internal Control Over Financial Reporting in appendix I.

Our responsibility is to express opinions on these financial statements and opinions on FDIC’s internal control over financial reporting relevant to the DIF and to the FRF based on our audits. U.S. generally accepted government auditing standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement, and whether effective

Report on the Financial Statements and on Internal Control over Financial Reporting

Management’s Responsibility

Auditor’s Responsibility


internal control over financial reporting was maintained in all material respects.

An audit of financial statements involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the auditor’s assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances. An audit of financial statements also involves evaluating the appropriateness of the accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, evaluating the design and operating effectiveness of internal control over financial reporting based on the assessed risk, and testing relevant internal control over financial reporting. Our audit of internal control also considered the entity’s process for evaluating and reporting on internal control over financial reporting based on criteria established under FMFIA. Our audits also included performing such other procedures as we considered necessary in the circumstances.

We did not evaluate all internal controls relevant to operating objectives as broadly established under FMFIA, such as those controls relevant to preparing performance information and ensuring efficient operations. We limited our internal control testing to testing controls over financial reporting. Our internal control testing was for the purpose of expressing an opinion on whether effective internal control over financial reporting was maintained, in all material respects. Consequently, our audit may not


identify all deficiencies in internal control over financial reporting that are less severe than a material weakness.2

An entity’s internal control over financial reporting is a process effected by those charged with governance, management, and other personnel, the objectives of which are to provide reasonable assurance that (1) transactions are properly recorded, processed, and summarized to permit the preparation of financial statements in accordance with U.S. generally accepted accounting principles, and assets are safeguarded against loss from unauthorized acquisition, use, or disposition, and (2) transactions are executed in accordance with applicable laws, regulations, contracts, and grant agreements that could have a direct and material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent, or detect and correct, misstatements due to fraud or error. We also caution that projecting any evaluation of effectiveness 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 the policies or procedures may deteriorate.

In our opinion:

• The DIF’s financial statements present fairly, in all material respects, the DIF’s financial position as of December 31, 2014, and 2013, and the results of its operations and its cash flows for the years then ended, in accordance with U.S. generally accepted accounting principles.

• The FRF’s financial statements present fairly, in all material respects, the FRF’s financial position as of December 31, 2014, and 2013, and the results of its operations and its cash flows for the years then

2A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, 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.

Definitions and Inherent Limitations of Internal Control over Financial Reporting

Opinions on Financial Statements


ended, in accordance with U.S. generally accepted accounting principles.

As discussed in note 7 to the DIF’s financial statements, the banking industry continued to improve in 2014. During 2014, 18 insured institutions with combined assets of $2.9 billion failed. The losses to the DIF from failures that occurred in 2014 were lower than the amount accrued at the end of 2013, as the aggregate number and size of institution failures in 2014—and their estimated cost to the DIF—were less than anticipated. However, the DIF’s contingent liability for anticipated failures increased from $1.2 billion at December 31, 2013, to $1.8 billion at December 31, 2014 due to the increase in the exposure to loss from certain troubled institutions. As discussed in note 17 to the DIF’s financial statements, through February 5, 2015, 2 institutions have failed thus far during 2015.

The financial condition of the DIF also improved in 2014. As of December 31, 2014, the DIF had a fund balance of $62.8 billion, compared to a fund balance of $47.2 billion at December 31, 2013. The DIF’s ratio of reserves to estimated insured deposits as of September 30, 2014, was 0.89 percent, compared to 0.79 percent at December 31, 2013. This improvement was primarily attributable to revenue earned in 2014 and, as noted above, lower losses from failed institutions than estimated at December 31, 2013, and lower estimated losses for institutions that failed in prior years. FDIC’s long-range plan is to maintain the reserve ratio at a minimum 2 percent.

Our opinion on the DIF’s financial statements is not modified with respect to this matter.

In our opinion:

• FDIC maintained, in all material respects, effective internal control over financial reporting relevant to the DIF as of December 31, 2014, based on criteria established under FMFIA.

• FDIC maintained, in all material respects, effective internal control over financial reporting relevant to the FRF as of December 31, 2014, based on criteria established under FMFIA.

Emphasis of Matter

Improvement in the Banking Industry’s and the DIF’s Financial Condition

Opinions on Internal Control over Financial Reporting


During our 2014 audit, we identified deficiencies in FDIC’s internal control over financial reporting that we do not consider to be material weaknesses or significant deficiencies.3

In connection with our audits of the financial statements of the DIF and of the FRF, both of which are administered by the FDIC, we tested compliance with selected provisions of applicable laws, regulations, contracts, and grant agreements consistent with our auditor’s responsibility discussed below. We caution that noncompliance may occur and not be detected by these tests. We performed our tests of compliance in accordance with U.S. generally accepted government auditing standards.

Nonetheless, these deficiencies warrant FDIC management’s attention. We have communicated these matters to FDIC management and, where appropriate, will report on them separately.

FDIC management is responsible for complying with applicable laws, regulations, contracts, and grant agreements.

Our responsibility is to test compliance with selected provisions of applicable laws, regulations, contracts, and grant agreements that have a direct effect on the determination of material amounts and disclosures in the financial statements of the DIF and of the FRF, and perform certain other limited procedures. Accordingly, we did not test FDIC’s compliance with all applicable laws, regulations, contracts, and grant agreements.

Our tests for compliance with selected provisions of applicable laws, regulations, contracts, and grant agreements disclosed no instances of noncompliance for 2014 that would be reportable under U.S. generally accepted government auditing standards. However, the objective of our tests was not to provide an opinion on compliance with applicable laws, regulations, contracts, and grant agreements. Accordingly, we do not express such an opinion.

3A 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 the attention of those charged with governance.

Report on Compliance with Laws, Regulations, Contracts, and Grant Agreements

Management’s Responsibility

Auditor’s Responsibility

Results of Our Tests for Compliance with Laws, Regulations, Contracts, and Grant Agreements


The purpose of this report is solely to describe the scope of our testing of compliance with selected provisions of applicable laws, regulations, contracts, and grant agreements, and the results of that testing, and not to provide an opinion on compliance. This report is an integral part of an audit performed in accordance with U.S. generally accepted government auditing standards in considering compliance. Accordingly, this report on compliance with laws, regulations, contracts, and grant agreements is not suitable for any other purpose.

In commenting on a draft of this report, FDIC noted that it was pleased that we provided unmodified opinions on the DIF’s and the FRF’s financial statements and that we reported that FDIC had effective internal control over financial reporting and complied with tested provisions of applicable laws, regulations, contracts, and grant agreements.

FDIC also stated that it will continue to take steps to strengthen and improve its internal control environment, and that FDIC will continue its dedication to establishing sound financial management as a top priority in helping achieve the agency’s mission. The complete text of FDIC’s response is reprinted in appendix II.

James R. Dalkin Director Financial Management and Assurance

February 5, 2015

Intended Purpose of Report on Compliance with Laws, Regulations, Contracts, and Grant Agreements

Agency Comments

Deposit Insurance Fund’s Financial Statements

Page 10 GAO-15-289 FDIC Funds' 2014 and 2013 Financial Statements

Balance Sheet




Statement of Income and Fund Balance



Statement of Cash Flows



Notes to the Financial Statements

December 31, 2014 and 2013

FSLIC Resolution Fund’s Financial Statements


Balance Sheet




Statement of Income and Accumulated Deficit



Statement of Cash Flows



Notes to the Financial Statements

December 31, 2014 and 2013

Appendix I: Management’s Report on Internal Control Over Financial Reporting


Appendix I: Management’s Report on Internal Control Over Financial Reporting

Appendix II: Comments from the Federal Deposit Insurance Corporation


Appendix II: Comments from the Federal Deposit Insurance Corporation

(194921)

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february 2015 financial audit › assets › 670 › 668496.pdf · 2015-02-12 · february 2015...

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