FINANCIAL AUDIT Federal Financing Bank’s Fiscal Year 1988 Financial Statements_part1 pdf

__ . - ^ - _.__._ _ _. _ _ -_ __ l __ -__ ~^ ____ S(‘lrl t’lxl t,cbt. I !)%!I FINANCIAL AUDIT Federal Financing Bank’s Fiscal Year 1988 Financial Statements . _ i;,40 ,;\1',%11)-r(!I-I 1% ‘ -_ - __ ~-_ -____ _ This is trial version www.adultpdf.com This is trial version www.adultpdf.com United States General Accounting Office Washington, D.C. 20548 Comptroller General of the United States B-206380 September 29,1989 / ‘i To the President of the Senate and the Speaker of the House of Representatives This report presents our opinion on the Federal Financing Bank’s finan- cial statements for the year ended September 30, 1988, disclosing that the financial statements present fairly, in all material respects, the Bank’s financial position and the results of its operation and cash flow. This report also presents our reports on the Bank’s system of internal accounting controls and on its compliance with laws and regulations. We conducted our audit in accordance with generally accepted government auditing standards. The Bank is an instrumentality of the United States within the Depart- ment of the Treasury. Under 12 USC. 2293, the Bank is subject to the budget and audit provisions of the Government Corporation Control Act (31 USC. 9105) applicable to wholly owned government corporations named in 31 USC. 9101(3). The Bank incurred a net loss of $1.15 billion during fiscal year 1988, due entirely to a $1.29 billion prepayment premium owed to the Department of the Treasury. The Bank was legislatively prohibited from collecting any related prepayment premium from borrowers who prepaid their debt. The legislation precluded the Bank from enforcing provisions in the loan notes that require the loans to be prepaid at their then current market value. However, it did not provide the Bank with rights to pre- pay its Treasury borrowing in ways other than under the terms of the agreement existing between the Bank and Treasury which required that the debt be prepaid at the then current market value. As of September 30, 1988, the Bank had $146.3 billion of loans receiv- able and $4.3 billion of accrued interest receivable. Most of these loans are guaranteed by federal agencies. When an agency must honor its guarantee because a borrower defaults, that agency must obtain an appropriation or use other resources to pay the Bank. However, if these resources are not available to the agency to repay the Bank, and the Bank is legislatively required to absorb the agency’s debt, the Bank would incur a loss as a result of these loans. Our report on the Bank’s internal accounting controls discloses that the Bank’s system of internal accounting controls, while significantly improved since our last audit, still had material weaknesses. Our report Page 1 GAO/AFlWIMSll8 Federal Financing Bank ” /.: , This is trial version www.adultpdf.com provides details on our findings and our recommendations for improvement. We are sending copies of this report to the Board of Directors of the Federal Financing Bank, the Director of the Office of Management and Budget, and the Secretary of the Treasury. &f&& Charles A. Bowsher Comptroller General of the United States Page 2 GAO/AFMD-89-118 Federal Financing Bank This is trial version www.adultpdf.com Page 3 GAO/AFMD-9&118 Federal Financing Bank This is trial version www.adultpdf.com % Contents Letter 1 Opinion Letter 6 Report on Internal Accounting Controls The Bank Has Taken Action on Internal Accounting Control Weaknesses, but Some Still Remain 10 11 General and Subsidiary Ledgers Are Not Properly 12 Maintained Interest Accruals Are Not Verified 14 Conclusions 14 Recommendations 14 Agency Comments 15 Report on Compliance 16 with Laws and Statements of Financial Position Statements of Income and Changes in Retained Earnings Statements of Cash Flow Notes to the Financial Statements 17 17 18 19 20 Abbreviations EXIM Export-Import Bank CSRDF Civil Service Retirement and Disability Fund HE A Rural Electrification Administration SBA Small Business Administration Page 4 GAO/AFMD-W118 Federal F’inancing Bank This is trial version www.adultpdf.com Page 6 GAO/AFMD4Wl18 Federal Financing Bank This is trial version www.adultpdf.com ” GAO United States General Accounting Office Washington, D.C. 20648 . Comptroller General of the United States B-206380 To the Board of Directors Federal Financing Bank We have audited the accompanying statement of financial position of the Federal Financing Bank as of September 30, 1988, and the related statement of income and retained earnings and statement of cash flow for the year then ended. These financial statements are the responsibil- ity of the Bank’s management. Our responsibility is to express an opin- ion on these financial statements based on our audit. The financial statements of the Bank as of September 30,1987, were audited by the Office of the Inspector General, Department of the Treasury, whose report dated May 20, 1988, expressed an unqualified opinion on those statements. In addition to this report on our audit of the Bank’s fiscal year 1988 financial statements, we are also reporting on our considera- tion of its system of internal accounting controls and compliance with laws and regulations. We conducted our audit in accordance with generally accepted govern- ment auditing standards. Those standards require that we plan and per- form the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles and significant estimates made by management, as well as evaluating the overall financial statement pre- sentation We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Federal Financing Bank as of September 30, 1988, and the results of its operation and its b cash flow for the year then ended, in conformity with generally accepted accounting principles. As described in note 1 to the financial statements, the Bank was estab- lished to assist and coordinate government agency borrowing and guar- anteed borrowing by government agencies to reduce the cost to the federal government of some of its borrowing operations. In general, loans made by the Bank are fully guaranteed by the federal government and are collectible. However, loans, or certain provisions of loans, could result in losses to the Bank if legislative actions are taken to modify the original terms of the loans. Page 6 GAO/AFMD-(IO-118 Federal Financing Bank This is trial version www.adultpdf.com B-200&30 The following supplementary information discusses a loss the Bank incurred in 1988 and agencies that have borrowed from the Bank that have a significant number of problem loans. Bank Incurs Loss on Debt Prepayment The Bank incurred a net loss of $1.15 billion during fiscal year 1988. Section 1401 of the omnibus Budget Reconciliation Act of 1987 (Public Law lOO-203), sections 101(e) of Title III and 101(k) of Title VI of the Continuing Appropriations Act for fiscal year 1988 (Public Law lOO- 202), and section 1011 of the Omnibus Budget Reconciliation Act of 1986 (7 U.S.C. 936(a)) required the Bank to accept certain loan prepay- ments from borrowers at par (book) value. Based on the original loan terms, the Bank would have collected $1.29 billion in premiums due as a result of these loan prepayments. However, this legislation prohibited the Bank from assessing the premiums by allowing the borrowers to repay at book value. Although not contractually required to prepay its related Treasury debt, the Bank repaid the debt to Treasury at market value, in accordance with its debt agreement. Prepaying the debt owed to Treasury when borrowers prepay their loans conforms with the Bank’s normal operating procedures. The difference in the market. value of the debt prepaid to Treasury and the book value of the debt resulted in a $1.29 billion loss to the Bank during 1988. The [Bank’s Loans and Interest Receivable . . The Bank has reported $146.3 billion of loans receivable and $4.3 billion of accrued interest receivable as of September 30, 1988. Recent financial statement audits of three of the primary agencies with outstanding loans from the Bank show that they have significant numbers of prob- lem loans, as discussed below. The Farmers Home Administration, which had $58.5 billion in loans from the Bank, or 40 percent of the Bank’s total loans receivable, reported an accumulated deficit of $36 billion as of September 30, 1987. Its audited 1987 financial statements reflect loss allowances of $19.0 bil- lion, or 40 percent of its loans and interest receivable. (See Financial Audit: Farmers Home Administration’s Losses Have Increased Signifi- cantly, GAO/AF’MD-89-20, dated December 20, 1988.) The Rural Electrification Administration (REA), which had $23.3 billion in loans from the Bank, or 16 percent of the Bank’s total loans receiv- able, incurred a net loss of $956 million during fiscal year 1987. This loss was due primarily to an $837 million increase in REA'S allowance for loss on loans receivable and guaranteed loans. (See Financial Audit: Page 7 GAO/AFMD-I)O-118 Federd Financing Bank This is trial version www.adultpdf.com B-206360 Rural Electrification Administration’s Financial Statements for 1987, ~O/AFMD89-21, dated December 23, 1988.) . The Export-Import Bank (EXIM), which had $11 .O billion in loans from the Bank, or 8 percent of the Bank’s total loans receivable, reported a cumulative deficit of $116.4 million at September 30, 1988. In addition, due to EXIM'S policy of not providing loss reserves on foreign sovereign debt, it had an unrecorded loan loss allowance which, had it been recorded, would have resulted in an estimated cumulative deficit of between $3.7 billion and $6.2 billion. (See Financial Audit: Exnort- Import Bank’s 1988 and 1987 Financial Statements, oM)/Al%&!+s4, dated July 25, 1989). Almost all of the Bank’s loans are to federal agencies or to private sector borrowers whose loans are guaranteed by a federal agency. When an agency has to honor its guarantee because a borrower defaults, that agency must obtain an appropriation or use other resources to pay the Bank. However, if an appropriation is not made or federal agencies are not allowed to fund losses by borrowing from the Treasury, and the Bank is legislatively required to absorb the debt the agency owes it, the Bank would incur the loss. August 16,1989 Page 8 GAO/AFMD-9&118 Federal Financing Bank This is trial version www.adultpdf.com . !)%!I FINANCIAL AUDIT Federal Financing Bank’s Fiscal Year 1988 Financial Statements . _ i;,40 ,;1',%11)-r(!I-I 1% ‘ -_ - __ ~-_ -____ _ This is trial version www.adultpdf.com This. the Federal Financing Bank’s finan- cial statements for the year ended September 30, 1988, disclosing that the financial statements present fairly, in all material respects, the Bank’s financial. 1988, expressed an unqualified opinion on those statements. In addition to this report on our audit of the Bank’s fiscal year 1988 financial statements, we are also reporting on our considera-