This report presents our opinions on the financial statements of the Bank
Insurance Fund, the Savings Association Insurance Fund, and the Federal
Savings and Loan Insurance Corporation (FSLC) Resolution Fund for the
years ended December 31, 1993 and 1992. These financial statements are
the responsibility of the Federal Deposit Insurance Corporation (FDIC), the
administrator of the three funds. This report also includes our opinion on
FDIC's system of internal controls as of December 31, 1993. FDIC has made
significant progress in addressing the internal control weaknesses we
reported in 1992. However, a material weakness existed as of
December 31, 1993, in FDIC's internal controls over its process for valuing
failed institution assets. This report also discusses our evaluation of FDIC's
compliance with laws and regulations during 1993.

In addition, this report includes our recommendations to improve FDIC's internal controls and discusses our concerns about the capitalization of the Savings Association Insurance Fund, the continued uncertainties surrounding the cost of financial institution failures, and improvements in the banking and savings association industries which have substantially accelerated the recapitalization of the Bank Insurance Fund and reduced the exposure of both the Bank Insurance Fund and the Savings Association Insurance Fund to losses from failed institutions. This report also discusses a $410 million reduction in the Bank Insurance Fund's estimated liability for troubled institutions, which FDIC reported on the fund's first quarter 1994 financial statements but which resulted from conditions as of December 31, 1993, and, therefore, more appropriately should have been reflected in the Bank Insurance Fund's financial statements as of December 31, 1993.

We conducted our audits pursuant to the provisions of section 17(d) of the Federal Deposit Insurance Act, as amended (12 U.S.C. 1827(d)), and in accordance with generally accepted government auditing standards.

We are sending copies of this report to the Acting Chairman of the Board of Directors of the Federal Deposit Insurance Corporation; the Chairman of the Board of Governors of the Federal Reserve System; the Comptroller of the Currency, the Acting Director of the Office of Thrift Supervision; the Chairmen and Ranking Minority Members of the Senate Committee on

B-253861

Banking, Housing and Urban Affairs and the House Committee on Banking, Finance and Urban Affairs; the Secretary of the Treasury, the Director of the Office of Management and Budget; and other interested parties.

This report was prepared under the direction of Robert W. Gramling, Director, Corporate Financial Audits. Other major contributors to this report are listed in appendix III

Chades A. Bowsher

Charles A. Bowsher Comptroller General of the United States

We have audited the statements of financial position as of December 31, 1993 and 1992, of the three funds administered by the Federal Deposit Insurance Corporation (FDIC), and the related statements of income and fund balance (accumulated deficit) and statements of cash flows for the years then ended. For these three funds—the Bank Insurance Fund (BIF), the Savings Association Insurance Fund (SAIF), and the Federal Savings and Loan Insurance Corporation (FSLC) Resolution Fund (FRF)—we found that the financial statements, taken as a whole, were fairly stated as of December 31, 1993.

During our prior year's audits of the 1992 financial statements of the three funds,' we identified several significant weaknesses in FDIC's internal controls which adversely affected its ability to manage, liquidate, and report on the large volume of assets acquired from failed financial institutions. These weaknesses also affected FDIC's ability to accurately report transactions associated with BIF's and FRF's resolution and liquidation activity, and increased the risk of misappropriation of assets. We noted that this could add to the losses on failed institution assets being incurred by the funds. We also identified significant weaknesses in FDIC's time and attendance processing controls which increased the risk of inappropriate payroll expenditures and exposed SAIF to significant misapplication of payroll and other overhead expenditures. In addition to these weaknesses, which we considered material, we identified other weaknesses in FDIC's internal controls which affected its ability to ensure that internal control objectives were achieved. We made a number of

Financial Audit Federal Deposit Insurance Corporation's 1992 and 1991 Financial Statements
(GAOVABID-86-6, June 30, 1983) and Financial Audit: Federal Deposit Insurance Corporation's Internal
Controls as of December 31, 1992 (GÃOVAIMD-94-36, February 4, 1994).

3A material weakness is a reportable condition in which the design or operation of the controls does not reduce to a relatively low level the risk that losses, noncompliance, or misstatements in amounts that would be material in relation to the financial statements may occur and not be detected promptly by employees in the normal course of their assigned duties. Reportable conditions involve matters coming to our attention relating to significant deficiencies in the design or operation of internal controls that, in the auditor's judgment, could adversely affect an entity's ability to (1) safeguard assets against loss from unauthorized acquisition, use, or disposition, (2) ensure the execution of transactions in accordance with laws and regulations, or (3) property record, process, and summarise transactions to permit the preparation of financial statements. Reportable conditions which are not considered material nevertheless represent significant deficiencies in the design or operation of internal controls and need to be corrected by management.