Freddie Mac 2006 Annual Report Download - page 23

Delays in meeting our Ñnancial reporting obligations could aÅect our ability to maintain the listing of our securities on
the New York Stock Exchange, or NYSE. IneÅective controls could also cause investors to lose conÑdence in our reported
Ñnancial information, which may have an adverse eÅect on the trading price of our securities.
We rely on internal models for Ñnancial accounting and reporting purposes, to make business decisions, and to manage
risks, and our business could be adversely aÅected if those models fail to produce reliable results.
We make signiÑcant use of business and Ñnancial models for Ñnancial accounting and reporting purposes and to manage
risk. For example, we use models in determining the fair value of Ñnancial instruments for which independent price
quotations are not available or reliable or to extrapolate third-party values to our portfolio. We also use models to measure
and monitor our exposures to interest-rate and other market risks and credit risk. The information provided by these models
is also used in making business decisions relating to strategies, initiatives, transactions and products.
Models are inherently imperfect predictors of actual results because they are based on assumptions about future
performance. Our models could produce unreliable results for a number of reasons, including invalid or incorrect
assumptions underlying the models or incorrect data being used by the models. The valuations, risk metrics, amortization
results and loan loss reserve estimations produced by our internal models may be diÅerent from actual results, which could
adversely aÅect our business results, cash Öows, fair value of net assets, business prospects and future earnings. Changes in
any of our models or in any of the assumptions, judgments or estimates used in the models may cause the results generated
by the model to be materially diÅerent. The diÅerent results could cause a revision of previously reported Ñnancial condition
or results of operations, depending on when the change to the model, judgment or assumption is implemented. Any such
changes may also cause diÇculties in comparisons of the Ñnancial condition or results of operations of prior or future periods.
If our models are not reliable we could also make poor business decisions, including loan purchase decisions, guarantee fee
pricing decisions, asset and liability management decisions, or other decisions, which could result in an adverse Ñnancial
impact. Furthermore, any strategies we employ to attempt to manage the risks associated with our use of models may not be
eÅective. See ""MD&A Ì CRITICAL ACCOUNTING POLICIES AND ESTIMATES Ì Valuation of Financial
Instruments'' and ""MD&A Ì RISK MANAGEMENT Ì Interest-Rate Risk and Other Market Risks'' for more informa-
tion on our use of models.
Changes in our accounting policies, as well as estimates we make, could materially aÅect how we report our Ñnancial
condition or results of operations.
Our accounting policies are fundamental to understanding our Ñnancial condition and results of operations. We have
identiÑed certain accounting policies and estimates as being ""critical'' to the presentation of our Ñnancial condition and
results of operations because they require management to make particularly subjective or complex judgments about matters
that are inherently uncertain and for which materially diÅerent amounts could be recorded using diÅerent assumptions or
estimates. For a description of our critical accounting policies, see ""MD&A Ì CRITICAL ACCOUNTING POLICIES
AND ESTIMATES.'' As new information becomes available and we update the assumptions underlying our estimates, we
could be required to revise previously reported Ñnancial results if our results for accounting periods remain subject to change
as a result of delays in the release of Ñnancial statements.
From time to time, the Financial Accounting Standards Board, or FASB, and the SEC can change the Ñnancial
accounting and reporting standards that govern the preparation of our Ñnancial statements. These changes are beyond our
control, can be diÇcult to predict and could materially impact how we report our Ñnancial condition and results of
operations. We could be required to apply a new or revised standard retroactively, which may result in the restatement of
prior period Ñnancial statements by material amounts.
A failure in our operational systems or infrastructure, or those of third parties, could impair our liquidity, disrupt our
business, damage our reputation and cause losses.
Shortcomings or failures in our internal processes, people or systems could lead to impairment of our liquidity, Ñnancial
loss, disruption of our business, liability to customers, legislative or regulatory intervention or reputational damage. For
example, our business is highly dependent on our ability to process a large number of transactions on a daily basis. The
transactions we process have become increasingly complex and are subject to various legal and regulatory standards. Our
Ñnancial, accounting, data processing or other operating systems and facilities may fail to operate properly or become
disabled, adversely aÅecting our ability to process these transactions. The inability of our systems to accommodate an
increasing volume of transactions or new types of transactions or products could constrain our ability to pursue new business
initiatives.
We also face the risk of operational failure or termination of any of the clearing agents, exchanges, clearing houses or
other Ñnancial intermediaries we use to facilitate our securities and derivatives transactions. Any such failure or termination
could adversely aÅect our ability to eÅect transactions, service our customers and manage our exposure to risk.
11 Freddie Mac