Freddie Mac 2009 Annual Report Download - page 323

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that the
information we are required to disclose in our financial reports is recorded, processed, summarized and reported within the
time periods specified by the SEC rules and forms and that such information is accumulated and communicated to senior
management, as appropriate, to allow timely decisions regarding required disclosure. In designing our disclosure controls and
procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and we must apply judgment in implementing possible
controls and procedures. Management, including the company’s Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2009. As a result
of management’s evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls
and procedures were not effective as of December 31, 2009, at a reasonable level of assurance, because our disclosure
controls and procedures did not adequately ensure the accumulation and communication to management of information
known to FHFA that is needed to meet our disclosure obligations under the federal securities laws.
We have not been able to update our disclosure controls and procedures to provide reasonable assurance that
information known by FHFA on an ongoing basis is communicated from FHFA to Freddie Mac’s management in a manner
that allows for timely decisions regarding our required disclosure. Based on discussions with FHFA and the structural nature
of this continuing weakness, it is likely that we will not remediate this weakness in our disclosure controls and procedures
while we are under conservatorship. As noted below, we also consider this situation to continue to be a material weakness in
our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such
term is defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process designed by, or under
the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by the Board of Directors,
management and other personnel to provide reasonable assurance regarding the reliability of our financial reporting and the
preparation of financial statements for external purposes in accordance with GAAP.
Because of its inherent limitations, internal control over financial reporting cannot provide absolute assurance of
preventing or detecting all misstatements. It is a process that involves human diligence and compliance and is, therefore,
subject to lapses in judgment and breakdowns resulting from human error. It also can be circumvented by collusion or
improper override. Because of its limitations, there is a risk that internal control over financial reporting may not prevent or
detect on a timely basis errors or fraud that could cause a material misstatement of the financial statements.
We assessed the effectiveness of our internal control over financial reporting as of December 31, 2009. In making our
assessment, we used the criteria established in Internal Control — Integrated Framework issued by COSO. A material
weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be
prevented or detected on a timely basis by a company’s internal controls. Based on our assessment, we identified a material
weakness related to our inability to update our disclosure controls and procedures in a manner that adequately ensures the
accumulation and communication to management of information known to FHFA that is needed to meet our disclosure
obligations under the federal securities laws, including disclosures affecting our consolidated financial statements.
We have been under conservatorship of FHFA since September 6, 2008. FHFA is an independent agency that currently
functions as both our Conservator and our regulator with respect to our safety, soundness and mission. Because we are in
conservatorship, some of the information that we may need to meet our disclosure obligations may be solely within the
knowledge of FHFA. As our Conservator, FHFA has the power to take actions without our knowledge that could be material
to investors and could significantly affect our financial performance. Although we and FHFA have attempted to design and
implement disclosure policies and procedures that would account for the conservatorship and accomplish the same objectives
as disclosure controls and procedures for a typical reporting company, there are inherent structural limitations on our ability
to design, implement, test or operate effective disclosure controls and procedures under the current circumstances. As our
Conservator and regulator, FHFA is limited in its ability to design and implement a complete set of disclosure controls and
procedures relating to us, particularly with respect to current reporting pursuant to Form 8-K. Similarly, as a regulated entity,
we are limited in our ability to design, implement, operate and test the controls and procedures for which FHFA is
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