Fannie Mae 2005 Annual Report Download - page 188

business practices, (b) inability to ensure practices were in accordance with management standards and
(c) ambiguity in delegation of authority.
Application of GAAP
We did not maintain effective internal control over financial reporting relating to designing our process and
information technology applications to comply with GAAP. We identified numerous material and immaterial
misapplications of GAAP related to 2004 and years prior which had not been remediated as of December 31,
2005 and; therefore, continue to constitute a material weakness as of that date. We identified misapplications
of GAAP in the following primary categories:
• our accounting for debt and derivatives;
• our accounting for commitments;
• our accounting for investments in securities;
• our accounting for MBS trust consolidations and sale accounting;
• our accounting for financial guaranties and master servicing;
• our amortization of cost basis adjustments; and
• other adjustments, including accounting for income taxes.
A detailed description of the material misapplications of GAAP is attached in Exhibit 99.7 hereto and is
incorporated herein by reference. Additionally, due to our focus on restating prior years financial statements,
we did not have the process and information technology applications in place to comply with Statement of
Position No. 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer as of December 31,
2005.
Financial Reporting Process
We did not maintain an effective, timely and accurate financial reporting process. Specifically, we identified
the following material weaknesses in our financial reporting process as of December 31, 2005:
•Financial Statement Preparation and Reporting
Our systems and processes were not designed and in operation to enable us to prepare accurate
consolidated financial statements in accordance with GAAP. These systems and processes, coupled with
our other material weaknesses, resulted in our inability to prepare and complete accurate financial
information.
•Disclosure Controls and Procedures
We did not maintain effective disclosure controls and procedures, including an effective Disclosure
Committee, designed to ensure complete and accurate disclosure as required by GAAP. In addition, we
have not filed periodic reports on a timely basis as required by the rules of the SEC and the NYSE.
•General Ledger Controls
We did not maintain effective internal control over financial reporting relating to the general ledger and
the periodic closing of the general ledger. Specifically, the design and operation of this control was
inadequate for managing the addition or deletion of specific balance sheet or consolidated statements of
income accounts. In addition, personnel were granted access to the general ledger that was not appropriate
to their scope of responsibility and we lacked a formalized process with adequate controls to ensure that
the general ledger was closed properly at the end of each period.
•Journal Entry Controls
We did not maintain effective internal control over financial reporting relating to the recording of journal
entries, both recurring and non-recurring. Specifically, the design and operation of this control was
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