Fannie Mae 2005 Annual Report Download - page 198

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Fannie Mae:
We have audited management’s assessment, included in the accompanying Management’s Report on Internal
Control over Financial Reporting, that Fannie Mae (the “Company”) did not maintain effective internal control
over financial reporting as of December 31, 2005, because of the effect of the material weaknesses identified
in management’s assessment based on criteria established in Internal Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on
management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial reporting, evaluating management’s
assessment, testing and evaluating the design and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the
company’s principal executive and principal financial officers, or persons performing similar functions, and
effected by the company’s board of directors, management, and other personnel to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of
collusion or improper management override of controls, material misstatements due to error or fraud may not
be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the
internal control over financial reporting to future periods are subject to the risk that the controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more
than a remote likelihood that a material misstatement of the annual or interim financial statements will not be
prevented or detected. Numerous pervasive material weaknesses have been identified and included in the
accompanying Management’s Report on Internal Control over Financial Reporting. The nature of these
weaknesses is described below:
•Control Environment—The Company did not maintain an effective control environment related to internal
control over financial reporting. Specifically, the control environment lacked the following controls which
represent material weaknesses: a comprehensive set of financial accounting policies, a comprehensive and
independent risk oversight function, an effective and independent Internal Audit function, a human resources
function with clear enterprise-wide coordination, clearly communicated information technology policies and
procedures, and adequate transactional policies and procedures.
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