Fannie Mae 2006 Annual Report Download - page 183

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Fannie Mae
Washington, DC
We have audited management’s assessment, included in the accompanying Management’s Report on Internal
Control over Financial Reporting, that Fannie Mae and consolidated entities (the “Company”) did not
maintain effective internal control over financial reporting as of December 31, 2006, 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. The following material weaknesses have been identified and included in management’s
assessment:
•Application of Accounting Principles Generally Accepted in the United States of America—The Company
did not maintain effective internal control relating to designing its process and information technology
applications to comply with accounting principles generally accepted in the United States of America as
specified in Statement of Position No. 03-3, Accounting for Certain Loans or Debt Securities Acquired in a
Transfer (SOP 03-3) which affects the Company’s accounting conclusions related to loans purchased from
trusts under the default call option.
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