Fannie Mae 2009 Annual Report Download - page 195

• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with GAAP, and that our receipts and expenditures are being made only in
accordance with authorizations of our management and our Board of Directors; and
• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on our financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting
objectives because of its inherent limitations. Internal control over financial reporting is a process that involves
human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human
failures. Internal control over financial reporting also can be circumvented by collusion or improper override.
Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a
timely basis by internal control over financial reporting. However, these inherent limitations are known
features of the financial reporting process, and it is possible to design into the process safeguards to reduce,
though not eliminate, this risk.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31,
2009. In making its assessment, management used the criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Management’s assessment of our internal control over financial reporting as of December 31, 2009 identified
two material weaknesses, which are described below. Because of these material weaknesses, management has
concluded that our internal control over financial reporting was not effective as of December 31, 2009.
Management also has concluded that our internal control over financial reporting also was not effective as of
the date of filing this report.
Our independent registered public accounting firm, Deloitte & Touche LLP, has issued an audit report on our
internal control over financial reporting, expressing an adverse opinion on the effectiveness of our internal
control over financial reporting as of December 31, 2009. This report is included below.
Description of Material Weaknesses
The Public Company Accounting Oversight Board’s Auditing Standard No. 5 defines a material weakness as 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.
Management has determined that we had the following material weaknesses as of December 31, 2009:
•Disclosure Controls and Procedures. We have been under the conservatorship of FHFA since September 6,
2008. Under the Regulatory Reform Act, FHFA is an independent agency that currently functions as both
our conservator and our regulator with respect to our safety, soundness and mission. Because of the nature
of the conservatorship under the Regulatory Reform Act, which places us under the “control” of FHFA (as
that term is defined by securities laws), 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 our shareholders and other stakeholders, and could
significantly affect our financial performance or our continued existence as an ongoing business. Although
we and FHFA attempted to design and implement disclosure policies and procedures that would account for
the conservatorship and accomplish the same objectives as a disclosure controls and procedures policy of a
typical reporting company, there are inherent structural limitations on our ability to design, implement, test
or operate effective disclosure controls and procedures. As both our regulator and our conservator under the
Regulatory Reform Act, FHFA is limited in its ability to design and implement a complete set of disclosure
controls and procedures relating to Fannie Mae, 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 responsible.
Due to these circumstances, we have not been able 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
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