Fannie Mae 2009 Annual Report Download - page 196

disclosures affecting our consolidated financial statements. As a result, we did not maintain effective
controls and procedures designed to ensure complete and accurate disclosure as required by GAAP as of
December 31, 2009 or as of the date of filing this report. Based on discussions with FHFA and the
structural nature of this weakness, it is likely that we will not remediate this material weakness while we are
under conservatorship.
•Change Management for Applications and Models used in Accounting for Our Provision for Credit Losses
and for Other-than-temporary Impairment on Our Private-label Mortgage-related Securities. We did
not maintain effective internal control over financial reporting with respect to our controls over the change
management process we apply to applications and models we use in accounting for (1) our provision for
credit losses and (2) other-than-temporary impairment on our private-label mortgage-related securities.
Specifically, requirements definition, and systems and user-acceptance testing were not adequate to
prevent or identify errors that affected (a) the identification of loan populations and (b) the estimation of
cash flows. As a result, incorrect data and assumptions were used in our accounting for our provision for
credit losses and for other-than-temporary impairment on our private-label mortgage-related securities.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Overview
Management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer,
whether any changes in our internal control over financial reporting that occurred during our last fiscal quarter
have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting. Below we describe changes in our internal control over financial reporting since September 30,
2009 that management believes have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
Implementation of New Accounting Standards
As described in “MD&A—Off-Balance Sheet Arrangements and Variable Interest Entities—Elimination of
QSPEs and Changes in the Consolidation Model for Variable Interest Entities,” effective January 1, 2010, we
adopted two new accounting standards that amend the accounting for transfers of financial assets and the
consolidation model for variable interest entities VIEs. These accounting standards will have a major impact
on the presentation of our consolidated financial statements. They require that we consolidate the substantial
majority of our MBS trusts and record the underlying assets (typically mortgage loans) and debt (typically
bonds issued by the trusts in the form of Fannie Mae MBS certificates) of these trusts as assets and liabilities
on our consolidated balance sheet. As a result, we expect to reflect approximately 18 million loans on our
consolidated balance sheet, compared with approximately two million loans as of December 31, 2009.
Our implementation of these new accounting standards required us to make major operational and system
changes to enable the reporting of these previously non-consolidated assets and liabilities on our consolidated
balance sheet. As a result, we have made material changes in our internal control over financial reporting.
A large-scale initiative was undertaken to manage the business process and system changes necessary to
comply with the new requirements. The operational and system changes that were implemented provide
support for (1) the process by which we determine whether to consolidate loans and (2) our compliance with
the associated accounting requirements for loans and securities. In developing system functionality across
multiple areas to support the new requirements, we have created new controls, amended existing controls and,
in some cases, removed controls that are no longer applicable under the new accounting guidance.
The effort to design and implement the operational and system changes, and the associated control activities
resident in the impacted business processes have been substantially completed as of the date of this filing and
integrated into management’s ongoing program to evaluate and monitor internal control over financial reporting.
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