Fannie Mae 2010 Annual Report Download - page 199

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purposes in accordance with GAAP. Internal control over financial reporting includes those policies and
procedures that:
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions
and dispositions of our assets;
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,
2010. 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, 2010 identified a
material weakness, which is described below. Because of this material weakness, management has concluded
that our internal control over financial reporting was not effective as of December 31, 2010 or 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, 2010. This report is included below.
Description of Material Weakness
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 weakness as of December 31, 2010:
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
194