Freddie Mac 2005 Annual Report Download - page 26

Information Statement. The risks that we have highlighted here are not the only ones that we face. If any of the risks
actually occur, our business, Ñnancial condition and/or results of operations could be adversely aÅected. In that case, the
trading price of our securities could decline, and you may lose all or part of your investment. Some of these risks are
managed under the risk management framework, as described in ""MD&A Ì RISK MANAGEMENT.'' We may also
encounter risks of which we are currently not aware or that we currently deem immaterial. These risks also may impair our
business operations, Ñnancial results, or your investment in our securities.
Business and Operational Risks
Material weaknesses and other control deÑciencies related to Ñnancial reporting could result in errors and a loss of
market conÑdence in our reported results.
EÅective internal controls are an important component of the process for producing timely, reliable Ñnancial reports,
preventing fraud and operating successfully as a publicly traded company. If we cannot provide reliable Ñnancial reports or
prevent fraud, our reputation and operating results could be adversely aÅected. We have discovered, and may in the future
discover, material weaknesses and signiÑcant deÑciencies in our internal controls that require remediation. Due to these
weaknesses and deÑciencies, management determined that, as of December 31, 2005, our internal control over Ñnancial
reporting was not eÅective. Although we are not an SEC registrant, our classiÑcation of internal control deÑciencies is
consistent with the deÑnitions established under standards adopted by the Public Company Accounting Oversight Board, or
PCAOB. Under the PCAOB standards, a ""material weakness'' is a signiÑcant deÑciency or combination of signiÑcant
deÑciencies that results in a more than remote likelihood that a material misstatement of the annual or interim Ñnancial
statements will not be prevented or detected. A ""signiÑcant deÑciency'' is a control deÑciency or combination of control
deÑciencies that adversely aÅects a company's ability to initiate, authorize, record, process, or report external Ñnancial data
reliably in accordance with GAAP such that there is a more than remote likelihood that a misstatement of our annual or
interim Ñnancial statements that is more than inconsequential will not be prevented or detected. For a description of our
existing material weaknesses and certain of our signiÑcant deÑciencies and our eÅorts to mitigate and remediate them, see
""MD&A Ì RISK MANAGEMENT Ì Operational Risks Ì Internal Control over Financial Reporting.''
We have not completed our evaluation of our internal control over Ñnancial reporting. Accordingly, we are unable to
determine whether additional weaknesses or deÑciencies that require remediation exist. We face continuing challenges
because of the deÑciencies in our accounting infrastructure and the operational complexities caused by the volume of
revised and new accounting policies that we have adopted in recent years. Our ability to identify, manage, mitigate and/or
remedy internal control weaknesses and deÑciencies and other risks may continue to delay our return to regular, timely
reporting.
Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives. Furthermore, we cannot be certain that our eÅorts to improve our control
environment will be successful or that we will be able to maintain adequate controls over our Ñnancial processes and
reporting in the future. A failure to establish and maintain an adequate control environment could result in a material error in
our reported Ñnancial results and additional delay in our Ñnancial reporting timeline, and could have a material adverse
aÅect on our business depending on the nature of the failure and any required remediation. An ineÅective control
environment, including our disclosure controls and procedures, could also cause investors to lose conÑdence in our reported
Ñnancial information, which would likely have an adverse eÅect on the trading price of our securities. If we fail to meet our
reporting obligations, this could aÅect our ability to maintain the listing of our securities on the New York Stock Exchange,
or the NYSE. Further, OFHEO could seek to require us to implement a remediation plan, hold additional capital, limit the
growth of our Retained portfolio or take other actions. In addition, a failure to eÅectively and timely implement the
remediation plan undertaken as a result of the prior restatement of our consolidated Ñnancial statements and the consent
order entered into with OFHEO, including particular initiatives relating to technical infrastructure and internal control over
Ñnancial reporting, could similarly adversely aÅect our business.
We rely on internal models for Ñnancial accounting and reporting purposes, to make business decisions, and to manage
risks, and our business could be adversely aÅected if those models fail to produce reliable results.
We make signiÑcant use of business and Ñnancial models for Ñnancial accounting and reporting purposes and to manage
risk. For example, we use models in determining the fair value of Ñnancial instruments for which independent price
quotations are not available or reliable or to extrapolate third-party values to our portfolio. We also use models to measure
and monitor our exposures to interest-rate and other market risks and credit risk. The information provided by these models
is also used in making business decisions relating to strategies, initiatives, transactions and products.
Models are inherently imperfect predictors of actual results because they are based on assumptions about future
performance. Our models could produce unreliable results for a number of reasons, including invalid or incorrect
assumptions underlying the models during periods of market stress and economic change or in general. The valuations, risk
10 Freddie Mac