Freddie Mac 2006 Annual Report Download - page 71

staÅ positions in targeted functions within the company to achieve our objectives for the remediation of our internal control
deÑciencies. Our employee voluntary turnover rate was higher in 2005 than prior years, but voluntary turnover in 2006 was
signiÑcantly lower than 2005. Undesirable voluntary turnover strains existing resources and contributes to increased
operational risk. Furthermore, our standards of performance need to be enforced in order to create a more eÅective culture of
accountability.
Our remediation activities are focused on addressing staÇng issues in targeted areas across the company by identifying
and Ñlling critical vacancies, addressing staÅ development and training needs, and eliminating key person dependencies in
critical roles. Additionally, we are taking steps to build a culture of accountability that supports operational risk
management decision-making and promotes the urgency to identify and address deÑciencies in our internal controls. For
example, risk management accountability has been formally included as a performance objective for all our employees. We
are also reinforcing accountability through staÅ training that raises the awareness of risks in our business and highlights the
importance of maintaining eÅective internal controls.
Management risk and control self-assessment process. We do not currently have a self-assessment process for our
internal control over Ñnancial reporting in order to reliably enable management to identify deÑciencies in our internal control,
evaluate the eÅectiveness of internal control or modify our control procedures in response to changes in risk in a timely
manner.
Our remediation activities are focused on an in-depth assessment of the design of internal control over Ñnancial
reporting in our existing business processes and the development of a self-assessment process that will provide management
with a more timely and reliable tool to identify changes to our processes, risks, and controls in order to identify and
remediate control deÑciencies. The new management self-assessment process will be implemented under an enhanced risk
governance structure designed to identify and escalate risk issues and control deÑciencies in a timely manner. Our objective
for this new process is to allow us to assess the design and eÅectiveness of our internal control over Ñnancial reporting in a
manner consistent with the requirements of the Sarbanes-Oxley Act of 2002.
In addition to these material weaknesses, we identiÑed a number of signiÑcant deÑciencies in our internal control over
Ñnancial reporting that, although not determined to be material weaknesses as of the end of the year, still present risks of
error in our Ñnancial statements and disclosures. These signiÑcant deÑciencies include:
‚ deÑciencies in our processes related to the valuation of our guarantee-related assets and liabilities;
‚ deÑciencies in our controls over the accuracy and completeness of data received from external counterparties or
passed between our business processes and used in our transaction processing and Ñnancial reporting systems;
‚ over-reliance on end-user computing solutions with insuÇcient development, documentation and change controls;
‚ deÑciencies in our new product implementation process; and
‚ deÑciencies in our procedures for monitoring our use of simplifying assumptions in the application of our accounting
policies, and our excessive reliance on such assumptions. The excessive use of simplifying assumptions increases the
risk that insigniÑcant diÅerences, when compared to a stricter application of our accounting policies, could become
consequential over time and result in errors that are not detected (e.g., if the underlying transaction volume aÅected
by a simplifying assumption increases).
As we continue our remediation activities, we may identify additional material weaknesses, signiÑcant deÑciencies or
other operational issues in our internal controls or conclude that signiÑcant deÑciencies we have already identiÑed should be
regarded as material weaknesses, either individually or in the aggregate. Improvements to the processes and controls we put
in place to remediate our control deÑciencies need to operate for a period of time to enable us to evaluate their eÅectiveness.
The material weaknesses and signiÑcant deÑciencies in our internal control over Ñnancial reporting adversely aÅect our
ability to record, process, summarize and report Ñnancial data in a timely manner. Based on the continued existence of
material weaknesses at December 31, 2006, our Chief Executive OÇcer and Chief Financial OÇcer have concluded that our
internal control over Ñnancial reporting was not eÅective at December 31, 2006. In order to compensate for the material
weaknesses and other deÑciencies in our internal controls, we continue to perform extensive veriÑcation and validation
procedures to provide reasonable assurance that our consolidated Ñnancial statements are prepared in accordance with
GAAP. Therefore, in view of the additional procedures we performed, we believe that these weaknesses do not prevent us
from preparing and issuing our consolidated Ñnancial statements in conformity with GAAP.
Our resumption of interim Ñnancial reporting will depend on continued progress with our remediation eÅorts; however,
our objective is to return to quarterly reporting during the second half of 2007. We will begin the process of registering our
common stock with the SEC after resuming timely quarterly reporting.
59 Freddie Mac