Freddie Mac 2011 Annual Report Download - page 179

program, there is a risk that it could prove to be inadequate to protect our computer systems, software, and networks. For
additional information, see “RISK FACTORS — Operational Risks — We may not be able to protect the security of our
systems or the confidentiality of our information from cyber attack and other unauthorized access, disclosure, and
disruption.”
Management, including the company’s Chief Executive Officer and Chief Financial Officer, conducted an evaluation
of the effectiveness of our internal control over financial reporting and our disclosure controls and procedures as of
December 31, 2011. As of December 31, 2011, we had two material weaknesses in our internal control over financial
reporting causing us to conclude that both our internal control over financial reporting and disclosure controls and
procedures were not effective as of December 31, 2011, at a reasonable level of assurance.
• The first material weakness relates to our inability 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 disclosures affecting our
consolidated financial statements. We have not been able to update our disclosure controls and procedures to
provide reasonable assurance that information known by FHFA on an ongoing basis is communicated from FHFA
to Freddie Mac’s management in a manner that allows for timely decisions regarding our required disclosure.
Given the structural nature of this weakness, we believe it is likely that we will not remediate this material
weakness while we are under conservatorship. We consider this situation to be a material weakness in our internal
control over financial reporting.
• The second material weakness relates to our inability to effectively manage information technology changes and
maintain adequate controls over information security monitoring, resulting from increased levels of employee
turnover. As discussed above, we are finding it difficult to retain and engage critical employees and attract people
with the skills and experience we need. In most areas, we have been able to leverage succession plans and reassign
responsibilities to maintain sound internal control over financial reporting. However, in the fourth quarter of 2011,
we experienced a significant increase in the number of control breakdowns within certain areas of our information
technology division, specifically within groups responsible for information change management and information
security. We identified deficiencies in the following areas: (a) approval and monitoring of changes to certain
technology applications and infrastructure; (b) monitoring of select privileged user activities; and (c) monitoring
user activities performed on certain technology hardware systems. These control breakdowns could have impacted
applications which support our financial reporting processes. Increased levels of employee turnover contributed to
ineffective management oversight of controls in these areas resulting in these deficiencies. We believe that these
issues aggregate to a material weakness in our internal control over financial reporting. We also consider this
material weakness to cause our disclosure controls and procedures to be ineffective.
In view of the mitigating actions we have undertaken related to these material weaknesses, we believe that our
consolidated financial statements for the year ended December 31, 2011 have been prepared in conformity with GAAP.
For additional information, see “CONTROLS AND PROCEDURES.”
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our business activities require that we maintain adequate liquidity to fund our operations, which may include the
need to make payments of principal and interest on our debt securities, including securities issued by our consolidated
trusts, and otherwise make payments related to our guarantees of mortgage assets; make payments upon the maturity,
redemption or repurchase of our debt securities; make net payments on derivative instruments; pay dividends on our
senior preferred stock; purchase mortgage-related securities and other investments; purchase mortgage loans; and remove
modified or seriously delinquent loans from PC trusts.
We fund our cash requirements primarily by issuing short-term and long-term debt. Other sources of cash include:
• receipts of principal and interest payments on securities or mortgage loans we hold;
• other cash flows from operating activities, including the management and guarantee fees we receive in connection
with our guarantee activities (excluding those we must remit to Treasury pursuant to the Temporary Payroll Tax
Cut Continuation Act of 2011 commencing in April 2012);
• borrowings against mortgage-related securities and other investment securities we hold; and
• sales of securities we hold.
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