Freddie Mac 2012 Annual Report Download - page 325

Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such
term is defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process designed by, or under
the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by the Board of Directors,
management and other personnel to provide reasonable assurance regarding the reliability of our financial reporting and the
preparation of financial statements for external purposes in accordance with GAAP.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. It
is a process that involves human diligence and compliance and is, therefore, subject to lapses in judgment and breakdowns
resulting from human error. It also can be circumvented by collusion or improper management override. Because of its
limitations, there is a risk that internal control over financial reporting may not prevent or detect, on a timely basis, errors that
could cause a material misstatement of the financial statements.
We assessed the effectiveness of our internal control over financial reporting as of December 31, 2012. In making our
assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, or
COSO, in Internal Control — Integrated Framework. A material weakness is 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 by a company’s internal
controls. Based on our assessment, we identified a material weakness related 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 been under conservatorship of FHFA since September 6, 2008. FHFA is an independent agency that currently
functions as both our Conservator and our regulator with respect to our safety, soundness and mission. Because we are in
conservatorship, 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 investors and could significantly affect our financial performance. Although we and FHFA have attempted to design and
implement disclosure policies and procedures that would account for the conservatorship and accomplish the same objectives
as disclosure controls and procedures for a typical reporting company, there are inherent structural limitations on our ability
to design, implement, test or operate effective disclosure controls and procedures under the current circumstances. As our
Conservator and regulator, FHFA is limited in its ability to design and implement a complete set of disclosure controls and
procedures relating to us, particularly with respect to current reporting pursuant to Form 8-K. Similarly, as a regulated entity,
we are limited in our ability to design, implement, operate and test the controls and procedures for which FHFA is
responsible. For example, FHFA may formulate certain intentions with respect to the conduct of our business that, if known
to management, would require consideration for disclosure or reflection in our financial statements, but that FHFA, for
regulatory reasons, may be constrained from communicating to management. As a result, we have concluded that this control
deficiency constitutes a material weakness in our internal control over financial reporting.
Because of this material weakness, we have concluded that our internal control over financial reporting was not
effective as of December 31, 2012 based on the COSO criteria. PricewaterhouseCoopers LLP, an independent registered
public accounting firm, audited the effectiveness of our internal control over financial reporting as of December 31, 2012 and
also determined that our internal control over financial reporting was not effective. PricewaterhouseCoopers LLP’s report
appears in “FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA — REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM.”
Mitigating Actions Related to the Material Weakness in Internal Control Over Financial Reporting
As described under “Management’s Report on Internal Control Over Financial Reporting,” we have one material
weakness in internal control over financial reporting as of December 31, 2012 that we have not remediated.
Given the structural nature of the material weakness related 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, we believe it is likely that we will
not remediate this material weakness while we are under conservatorship. However, both we and FHFA have continued to
engage in activities and employ procedures and practices intended to permit accumulation and communication to
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