FDICís Receivership Service Billing Process
This report presents the results of the subject audit. When an FDIC-insured institution fails or is closed by a federal or state regulatory agency, the FDIC is appointed as receiver. The receivership service billing process is the method by which the Corporation bills the cost of FDIC services provided to individual receiverships. The audit objective was to assess the design and implementation of controls over the FDICís receivership service billing process. The audit focused on controls for ensuring that receiverships are fairly and accurately billed in accordance with applicable laws and regulations. We conducted this performance audit in accordance with generally accepted government auditing standards. Appendix 1 of this report discusses our audit objective, scope, and methodology in detail.
The FDICís Receivership Management Program, one of the FDICís three main business lines, includes performing the closing function of a failed institution, maintaining the value of and liquidating any remaining failed institution assets, and distributing any proceeds of the liquidation to those with approved receivership claims. The FDIC is often the largest claimant after fulfilling its obligations as deposit insurer. Receivership billings can occur for a number of years after a financial institution is closed depending on such factors as success in selling assets and the results of litigation.
As shown in Figures 1 and 2 on the following page, receivership billings decreased from $63.1 million in 2002 to $21.1 million in 2007 as the number of receiverships reduced from 119 to 35. However, as of August 31, 2008, 38 receiverships were billed $32.8 million and 10 new receiverships were established in 2008. The FDIC projects that the number of receiverships will continue to increase during the remainder of 2008. An indicator of this increase is the number of institutions that are poorly rated as a result of safety and soundness examinations. Figure 3 shows the recent increase in these institutions.
Receivership Service Billing Process
The receivership service billing process consists of an annual rate-setting process managed by the FDICís Division of Resolutions and Receiverships (DRR) and the monthly billings process for receiverships that involve both DRR and the FDICís Division of Finance (DOF). DOF is responsible for the FDICís Receivership Service Billing System (RSB), which is the system of record for receivership billings. Receivership billings reduce the cash available for dividend payments, including those to uninsured depositors and other claimants. Therefore, it is important that the FDIC establish and implement effective cost monitoring and control activities to ensure fairness and accuracy in incurring and recording the costs of receivership servicing operations.
To bill receiverships for operational expenses, the FDIC established 19 types of activities (service lines) as shown in Table 1 that represent receivership program functions performed to resolve a failed financial institution and liquidate the receivership.
Table 1: 2007 Receivership Service Line Billings
The FDIC has also established a five-digit program code in the FDICís financial systems that represents a service line and is used to charge expenses, record costs, and measure financial performance and planned outcomes.
Monthly Receivership Service Billing Process and Controls. Based on the approved 2008 service line rates, receiverships are billed on a monthly basis for the hours charged in the FDICís Corporate Human Resources Information Time and Attendance System (CHRIS T&A) by DRR and Legal Division employees. Employees code their hours in CHRIS T&A by receivership and service line, which are then reviewed and approved by their assigned supervisor. The approved time charges electronically feed into DRRís Billing and Cost Center Reporting Tool (BCCR) and to the RSB. Preliminary invoices, by service line, are created in the BCCR and are accessible by the BCCR Administrator, Service Line Owners, Program Code Owners, and Receivership Oversight personnel.
Service Line Ownerís Review. By the 10th of each month, Service Line Owners receive an email notification from the BCCR Administrator that they should review the appropriateness of the charges billed to the respective service line. If any questionable charges are noted, the Service Line Owners should contact supervisors of employees whose charges appear questionable to verify that the charges are appropriately billed. The Service Line Owners certify the monthly charges to the BCCR Administrator and/or submit adjustments by the 15th of each month.
Program Code Ownerís Review. On a quarterly basis, the BCCR Administrator provides each Program Code Owner with cost reports for a detailed review to ensure that costs, including employee hours are charged accurately. The Program Code Owners must certify to the BCCR Administrator that employee hours are being charged to the correct Program Code.
Receivership Oversight Sectionís Review. The DRRís Receivership Oversight Section is assigned the role of an advocate for the interests of the receivership. This role includes performing monthly reviews of service billings for reasonableness of charges, recommending billing adjustments to Service Line Owners, communicating with all Service Line Owners and the BCCR administrator on billing errors that may impact all service lines, and providing updates on the performance of receiverships, noting any billing and cost issues.
Upon completion of DRRís review, the BCCR Administrator submits the certified invoices to the RSB System Administrator in DOF. The RSB System Administrator reconciles the BCCR invoices to the information contained in the RSB to ensure the accuracy and completeness of the billings. The RSB System then automatically feeds these charges to the NFE General Ledger and the receivership Statement of Operations to bill the receiverships. Figure 5 on the next page illustrates the receivership service billing process.
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Laws and Regulations Related to Receivership Expenses
The Federal Deposit Insurance Act,2 permits the FDIC to charge its receiverships all of the expenses of liquidation as are fixed by the FDIC. No specific standards regarding the manner in which expenses are to be charged are set by the Act. However, the FDIC has adopted an implementing regulation governing administrative expenses of a receivership at 12 Code of Federal Regulations (C.F.R.) ß360.4,3 which states that such expenses shall include obligations that the receiver determines are necessary and appropriate to facilitate the smooth and orderly liquidation or other resolution of the institution.
Guidance and Controls Related to Receivership Service Billing
The FDIC has established policies and procedures related to controls over the receivership service billing process as described below.
FDIC Circular 4010.3. FDIC Enterprise Risk Management Program. The circular adopted internal control standards prescribed in the Government Accountability Office (GAO) publication, Standards for Internal Control in the Federal Government. The GAO standards apply to all operations (programmatic, financial, and compliance) and are intended to ensure the effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and regulations. Circular 4010.3 requires management to develop and implement controls to ensure that management directives are carried out and to provide reasonable assurance that controls are sufficient to minimize exposure to waste, fraud, and mismanagement.Key control activities related to the receivership service billing process described in Circular 4010.3 include:
FDIC Circular 7000.5, Billing and Cost Management Program for the Receivership Management Business Line, dated July 11, 2006, establishes policies and procedures for the Billing and Cost Management Program for the Receivership Management Business Line. The circular provides the roles and responsibilities for establishing billing rates, the monthly receivership billing process, and controls for ensuring that effective cost monitoring and management principles are in place and observed to promote efficiency. Key controls are established for the receivership billing process, as described below:
RESULTS OF AUDIT
The FDIC has designed and implemented controls over the receivership service billing process to ensure that receiverships are fairly and accurately billed in accordance with applicable laws and regulations. The process for establishing the FDICís 2008 service line rates was documented in rate cases approved by the FDICís Chief Financial Officer for each service line. The six rate cases we examined were accurately calculated and fully supported.
The receivership billing process includes controls in DRR and DOF to provide reasonable assurance that receivership service billings are accurately recorded and billed to the receiverships. For example, during the first quarter of 2008, certain litigation billings did not properly transfer to the BCCR due to an account coding issue in the CHRIS T&A system. However, the discrepancies were identified because of the internal control procedures designed in the process. As a result, corrective action was initiated to resolve the coding issue, and DOF personnel ensured that the proper billings were entered into the RSB.
Additionally, DRR has established a performance measure to evaluate receivership billings in accordance with FDIC Circular 4010.3, FDIC Enterprise Risk Management Program. DRRís Receivership Oversight Section prepares a Quarterly Update report on each receivership to measure its progress. The Quarterly Update provides a detailed description of the status of the receivership operations including: financial data on the receivership expenses, estimated cash recoveries, projected and completed milestones, asset disposition, and litigation status. The Quarterly Update includes the quarterly and cumulative receivership service line expenses billed and provides a performance measure to analyze the receiverships budgeted to actual expenses.
Although adequate controls have been designed and implemented to ensure that billings by service line are reviewed, controls can be strengthened for ensuring that billings are reviewed for the receiverships. Specifically, DRR is not providing the same level of review for billings by receivership as that provided for billings by service line. Fully documenting the receivership billing review procedures, as well as the billing review results, and certifying the Receivership Oversight Section reviews similar to the review process of billings by service line would help to ensure the FDIC thoroughly and consistently fulfills the role of advocate for the interests of the receiverships.
CONTROLS IN THE FDICíS RECEIVERSHIP BILLING PROCESS
The FDIC has established controls to ensure that the receiverships are fairly and accurately billed in accordance with applicable laws and regulations. We found that the process for establishing the FDICís 2008 service line rates was fully documented and supported in accordance with FDIC Circular 7000.5. The monthly receivership billing process includes controls in DRR and DOF to provide reasonable assurance that receivership service billings are adequately reviewed and supported and that performance measures for receivership billings have been established to monitor receivership performance.
Monthly Service Billing Process
We obtained the preliminary receivership invoices from the DRR BCCR Administrator for the period January to April 2008. We compared the billings provided from DRRís BCCR to those recorded in the RSB. We found that hourly charges totaling $1.2 million did not reconcile between the two systems. We presented these results to the RSB Administrator in DOF who provided support for each of the exceptions we noted. The RSB Administrator told us that some of these charges were related to adjustments resulting from the Service Line Ownersí preliminary invoice review. However, most of the billing exceptions were due to a CHRIS T&A coding problem that the RSB Administrator had discovered during the standard monthly processing of receivership billings. As part of the control process, the RSB Administrator compares the reports he receives from the BCCR to the payroll information in the RSB. He discovered that the data did not match for an unusually high number of records.
As a result, DOF, DRR, and Legal Division personnel involved in the monthly billing process met and determined that the source of the problem was the CHRIS T&A code used by paralegals and attorneys in the Legal Division to charge their time to the Legal Services service line. The CHRIS T&A code was revised to ensure that charges for the Legal Services service line were accurately reflected in the RSB.
We selected a judgmental sample of 20 invoices from January to April 2008 to verify whether the Service Line Owners had certified the preliminary invoices for their service lines as required by Circular 7000.5. Of the 20 sample invoices, 19 had been certified within the timeframes established by DRRís BCC. The one exception was due to the Service Line Owner being out of town during the billing process. However, the invoice was subsequently approved by the Service Line Owner.
To determine whether receivership billings were in excess of the cost of services provided, we examined the billings to the Franchise Marketing Service Line that uses a market-based scale for receivership billings based on the premium paid by the acquiring bank, rather than the DRR employee hourly rate. According to Counsel in the FDICís Legal Division, the use of a market rate is appropriate as long as it does not result in the receivership being billed in excess of the FDICís cost to perform the services for the receivership. To ensure that the FDIC is not billing receiverships over the cost of services for franchise marketing, we compared the billings for five judgmentally selected financial institution closings to FDIC Franchise Marketing related costs. None of the Franchise Marketing billings exceeded the cost of services for the five financial institution closings we reviewed.
FDIC Circular 4010.3, FDIC Enterprise Risk Management Program, requires management to establish and review performance measures and indicators. It provides that controls shall be established to monitor performance by comparing and assessing actual performance data with performance goals and analyzing significant differences between the two. DRRís Receivership Oversight Section prepares a Quarterly Update to report on the progress of each receivership for DRR senior management. This document is intended to provide a historical record of the receivership; framework for creating, executing, and monitoring the receiverships goals and objectives; and means to measure performance. We obtained a judgmental sample of 10 receivership Quarterly Updates completed from March to June 2008 (shown in Table 2 later in this report). We verified that each Quarterly Update included receivership billing data for the quarter and the budget variance analysis to measure the receivership billings. We found each report accurately reported the receivership billings and included a budget variance for the receivership.
DRR has established and implemented controls and performance measures to ensure receiverships are fairly and accurately billed in accordance with applicable laws and regulations. However, as described below, procedures for the Receivership Oversight Sectionís billing review need to be fully documented to help ensure the effective advocacy of receivership interests and protect the FDICís reputation as the receiver for failed financial institutions.
REVIEW PROCEDURES FOR THE RECEIVERSHIP OVERSIGHT SECTION
DRRís Receivership Oversight Section serves as an advocate for the interests of receiverships. Its mission is to foster the administration and conclusion of the affairs of all receiverships in a responsible, expedient, and cost-effective manner. Circular 7000.5 requires the Receivership Oversight Section to review monthly receivership billings for reasonableness. However, the procedures for conducting the receivership billings review have not been fully documented in accordance with FDIC Circular 4010.3. Additionally, the billing review conducted by the Receivership Oversight Section is not required to be certified, in contrast to such a requirement for the service line billing reviews conducted by the Service Line Owners and Program Code Owners. Such reviews, which include certification, provide added assurance that billings are reasonable. Fully documenting the receivership billing review procedures, as well as the billing review results, and certifying the Receivership Oversight Section reviews similar to the review process for service lines would help to ensure that the FDIC thoroughly and consistently fulfills the role of advocate for the interests of the receiverships.
According to Receivership Oversight Section personnel, they review receivership billings on a quarterly rather than monthly basis in conjunction with their preparation of the Quarterly Update report. The Receivership Oversight Section personnel explained that it is more efficient for them to review the billings for comparison with the liquidation activity that has occurred for the receivership during the quarter. For example, to prepare the Quarterly Update report, Receivership Oversight Section personnel obtain quarterly data on assets sold for the receivership. To assess the reasonableness of receivership quarterly billings, Receivership Oversight Section personnel compare the quarterly billings to the assets sold for the receivership to determine whether the charges appear reasonable. Similar analysis is conducted for other service lines such as legal services, receivership claims, investigations, and closings. When billings appear to be excessive or unusual, the Receivership Oversight Section personnel contact the respective Service Line Owner or manager involved to determine why the charges occurred and recommend adjustments to be made, if necessary. Also, as mentioned earlier, the Quarterly Update report includes performance data on the service line billings, including a calculation of the budget variance analysis. Receivership Oversight Section personnel told us that they also use this data to evaluate the receiverships billings.
Information on the 10 Quarterly Update reports is shown in Table 2 on the following page.
Table 2: Quarterly Update Reports Reviewed
Although the Quarterly Updates we reviewed included an explanation for the causes of the budget variance, they did not state that the billings had been examined and were found to be reasonable or provide information on how the review was conducted and the results.
Circular 7000.5 contains a provision indicating that DRRís Receivership Oversight Section is responsible for acting as an advocate for the interests of the receivership, including the monthly review of receivership billings for reasonableness of charges; recommending billing adjustments to Service Line Owners; communicating with all Service Line Owners and the BCC on billing errors that may impact all service lines; and providing updates on the performance of receiverships, noting any billing and cost issues.
Guidance issued by DRRís BCC to Program Code Owners and Service Line Owners provided procedures for their monthly review of service line billings. These procedures include: accessing the BCCR to review hourly charges to the program and projects, ensuring that the proper coding was used, contacting supervisors of employees whose charges appear questionable, and correcting any charges immediately via the CHRIS T&A system. These procedures also provide that this review be conducted each month and require that the Service Line Owners certify that the charges are correct prior to being submitted to DOF. However, the BCC has not issued similar guidance to the Receivership Oversight Section for the review of receivership billings. As a result, the billing reviews for receiverships are not conducted on a monthly basis as prescribed by Circular 7000.5, fully documented, and certified in the same manner as the review for service line billings.
FDIC Circular 4010.3. FDIC Enterprise Risk Management Program requires every operating and policy area in the Corporation to have fundamental requirements, including procedures that are both current and appropriately documented. By fully documenting procedures for the Receivership Oversight Section review of receivership billings and the review results, DRR will improve controls to ensure that it thoroughly and consistently fulfills its role of advocate for the interests of the FDICís receiverships.
Recommendation on Procedures for Receivership Oversight
We recommend that the Director, DRR, strengthen the receivership advocacy role of the Receivership Oversight Section by:
CORPORATION COMMENTS AND OIG EVALUATION
On September 16, 2008, the Director, DRR, provided a written response to the draft of this report. DOF was not required to provide a written response to the draft of this report. Managementís response is presented in its entirety in Appendix 2. Management agreed with our findings and recommendation.
To address the recommendation, DRR will update Circular 7000.5 and develop a job aid that documents the review procedures performed by the Receivership Oversight Section. Circular 7000.5 will be updated to state that the receivership billing review will be performed in conjunction with the preparation of the Quarterly Update. The job aid will provide instructions on documenting and reporting the results of the review, including the reasonableness of the charges.
A summary of managementís response to the recommendation is in Appendix 3. DRRís planned actions are responsive to our recommendation. The recommendation is resolved but will remain open until we determine that the agreed-to corrective actions have been completed and are responsive.
OBJECTIVE, SCOPE, AND METHODOLOGY
To determine whether the FDICís process for establishing 2008 service line rates was conducted and documented in a manner to ensure that receivership billings were necessary and appropriate, we performed the following:
To determine whether adequate policies, procedures, guidelines or other instructions have been established to ensure that time charged to receiverships was accurately recorded and processed to the RSB, we interviewed the following FDIC personnel:
To determine whether receivership billings were supported and accurately billed, we performed the following:
We evaluated the effectiveness of controls in place for the receivership service billing process. We flowcharted the 2008 rate setting process and identified key internal controls by assessing the sufficiency of those controls. Specifically, we reviewed evidence of supervisory review and tested the validity of information on rate options. Furthermore, we flowcharted the procedures and identified key controls for preparing monthly receivership billings. We verified key control points by assessing the processes for ensuring that service line data were properly reviewed prior to being recorded in the RSB.
Reliance on Computer-processed Information
Our audit objective did not require that we separately assess the reliability of computer-processed data to support our significant findings, conclusions, and recommendations. Additionally, in performing this audit, we did not consider it necessary to evaluate the effectiveness of information systems controls in order to obtain sufficient, appropriate evidence.
Compliance with Laws and Regulations and Government Performance and Results Act
We reviewed applicable laws and regulations related to the FDICís receivership service billing process. We found no instances where the FDIC was not in compliance with applicable laws and regulations. We assessed the risk of fraud and abuse related to the audit objective in the course of evaluating audit evidence.
We reviewed DRR and DOF performance measures under the Government Performance and Results Act, Public Law 103-62. We also reviewed the FDICís 2008 Annual Performance Plan, the FDICís Strategic Plan for 2005-2010 to determine whether the FDIC has established goals related to its receivership service billing process. Neither the annual plan nor the strategic plans include goals, objectives, or indicators specifically related to the subject of our audit. However, we identified that DRR has established performance measures for reviewing receivership expenses in Quarterly Updates prepared for DRR senior managementís review.
This memorandum is in response to the recommendation in the subject draft audit report dated August 22, 2008.
OIG Audit Recommendation:
The report recommends that the Director, DRR, strengthen the receivership advocacy role of the Receivership Oversight Section by:
DRR Response: DRR agrees with the recommendation.
To address the recommendation, DRR will update Circular 7000.5 and develop a job aid that documents the review procedures performed by the Receivership Oversight Section. The timing of the receivership billing review will be updated in Circular 7000.5 to state that it will be performed in conjunction with the preparation of the Quarterly Update. The job aid will provide instructions on documenting and reporting the results of the review, including the reasonableness of the charges. The aforementioned documents should be finalized by December 31, 2008.
cc: James Angel, Jr., OERM
Ronald Bieker, DRR
Gail Patelunas, DRR
James Wigand, DRR
Jim Seegers, DRR
Steven Trout, DRR
Howard Cope, DRR
MANAGEMENT RESPONSE TO RECOMMENDATIONS
|Corrective Action: Taken or Planned||Expected Completion Date||Monetary Benefits||Resolved:a Yes or No||Open or Closedb|
|DRR will update Circular 7000.5 and develop a job aid that documents the review procedures performed by the Receivership Oversight Section.
The circular will state that the receivership billing review will be performed in conjunction with the preparation of the Quarterly Update. The job aid will provide instructions on documenting and reporting the results of the review, including the reasonableness of the charges.
|a Resolved Ė||(1) Management concurs with the recommendation, and the planned corrective action is consistent with the recommendation.|
|(2) Management does not concur with the recommendation, but planned alternative action is acceptable to the OIG.|
|(3) Management agrees to the OIG monetary benefits, or a different amount, or no ($0) amount. Monetary benefits are considered resolved as long as management provides an amount.|
ACRONYMS USED IN THE REPORT
|BCC||Billing and Cost Center|
|BCCR||Billing and Cost Center Reporting Tool|
|C.F.R.||Code of Federal Regulations|
|CHRIS T&A||Corporate Human Resources Information Time and Attendance System|
|DOF||Division of Finance|
|DRR||Division of Resolutions and Receiverships|
|GAO||Government Accountability Office|
|NFE||New Financial Environment|
|RSB||Receivership Service Billing System|
|Last updated 1/13/2009|