Fannie Mae: The US Mortgage Giant's AccountingControversies?
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Code : GOV0037
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Region : USA |
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The Scandal Accounting firmDeloitte&Touché LLPwas hired byOFHEOin February 2004, to scrutinize Fannie Mae’s accounts. After eight months of investigation, the main charges levelled against Fannie Mae by OFHEO were: (1) Fannie Mae applied accounting methods and practices that did not comply with GAAP in accounting for the enterprise’s derivatives transactions and hedging activities. (2) FannieMae had materially understated its accrued cost-of-access liability... Cookie Jar Accounting The report further states that Fannie Mae developed a system to record $95 million of the $200 million catch-up amount in 1999. Itmade adjustments to recognize estimated losses of $5 million to Net Interest Income (NII) and $2.9 million to deferred price adjustments... Problem of Insufficient Capital FannieMae had assets (derivatives) worth $1 trillion, but the equity backing such huge assets was a mere $26 billion. Its $26 billion of equity was holding up an asset and derivatives book that was about 20% of GDP of US.13 Moreover analysts cite that Fannie Mae had deferred its losses and if those deferred losses were accounted into the retained earnings then Fannie Mae’s earnings would have bled... |
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Management and its Role Fannie Mae’s management tolerated significant control weaknesses to assist its process of smoothing the earnings. The amortization system they selected was not subject to internal controls. There existed insufficient segregation of duties and the whole process was dependent on key persons. The OFHEO’s report charged, J.Timothy Howard, the company’s vice chairman and chief financial officer, of failing to provide adequate oversight of key control and reporting functions...
