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Auditor Found Recent Lapses At Fannie Mae

'Post-Closing Entries' Made After 3rd Quarter

By David S. Hilzenrath
Washington Post Staff Writer
Wednesday, December 29, 2004; Page E01

Auditor KPMG LLP found problems in the way Fannie Mae was compiling its financial results as recently as the quarter that ended Sept. 30, when the giant mortgage funding company was under a regulatory microscope, Fannie Mae disclosed last night.

KPMG "observed deficiencies" in the way Fannie Mae closed its accounting records for the third quarter, Fannie Mae said in a report filed with the Securities and Exchange Commission. It added that entries were made after the books were closed.

Fannie Mae last week dismissed KPMG as its auditor at the same time it ousted chief executive Franklin D. Raines , left, and J. Timothy Howard, chief financial officer. (Dennis Cook -- AP)

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Neither Fannie Mae nor KPMG would explain the deficiencies. But Charles V. Greener, a Fannie Mae spokesman, said the company made the "post-closing entries" to address the auditor's concerns.

Fannie Mae was unable to file a standard quarterly financial report for the third quarter because various investigations were unresolved.

KPMG observed the deficiencies after the company's regulator, the Office of Federal Housing Enterprise Oversight, had accused Fannie Mae in a Sept. 17 report of violating accounting rules, Greener said. Earlier this month, the SEC chief accountant agreed with OFHEO and directed the company to correct its financial statements. Fannie Mae said those changes could wipe out $9 billion in reported profit since 2001.

Fannie Mae last week dismissed KPMG as the company's auditor and announced that investors should no longer rely on its audited financial reports filed since 2001. The same day, its board announced the ouster of chief executive Franklin D. Raines and chief financial officer J. Timothy Howard.

KPMG was paid nearly $11 million by Fannie Mae last year, including $2.7 million in audit fees, according to a Fannie Mae proxy statement.

KPMG had previously given Fannie Mae clean audit opinions. However, in the September report, OFHEO alleged that KPMG had expressed concern internally about some of Fannie Mae's accounting practices, such as the company's decision to delay recording $200 million in expenses in 1998. The delay increased Fannie Mae's profit, enabling top executives to receive millions of dollars in bonuses.

The report Fannie Mae issued yesterday, a formal statement that it had fired KPMG, also said the accounting firm had cited "strong indicators of material weaknesses" in Fannie Mae's internal controls. Those comments also came after the OFHEO report, Greener said.

Fannie Mae said it is assessing the seriousness of "numerous observations" KPMG has made about the company's internal controls to see if more needs to be disclosed about them.

The District-based financial company faces few options in its search for a new auditor. With the collapse of Arthur Andersen in the aftermath of the accounting scandal at Enron Corp., there are only four giant accounting firms. Ernst & Young advised Fannie Mae during its long-running defense of its accounting. PricewaterhouseCoopers audits Fannie Mae's rival, McLean-based Freddie Mac. And Deloitte & Touche helped regulators prepare the report that faulted Fannie Mae's accounting.

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