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Fannie Mae Executives Step Down

Three Responsible for Accounting to Take Advisory Roles

By David S. Hilzenrath
Washington Post Staff Writer
Tuesday, January 25, 2005; Page E03

The turnover at Fannie Mae continued as three more executives who shared responsibility for the mortgage-funding company's accounting stepped down late last week.

Moving into unspecified advisory roles were senior vice presidents Jonathan Boyles, who oversaw accounting policy and tax; Janet L. Pennewell, who oversaw financial reporting; and Sam Rajappa, who oversaw internal auditing, company spokesman Charles V. Greener said.


Regulators say Fannie Mae didn't properly apply an accounting rule. (Jay Mallin -- Bloomberg News)

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The latest shake-up in the executive ranks follows the forced departures last month of Franklin D. Raines as chairman and chief executive and J. Timothy Howard as vice chairman and chief financial officer. In addition, Fannie Mae announced Friday night that principal accounting officer Leanne G. Spencer, senior vice president and controller, was moving into an advisory role and will stay on the payroll for a year unless she resigns or is fired.

Those actions came after regulators said last fall that the company had manipulated earnings by purposely misapplying a new accounting rule and the chief accountant of the Securities and Exchange Commission last month directed Fannie to correct its financial reports since 2001. The company has estimated it may have to record $9 billion of previously unreported losses related to financial instruments known as derivatives, which the company says it uses to hedge against changes in interest rates.

Arrangements were still being finalized for Boyles, Rajappa and Pennewell, Greener said, "but we expect them to be similar to those of Leanne Spencer." The three declined to comment, the spokesman said.

Chartered by the government, District-based Fannie Mae plays a behind-the-scenes role in the housing finance system, borrowing money from investors to buy mortgages from lenders. It also packages mortgages into securities for sale to investors, replenishing lenders' funds so they can make more loans.

Boyles had primary responsibility for developing Fannie Mae's internal guidelines on accounting for derivatives under a rule known as FAS 133, which a September report by the Office of Federal Housing Enterprise Oversight said Fannie violated.

The report quoted Boyles as telling regulators, "We have several known departures from GAAP [generally accepted accounting principles] in our adoption of FAS 133."

"We have cleared those with our auditors," Boyles reportedly told regulators. The company has since replaced its longtime auditor, KPMG LLP.

The report cited a memo by Boyles listing "several tenets that . . . drove our decisions" in implementing the rule, including: "1. Earnings volatility was to be minimized and if there were earnings volatility it should be as predictable as possible."

Pennewell co-authored a 1999 memo to Howard, the chief financial officer, saying one advantage of a particular accounting method was that it "maintains a cushion for income statement flexibility," the OFHEO report said.

OFHEO said there was an inherent conflict in Pennewell's role because she had the ability to affect the company's reported profit to achieve results forecast by her group.

The regulators alleged that, under Rajappa, the company's internal audit unit showed a "lack of diligence" in examining accounting concerns raised by a former Fannie manager. The agency accused the internal audit unit of failing to follow standards established by the Institute of Internal Auditors, and it said Rajappa, a former controller of the company, was given authority to audit his own work, "a major conflict of interest."


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