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New Light Shed on Critic of Fannie

Two exhaustive investigations have backed up Roger L. Barnes's allegations that Fannie Mae's financial statements could not be trusted and that accounting managers manipulated numbers to meet rising earnings targets.
Two exhaustive investigations have backed up Roger L. Barnes's allegations that Fannie Mae's financial statements could not be trusted and that accounting managers manipulated numbers to meet rising earnings targets. (By Lucian Perkins -- The Washington Post)

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By Terence O'Hara
Washington Post Staff Writer
Monday, February 27, 2006

Roger L. Barnes, a former mid-level manager in the controller's office of Fannie Mae, surfaced as a whistle-blower in September 2004 when he was identified by federal regulators as a key figure in uncovering accounting irregularities that ultimately lead to the biggest earnings restatement in history.

Barnes's assertions, though wrapped in the complex language of mortgage income accounting, were simple: Fannie Mae's financial statements could not be trusted, and accounting managers were manipulating the numbers to meet steady, rising earnings targets. He made these claims inside Fannie Mae and believed he was punished for it, retaliation that in effect ruined his career in the public accounting profession.

Barnes's central criticism, two exhaustive investigations have found, was spot on. He had alleged that the company wasn't following accounting rules and was managing earnings, and the subsequent probes backed him up -- including the more-than-2,000-page report issued last week by former senator Warren B. Rudman.

But the document also provides a far more complicated picture of Barnes, his allegations and how Fannie responded to them.

In some cases, where Barnes saw malfeasance, Rudman simply saw reasonable differences of opinion over how to account for Fannie Mae's hundreds of billions of dollars in annual mortgage and other transactions.

Barnes viewed one $6.5 million error, for example, as evidence that Fannie Mae's financial statements were inaccurate, but Rudman agreed with Fannie's interpretation that the mistake was not "material" -- and certainly not important enough to call Fannie Mae's entire accounting system into question. While Barnes interpreted a seemingly illogical set of statistics as evidence of potential accounting fraud, Rudman's report concluded that Fannie's practice of bundling mortgages into pools caused the numbers to be out of whack and were nothing to worry about.

Rudman also gave a nuanced portrait of Barnes's position inside the company. Barnes, a black CPA and MBA who lives in Columbia, is portrayed as prickly and quick to read organizational slights as racism -- e-mailing himself notes about issues such as who got offices and citing instances in which his superiors used material he prepared without crediting him.

Rudman's report also raised doubts about Barnes's claim to have sent an anonymous inter-office memo to Franklin D. Raines, then chief executive, and J. Timothy Howard, then chief financial officer, in 2002 that detailed his concerns about the accounting a full year before he pressed them officially. Rudman could find no evidence that the memo existed.

The document cites Howard and controller Leanne Spencer as "largely responsible" for the accounting problems -- a finding both have rejected through their lawyers -- and concludes there was "no indication" Raines knew that company practices routinely violated accounting standards.

But Rudman also concluded that Barnes's complaints about the company were handled poorly.

According to the report, Barnes, shortly after being passed over for a promotion in July 2003, asked for a confidential meeting with Fannie's internal auditing manager to discuss "analysis and research [Barnes had] been conducting for a number of weeks."

He was quickly ostracized by his peers, who the Rudman report found were deliberately avoiding him to avoid any charge of retaliation. The system set up to evaluate his evidence, meanwhile, was riddled with conflicts and "flawed."


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