Fannie Mae Warnings Documented
Monday, March 13, 2006
A recently released investigative report attributed Fannie Mae's accounting problems in large part to two executives, but documents within the study indicate that the board and former chief executive were informed about some of the policies and practices that got the company into trouble.
In a November 2003 meeting of the board's audit committee, attended by chief executive Franklin D. Raines and his successor, Daniel H. Mudd, the company's controller spelled out a policy related to interest income that regulators have since declared invalid.
In May 2003, a presentation for the company's Office of the Chair, an executive group that included Raines and Mudd, said one of Fannie Mae's goal in implementing a new accounting rule was to "Minimize earnings volatility."
In July 2003, an internal audit report, which included Raines and Mudd on its distribution list, cited problems with Fannie Mae's accounting controls that may have affected its books by as much as $155 million.
Those warning signs came against the backdrop of an accounting scandal at Fannie Mae's direct competitor in the mortgage industry, Freddie Mac, a company with a virtually identical business model and a similar government charter to keep the housing markets supplied with money. The problems at Freddie Mac had raised widespread concerns about Fannie Mae's accounting -- concerns that Raines sought to dispel.
When a House committee convenes tomorrow to review the recent investigative study of Fannie Mae, one of the company's congressional overseers plans to ask about the conduct of the board and Raines. The company's accounting problems set in motion one of the largest ever financial restatements and an overhaul of the company's top management.
The board "perhaps did not discharge their duties sufficiently well to protect the corporation's or the shareholders' interests," said Rep. Richard H. Baker (R-La.), chairman of the subcommittee that oversees Fannie Mae and a longtime critic of the company. "I am at a loss as to how the report didn't conclude that Mr. Raines was more directly involved."
The recent investigation was conducted by a team of outside lawyers and accountants led by former senator Warren B. Rudman. It found a variety of errors and manipulations presided over by members of Fannie Mae's management -- including one instance in which the company refrained from booking nearly $200 million in estimated expenses, allegedly to maximize management bonuses. That decision was a major focus of Rudman's report and another case in which directors received information about possible accounting trouble: The audit committee was told in February 2000 that outside auditor KPMG LLP had logged an "audit difference" related to the expenses.
Robert P. Parker, a lawyer who worked on the Rudman report, said board members were told that the matter was "immaterial."
Overall, the Rudman report cited former company controller Leanne G. Spencer and former chief financial officer J. Timothy Howard as "primarily responsible" for accounting violations at the company -- a contention that both deny.
In contrast, the report, commissioned by board members at a cost of up to $70 million, said the board "endeavored" to meet its obligations but was not alerted to problems by Fannie Mae's management.
As for Raines, "we did not find that he knew" that the company's accounting departed from the rules "in significant ways," the report said.