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Fannie Sues KPMG for Approving Bad Numbers

By David S. Hilzenrath
Washington Post Staff Writer
Wednesday, December 13, 2006

Fannie Mae yesterday sued its former auditor, KPMG, alleging malpractice by the big accounting firm when it approved years of financial statements that were riddled with errors.

Fannie Mae alleged that KPMG's failures led to one of the biggest accounting restatements in history, involving "virtually every key accounting policy" affecting its business. The problems were so extensive that the mortgage-finance giant has spent more than $1 billion to redo its books, Fannie Mae said.

"KPMG often did nothing more than rubber-stamp Fannie's internal accounting decisions, in defiance of KPMG's professional obligations and the very purpose for which it was hired," Fannie Mae says in the lawsuit.

KPMG spokesman Tom Fitzgerald declined to address the allegations in the lawsuit. However, he said that the firm intends "to pursue our own claims against Fannie Mae."

Fannie Mae's lawsuit covers audits for 2001 through 2003, including work performed after the accounting debacle at Enron heightened awareness of audit risks and led to the downfall of KPMG's rival, Arthur Andersen.

Fannie Mae, which is seeking more than $2 billion, employed KPMG for more than 30 years, and it paid KPMG more than $28 million from 2001 through 2003, the suit says. The accounting firm wore two hats in the relationship -- for example, advising Fannie on how to comply with a new accounting rule and then auditing Fannie's compliance, the lawsuit said.

The chief accountant at the Securities and Exchange Commission reviewed Fannie Mae's compliance with that rule in December 2004 and concluded that it was "not even on the page," the lawsuit said. That determination led Fannie Mae directors to replace top executives and dismiss KPMG.

Fannie Mae this year paid $400 million to settle with regulators, and it is still defending itself against claims by shareholders.

The KPMG spokesman said the firm will seek to move Fannie Mae's lawsuit from D.C. Superior Court to U.S. District Court, where the other litigation is pending.

Fannie Mae's restatement, issued last week, erased $6.3 billion of company profit.

While the lawsuit blames KPMG for the accounting troubles, regulators have alleged that Fannie Mae deliberately and fraudulently violated accounting requirements.

In a 2004 report, the Office of Federal Housing Oversight quoted a senior vice president of the company as saying Fannie Mae had "several known departures" from generally accepted accounting principles and that the company had cleared them with its auditors.

In a May report, OFHEO accused the audit committee of the company's board of directors of exercising "little, if any, meaningful or active oversight."

Fannie Mae's lawsuit defends the audit committee, which was headed by Thomas P. Gerrity, a former dean of the Wharton business school at the University of Pennsylvania. "The Audit Committee was diligent in performing its duties and properly relied on KPMG's continuing assurances," the suit says.

OFHEO director James B. Lockhart III issued a statement yesterday saying Fannie's complaint against KPMG was appropriate and consistent with the agency's findings.

One of the senior KPMG accountants involved in auditing Fannie Mae, Joseph Boyle, was also involved in disputed KPMG audits of Xerox, the lawsuit says. Without admitting or denying wrongdoing, Boyle last year agreed to an SEC order in the Xerox case suspending him from auditing public companies.

Boyle, who retired from KPMG in 2003, did not return a call seeking comment, and neither did a lawyer who represented him.

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