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Fannie Mae Accused Of Deceiving KPMG, Its Former Auditor

By David S. Hilzenrath
Washington Post Staff Writer
Saturday, April 21, 2007

Auditor KPMG this week sued its former client Fannie Mae, alleging that the giant mortgage funding company deceived it for years, damaging KPMG's reputation and exposing it to the threat of substantial liability.

Both firms have been sued by investors since Fannie Mae was revealed to have overstated profits by billions of dollars. For years, KPMG put its stamp of approval on financial statements that Fannie Mae now acknowledges were flawed.

In court papers filed in U.S. District Court for the District of Columbia, KPMG also disclosed that it has become the subject of regulatory inquiries.

The accounting firm says it was relying on Fannie Mae to tell the truth about its finances when KPMG issued clean audit reports year after year "in the absence of further analysis, review procedures, and/or modifications to the financial statements."

"Fannie Mae repeatedly, deliberately, and recklessly provided misleading information to KPMG," the lawsuit says.

The fees KPMG charged Fannie Mae were "significantly lower than the fees that would have been charged had Fannie Mae disclosed all material information," KPMG added in the lawsuit.

It was countering a lawsuit Fannie Mae filed in December, which alleged that the audit firm committed malpractice when it signed off on financial statements that were riddled with errors. KPMG's counterclaims were reported yesterday by Bloomberg News.

A Fannie Mae spokesman yesterday declined to comment.

Though KPMG didn't quantify the damages it is seeking, Fannie Mae is trying to recoup more than $2 billion from the accounting firm, including the more than $1 billion Fannie Mae has spent redoing its books.

KPMG is one of the Big Four accounting firms left standing after the collapse of rival Arthur Andersen in the Enron scandal.

District-based Fannie Mae was chartered by the federal government to advance home ownership by providing funding for mortgage lenders. During the fallout from the accounting scandal, Fannie Mae was accused of fraud by the Securities and Exchange Commission, and it agreed to pay a $400 million settlement with regulators.

The charges in KPMG's suit include breach of contract and fraudulent misrepresentation.

Among the alleged false representations are letters to KPMG signed by members of Fannie Mae management, including former chief executive Franklin D. Raines, former chief financial officer J. Timothy Howard, former president Lawrence M. Small -- who recently resigned as head of the Smithsonian Institution -- and current chief executive Daniel H. Mudd. Those men are not named as defendants in KPMG's suit.

KPMG cited findings of an investigation by the Office of Federal Housing Enterprise Oversight, including the agency's assertion last year that Fannie "worked strenuously to hide" its "improper earnings management" from KPMG.

KPMG also quoted a 1998 communication by a Fannie Mae employee describing how an accounting change planned for 1999 should be kept from KPMG so the auditing firm would not demand that it be booked at the end of 1998.

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