As investigators dig into Fannie Mae's financials, they will find detailed statements defending the company's accounting practices by Franklin D. Raines, Fannie's chairman and chief executive, that are directly contradicted by the highly critical report issued last week by the company's chief regulator.

Lawyers say Raines will be under scrutiny as the various investigations intensify both because he has certified Fannie's financial results as accurate and because he denied in public comments that there were problems with Fannie's accounting. The Securities and Exchange Commission, which is conducting one probe, will determine whether the company's accounting has stayed within the rules. Executives can face fines and prison for knowingly or willfully issuing false certifications.

Raines issued the statements last year when, as he put it, Fannie Mae was suffering "collateral damage" from revelations of improper accounting at rival Freddie Mac. From Wall Street to Capitol Hill, people were asking if Fannie had operated the same way.

In an effort to allay the concern, Raines said that Fannie Mae did not have "similar issues." He denied that Fannie tried to reduce the "earnings volatility" -- unpredictable swings that can make investors uncomfortable and hurt a company's stock price -- that resulted from a new rule, called FAS 133. The rule governs the accounting for complex contracts called derivatives that both companies use to protect themselves from sudden shifts in interest rates.

Fannie and Freddie borrow money from investors to buy mortgages from banks and other lenders, thereby replenishing the funds that lenders can use to make more loans.

In the summer of 2003, an investigation commissioned by Freddie Mac's board found that Freddie had used elaborate strategies to mask changes in the value of its derivative contracts. Several Freddie executives, including chief executive Leland C. Brendsel, were forced out.

In June and July of 2003, Raines issued "Answers from the CEO" to the following questions: "Why do you have confidence that you have done your derivative accounting properly?" and "Can you assure us that Fannie Mae does not have the accounting issues raised in the 'Report to the Board of Directors of Freddie Mac'?"

The answer to the second question was an unqualified "Yes."

"In short," Raines wrote, in a statement still posted on the Web site, "our two companies' approach to the earnings volatility created by FAS 133 was radically different: They tried to reduce the volatility. We reported and explained the volatility."

In the report the Office of Federal Housing Enterprise Oversight released last week, regulators told a different story. Minimizing earnings volatility "was a central organizing principle in the development of key accounting policies" at Fannie, the regulators wrote, citing internal company records.

The report said "misapplications" of accounting rules "are not limited occurrences, but appear to be pervasive and reinforced by management whose objective is to reduce earnings volatility at significant cost to employee and management integrity."

In a March 2003 memo cited in the report, Jonathan Boyles, Fannie's senior vice president for financial standards and corporate tax compliance, listed "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." A May 2003 presentation also cited "minimizing earnings volatility" as one of Fannie Mae's goals when it implemented the rule. The presentation was prepared by Chief Financial Officer J. Timothy Howard and others, sources familiar with the document said.

"Either Raines wasn't telling the truth or he was unaware of his employees' practices," said Frank Partnoy, a professor at the University of San Diego School of Law.

The more likely explanation "is that he, like a lot of CEOs, simply is not in a position to know all of the details about goings-on at a complex financial institution," Partnoy said. But Partnoy added, "It's much more difficult for the CEO to claim he's in the dark when the answers are so obviously from, come from, a detailed review rather than just one person's response."

Fannie Mae spokeswoman Janice Daue declined to comment for this story and said Raines declined to comment.

In his defense of the company, Raines said Fannie's confidence in its accounting for derivatives was based in part on its consultations with the rulemakers. "More specifically, years before the FAS 133 accounting practices pertaining to derivatives were adopted, we worked closely with the Financial Accounting Standards Board (FASB) to make sure we understood how the new requirements would apply to our business," Raines said in a June 2003 statement.

The regulators' report said Fannie consulted and lobbied the rulemakers -- and then ignored them. "At times, even though the FASB had rejected the requested treatment, Fannie Mae disregarded the FASB's guidance and accounted for their transactions the way they had originally proposed," the report said.

In his Web site statements, Raines also delved into the nitty-gritty of complex accounting treatments -- saying, for example, that accounting for individual hedges was documented in writing before Fannie entered such transactions and "cannot subsequently be changed."

Regulators disagreed. They found that Fannie had failed to properly document or test the accounting for its hedges -- one of the basic failings that Freddie admitted.

Raines's defense also addressed one of the most common corporate accounting abuses, setting up artificial reserves that can be drawn down and used to boost earnings as needed.

"We do not create or use reserves to meet earnings expectations," Raines said.

But OFHEO said Fannie, in effect, "developed policies and methods to create a 'cookie jar' reserve." The regulators reported that internal policy allowed Fannie to defer a certain amount of income or expenses each quarter. In 1998, even before that policy was adopted, Fannie deferred $200 million of expenses, enabling several top executives to receive their maximum bonuses.

Raines, one of the most highly paid executives in the Washington area, received $17.1 million in compensation last year, plus stock options that Fannie Mae estimated were worth $3 million.

A year ago chief executive Franklin D. Raines said Fannie Mae had not used accounting to reduce earnings volatility.