In Rare Move, Auditor Sues Client

''Fannie Mae repeatedly, systematically and intentionally misled KPMG,'' the audit firm alleges in a countersuit.
Stephen Taub and Dave CookApril 23, 2007

KPMG has countersued its former client Fannie Mae for “fraudulent
deception” stemming from the mortgage giant’s $6.3 billion accounting scandal, according to published reports.

In a filing with the U.S. District Court for the District of Columbia, the Big Four firm asserted that from 1998 until 2004, Fannie withheld and distorted its accounting, engaging in “breach of contract, fraudulent misrepresentation, fraudulent
inducement” and other wrongdoing, reported Bloomberg.

Perhaps the best-publicized recent incident of an auditor pursuing legal claims against a client was Ernst & Young’s lawsuit against HealthSouth, filed during the trial of Richard Scrushy. E&Y, which served as HealthSouth’s auditor from 1996 through 2002, claimed that the scandal exposed the firm to lawsuits and damaged its reputation. HealthSouth countersued the following month.

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In this case, the client struck first. KPMG was fired by Fannie Mae in December 2004 after the Securities and Exchange Commission accused Fannie executives of using improper reserves in an effort to smooth earnings and hit bonus targets, according to Bloomberg.

Two years later, in December 2006, Fannie Mae sued KPMG for negligence and breach of contract, accusing the auditor of failing to prevent $6.3 billion in accounting errors. At the time, Fannie reportedly claimed that it suffered more than $2 billion in damages as a result of the errors and incurred more than $1 billion in costs related to its restatement. We also reported that KPMG intended “
to pursue our own claims against Fannie Mae

In the current court filing, KPMG reportedly asserted that Fannie’s misrepresentation caused KPMG to suffer “injury to its reputation, legal costs, exposure to legal liability, costs, and expenses of responding to investigations” of Fannie Mae and other losses.

“Fannie Mae repeatedly and intentionally violated” its contractual obligations toward the audit firm “by failing to disclose information to KPMG that was vital to KPMG’s ability to perform audits and quarterly reviews and by misrepresenting material information,” the filing reportedly stated. “Fannie Mae repeatedly, systematically and intentionally misled KPMG.”

According to The Washington Post, KPMG also disclosed that it has become the subject of regulatory inquiries.