The federal agency that oversees Fannie Mae presented the results of its eight-month investigation to the board of directors of the mortgage giant, detailing earnings manipulation and other accounting problems it has uncovered, according to published reports.
So far, neither The Office of Federal Housing Enterprise Oversight (OFHEO), which briefed the Securities and Exchange Commission last week on the report, nor the company have chosen to speak publicly about the issues that were raised.
But, there were enough leaks to keep a number of major newspapers and wire services happy. “Our understanding is that OFHEO’s exam, while it’s not completed, has found discrepancies with GAAP (generally accepted accounting principles) and insufficient internal controls,” a congressional source told Reuters.
OFHEO’s probe found evidence that executives manipulated earnings to present a smoother performance, according to Dow Jones Newswires. The wire service added that Michael DiResto, spokesman for Louisiana Rep. Richard Baker, who is chairman of the House subcommittee that oversees Fannie and Freddie Mac and who has been briefed on some of the report’s findings, said the legislator “has concerns that the reasons behind Fannie’s smoothingÂÂ may be tied with executive compensation.”
Nevertheless, it wasn’t clear that the accounting problems were extensive enough to lead to a restatement of Fannie’s prior earnings, The Washington Post reported. OFHEO officials, however, described “a number of circumstances that sounded troubling, and we need to know more,” an SEC official who was briefed on the findings last week also told the paper.
The OFHEO reportedly brought in a number of top guns to help in its investigation, including Stanley Sporkin, the former U.S. judge and former celebrated SEC enforcement head, as well as a partner at Weil, Gotshal & Manges; Enron investigator Robert Maxant; and Lisa Choi, a former Federal Reserve bank examiner with an expertise in derivatives and fixed-income trading.
In May, OFHEO Director Armando Falcon Jr. said that the agency found in a preliminary examination of Fannie Mae that the company wasn’t “applying the appropriate accounting with respect to determining asset impairments and revenue recognition for manufactured housing and aircraft lease securities,” according to a release issued by the agency.
“Fannie Mae improperly accounted for these assets in a way that fails to reflect losses, ” said Falcon. “As safety and soundness regulator, we will take the necessary steps to correct this.”
Falcon directed Fannie Mae to complete the accounting to recalculate the proper asset impairment on the securities by close of business May 14, 2004.