Risk & Compliance

Regulator Singles Out Fannie Mae CFO

Finance chief doesn't have the independence needed to function as the company's chief risk officer, OFHEO report asserts.
Stephen TaubSeptember 24, 2004

The Federal agency that oversees the nation’s largest mortgage companies cited Fannie Mae’s vice chairman and finance chief, J. Timothy Howard, for failures in overseeing the organization’s controller’s office and its audit functions.

The Office of Federal Housing Enterprise Oversight (OFHEO) said in a 198-page special report on the findings of an examination of Fannie Mae issued late Wednesday that “the CFO, as the primary manager for key financial reporting and accounting areas, failed in providing adequate oversight to key control and reporting functions within the Enterprise.”

Further, Howard “developed and rewarded a staff that collectively does not possess the skills necessary to ensure that Fannie Mae has proper accounting policies, adequate resources to support proper implementation of such policies, and an effective system of internal controls,” according to OFHEO, which is poring over Fannie Mae’s accounting policies, internal controls, and financial reporting.

Besides overseeing the controller’s department, Howard functions as chief risk officer of Fannie Mae and is directly responsible for overseeing treasury and portfolio management functions. “The combination of these responsibilities does not provide the independence necessary for an effective chief risk officer function,” OFHEO reported.

Fannie Mae spokesman Brian Faith told Bloomberg it that the company would not make Howard available for comment. The wire service also said Howard didn’t return a message left on his office voicemail. OFHEO spokeswoman Corrine Russell declined to comment, Bloomberg noted.

Howard joined Fannie Mae as vice president and chief economist in 1982, and later served as senior vice president of economics and planning. After serving in other posts at the company, he became executive vice president and CFO in February 1990 and was named to the company’s Office of the Chairman in November 2000. Before joining Fannie Mae, Howard served for five years as vice president and senior financial economist at Wells Fargo Bank in San Francisco.

In the broader findings of its report, OFHEO charged Fannie Mae, currently the subject of a Securities and Exchange Commission investigation, with misapplying generally accepted accounting principles, improperly using a “cookie jar” reserve, and other failures.

The report also concluded that Fannie Mae failed to adequately exercise its duty to develop sound accounting policies. For example, the regulator found that the company failed to develop an internal control system to make sure that accounting policy was adequately developed and reviewed.

“A combination of heavy workload, weak technical skills and a weak review environment contributed to the development of key person dependencies,” the report stated. “Fannie Mae relies on just a few individuals to make key decisions, particularly those related to accounting policy development. A cornerstone of sound corporate oversight is the control structure itself.”

OFHEO also asserted that business managers were aware of the lack of accounting know-how in the controller’s department. “However, management appears to have been slow taking action to remedy the situation,” the report added.