Risk & Compliance

SEC Probing Fannie Mae

The commission is looking into allegations of GAAP violations, improper use of a "cookie jar" reserve, and internal-control problems.
Stephen TaubSeptember 23, 2004

The Securities and Exchange Commission is investigating accounting issues at Fannie Mae that had been cited by the mortgage company’s federal regulator, according to the presiding director of Fannie Mae’s Board.

Fannie Mae’s regulator, the Office of Federal Housing Enterprise Oversight (OFHEO) has not made the report in which the issues were raised publicly available. But Ann Korologos, the company’s presiding director said in a letter to the board that summarizes the report that OFHEO found that Fannie Mae:

  • Applied accounting methods and practices in booking the its derivatives transactions and hedging activities that don’t comply with generally accepted accounting principles.
  • Used an improper “cookie jar” reserve in accounting for its amortization of deferred price adjustments under GAAP.
  • Tolerated internal control deficiencies.
  • In at least one case, deferred expenses in apparent attempt to achieve bonus targets.
  • Carried on a corporate culture that stressed stable earnings at the expense of accurate disclosures.

OFHEO’s report to the board stated that “the matters detailed in this report are serious and raise doubts concerning the validity of previously reported financial results, the adequacy of regulatory capital, the quality of management supervision, and the overall safety and soundness of the Enterprise,” Korologos stated in the press release.

Fannie Mae’s board has set up a committee of independent directors to lead in responding to both the OFHEO report and the SEC inquiry, according to the top director. The board has pledged its full cooperation with the regulators, she said.

The board has hired former U.S. Senator Warren Rudman of Paul, Weiss, Rifkind, Wharton & Garrison LLP as counsel to the committee. The law firm will retain an independent accounting firm to aid in the review of the accounting issues so that the committee and the board can report back to OFHEO and the SEC as quickly as possible, according to Korologos.

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