Troubled mortgage giant Fannie Mae said this week that a report on its accounting policies and practices uncovered serious issues that raised doubts about the validity of its previous financial results.

The company also revealed that the Securities and Exchange Commission is conducting an informal inquiry that includes issues raised in that report, which was issued by the Office of Federal Housing Enterprise Oversight.

Fannie Mae's board said that it will cooperate with both regulators.

The OFHEO report detailed findings to date of the agency's special examination into Fannie Mae's accounting policies and practices, which was announced more than a year ago. In a letter to the board summarizing the report, the OFHEO said that Fannie Mae applied accounting methods and practices that don't comply with generally accepted accounting principles in accounting for the enterprise's derivatives transactions and hedging activities, employed an improper "cookie jar" reserve in accounting for amortization of deferred price adjustments under GAAP and tolerated related internal control deficiencies.

In addition, the OFHEO said that in at least one instance, Fannie Mae deferred expenses "apparently to achieve bonus compensation targets," and that Fannie "maintained a corporate culture that emphasized stable earnings at the expense of accurate financial disclosures."

"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," the OFHEO report said.

"The board takes the report seriously and is working with the OFHEO to resolve these matters," Fannie Mae said in a statement. Fannie Mae noted that the board's audit committee, which was charged with overseeing the company's response to the examination, engaged outside counsel, which in turn engaged the accounting firm of Ernst & Young. Fannie said that its board designated a committee of independent directors to take the lead on both the OFHEO report and the SEC inquiry, and that it has retained independent counsel, former Senator Warren Rudman of Paul, Weiss, Rifkind, Wharton & Garrison LLP, to serve as counsel to the committee. Fannie added that the firm will retain an independent accounting firm to assist in the review "so that the committee and the board may report back to OFHEO and the SEC expeditiously."

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