The Public Company Accounting Oversight Board has reportedly opened an investigation into KPMG's audits of mortgage finance company Fannie Mae.
The board last week authorized its enforcement staff to scrutinize KPMG's work, according to a report by The Financial Times. The PCAOB investigation will reportedly look into whether the Big Four firm breached auditing rules in its work on Fannie Mae. KPMG became Fannie's auditor in 1969.
"In situations like Fannie Mae, it is to be expected that the PCAOB would become engaged, and we recognize the responsibility of the PCAOB to investigate audit matters such as these that come to their attention," a spokesman for the firm told WebCPA. "It is the policy of KPMG to cooperate fully and thoroughly with any PCAOB investigation. However, inquiries from the PCAOB are, as a matter of law, confidential and we believe that it would be inappropriate to comment further."
A spokesman for the PCAOB said, "It would be inappropriate to comment on any action the PCAOB may or may not take regarding a specific company." Fannie Mae did not respond to a request for comment.
Fannie Mae, which is already under investigation by both the Justice Department and the Securities and Exchange Commission, also faces a possible $9 billion restatement following a review by the SEC that found that it violated accounting rules related to deferred purchase price adjustments and derivatives and hedging activities between 2001 and mid-2004.
Following a commission review of its accounting at the company's request, SEC chief accountant Donald Nicolaisen said that Fannie Mae should restate its accounts. Fannie Mae said that it would comply with the request. Commenting on the SEC decision, KPMG said, "We accept the Office of the Chief Accountant as the final arbiter of generally accepted accounting principles."
The SEC findings are a blow to Fannie Mae executives, who have contended that its accounting methods were proper. Media reports have speculated about the fate of at least two of the mortgage concern's top executives, chief executive Franklin Raines and chief financial officer Timothy Howard, in light of the SEC decision, made public late Wednesday.
Under Sarbanes-Oxley, CEOs and CFOs must certify the accuracy of the financial statements, and could face jail time if they knowingly misrepresent a company's condition.
Defending the company's accounting practices before members of Congress back in October, Raines said, "Our accounting staff has repeatedly determined that our policies and practices with regard to FAS 91 and 133 are reasonable and in accord with GAAP, and KPMG has issued unqualified opinions on our financial statements."
Raines added, "When I certify our financial statements, I certify that these documents 'fairly present in all material respects the financial condition, results of operations and cash flows' of the company." Raines continued, "That is a very serious statement, and I take it very seriously. We engage in a rigorous due diligence process before I ever put a pen to paper and make that certification."
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