An exhaustive internal report on the accounting woes of mortgage finance giant Fannie Mae says that the company's former chief financial officer, J. Timothy Howard, was "primarily responsible" for deviating from GAAP.

The accounting irregularities lead a $10.8 billion restatement and also misled Fannie Mae's board of directors, which commissioned the report. Former New Hampshire Senator Warren Rudman, who authored the 2,600-plus page report, did say that "ultimate responsibility" for the mistakes laid with f ormer chief executive Franklin Raines.

The report details about 20 accounting issues at the company, but revealed no additional mistakes other than those already disclosed during a 16-month federal and internal probe.

"The report suggests that, because these subjects are so complex, the staff in the trenches can easily manipulate the board, and maybe even senior managers about what is really going on below," American Enterprise Institute resident scholar Peter J. Wallison told WebCPA. "That does not give me any comfort."

Wallison is a former White House counsel and general counsel of the Treasury, who has written extensively about Fannie Mae, and its counterpart, Freddie Mac. The two are the largest buyers of home loans and own or guarantee almost half the $7.6 trillion U.S. mortgage market.

Fannie Mae has said that it expects to complete the multibillion earnings restatement, covering mistakes from 2001 through mid-2004, in the second half of this year.

"[Both companies] are managing interest rate risk by using enormously complex hedging strategies," Wallison said. "They were apparently unable to get the accounting right, and that makes one worry about whether they have managed the hedging correctly. In the end, the country's entire economic and financial system rests on whether the managements of these two companies do their jobs correctly."

The problems triggered an overhaul of the company's leadership, a move on Capitol Hill to tighten regulation of both Fannie Mae and Freddie Mac, and a scaling back of Fannie's politically controversial profile. The company is still working to sort out its books.

Both Raines and Howard were forced out of the company in December 2004 after regulators raised concerns. Howard joined Fannie Mae in 1982 as chief economist and became its chief financial officer in 1990.

Daniel Mudd was promoted to chief executive from chief operating officer after Raines left and has frozen hiring along with replacing one third of the company's senior executives.

''Fannie Mae is a different company than a year ago,'' said Mudd, in a statement. ''We have been humbled, even embarrassed. But we have begun to make significant changes.''

In August, Mudd said that he planned to deploy about 1,500 consultants who would work with full-time staff to devote up to 8 million labor hours to the restatement. He said that the cost of correcting company books in 2005 alone totaled $420 million. Fannie Mae hasn't filed quarterly results since July 2004.

The company remains under investigation by the Securities and Exchange Commission, the Justice Department and its regulator, the Office of Federal Housing Enterprise Oversight.

The full report, as well as an executive summary, is available at www.fanniemae.com .

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