The Securities and Exchange Commission stepped up to a formal probe its previous informal inquiry into accounting issues at mortgage giant Fannie Mae this week, the company disclosed in an SEC filing.
Fannie Mae had revealed the SEC's informal inquiry in September, when it disclosed that a report on its accounting policies and practices uncovered serious issues that raised doubts about the validity of its previous financial results. The issues raised in that report by Fannie Mae's regulator, the Office of Federal Housing Enterprise Oversight, are the subject of the SEC probe.
Fannie Mae has said that it is cooperating with both regulators.
The OFHEO report alleges that, in 1998, the company willfully violated generally accepted accounting principles in order to maximize executive bonuses -- an allegation that Fannie Mae's chief executive and chairman Franklin D. Raines said it "strongly disagrees with" in testimony before members of Congress earlier this month.
Responding to allegations raised in the report about Fannie Mae's implementation of two accounting standards -- FAS 91, which requires that the premiums or discounts on the purchase of mortgage-backed securities be amortized over the expected average life of the security, and FAS 133, the standard for derivative and hedge accounting -- Raines said, "We believe we applied those standards in accordance with GAAP, and our independent auditor, KPMG, reviewed our application of those standards and concurred."
He also noted that Fannie Mae hasn't withdrawn its financial statements, and that its auditor, KPMG, hasn't withdrawn its opinion that those financial statements were prepared consistently with GAAP in all material respects.
In September, days after the release of the scathing report, Fannie Mae entered into a deal with OFHEO in which it agreed to changes to its accounting, to discontinue the use of a range in implementing FAS 91 beginning in the fourth quarter of 2004, and, with respect to FAS 133, to shift in the first quarter to the "long haul" approach where applicable. Fannie Mae also agreed to build up to a 30 percent capital surplus over the next nine months, to appoint an independent chief risk officer, and to hire an independent counsel and an independent accounting consultant to review and report on its accounting policies and practices.
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