Rosella Faye R.

Gabiola
BSA-III
Auditing Theory
TTH 4:00-7:00

A CRITICAL ANALYSIS ON THE FEDERAL NATIONAL MORTGAGE

ASSOCIATION a.k.a. FANNIE MAE SCANDAL

INTRODUCTION

The federally chartered company, Federal National Mortgage Association also known as
Fannie Mae was issued about its alleged manipulation by lying to their investors on the
growth of their earnings. They were also accused of not complying with the accounting
standards. Fannie Maes accounting firm, KPMG, was charged for hiding that they are not
complying its own accounting policies and practices.

Fannie Mae was not filing their earnings statement since the late 2004. The Office of
Federal Housing Enterprise Oversight report showed that their violation with their accounting
policies have led to $11 billion scandal.

SUMMARY

The Office of Federal Housing Enterprise Oversight report have showed that Fannie Mae
have not been complying with their own accounting policies. This shows to a finding of a
scandal worth $11 billion. In their review there were over 8 million pages of documents that
was manipulated so that the senior executives could collect millions in bonuses from 1998 to
2004. There was a penalty set that amounted to $400 million civil liability, and of that amount
$350 million was assessed by Securities and Exchange Commission. The company, Fannie
Mae, wanting to keep their business from operating have arranged that they will redo every
file from said year and that they will comply with their accounting policies. The company
also agreed to limit the growth of its multibillion-dollar mortgage holdings, capping them at
$727 billion, and to make top to bottom changes in its corporate culture, accounting
procedures and ways of managing risks. Fannie Maes CEO did a lot of help as he lead the
review of the documents. Fannie Maes twenty-nine current and former executives and
employees, including former chairman and chief executive Franklin Raines and former chief
financial officer Timothy Howard, are fired and fined for their wrong doings on the company.
Their compensation totalled to be more than $90 million including $52 million that are tied to
the company. Mr. Raines was accused in a civil lawsuit and has agreed to pay $24.7 million
including a $2 million fine. And Mr. Howard will be paying a fine of $6.4 million.

ANALYSIS

The Federal National Mortgage Association (Fannie Mae) is a business that is

government sponsored enterprise. There has been embezzlement on the part of the
accountants who made the financial statements. The accountants did not comply with the
accounting policy and made arrangement on how they will direct the earnings to the
executives pocket. It also resulted to frauds such as earning management and income
smoothing. This has been made to still attract investors when really the investors should have
been pulling out their money because of the things happening in the business. And there has
been a conspiracy between the executives to fool the investors and their customers so that
they could get more from the business. Fannie Mae is focused on enabling people to buy,
refinance, or rent a home and helping struggling homeowners avoid foreclosure. As they
wanted to serve more to the public, they agreed to the settlement with the SEC and OFHEO
without admitting or denying guilt. The company is in the midst of trying to create accurate
accounting records for the years in question, an undertaking that is costing it hundreds of
millions of dollars. The agreement requires the company to invest in up-to-date computer
technology and human expertise. It bars the company from growing one of its most profitable
but risky business lines, which of buying and holding home loans for its own investment
portfolio. It also requires reviewing the conduct of the members of the board. In doing so,
Fannie Mae can continue their business and regain losses and trust from the public.

CONCLUSION

As there are a lot of businesses opening for the public, they should be the one to assure
that their consumers are in safety. In a way that there are no behind the scenes going on, on
their operations. Fraud cannot be removed that easily, but it can be prevented. The companies
have to keep their faith that their business will go well without having to window dress their
financial statements. Fraudulent financial reporting cheats investors of their savings those
whose actions led to the actions led to the accounting fraud every business know. The
financial statements, that are to be provided to the public, should be in accordance with the
generally accepted accounting principles so that investors can rely in it without the worry of
losing their money. Never mess your life on doing something that would only benefit you for
a limited period.