PricewaterhouseCoopers LLC and Deloite & Touche LLP had a ring side seat to the collapse of Freddie Mac (NYSE:FRE) and Fannie Mae (NYSE: FNM) which may cost taxpayers hundreds of billions of dollars. The two auditing firms have some serious explaining to do to taxpayers and members of Congress.According to the New York Times, advisers to the U.S. Treasury Department found that Freddie's accounting methods overstated its financial cushion.
"The company had made decisions that, while not necessarily in violation of accounting rules, had the effect of overstating the firm's capital resources and financial stability," the paper said. "Indeed, one person briefed on the company's finances said Freddie Mac had made accounting decisions that pushed losses into the future and postponed a capital shortfall until the fourth quarter of this yearwhich would not need to be disclosed until early 2009." Fannie Mae used the same methods, though, apparently not as aggressively as Freddie Mac.
A spokesman for Freddie Mac's auditors, Pricewaterhouse, did not immediately return an email seeking comment. In its letter to shareholders filed with the 2007 annual report report, PwC noted that Freddie Mac had changed some accounting policies. It elected to offset the amounts of some derivative contracts as of October 1; elected to measure newly acquired interests in securitized financial assets that contain embedded derivatives at fair value as of January 1, 2007; changed its method for accounting for uncertainty in income taxes as of January 1; changed the method for accounting for defined benefits plans as of December 31, 2006, changed its method for determining gains and losses on sales of certain guaranteed securities as of October 1, 2005
That's quite a bit to keep track of, no? I am sure Congressional investigators will want more detail about why these policies were changed.
Fannie Mae, whose former chief executive Franklin Raines was ousted in 2004 following another accounting scandal, paid Deloitte $49.3 million in fees in 2007. The firm was hired by Fannie Mae in 2005 because its predecessor KPMG missed accounting errors that cost the housing finance company $9 billion in previously reported profit. A Deloitte spokesman declined to comment.
Chief Executive Daniel Mudd told investors following weaker-than-expected first quarter results that this year and next year would beg "tough." Little did he know that those words would foreshadow his ouster along with his counterpart at Freddie Mac Richard Syron. They no doubt will be getting a pretty fat golden parachutte. Both companies have lost a combined $14 billion over the past year.
If the auditors were not as diligent with Freddie and Fannie as they should have been, then members of Congress needs to hold them accountable. The shareholders who have been wiped out by the government's rescue deserve to know if auditors missed signs of the collapse that they should have caught.
A spokesman Freddie Mac's auditors, Pricewaterhouse, did not immediately return an email seeking comment. In its letter to shareholders filed with the 2007 annual report report, PwC noted that Freddie Mac had changed some accounting policies. It elected to offset the amounts of some derivative contracts as of October 1; elected to measure newly acquired interests in securitized financial assets that contain embedded derivatives at fair value as of January 1, 2007; changed its method for accounting for uncertainty in income taxes as of January 1; changed the method for accounting for defined benefits plans as of December 31, 2006, changed its method for determining gains and losses on sales of certain guaranteed securities as of October 1, 2005
That's quite a bit to keep track of, no? I am sure Congressional investigators will want more detail about why these policies were changed.
Fannie Mae, whose former chief executive Franklin Raines was ousted in 2004 following another accounting scandal, paid Deloitte $49.3 million in fees in 2007. The firm was hired by Fannie Mae in 2005 because its predecessor KPMG missed accounting errors that cost the housing finance company $9 billion in previously reported profit. A Deloitte spokesman declined to comment.
Chief Executive Daniel Mudd told investors following weaker-than-expected first quarter results that this year and next year would beg "tough." Little did he know that those words would foreshadow his ouster along with his counterpart at Freddie Mac Richard Syron. They no doubt will be getting a pretty fat golden parachutte. Both companies have lost a combined $14 billion over the past year.
If the auditors were not as diligent with Freddie and Fannie as they should have been, then members of Congress needs to hold them accountable. The shareholders who have been wiped out by the government's rescue deserve to know if auditors missed signs of the collapse that they should have caught.
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Reader Comments (Page 1 of 1)
9-08-2008 @ 3:43PM
adb said...
So what's the problem ?? This is how the current system works. If the screwup is big enough the government comes in (read "the bozo taxpayers") and pays the bill. The execs "are fired" so they go on to "lead another industry". There is no personal accountability anymore in America. Our leaders then issue a statement for the masses and end of story (savings and loans disaster, ENRON, now this, more to come).
9-08-2008 @ 4:17PM
Phyllis D. Persson said...
A sad commentary on The United States of America when 2 more of our financial institutions are taken over by a corrupt politcal system. Our original idea was to keep Freddie and Fannie in place to avoid becoming a State "Owned" Government.
Time to let the Democrats take over the mess these past 8 years have cost our hard working citizens. Time for a big over-haul in this country, it's ripple effect in the world is evident.
9-08-2008 @ 4:28PM
acm said...
more to come in view: piggy bank work
9-08-2008 @ 6:09PM
Ann said...
Well thought out plan. The Goverment has the unswer in their hand!]
Don't forget the equal opportunity act.
9-08-2008 @ 11:03PM
auditor said...
You cannot hold the auditors responsible if as you yourself stated the companies policies were: "not necessarily in violation of accounting rules". Auditors are not even allowed to report on positions that "might" be agressive unless they ARE in violation of accounting rules (GAAS & GAAP). Financial statements are managements responsibility. Auditor's responsibility is to provide an opinion on them (in accordance with GAAS and GAAP).
Still, there's a major flaw in your argument: Those accounting changes you elude to as being suspicious were actaully required changes (for the periods of transition you note) for all companies. Complete your research before impying auditor wrong doing. A quick glace at nearly EVERY public company's 10K for those periods will reveal identical accounting policy changes. Here's a couple free citations: FIN 48 - Uncertain Tax Positions; SFAS 158 - Pensions
9-08-2008 @ 11:01PM
Dan said...
They were jumping for joy at all the money they were taking in and relishing the bonus $$$. Every one should have to pay restitution and serve jail time. Oh, sorry, in this PC world all that has to happen is a few grandstanding congressional commitees, a thousand study groups, and a proclamation by a bipartisan group of idiots that this will never happen again. Time to clean house. Country before party, either one.
9-09-2008 @ 6:33PM
Scott Brokaw said...
I just couldn't help myself this afternoon and pulled the trigger on 2500 shares of Fannie at a buck a share. Within 5 minutes it was trading at a buck 18 a share. Crazy world when an average joe can get an 18% return on a $2500 investment in 300 seconds. The common and preferred stock got murdered on monday but the propensity for humans to look for opportunities to profit from adversity will likely reincarnate fannie and freddie again and again.
10-12-2008 @ 1:33AM
Gholamhossein Davani said...
It is wonderful and tragedic story in Fannie and Freddie .The banking system has done several mistake and fraud and people shall pay thier collaps by tax.I think the Fannie and Freddie are direct result of Raygan policy in 1990 when they push mortgage bank to pay more and more and itis the begining of the first.We will see other bankrupay soon
10-12-2008 @ 1:31AM
Gholamhossein Davani said...
It seems that all the Big Fore audit firms have now formally separated from their consultancy interests but unfortunitly all of them do audit and nonaudit together and finnally it will apear that in Freddie Mac and Fannie Mae !!? I am sure big four were engaged in design of high risky modul in mortgage so they couldn't critism these modul in thier report and risky financial tools are base of fraud and bankrupcy.