The Fannie Scandal

The Fannie Scandal: The 'Financiopaths' Did It

Article Analysis

Jami L. Harris

University of Phoenix

ACC 363/ Financial Accounting II

Facilitator: Eduard Delacruz

November 5, 2006

Abstract

When most people hear the word "Enron," they the first thought that comes to mind is watching the news with the executives being taken by handcuffs to a police car due to the scandal. Though it remains very familiar in the minds of the American people, Fannie Mae had also lead a scandalous act to line the pockets with millions of dollars for the top executives. This paper is going to help the reader to understand the flaws of the accounting practices within the mortgage industry and why research in any company before action is taken is very important.

Introduction

On September 22,2004, Fannie Mae was charged with "with inappropriate accounting practices" by a government review. The Office of Federal Housing Enterprise Oversight, the company's official regulator outlined their findings by stating that Fannie Mae's accounting methods "deviate from standard practice, internal control failures and presents a pattern that accentuated stable earnings at the expense of accurate financial disclosures." (Paul Muolo, 2006).

The findings concluded that the company has to restate earnings back to 2001 because it violated accounting rules for derivatives, which are financial instruments used to hedge against interest-rate swings, as well as for prepaid loans. "Investors have been fooled, homebuyers have been cheated, and taxpayers are at risk," said Rep. Richard H. Baker (R-La.), chairman of the House subcommittee on capital markets. (David S. Hilzenrath, 2004)

Fannie Mae, the giant mortgage finance company, has used improper accounting methods that raise serious questions about the quality of its management and the validity of its financial reports resulting in an $11 billion accounting scandal. Regulators had earlier said that Fannie Mae in 1998 improperly put off accounting for $200-million in expenses so executives could collect $27-million in bonuses. "By deliberately and intentionally manipulating accounting to hit earnings targets, senior management maximized the bonuses and other executive compensation they received, at the expense of shareholders,". The manipulation "made a significant contribution" to the compensation of former