Fannie Mae Plays Catchup With SEC and Sues Its Former Auditor
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December is starting off with a bang for Fannie Mae.
On December 6 the mortgage giant announced that it had (finally) finished a
restatement of its earnings dating from 2004 back to 2001 and
had filed the required Form 10Ks with the Securities and Exchange Commission
(SEC). And then on December 12 it filed a lawsuit against its former auditing
company, KPMG, largely blaming the firm for all of the financial and regulatory
problems Fannie Mae has encountered since massive accounting irregularities
were discovered in 2004.
The 10K filing provides consolidated financial statements for 2004 and restatements
of previously filed reports for 2002, 2003, and the first two quarters of 2004.
Restatements related to ever earlier quarters are handled as adjustments to
retained earnings as of December 31, 2001.
The cumulative impact of the restatement was a total reduction in retained
earnings of $6.3 billion through June 30, 2003 due to the accumulated
impact of the various accounting errors unearthed during the restatement process.
These adjustments included:
- A net decrease of $7.0 billion in earnings for periods prior to January
1, 2002;
- A net decrease in earnings for the year ended December 31, 202 of $705
million;
- A net increase in earnings of $176 million for fiscal 2003 and $1.2
billion for the first six months of 2004.
The damage to Fannie Mae, of course, goes far beyond the negative impact on
its bottom line. After the accounting irregularities were discovered some two
years ago, the corporation was forced to demand the resignation/retirement of
two of its top executives (while paying them some truly staggering separation
benefits), faced possible criminal indictments which did not materialize, paid
a $400 million civil penalty to the SEC and the Office of Federal Housing Enterprise
Oversight, and continues to face pressure from Congress for increased government
regulation of its operations. The publicly held company also came close to losing
its listing on the New York Stock Exchange due to its delinquent filing status.
Fannie must still file past due reports to the SEC for all quarters from the
beginning of 2005 to the present.
A second part of the announcement was good news for the corporation's
shareholders. In the midst of the accounting scandal and faced
with regulator's demands that it increase its capital reserves, Fannie slashed
its quarterly common stock dividend in half to $0.26 per share. Fannie Mae will
now partially restore this dividend to $0.40 per share
The lawsuit filed by Fannie Mae against its former outside
auditor on Tuesday alleges that the professional negligence of KPMG LLP forced
Fannie Mae to "undertake one of the largest accounting restatements in history."
The corporation states that at least thirty accounting policies and practices
approved by KPMG were not consistent with generally accepted accounting principles
and that Fannie Mae consequently has suffered more than $2 billion in damages
including over $1 billion in costs to amend the historical financial statements
that "KPMG negligently approved."
The suit which was filed the Superior Court of the District of Columbia, asks
that the suit be heard before a jury and that the Corporation be awarded not
less than $2 billion in compensatory damages with pre-judgment and post-judgment
interest, an award of costs and expenses incurred in this action, and "any
further relief that the court may deem just and proper in light of the circumstances
of the case."
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