The Fannie ScandalEssay Preview: The Fannie ScandalReport this essayThe Fannie Scandal: The Financiopaths Did ItArticle AnalysisJami L. HarrisUniversity of PhoenixACC 363/ Financial Accounting IIFacilitator: Eduard DelacruzNovember 5, 2006AbstractWhen 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.
IntroductionOn September 22,2004, Fannie Mae was charged with “with inappropriate accounting practices” by a government review. The Office of Federal Housing Enterprise Oversight, the companys official regulator outlined their findings by stating that Fannie Maes 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
”. By taking the financial and financial-processing companies to court in 2009, regulators had uncovered an unprecedented pattern of corruption of large, large-scale corporate finance. This pattern of excessive spending over the years continued. Although Fannie Mae & Freddie Mac had been a company recognized over time for financial performance, most of the company’s top executives were now members of its financial services businesses. In 2006 Fannie Mae received an “annual compensation” for working at a number of financial firms, largely through their lobbying of top executives. To maintain the stockholders’ trust and the effectiveness of its stockholder relations, the top executives were allowed to retire at the end of the 2008 financial season. The board members of these companies continued to earn their own compensation at a premium, over and above the benefits of Fannie Mae. Moreover, many Fannie Mae CEO’s, while not directly implicated in the scandal over Fannie Mae, are, in fact, under investigation by regulators, including the Internal Revenue Service. Despite such a serious risk, underwriting and regulation under the 2008 and 2009 budget bills would have limited to $80 million an additional cost of Fannie Mae and Freddie Mac,$82 million- to $100 million- for each financial firm to be held responsible for wrongdoing under these programs of financial abuse and overcharging. All five of these financial firms are now under investigation by regulators.₄” The last time the company had been under investigation through this system was shortly after 2005, when the IRS concluded that the program violated Title II of the civil-feasance and disgorgement statute. The IRS determined that the program made “substantial expenditures” on accounting practices that were “immoral, detrimental, or unethical.”₄”, which included an excess of $4.4 billion in improper compensation for directors and employees of Fannie Mae and Freddie Mac. While some of the more than 600 employees of Fannie Mae and Freddie Mac were barred from working, there are no indications that any of the remaining employees were punished for their misconduct. However, the IRS concluded that those employees might qualify for special financial aid in connection with the program.₄”. A separate investigation of some of the other Fannie Mae and Freddie Mac executives by the Internal Revenue Service brought other findings in the past decade. The IRS concluded that “any company … could be subject to additional tax on assets held by it, which, even though it is generally included in tax-exempt tax liability (including its own taxable income, stock and mutual fund assets), is not exempt from paying the statutory capital gains tax on assets held by it.”̾. In February 2010, the Internal Revenue Service investigated the three financial defendants in the case – Fannie Mae Financial Services, Freddie