- The Washington Times - Monday, November 15, 2004

From combined dispatches

Mortgage giant Fannie Mae missed a regulatory deadline yesterday for filing its third-quarter financial results after its independent auditor KPMG refused to sign off on the report.

Company shares fell in late trading as its accounting crisis deepened.

The government-sponsored company, recently cited by regulators in the U.S. Department of Housing and Urban Development (HUD) for serious accounting problems and accused of earnings manipulation, notified the Securities and Exchange Commission (SEC) that it would not file the third-quarter report on time.

The HUD regulators had ordered Fannie Mae to make massive recalculations, and the delay fueled speculation about whether the company — which finances one of every five home loans in the United States — would restate earnings.

The SEC is investigating Fannie Mae’s accounting.

Fannie Mae shares fell 2 percent, or $1.48, in the extended trading session. In regular trading, the shares fell 21 cents to close at $70.20 on the New York Stock Exchange.

In its filing notifying the SEC, Fannie Mae said it “is not able to file a timely [quarterly report] that complies with the SEC’s rules because it has been advised by its independent auditor that it is unable to complete its review of Fannie Mae’s interim unaudited financial statements for the quarter ended September 30, 2004.”

KPMG and other accounting firms have set a precedent by refusing to issue reports on companies while they are being investigated, said Brad Ball, an analyst at Prudential Equity Group LLC in New York, in a research note last month. Mr. Ball didn’t return a call seeking comment.

“It’s a very complex accounting rule that experts disagree on,” said Jonathan Gray, an analyst at Sanford C. Bernstein & Co. The regulator’s assertions that the company violated rule Financial Accounting Standards (FAS) 133 are “based on a very weak foundation,” he said.

The Office of Federal Housing Enterprise Oversight, part of the U.S. Department of Housing and Urban Development, in September accused Fannie Mae of wrongly accounting for hedging transactions on its mortgage portfolio, using improper “cookie jar” reserves, and deferring expenses in 1998 so earnings could meet an internal target that would trigger maximum executive bonuses.

Fannie Mae directors in September agreed the company would change some accounting policies and enhance supervision, though it didn’t admit to breaking accounting rules and stood by its financial reports.

“Fannie Mae has not withdrawn those financial statements and KPMG has not withdrawn its opinion that those financial statements were prepared consistent with” generally accepted accounting principles, Fannie Mae Chief Executive Officer Franklin Raines testified to Congress on Oct. 6.

The SEC allows companies to obtain a five-day extension for filing their quarterly reports. The extension automatically is granted as long as companies spell out the reason for needing the extra time, said Linda Griggs a former official in the SEC’s corporation finance division who is now a partner at Morgan, Lewis & Bockius in Washington.

Fannie Mae and the smaller McLean-based Freddie Mac were chartered by Congress to spur homeownership by acquiring mortgages from banks with the proceeds from bond sales. Fannie Mae is the second-largest debtor in the U.S. after the government, with $942 billion as of July 31.

The companies own or guarantee almost half the $7.6 trillion in U.S. residential mortgage. Mr. Raines is a former investment banker at Lazard Freres & Co. and budget director in the Clinton administration. He became chairman and chief executive officer of Fannie Mae in 1999.

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