COMPANIES Regulators have opened an investigation into KPMG's auditing of Fannie Mae, the mortgage finance company which faces a possible $9bn restatement after violating US accounting rules.
The Public Company Accounting Oversight Board, which regulates auditors of listed companies, decided on Tuesday to authorise its enforcement staff to scrutinise KPMG's work. The inquiry adds to investigations by the Department of Justice and the Securities and Exchange Commission into Fannie's activities.
Senior Fannie executives, including Franklin Raines, chief executive, and Timothy Howard, chief financial officer, were on Thursday facing new pressure to explain whether they knew they were misrepresenting the company's financial condition when they certified its accounts. The SEC announced on Wednesday that Fannie's reporting practices did not comply with two US accounting standards between 2001 and mid 2004.
Fannie's board of directors, which is chaired by Mr Raines, convened on Thursday afternoon to discuss the SEC's decision but the meeting ended without a statement on his future.
Fannie loses its fight
For months, Fannie Mae has tried to portray the accounting of its derivatives transactions as an amorphous exercise, with its executives arguing that US accounting standards are complex rules open to interpretation. The argument, however, is now over.
However, more board meetings are expected over the next week to discuss the issue. Fannie declined to comment.
A similar accounting scandal last year at Freddie Mac, Fannie's sibling mortgage finance provider, resulted in the departures of two chief executives. Mr Raines told lawmakers in October that he would hold himself "accountable" if Fannie was found to have made mistakes.
The 2002 Sarbanes-Oxley law requires chief executives and chief financial officers to certify the accuracy of accounts, and if they knowingly misrepresent a company's condition they could face up to 10 years in jail.
Donald Nicolaisen, SEC chief accountant, said Fannie should restate its accounts, but did not comment on KPMG's work. Fannie, in its only comment so far on Mr Nicolaisen's conclusions, said on Wednesday it would comply with the request to restate. The restatement could lead Fannie to record some $9bn of losses on derivatives transactions, and will also damage the company's capital position.
KPMG's US business, which became Fannie's auditor in 1969, signed off on its financial statements throughout the period scrutinised by the SEC. KPMG said on Thursday it accepted Mr Nicolaisen's office "as the final arbiter" of US generally accepted accounting principles (Gaap), and noted that he had concluded that the company's application of reporting rules on derivatives did not comply with Gaap.
The PCAOB investigation will look at whether KPMG, one of the big four accounting firms, breached auditing rules in its work on Fannie.
A report in September by the Office of Federal Housing Enterprise Oversight, Fannie's regulator, highlighted how the company regarded KPMG's accounting advice as definitive. KPMG is already the subject of a Department of Justice inquiry into sales of tax shelter products to clients. It declined to comment yesterday on the PCAOB.
The PCAOB said: "It would be inappropriate to comment."
