Fannie Mae Accounting Scandal Case Study Example | Topics and Well Written Essays - 1250 words

Fannie Mae Accounting Scandal - Case Study ExampleIn 2004, the mathematical function of Federal Housing Enterprise Oversight (OFHEO) found out that the firm Fannie Mae was violating the Generally Accepted Accounting Principles (GAAP). This practice, as per the government investigation took place from 1998-2004, while in the year 1998, the management over stated revenues and understated the expenses. In accordance with a report that has been recently presented by OFHEO, there was involvement of broad(prenominal) level executives that led to the misinterpretation and violation of accounting standards, which was a massive scale organized-accounting-robbery mounting the dollar amount to 11 billion. The director of OFHEO took an immediate line of products and directed correction, which was turned down by Fannie Mae making an excuse that it could have been an end-user issue as the company is not fully automated.What truly went improper was the point that loans and mortgage are fairly risky games and there are always chances of customers defaulting, alongside the interest rate risk makes the venture further riskier. For securing their investment and self-aggrandising better return to stakeholders, Fannie Mae undertook risky ventures and investment for better returns and compensating the main stream line of business. When there were phenomenal profits, the shareholders and executives remain satisfied due to income (dividend yield and chief city gains) and bonuses respectively.Violation of GAAPIn the recently presented report by OFHEO, after three years of extensive investigations, there was a major accounting flaws in the accounting practices of Fannie Mae noticed and marked. The major ones are highlighted as the violation of the following GAAP standards1. SFAS-91 Accounting for Nonrefundable Fees and be Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases2. SFAS-133 Accounting for Derivative Instruments and Hedging ActivitiesAs men tioned previously, that there was too much over-estimation of income and underestimated expenses that mainly contributed to increased bottom-line of the financial statements. The excess income was mainly recorded by elbow room of non-refundable fees. Alongside, the future in-flows of cash were adjusted by using hedging and futures counters that introduced lesser risk with fluctuating interest rates, however, these also increased the risk by government agency of gambling over the same counters with excess money.Official Involvement & AuditorsThe major player/official involved in this scandal was the Chief Executive of Fannie Mae i.e. Franklin Raines. He always defended the company in good terms by making others responsible by tarnishing the repute of the company. The CFO (Chief Financial Officer) also defended the company in good terms by stating that the financial statements were as per the GAAP requirements. The audit of this firm was KPMG who backed out after sometime. The denia l of having the firm involved in such a violation gave a view of KPMG being involved them in the issue but it could have been a case of negligence as well as the auditors drew their hands from this case soon. OFHEO