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Report Names Players in Scandal

OFHEO report about Fannie points to CFO

September 29, 2004


A 211 page report from Fannie Mae's regulator provides some interesting details about who played a roll in the company's current accounting scandal.

As the mortgage mammoth has struggled through a seemingly endless string of controversies over management and financial reporting issues, it has been chairman and CEO Franklin Raines who is most often criticized.

But in a scathing report by the Office of Federal Housing Enterprise Oversight, or OFHEO, a new name is taking the heat -- chief financial officer Tim Howard.

The report by government regulators clearly points the finger at Howard's lack of oversight in financial reporting and lays much of the accounting problems at his feet.

The OFHEO even used a word more common on Dr. Phil than in complicated government reports -- "dysfunctional" -- in describing Fannie's accounting problems.

"Fannie Mae's dysfunctional accounting policy development, key person dependencies and poor segregation of duties were major contributors to the accounting failures and the safety and soundness problems detailed in this report," the regulator said in the massive report.

"Chief Financial Officer Tim Howard failed to provide adequate oversight to key control and reporting functions within Fannie Mae," the OFHEO said.

Fannie Mae's executives and board of directors, already under intense scrutiny from Congress and facing the possibility of tougher oversight and regulations, have acted quickly on the report.

In addition to increasing its capital by billions of dollars and changing its accounting procedures, Fannie Mae has also agreed to review its internal operations.

"The serious concerns raised on OFHEO's report require prompt action," Armando Falcon Jr., director of the regulatory office, said in a statement.

Fannie will "undertake a top-to-bottom review of staff structure, responsibilities, independence of functions" and "separate other key business functions currently performed jointly by certain individuals or departments," the OFHEO said in the statement.

Howard has not commented on the report.

Throughout the report are instances of too little oversight of Howard's duties and weak internal controls that weren't successful at ebbing apparent conflicts within Fannie's management structure.

For instance, in March of 2003 Jonathan Boyles, Fannie's senior vice president for financial standards, raised concerns that the company wasn't properly following accounting procedures.

Those decisions "were often the joint decisions of management, including (Howard)," Boyles wrote at the time, according to the report.

"In hindsight," he said, "these decisions may not have been the best decisions given what we know now."

Some of the problems occurred because of Howard's functions and responsibilities, many of which were intertwined.

In addition to serving as CFO, Howard is also Fannie's chief risk officer and vice chairman and oversees the comptroller's department, treasury and portfolio management functions, according to the report.

"The combination of these responsibilities does not provide the independence necessary for an effective chief risk officer function," the OFHEO said. "We further found that Mr. Howard was instrumental in setting financial targets as vice chairman, and the authority to meet these targets as chief financial officer."

Fannie's biggest problems came about because too few people were involved in making major decisions and the proper accounting techniques were not used.

"Fannie Mae relies on just a few individuals to make key decisions, particularly those related to accounting policy development," the regulator found. "The failure by management to properly implement critical accounting policies is due in part to the lack of a sound framework for developing these policies."

Patrick Crowley is a political reporter and columnist and former business writer for The Cincinnati Enquirer. Email Patrick at: [email protected]

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