Mortgage Daily

Published On: July 24, 2003
Freddie Releases Internal Audit

Document critical of former management, accounting

July 24, 2003

By ANNE LINEBERRY

In an internal audit, investigators found problems with accounting and reporting by secondary lender Freddie Mac.

Freddie was found by the independent investigative team from Baker and Botts to have misapplied generally accepted accounting principles (GAAP) in reported transactions during 2000 and 2001. According to the auditors, it might have been possible to structure some transactions differently and legitimately achieved accounting objectives.

Freddie was also found to have not properly disclosed some of these transactions. Baker and Botts said that the disclosures of generalized strategies fell short of public company reporting standards.

The investigators also concluded that two executives no longer with the company, Leland Brendsel and David Glenn, controlled information. To keep an image of “steady Freddie,” accounting “challenges” weren’t properly presented, Baker and Botts reported.

Former Securities and Exchange Commission General Counsel James R. Doty led the investigative team, which issued a 107-page report, Freddie said.

During a webcast discussing the internal audit, Doty said, “This is not a story of rampant criminal misconduct or abuse of authority for personal gain. Rather, it is a story of serious failures by prior senior management of the company.”

Shaun F. O’Malley, chairman of Freddie Mac’s Board of Directors, also spoke from a prepared statement in the webcast.

“This is a painful day for Freddie Mac. In the simplest terms: the findings reflect poorly on the past accounting, controls and disclosure practices used by Freddie Mac,” he said.

O’Malley said that Freddie’s board allowed the investigators full access to documents and employees.

“Baker Botts [had] an unlimited mandate to get to the bottom of the issues and errors that necessitated a restatement,” he said.

“First – and simply put – the Board let the chips fall where they may,” he said.

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Anne Lineberry is MortgageDaily.com‘s editor. She previously worked as an online editor/producer for DallasNews.com and on the Metropolitan desk for the print edition of The Dallas Morning News. Email Anne at [email protected]

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