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Report Alleges Freddie Mac Violations

Jul 24, 2003 | AP

Freddie Mac Violations

Afoul of Accounting Rules.

Freddie Mac executives ran afoul of accounting rules in their drive to maintain the housing finance company's "Steady Freddie" image and meet Wall Street's earnings forecasts, a new investigation has found.

Findings of the inquiry made public Wednesday also shed some light on the mystery surrounding the diaries of former president David Glenn, fired last month for what the company said was his failure to fully cooperate in the review.

The inquiry uncovered numerous accounting errors and manipulations of internal accounts that resulted in the government-sponsored company underreporting its earnings by $1.5 billion to $4.5 billion in 2000-2002. That puts it among the biggest corporate accounting failures of recent years.

Some of the questionable transactions "may have gone beyond simple error," said James Doty, the Washington lawyer who led the six-month review conducted at the request of Freddie Mac's board of directors.

But he added: "This is not a story of rampant criminal conduct or abuse of authority for personal gain."

The report paints, in many cases, "an unflattering and critical portrait" of company practices, new Freddie Mac Chairman Shaun O'Malley told analysts in a conference call. "This is a painful day for Freddie Mac," he said.

That portrait includes a culture of secrecy at the top of the $40 billion-a-year company, No. 32 of the Fortune 500, that kept company directors and investors in the dark concerning financial information.

The 100-page report details breaches of accounting rules in an effort by executives to smooth out volatility in earnings, meet analysts' expectations and uphold the image of a well-managed, reliable company dubbed "Steady Freddie" on Wall Street.

The McLean, Va.-based company is the second-largest player in the multitrillion-dollar home mortgage market, after Fannie Mae. It has come under scrutiny since it announced in early June that it had ousted Glenn and two other top executives and the Justice Department confirmed that it was conducting a criminal investigation.

The Securities and Exchange Commission which is investigating Freddie Mac's accounting, generally frowns on deliberate bending of accounting rules to smooth turbulence in earnings.

Assessments were made of the roles of several key players in the corporate drama:

New Freddie Mac Chief Executive Gregory Parseghian was involved in several of the questionable transactions in his former role as chief investment officer.

"He was aware that the objective of the transactions was to manage earnings," said Doty, who was a general counsel at the SEC during the first Bush administration. "However, he relied in good faith on corporate accounting and Arthur Andersen to provide the necessary accounting advice."

He Hadn't Had Enough Time to "Determine Its Accuracy." 

Ousted former chairman and chief executive Leland Brendsel was cited by the report for setting the corporate tone. Brendsel and Glenn, the sacked president, may not have been truthful in their interviews with the investigating attorneys, the report suggested. Spokesmen for Brendsel couldn't immediately be reached for comment.

Glenn: A missing page from his diaries contains material related to a meeting in which the company's auditors from the Arthur Andersen accounting firm raised concerns to executives about some of the transactions at issue. Freddie Mac fired the now-fallen Andersen as its auditing firm in March 2002 and replaced it with PricewaterhouseCoopers.

Glenn's attorney, Thomas Vartanian, said he was deferring comment on the new report because he hadn't had enough time to "determine its accuracy."

Vartanian added, however, that the report demonstrates that because the accounting used by Freddie Mac to hedge against swings in interest rates is so complex, "Mr. Glenn, who is not an accountant by background or training, like others in the company and on its board of directors, was in a position where he had to rely on the expertise of the company's accountants and its independent auditors."

Andersen auditors generally were aware of the transactions, "were closely involved in the planning and details, and agreed with the company's accounting treatment," the report said.

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