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

Fannie Mae Accounting Scandal - Case Study ExampleIn 2004, the Office 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 g all overnment 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 betrothal of high level executives that led to the misinterpretation and violation of accounting standards, which was a massive scale organized-accounting-robbery raise the dollar amount to 11 billion. The director of OFHEO took an immediate note and directed correction, which was turned down by Fannie Mae making an excuse that it could have been an end-user issue as the come with is not fully automated.What truly went amiss(p) was the fact that loans and mortgage ar fairly risky games and there are always chance s of customers defaulting, alongside the arouse rate risk makes the venture further riskier. For securing their coronation and giving 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 hand and capital gains) and bonuses respectively.Violation of GAAPIn the recently presented report by OFHEO, after three geezerhood 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 Costs Associated with Originating or Acquiring Loans and Initial read Costs of Leases2. SFAS-133 Accounting for Derivative Instruments and Hedging ActivitiesAs mentioned previously, that there was too much over- estimation of income and underestimated expenses that mainly contributed to change magnitude bottom-line of the financial statements. The excess income was mainly recorded by means 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 means of gambling over the same counters with excess money.Official Involvement & AuditorsThe major player/ semiofficial involved in this scandal was the Chief Executive of Fannie Mae i.e. Franklin Raines. He always defended the company in ingenuous 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 indorse out after sometime. The denial of having the firm involved in such a violat ion gave a view of KPMG being involved them in the issue but it could have been a case of failure as well as the auditors drew their hands from this case soon. OFHEO