Freddie Mac, the embattled US mortgage provider, reports that accounting irregularities will mean a revision of earnings by as much as $4.5 billion. But where accounting discrepancies are usually associated with bloated profits, earnings at Freddie Mac will be revised upwards.
Gregory Parseghian, CEO and president of Freddie Mac, says: “The information we are disclosing today reflects poorly on Freddie Mac’s past accounting, control and disclosure practices. Management is aggressively addressing these issues.” It may reflect poorly on management, but at least the shareholders are cheering – the fair value of shareholder equity is set to increase in line with the revisions.
The process of revision started with the resignation of Leland Brendsel and Vaughn Clarke, the company’s CEO and CFO, and is continuing with renewed investigation into company accounts. “Freddie Mac is dedicating extraordinary resources to completing this labour intensive process,” explains Martin Baumann, the CFO in place of Clarke. “We are working closely with our independent auditor and other advisors to complete this job as quickly as possible.”
The incorrect classification of mortgage securities, the status of company derivative trading in 2001 to 2002, asset transfers and securitizations and the valuation of financial instruments have all been cited as problems. The Board of Counsel for Freddie Mac identified a lack of accounting expertise and management weakness that led to the incorrect application of the Generally Accepted Accounting Principles (GAAP). Had Freddie Mac been an SEC registrant, the Board concludes, some of its disclosure processes would not have matched SEC standards.
Freddie Mac was established by the US Congress in 1970 to support America’s expanding home ownership market.
