Fannie Mae ordered to clean up flawed accounting systems

February 27, 2004

Regulator identifies 70 systems that pose risk for error

Inman News

Mortgage giant Fannie Mae's chief federal regulator this week gave the company 30 days to submit its remediation plan for its financial reporting and end user systems.

The Office of Federal Housing Enterprise Oversight conducted a special review of the company's accounting policies after it reported a $1 billion mistake in its third quarter earnings last year.

"OFHEO's review has raised concerns about the extensive reliance of Fannie Mae on manual systems (otherwise known as end user computing systems)," OFHEO Director Armando Falcon wrote in a letter to Fannie's Chief Exec. Franklin Raines.

The end user computing systems carry a significant risk of error. The $1 billion error in third quarter occurred in one of Fannie's end user applications, according to OFHEO.

Fannie Mae relies on more than 70 of these end user systems in its financial reporting. OFHEO identified other flaws associated with the systems as a lack of technical and user documentation, insufficient testing and inadequate backup and recovery techniques.

Fannie Mae is to come up with a plan of action to address all financial reporting end user systems. The plan should include an internal assessment of all systems used and the risks involved with each and a timetable for full automation of applications.

OFHEO said Fannie Mae's third-quarter accounting error underscores the need for special review of accounting policies, practices and internal controls at the mortgage giant. The regulator recently hired a private accounting firm to audit the company.

"The special examination of accounting policies and practices at Fannie Mae is ongoing," Falcon said.

Fannie Mae is a shareholder owned corporation with a government charter. The company buys mortgages, packages them into securities and sells them to investors. As part of its charter, Fannie Mae is charged with fulfilling specified national housing goals.

Copyright: Inman News Features

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