Posted on 07/23/2003 6:30:40 AM PDT by Starwind
DJ Freddie Report: 'Steady Freddie' Tone Came From Brendsel
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WASHINGTON (Dow Jones)--The report by the law firm of Baker Botts to the board of Freddie Mac said "it was understood throughout the organization that the tone of 'steady Freddie' came from its chief executive officer," Leland Brendsel.
The report said employees in business units "were expected to take actions that would help achieve the goal of steady, nonvolatile earnings growth."
It said the board was aware of this strategy but that the flow of information was controlled by Brendsel, whose resignation was accepted by the board last month, and by former Vice Chairman and Chief Operating Officer David Glenn, who was fired by the board last month, "in such a way that the accounting challenges involved in executing this strategy were not fairly presented.
"This was a contributing factor to the accounting and disclosure problems," said the report, which was released Wednesday.
"Finally, as the board and audit committee members became increasingly concerned over the depth and expertise in corporate accounting and the board became increasingly direct and specific in its demand for action (in the fall of 2001 and the spring of 2002), Brendsel and Glenn failed to take prompt corrective action," the report said.
-By John Connor, Dow Jones Newswires; 202-862-9273; John.Connor@dowjones.com
(END) Dow Jones Newswires 07-23-03 0807ET- - 08 07 AM EDT 07-23-03
DJ Freddie Report -2: Cites 'Serious Failures' By Sr Mgmt
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The Baker Botts report said senior management at Freddie Mac encouraged the use of complex transactions and reserve adjustment to achieve strong steady earnings growth within two or three cents of analysts' expectations, and that senior management knew corporate accounting lacked the skills and resources to comply in this regard with generally accepted accounting principles.
The law firm of Baker Botts was hired by the Freddie Mac board to investigate accounting and financial reporting matters. The firm is in the process of restating its financial statements for 2002, 2001 and 2000.
Also investigating matters involving Freddie Mac are a U.S. Attorney, the Securities and Exchange Commission, and the Office of Federal Housing Enterprise Oversight.
"At this writing, the story is not one of rampant criminal misconduct," said the Baker Botts report, "or abuse of authority for personal gain, but of serious failures by senior management to discharge responsibilities entrusted to and placed upon them by the board."
Specifically, the report said, "senior management encouraged the use of complex, capital market transactions and to a lesser extent, reserve adjustments, for purposes of achieving strong, steady earnings growth and reported earnings that were within 2 cents to 3 cents a share of analysts' expectations.
"Senior management also knew that corporate accounting lacked the necessary skill and resources to assure that the company's activities in this regard remained within the bounds of GAAP," the report said.
-By John Connor, Dow Jones Newswires; 202-862-9273; John.Connor@dowjones.com
(END) Dow Jones Newswires 07-23-03 0831ET- - 08 31 AM EDT 07-23-03
DJ Freddie Report -3: Disclosure Practices Criticized
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The Baker Botts report said "the story that developed during our investigation is one replete with accounting error, often resulting from judgments and decisions by employees who lacked the expertise to appreciate the significance, gravity or rigor required by, the accounting decisions they were making."
The report said the events displayed "an approach by senior management to maintaining a public corporate image at the expense of good management practices and effective internal controls." It said the management approach also created an environment that "interdicted transparent communication to the board and, ultimately, to the public and the markets."
The report specified that senior management at all relevant times included Brendsel, Glenn and the chief financial officer, who was in control of financial reporting and disclosure policy. "During this period," the report said, "the chief financial officers were Richard Daniels, 1994-1996, John Gibbons, 1996, 2000, and Vaughn Clarke, 2000-03," it said.
The result of the management approach described in the report, Baker Botts said, "was a pattern of financial reporting and disclosure practices that fell below the standards required of a registered public company."
Regarding diaries maintained by former Freddie Mac COO Glenn, the report said the diaries document concerns over the company's accounting capabilities. "According to Glenn's diaries, Arthur Andersen expressed directly to Glenn their concern that Corporate Accounting lacked expertise and depth."
The report said that "with respect to the involvement of the board in the issues we investigated, we found that senior management's approach to governance was such that the information flow to the board was tightly scripted and controlled.
"In those instances where information relevant to the investigated transactions was contained in board materials, the information was delivered in a manner to ensure that it escaped notice and would not generate questions," the report continued. "Accounting issues were always presented to the board in a manner that represented, expressly or by clear implication, that they were in compliance with GAAP."
(MORE) Dow Jones Newswires 07-23-03 0851ET- - 08 51 AM EDT 07-23-03
DJ Freddie Report -4:Linked Swaps Transactions Raise Concern
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The Baker Botts report investigated a number of financial transactions that were identified by the company and its auditors that may have involved accounting and reporting issues that went beyond simple error.
Many of the transactions were entered into in late 2000 and 2001.
One such transaction, referred to as linked swaps, had the effect of transferring $420 million in operating earnings from 2001 into later years, the report said.
"The transactions had minimal business justification other than the shifting of operating earnings," the report said.
The report also noted that the company continued to conduct the transactions even though in-house accountants and external auditors raised concern "that the transactions could be construed as improper earnings management." Freddie Mac's auditor at the time, Arthur Andersen, wasn't consulted prior to the linked-swaps transactions being entered into.
The report said the facts surrounding the linked swaps transactions "raise concerns because at the time the company had identified 'operating earnings' as the key financial metric to which the market should refer as reflecting the true economics of the company, on a basis comparable with its competitor, Fannie Mae."
-By Jennifer Corbett Dooren, Dow Jones Newswires; 202-862-9294; jennifer.corbett@dowjones.com
(END) Dow Jones Newswires 07-23-03 0904ET- - 09 04 AM EDT 07-23-03
DJ Freddie Report -5: Cites Noncompliance With GAAP
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The Baker Botts report said various Freddie reserve adjustments "frequently did not comply with GAAP and were driven more by the desire to achieve earnings targets than by a balanced assessment of the underlying probable losses."
The report said that accounting decisions involving the reserve adjustments were viewed by the both the company and its then-independent auditor, Arthur Andersen, "as simply not material."
This and other findings of the report are likely to be elaborated in other forums by other investigators, including the SEC.
"Notwithstanding the various accounting errors, we did not find that the company entered into transactions that have an effect on the timing of earnings recognition at the expense of the company's risk management policies and practices," the Baker Botts report said.
At the same time, after reviewing a batch of issues and transactions, the report said among other things that "the pattern that emerges is of an institution whose culture discouraged the candid disclosure and explanation of errors."
-By John Connor, Dow Jones Newswires; 202-862-9273; John.Connor@dowjones.com
(END) Dow Jones Newswires 07-23-03 0923ET- - 09 23 AM EDT 07-23-03
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