Big ShakeUp: Freddie Mac Fires Pres Over Audit Investigation

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Big ShakeUp: Freddie Mac Fires Pres Over Audit Investigation

June 9, 2003 10:20 a.m. EDT Freddie Mac Fires President
Over Investigation of AuditsA WALL STREET JOURNAL ONLINE NEWS ROUNDUP(See a statement and letter1 from the Office of Federal Housing Enterprise Oversight about Freddie Mac, at the agency's Web site.
[url=http://www.ofheo.gov/News.asp?FormMode=Release&ID=74]http://www.ofheo.go... )
McLEAN, Va. -- Under pressure from regulators over accounting procedures, Freddie Mac said it fired its president because he wasn't fully cooperating with the company's audit and announced the resignation of its chief executive and chief financial officer.The mortgage-finance company said Monday it had terminated President and Chief Operating Officer David Glenn because of "serious questions about the timeliness and completeness of his cooperation and candor with the board's audit committee counsel."Freddie Mac also announced the resignation of Leland Brendsel, as chairman and chief executive, and Vaughn Clarke, as executive vice president and chief financial officer.The shake-up comes amid pressure from the Office of Federal Housing Enterprise Oversight, which regulates Freddie Mac. In a letter to the company June 7, OFHEO Director Armando Falcon said that he has "become increasingly concerned about evidence that has come to light of weakness in controls and personnel expertise in accounting areas and the disclosure of misconduct on the part of Freddie Mac employees." The agency is continuing its probe of Freddie and has assembled a special investigative team.Freddie Mac in January announced plans to restate its earnings "materially" higher for at least the previous two years after its new auditor recommended certain changes to its accounting policies. The changes have been expected to slow the company's earnings growth during the next year.Mr. Falcon sent his letter to Freddie Mac's board as a result of "management misjudgments that led to a misapplication of [generally accepted accounting principles] and disclosures of employee misconduct." The OFHEO alleges misconduct involved "altering and failing to supply documents relevant to the restatement process."Freddie Mac named Gregory Parseghian, who has been chief investment officer since June 2002, as chief executive and president. Shaun F. O'Malley, the retired chairman of Price Waterhouse LLP, was named as nonexecutive chairman. Marty Baumann was named chief financial officer to succeed Mr. Clarke. Mr. Baumann has been executive vice president since March. The company tapped Paul Peterson, executive vice president of Freddie Mac's single-family division, as chief operating officer.But Mr. Falcon said in his letter over the weekend that "the removal of members of the management team only goes a part of the way toward correcting serious problems -- concerns surrounding management practices and controls remain."The OFHEO has set up a special investigative team to review accounting practices relevant to the restatement process at Freddie Mac and to look into allegations of employee misconduct.The agency is also investigating "termination packages" for Messrs. Brendsel, Clarke and Glenn in light of the circumstances surrounding their departures.Mr. Falcon directed Freddie Mac to provide the OFHEO with plans to address: reform of board oversight of management's supervision of accounting practices; personnel and systems changes for implementing accounting services quality controls; and a program for routine communications by the board with the OFHEO on the progress of its remediation plan.Mr. Falcon said, however, that "Freddie Mac's asset quality, capital positions and other safety and soundness measures remain strong."Freddie Mac is a government-sponsored enterprise and a publicly traded company that buys mortgages from lenders to increase the flow of capital through the mortgage-finance system. In March 2002 it brought in PricewaterhouseCoopers to replace its previous auditor, Arthur Andersen LLP. After reviewing the company's books, the new auditor recommended Freddie Mac treat certain financial instruments, which rose in value, as assets rather than derivatives. Freddie uses derivatives -- broadly, financial contracts whose value is designed to track the return on stocks, bonds, currencies or some other benchmark -- to protect its mortgage portfolio from swings in interest rates.As an asset, the market value of the instrument -- as well as any income from it -- must be recorded at the time it was purchased rather than over the life of the derivative. Previously, Freddie amortized the derivative over the life of the contract, and income was recognized over a period of time. As a result of the restatements Freddie will be recognizing certain income earlier, and its earnings will therefore be higher for those periods.URL for this article:
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