Fannie Mae 2004 Annual Report Download - page 76

private-label issuers of mortgage-related securities in recent years continue to represent an elevated level of
originations by historical standards.
Over the next decade, we expect demographic demand (primarily from stable household formation rates, a
positive age structure of the population for homebuying and rising homeownership rates due to the high level
of immigration over the past 25 years) that suggests a fundamentally strong mortgage market. We believe that
these and other underlying demographic factors will support continued long-term demand for new capital to
finance the substantial and sustained housing finance needs of American homebuyers.
RESTATEMENT
Overview
Background. In September 2004, OFHEO delivered to our Board of Directors an interim report of its
findings, through that date, of its special examination of our accounting policies and internal controls.
OFHEO’s interim report concluded that we misapplied GAAP in specified areas, including hedge accounting
and the amortization of purchase premiums and discounts on securities and loans and on other deferred
charges. The interim report also identified numerous control weaknesses relating to, among other matters, our
processes for estimating amortization and developing and implementing accounting policies. The control
weaknesses identified by the interim report included inadequate segregation of duties, key person
dependencies, and a lack of written procedures and supporting documentation.
Following the receipt of OFHEO’s interim report, we requested that the SEC’s Office of the Chief Accountant
review our accounting practices relating to hedge accounting and to our amortization of purchase premiums
and discounts on securities and loans and on other deferred charges. On December 15, 2004, the SEC’s Office
of the Chief Accountant announced that it had advised us to (1) restate our financial statements filed with the
SEC to eliminate the use of hedge accounting, and (2) evaluate our accounting for the amortization of
premiums and discounts, and restate our financial statements filed with the SEC if the amounts required for
correction were material. The SEC’s Office of the Chief Accountant also advised us to reevaluate the GAAP
and non-GAAP information that we previously provided to investors, particularly in view of the decision that
hedge accounting was not appropriate.
Announcement of Restatement and Non-reliance on Previous Financial Statements. On December 16, 2004,
we announced that we would comply fully with the determination of the SEC’s Office of the Chief
Accountant. On December 17, 2004, the Audit Committee of our Board of Directors concluded that our
previously filed interim and audited consolidated financial statements for the periods from January 2001
through the second quarter of 2004 should no longer be relied upon because these financial statements were
prepared applying accounting practices that did not comply with GAAP.
Replacement of Independent Registered Public Accounting Firm. On December 21, 2004, the Audit
Committee of the Board of Directors dismissed the firm of KPMG LLP as our independent registered public
accounting firm and, effective January 28, 2005, engaged Deloitte & Touche LLP as our independent
registered public accounting firm.
Changes to Senior Management. On December 21, 2004, our Board of Directors appointed Stephen B.
Ashley to serve as non-executive Chairman of the Board, and appointed Daniel H. Mudd as interim Chief
Executive Officer and Robert J. Levin as interim Chief Financial Officer to replace Franklin D. Raines as
Chairman of the Board of Directors and Chief Executive Officer, and Timothy Howard as Chief Financial
Officer. In addition to our Chief Financial Officer, all of our other senior financial officers, including the
previous Controller and previous Chief Audit Executive, were replaced following the discovery and
announcement of the accounting errors discussed above. The Board of Directors subsequently appointed
Daniel H. Mudd as Chief Executive Officer and Robert T. Blakely as Chief Financial Officer. The Board
appointed Daniel H. Mudd as CEO following the completion of an executive search effort overseen by a
subcommittee of the Board comprised of independent Board members and utilizing the services of an
executive search firm.
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