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Freddie Mac to Restate Earnings Upward
Wednesday June 25, 9:30 am ET
By Mark Felsenthal
WASHINGTON (Reuters) - Freddie Mac, the No. 2 U.S. mortgage finance company, on Wednesday said it expects to restate earnings for 2000, 2001 and 2002 upward by as much as $4.5 billion and admitted to flaws in its accounting and financial-disclosure practices.
Earlier this month the company replaced its top three executives over an accounting probe, fueling fears about its financial stability and roiling U.S. financial markets.
The company said a lack of accounting expertise and weak controls led to "numerous errors" in accounting by its staff.
It said investors can expect greater volatility in its financial statements under accounting changes it is adopting. It said its ability to securitize mortgages or manage risks will not be affected.
Freddie Mac said that in the past it engaged in transactions and adopted accounting policies aimed at smoothing out volatility in its earnings growth.
"Certain capital market transactions and accounting policies had been implemented with a view to their effect on earnings in the context of Freddie Mac's goal of achieving steady earnings growth," the company said in a statement.
It said it believed "in most cases" that the transactions and policies were appropriate and it had acted after consulting with its accountant at the time, Andersen.
It said its disclosure of those transactions was below the standards of companies that report financial data to the U.S. Securities and Exchange Commission (News - Websites).
Congress gives Freddie Mac certain benefits to help the company expand U.S. home ownership, including some reporting exemptions. The firm has been under fire from some members of Congress and industry rivals over its transparency, and it recently committed to expanded disclosure.
The Justice Department, the SEC and the Office of Federal Housing Enterprise Oversight are investigating the McLean, Virginia-based company's accounting practices.
In Freddie Mac's management shake-up, Chief Operating Officer David Glenn was fired and the company's chief executive and chief financial officer stepped down.
Freddie Mac said it would restate earnings for 2000, 2001 and 2002 upward by between $1.5 billion and $4.5 billion
"The information we are disclosing today reflects poorly on Freddie Mac's past accounting, control and disclosure practices. Management is aggressively addressing these issues," Gregory Parseghian, the company's new chief executive and president, said in a statement.
Freddie Mac said it will make public a review of its restatement by outside counsel some time in July. It also said it is adding 34 employees in its accounting unit and several senior-level staff with accounting experience.
The company's accounting errors are coming to light after a March 2002 change in accountants. Freddie Mac hired PricewaterhouseCoopers (News - Websites)to replace Andersen, which had been discredited in the accounting scandal that led to the collapse of energy trader Enron.
Freddie Mac is a shareholder-owned, congressionally chartered company that buys mortgages from lenders, and either repackages them as securities for investors or holds them in its own portfolio.
Freddie Mac shares rose to $51 in pre-opening trade from $50.03 at Tuesday's close.
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