Fannie Mae Accounting Fraud

Introduction

The Federal National Mortgage Association, also called Fannie Mae, was formed in 1938. The main objective of the company was to increase the secondary mortgage market size through mortgage securitization. In 2004, company's operations were offset due to financial fraud in the company. It had to pay big sums of money as a penalty to the government. Recent investigations by Fannie Mae have identified affinity fraud as an enduring stronghold in fraud schemes, which has occurred in ethnic, religious, professional, or age-related groups. The image of Fannie Mae even deteriorated a lot although they were regarded as one of the best financial institution in the country at one point of time.

a. Description of the fraud

The accounting fraud that occurred in Fannie Mae Company in 2004 is one of the biggest frauds in the American Accounting history. There were some of the Senior Executives at Fannie Mae, who tried to manipulate the accounting records. Their main objective was to receive millions of dollars from the bonuses earned by people in the company. All this information published by the federal report. This is the reason why the famous state's mortgage company fined around $400 million, which even spoiled their reputation in the business world. The shocking report published by OFHEO was mainly because of the outcome of an extensive three-year investigation. This incident created a massive negative impact on the company because Fannie Mae faced many difficulties to recover from an $11 billion accounting scandal. The penalty, which was imposed by the government through SEC of around $400 million against Fannie Mae, further created difficulties for the organization. At that time, SEC even decided to compensate $350 million out of the penalty of $400 million to the investors of Fannie Mae because they even suffered a lot due to this incident.

b. How the fraud was detected

Recent affinity cases reveal a pattern of asset misrepresentation, employment misrepresentation, and phony down payments in the form of falsified gift funds. The perpetrators have resorted to classic-fraud tactics including alteration of documents and establishment of phone banks. Asset Misrepresentation has taken the form of altered bank statements to support the existence of funds available for the substantial down payments. Bank statements have been altered to add $100,000+ to the bank balances to support significant down payment amounts.

Employment Misrepresentation has presented itself via altered pay stubs and W-2's as well as the resurgence of handwritten verifications of employment (VOE's) to document false income and employment. Another common tactic is to pass off a self-employed borrower as an employee of the company and withhold information regarding their ownership of the company. Falsified Gift Funds have been identified as the source of large down payments in many of the affinity cases. The gift donors are represented as “aunts”, “uncles” or “cousins”, and the gift amounts frequently fall in the $50,000 - $150, 000 ranges. Bank statements are being altered to support the gift giver's ability to provide such a large gift. In some cases, the same bank statement is reused ...