Fannie Mae has sued its former outside auditor, KPMG LLP, alleging the firm’s “professional negligence” forced the government-sponsored mortgage repurchaser to undertake one of the largest accounting restatements in history.
In a complaint filed Tuesday in the Superior Court of the District of Columbia, Fannie Mae said that for more than 30 years it relied on KPMG to review and analyze its critical accounting policies and practices, and to act as “an independent watchdog.” KPMG was paid “tens of millions of dollars to do so,” the complaint said.
A scandal over Fannie Mae’s accounting and management policies has caused more than $2 billion in damages, including more than $1 billion in costs to correct financial statements “negligently approved” by KPMG, the complaint alleges.
The suit, which alleges malpractice, breach of contract and negligence, seeks to recover those damages, legal costs, plus “any further relief the court may deem just and proper in light of all the circumstances of this case.”
KPMG spokesman Tom Fitzgerald said the company intends to pursue its own claims against Fannie Mae, and that the issues raised in the lawsuit are already pending in federal court.
Fannie Mae is facing several lawsuits by shareholders, and KPMG and Goldman Sachs Group Inc. were added as defendants in one of the suits in August.
KPMG served as Fannie Mae’s auditor and principal accounting firm from 1969 until the scandal broke in December 2004. A key issue cited by regulators who found that Fannie Mae overstated earnings was the way the company reported its hedging strategies — transactions used by lenders to limit their exposure to fluctuating interest rates.
When KPMG was asked to analyze Fannie’s proposed hedging strategies in light of a new accounting rule, the firm signed off on them and then approved subsequent financial statements that employed those strategies “year after year,” Fannie Mae alleged in its lawsuit.
Fannie Mae claims it also got bad advice from KPMG concerning amortization accounting, which takes into account purchase discounts or premiums and other deferred price adjustments in mortgage loans.
The director of the Federal Office of Housing Enterprise Oversight, which oversees Fannie Mae, called the lawsuit “appropriate and consistent with the findings” of OFHEO’s investigation into the scandal.
In December 2005, a key KMPG employee involved in auditing Fannie Mae’s statements, Joseph Boyle, agreed to an SEC fine and suspension in connection with auditing work the company performed for Xerox Corp.
