(To read more on the debt and equity markets, click here and to read more on the multifamily market, click here.)

WASHINGTON, DC-Fannie Mae’s board of directors has released its long awaited Paul, Weiss investigation on the firm’s accounting, governance, structure and internal controls. The board had asked former US Sen. Warren Rudman and the law firm of Paul, Weiss, Rifkind, Wharton & Garrison LLP to do this review after a special examination by the Office of Federal Housing Enterprise Oversight in September 2004 raised these issues. In the combined agreements with OFHEO and the SEC, the company has agreed to pay a $400-million civil penalty.

“This important step today builds on some of the changes and progress we have made over the past 18 months to rebuild the company and restore the confidence of our shareholders and stakeholders,” says Stephen B. Ashley, chairman of the board. “The company has undertaken a number of remedial steps. Over the course of the past two years, the board has made a number of changes in its structure and membership, and its relationship to the company.”

The findings generally supported most of the Office of Federal Housing Enterprise Oversight’s 2004 report that Fannie Mae’s accounting was not consistent with generally accepted accounting principals. OFHEO is set to release its own final report on its special examination of Fannie Mae. For previous coverage, click here.

According the report, virtually all of the areas reviewed were not consistent with GAAP “and in many instances management was aware of the departures from GAAP.” Management, for instance, skirted GAAP requirements in its implementation of FAS 131 in order minimize earnings volatility and avoid investing in a new system.

The report said, “We did find amply evidence supporting the conclusion that management’s adoption of certain accounting policies and procedures was motivated by a desire to show stable earnings growth, achieve forecasted earnings and avoid income statement volatility.” The former CFO Timothy Howard and former controller Leanne Spencer were primarily responsible for adopting or implementing these practices, the report concluded.

The report did not find, though, that the former chairman and CEO Franklin Raines “knew that the company’s accounting practices departed from GAAP in significant ways. We did find, however, that [he] contributed to a culture that improperly stressed stable earnings growth and that, as chairman and CEO of the company from 1999 through 2004, he was ultimately responsible for the failures that occurred on his watch.”

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