The Street had an interesting piece about Fannie Mae's most recent "out-of-period adjustments," which is Fannie's casual way of explaining away a $4 billion error over five consecutive quarters from Q4 2011 through Q4 2012, as well as Q2 2010.
While Fannie Mae did disclose the errors, one reason they did not attract more scrutiny is likely the manner in which they were disclosed — as out-of-period adjustments rather than restatements. In correspondence with the Securities and Exchange Commission, Fannie Mae took the position that the errors were too small to be of much interest to investors.
That's all well and good but this isn't Fannie Mae's first rodeo. If accounting errors were felonies in California, Fannie Mae would already be serving life under Three Strikes.
See also, this 2006 SEC complaint, which saw Fannie settling with a $400 million penalty:
In its federal court Complaint, the Commission charged that, between 1998 and 2004, Fannie Mae engaged in a financial fraud involving multiple violations of Generally Accepted Accounting Principles ("GAAP") in connection with the preparation of its annual and quarterly financial statements. These violations had the effect, among other things, of falsely portraying stable earnings growth and reduced income statement volatility, and – for year-ended 1998 – of maximizing bonuses and achieving forecasted earnings.
So you see, Fannie is a habitual offender. One can only deduce that they are either really, really bad at accounting (possible) or doing this on purpose (also possible). Olga Usvyatsky of Audit Analytics seems to feel maybe it is just an honest mistake but our pal Francine McKenna does not share that opinion.
Olga Usvyatsky, an accountant with a research firm called Audit Analytics, believes the errors may point to "control deficiencies" — a catch-all accounting phrase that encompasses issues such as poorly trained or inadequate staffing, inadequate technological capabilities or ineffective business processes, among other examples.
"From what I see on the surface, it does not look like intentional manipulation," she said. "It looks more like [the] financial statements in general are not very reliable because they keep finding those errors."
Leave it to Francine to point out the obvious: when you do the math on numerous immaterial errors, it adds up to one big error. Now where have we seen that before?
"How do you know? That's the WorldCom situation. Nobody adds it all up until someone says 'Wait a minute. Over five years we've had so many billions of non-material errors it adds up to be material.'"
It's all good, though, according to Fannie Mae. These things happen. In fact, they got so flippant with the SEC about it, you can't help think there's no way they are actually trying to pull a fast one:
These misstatements were less than 2% of our allowance for loan losses as of December 31, 2011 and less than 5% of our net loss for the year ended December 31, 2011. Additionally, we concluded that the misstatements were not material to our projected 2012 consolidated financial statements taken as a whole.
Less than 2%! Don't even worry about it. So what if it all adds up to $4 billion? Totes immaterial.