The Counter-deception Blog

“Greed is good, greed is right, greed works.” Gordon Gekko, “Wall Street”

"If you look at all the instances of negative publicity and lawsuits, all of them are occurring for pre- Enron activity," said Arthur W. Bowman, the editor of an accounting industry newsletter. "Today, KPMG would probably stand up and tell Fannie Mae you can't do that."

Sure.

December 17, 2004 NYTimes.com
THE AUDITOR
The Latest in a String of Setbacks for KPMG
By ERIC DASH
The Securities and Exchange Commission's announcement on Wednesday night that Fannie Mae had violated accounting rules was the latest blow to the company, whose top executives had long maintained that its methods were in compliance.
But the announcement was also an embarrassment for the company's independent auditor, KPMG, which had raised questions about Fannie Mae's practices but continued to sign off on the company's statements.
The S.E.C.'s chief accountant found that Fannie Mae's accounting practices "did not comply" with two requirements for recording gains and losses on derivatives contracts, which the company used to hedge against the risk of interest rate swings.
While Fannie Mae said that it would comply with the S.E.C.'s decision, which could wipe out as much as $9 billion when it restates its earnings, the company's executives had previously argued that the accounting rules had room for a different interpretation and often consulted with KPMG when there was a concern about compliance.
KPMG, which had previously stood by Fannie's financial results, said in a statement yesterday that it accepted the company's decision to follow the S.E.C.'s directions with respect to prior financial reports. The firm also said that it accepted the S.E.C.'s findings on a complex derivatives accounting rule, known as FAS 133, "as the final arbiter of GAAP."
"It should have a jarring effect on KPMG, but the quiet undertone shared by all of the Big Four accounting firms is, 'this too shall pass,' " said Allan D. Koltin, president of PDI Global Inc., a Chicago-based consultancy that works with many large accounting firms.
The decision on Fannie Mae is the latest setback for the accounting firm. In recent years, KPMG has been at the center of several high-profile financial scandals and has settled a number of lawsuits without admitting wrongdoing.
In October, KPMG agreed to pay $10 million to settle S.E.C. charges that the firm and four of its accountants did not properly audit the financial statements of Gemstar-TV Guide International.
Earlier that month, KPMG's American and Belgian business units agreed to pay $115 million to settle shareholder claims of accounting malpractice that arose from the collapse of Lernout & Hauspie Speech Products, a Belgian speech-recognition software company.
Last year, KPMG paid more than $200 million to settle lawsuits stemming from its audits of Rite Aid and Oxford Health Plans.
The firm is also under investigation by a federal grand jury in Manhattan looking into the sale of tax shelters. And it remains entangled with the S.E.C. over Xerox, whose books it audited while executives there committed securities fraud.
But the firm's swift action to dismiss partners and clean up practices in other cases has allowed it to survive, accounting analysts said. While the KPMG name may now be more frequently in the news, they said, its practices were in line with the rest of the industry during the late 1990's.
"If you look at all the instances of negative publicity and lawsuits, all of them are occurring for pre- Enron activity," said Arthur W. Bowman, the editor of an accounting industry newsletter. "Today, KPMG would probably stand up and tell Fannie Mae you can't do that."