Accounting for Freddie Mac
Accounting should produce a crystal-clear picture of a company's finances. But in too many instances, practices have been used to obfuscate the bottom line in order to meet investors' earnings expectations.
That's an especially risky tactic for a mortgage giant like Freddie Mac. Ironically, a 107-page report prepared by outside investigators for Freddie Mac's board - released Wednesday - revealed labyrinthine accounting practices used to mask excessive profits. (Freddie wanted to show investors that it was doing a good job staying within financial projections, even though it was not.)
Last month, three of Freddie Mac's top executives were forced out as the company reported it had understated pretax profits by some $6.9 billion last year. The report alleges that even the new CEO was involved in the questionable dealings.
The report also found Freddie's accounting controls to be weak, and that the company worked to keep employees from discussing accounting errors.
As government-sponsored enterprises, Freddie Mac and its larger cousin Fannie Mae have an implicit public backing should they have financial difficulties.
Yet for far too long, the two giants have operated with minimal government oversight. Congress should move quickly to end this obvious governance failure. Though that would be just the beginning of needed reforms (in the longer term, Congress ought to work to sever government ties with these two companies) such action would do much to help settle investor jitters.