Mortgage giant Fannie Mae missed a regulatory deadline Monday for filing its third-quarter financial results after its independent auditor KPMG refused to sign off on the report.
Company shares fell in late trading as its accounting crisis deepened.
The government-sponsored company, recently cited by regulators in the Office of Federal Housing Enterprise Oversight for serious accounting problems and accused of earnings manipulation, notified the Securities and Exchange Commission that it would not file the third-quarter report on time.
The OFHEO regulators had ordered Fannie Mae to make massive recalculations, and the delay fueled speculation as to whether the company — which finances one of every five home loans in the United States — would restate earnings.
The SEC is investigating Fannie Mae's accounting.
The company said Monday that if the SEC finds that it has improperly accounted for derivatives, the financial instruments it uses to hedge against interest-rate swings, it would show a net loss of $9 billion for the July-September period.
Fannie Mae shares were down 2.3 percent, or $1.64, in the extended trading session. In regular trading, the shares fell 21 cents to close at $70.20 on the New York Stock Exchange.
SEC spokesman Matt Well declined comment on the filing as did Corinne Russell, a spokeswoman for OFHEO, an independent agency within the Department of Housing and Urban Development. Spokesmen for Big Four accounting firm KPMG could not be reached for comment Monday night.
In its filing notifying the SEC, Fannie Mae said it "is not able to file a timely (quarterly report) that complies with the SEC's rules because it has been advised by its independent auditor that it is unable to complete its review of Fannie Mae's interim unaudited financial statements for the quarter ended September 30, 2004."
Fannie Mae also acknowledged that some of its accounting policies do not comply with generally accepted accounting principles, apparently contradicting recent public statements by top executives who have defended the company's accounting.
Chief executive Franklin Raines and Chief Financial Officer Timothy Howard insisted in sworn testimony at a congressional hearing last month that the HUD regulators' allegations of accounting improprieties and management misdeeds going back to the late 1990s were a matter of interpreting complex rules.
In its filing Monday, the company said it "recently determined that its methodology for performing" some calculations for 2001 and 2002 balance sheets "was not consistent" with generally accepted accounting principles. It said it expects the effect of the discrepancies will be an increase in earnings for 2001 and 2002, and a decrease in 2003 profits, "with the cumulative effect of these changes across the three periods netting to zero."
The "catch-up" calculations in question were related to 1998 expenses that OFHEO had said the company incorrectly put off to future periods so that top executives could collect full annual bonuses.
The stakes are high for Washington-based Fannie Mae, the second-largest financial institution in the country behind Citigroup, which also faces a criminal investigation by the Justice Department.
The accounting debacle erupted on Sept. 22, when the company disclosed the SEC investigation.
That inquiry makes things potentially tricky for Fannie Mae. Also by law, the quarterly financial results must be certified by Raines and Howard.
If the SEC investigators turn up accounting violations in the quarter, that could expose Fannie Mae and its executives to legal liability with shareholders and others, some analysts say.
A restatement could lead Fannie Mae's board to shuffle the company's executive ranks.
In cases involving other companies, KPMG has held off on approving companies' statements until government investigations of their accounting were completed, because of the accounting firm's own potential liability.
Fannie Mae and its smaller sibling Freddie Mac pump money into the home mortgage market by buying and guaranteeing repayment of billions of dollars of home loans each year from banks and other lenders, then bundling them into securities that are resold to investors. Their stock and debt are widely held by investors worldwide.