PCAOB looks into KPMG's Fannie work

KPMG is the subject of a Department of Justice probe into its past sales of tax shelter products

US regulators have launched an investigation into KPMG's work as auditor to Fannie Mae, the mortgage finance company found to have violated US accounting rules.
The Public Company Accounting Oversight Board, which regulates auditors of public companies, decided on Tuesday to authorise its enforcement staff to scrutinise KPMG's work.
Meanwhile, Fannie's senior management is likely to come under pressure to explain whether they knew they were misrepresenting the company's financial condition when they certified its accounts.
The Securities and Exchange Commission, the chief US financial regulator, said on Wednesday that Fannie's reporting practices did not comply with two US accounting standards between 2001 and mid-2004.
A similar accounting scandal last year at Freddie Mac, Fannie's sibling mortgage finance provider, resulted in the departures of two chief executives.
Franklin Raines, Fannie's chief executive, told lawmakers in October that he would hold himself "accountable" if the company was found to have made mistakes.
Donald Nicolaisen, SEC chief accountant, said on Wednesday that Fannie should restate its accounts, but he did not comment on KPMG's work. Fannie, in its only comment so far on Mr Nicolaisen's conclusions, said on Wednesday it would restate.
The restatement could lead Fannie to record some $9bn of losses on derivatives transactions, and could also damage the company's capital position, which is closely
watched by regulators as a measure of its safety and soundness.
KPMG's US business, which became Fannie's auditor in 1969, signed off on its financial statements throughout the period scrutinised by the SEC.
KPMG said yesterday it accepted Mr Nicolaisen's office "as the final arbiter" of US GAAP, and noted he had concluded that the company's use of derivatives rules did not comply with GAAP.
The PCAOB investigation will look at whether KPMG, one of the big four accounting firms, breached auditing rules in its work on Fannie. A report by Fannie's regulator in September highlighted the extent of its reliance on KPMG for advice on compliance with US accounting rules. The Office of Federal Housing Enterprise Oversight, which supervises Fannie, said: "Our report documents that Fannie Mae's external auditor, KPMG, is often viewed within the enterprise as the final arbiter of compliance with GAAP."
KPMG is already the subject of a Department of Justice probe into its past sales of tax shelter products. It declined to comment yesterday on the PCAOB.
PCAOB would only say: "It would be inappropriate to comment on any action the PCAOB may or may not take regarding specific companies."