http://www.nytimes.com/2004/09/26/business/yourmoney/26watch.html?pagewanted=all&position=A SHOCKING exposé hit the Street last week about one of the best-loved, all-American companies: Fannie Mae, the mortgage and financial services giant. The report, written by the company's regulator, the Office of Federal Housing Enterprise Oversight, offered a litany of accounting improprieties at the company. You might call it "In the Kitchen With Fannie: How to Cook the Books for Fun and Profit."
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For example, will investors finally realize that no matter what management says, companies cannot produce smooth and steady earnings growth from their operations, quarter after quarter? We live in a volatile world with highs and lows, peaks and valleys. Any company that claims to produce predictable growth - and so many still do - can watch its nose grow.
INVESTORS also learned from the report that when bonuses are at risk, executives will think nothing of manipulating numbers to remove the threat. In 1998, for example, Fannie Mae was facing the possibility of having to record an expense of $400 million. Sure, the company's earnings would have been reduced if it took the expense, but more important, its executives' bonuses would be diminished. So, the company took only $200 million, and put off expensing the rest.
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Another lesson from the report is that employees who speak out about misconduct at their companies are often ignored. Roger Barnes, a former employee in the controller's department at Fannie Mae, who left in November 2003, raised questions about the company's accounting. The company pooh-poohed the allegations, but regulators later found them to be "substantive.''
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