the top" and corporate culture, internal controls, review of existing Board and senior management practices and compensation, and changes to the role of Board Chairman and company CEO and terms for the Board of Directors. Finally, OFHEO is pursuing legal actions requiring the termination for cause of the company's former CEO and CFO. Our review of Freddie Mac practices continues, as we now will look into counterparty activities and oversee Freddie Mac's implementation of the consent order. I have undertaken actions at OFHEO as well. Our examination force is being strengthened. A new office of chief accountant will elevate our work in the important field of corporate accounting and reporting and a new office of compliance will expand our capacity to address ongoing Enterprise compliance with OFHEO rules and requirements and be available to investigate more deeply targeted areas of concern. On this latter point, I would note that we have, within budget constraints, begun our review of accounting and corporate controls at Fannie Mae. THE CURRENT BUDGET SITUATION Mr. Chairman, I would like to close my testimony with an urgent appeal to the Committee for assistance in obtaining our 2004 budget. Once again, the appropriations process has placed severe constraints on our operations. The short-term continuing resolutions we are operating under prevent us from hiring the additional examiners, accountants and analysts we need to strengthen our oversight. In addition, we are unable to hire the forensic accounting help we need to assist in the Fannie Mae review. If a long-term CR is enacted which freezes OFHEO's budget at 2003 levels, we will need to scale back oversight at the very time that greater oversight has never been more urgent. I urge the Committee to help OFHEO get its full resources as soon as possible. Mr. Chairman, thank you for the opportunity to testify. I will be pleased to answer any questions you and the Subcommittee may have. 8 Appendix OFHEO must ensure that the management of Freddie Mac has established an adequate remediation plan and is allocating the necessary resources to ensure that all of the remedial recommendations are promptly implemented. OFHEO should also take steps to ensure that the following recommendations are implemented: 1. Freddie Mac Should Separate the Functions of the CEO and the Chairman of the Board 2. Freddie Mac Should Develop Financial Incentives for Employees Based 3. OFHEO Should Establish a Regulatory System of Mandatory Disclosures 6. OFHEO Should Establish a “Materiality” Standard for the Provision of 7. Freddie Mac Should Impose Strict Term Limits on the Members of the Board of Directors 8. OFHEO Should Ensure that the Board Becomes More Actively Involved in Oversight of the Enterprise 9. Freddie Mac Should Establish a Formal Compliance Program 10. Freddie Mac Should Establish the Position of Chief Risk Officer 11. Freddie Mac Should Document the Legitimate Business Purpose of Every Significant Derivative Transaction 12. Freddie Mac Should Establish and Maintain Superior Accounting Controls 13. Freddie Mac Should Prevent Undue Reliance on the External Auditor 14. Freddie Mac Should Strengthen and Clarify the Role of the Internal Audit Department 15. OFHEO Should Expand Its Capacity to Detect and Investigate Misconduct 16. OFHEO Should Conduct a Special Examination of the Accounting Practices of Fannie Mae II. CORPORATE CULTURE AND "TONE AT THE TOP".. The Culture of "Steady Freddie"... The Tone at the Top and Earnings Management... Failure to Allocate Adequate Resources to Accounting and Infrastructure.. Inadequate Accounting Personnel and Expertise.. Reliance on External Auditor for Basic Accounting Functions and Decisions... Derivatives Execution, Administration, and Accounting... 83 84 84 91 96 102 104 105 Trades with Blaylock & Partners and with Salomon Smith Barney.. 107 Inadequate Implementation of the Financial Reporting Controls Improvement Plan...... 109 Weaknesses in the Internal Audit Function.. 112 Lack of Responsibility Regarding Financial Information........... 113 115 Failure of Non-Executive Directors to Make Adequate Inquiries ..... Complacency of Non-Executive Board Members... Failure to Ensure the Hiring of Qualified Executives for Key Positions.. 122 123 124 133 137 143 143 145 149 153 156 159 |